by Diana Hulova,
Myanmar (Burma), one of the world’s poorest countries, has been the subject of a number of debt restructuring and relief packages during the past few months. In January, debt owed to the World Bank and the Asian Development Bank was refinanced, and the bilateral creditors organised in the Paris Club followed Japan’s earlier example and agreed to relieve a substantial share of their claims, thereby clearing arrears of “phantom debt” that have piled up over the past decades.
The sudden creditor rush comes as a surprise. Myanmar’s debt indicators were below the International Monetary Fund’s (IMF) thresholds for debt distress, and the country does not appear on the list of the Heavily Indebted Poor Countries (HIPC) eligible countries.
As Myanmar opens up, multilateral development banks and rich countries are increasingly interested in getting lending and investments back to the country. While the official justifications read that the ongoing transformation processes towards more democracy and a more liberal and deregulated economy shall be rewarded, there remain concerns that new lending will primarily serve the interests of foreign powers and local elites keen to exploit the geo-strategically important countries’ vast natural resources.
A need for the debt audit
The lack of information on the use of loans and their actual beneficiaries prevents us from assessing the legitimacy of creditor’s claims. There are indications that a substantial share of the cancelled debt fulfills the criteria for illegitimate or odious debt. The full picture is unclear however, as data is patchy and thorough project-level impact assessments did not take place.
The country’s debt to Norway, which dates back to Norwegian ship exports of the late 70s, is an example that some of Myanmar’s debt has actually been found to be illegitimate. A thorough debt audit would reveal the necessary information and provide the basis for fair burden sharing in a debt restructuring process.
The messy process demonstrates the need for a comprehensive debt workout
The Myanmar case proves once again that new mechanisms are needed that deal comprehensively with debt workouts – mechanisms that include all creditors along a set of clear criteria. In the Myanmar case, the new loans extended by multilateral development banks will be mostly used to repay the bridge loan provided by Japan, rather than providing fresh money. Different creditor groups negotiated different deals separately. Some bilateral creditors (in this case Norway) cancelled 100%; others (in this case China) did not participate at all in the bilateral debt restructuring.
The impact of the debt relief
The Paris Club debt relief will result in the reduction of about 40 per cent of Myanmar’s total debt, leaving the external debt stock at $9.4 billion. Neither debt relief, nor refinancing by multilateral institutions will free up resources for development and poverty eradication automatically. The main impact of the debt agreements is that they will open avenues for new lending.
Increased access to foreign finance, if used well, can increase a country’s development prospects. However, there must be caution with regards to lending from foreign creditors, so that Myanmar does not fall into a new debt trap. In a country with persisting governance challenges, responsible financing standards need to be strictly applied to ensure that resources are used for the benefit of Myanmar’s population, rather than that of creditors or ruling elites.
Read the full analysis of Myanmar’s debt.