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Debt

Debt management has been exposed to developmental criteria. A comprehensive reform of Development Credits (FAD) is still outstanding.

Public loans to developing countries have long been considered a mayor instrument for development. Beginning with the debt crisis of Mexico in 1982, debt service took on an increasing share of the state budget of developing countries, while debt overhang became an issue of concern for both developing countries (having to service their debts) and creditors (being forced to reschedule repayment of their loans). In the late 1990s, the concept of “debt sustainability” was coined.1 Debt sustainability calculates the ratio of public debts to the country’s exports, its gross national income and public sector income, all of them basic indicators of the debtors’ ability to pay. Governments in the South are in essence faced with the choice of satisfying their creditors or investing in social development – or spending the money on something else. Critiques argue that the concept of debt sustainability does not connect the ability to pay with the developmental needs of the country – measured for example by poverty rates or other social development indicators. Thus the management of public debt, in general, is not linked to the objectives of the MDGs.2

In Spain, 2005 was a year of considerable progress in action, discussion and legislation. The issues of cancelling debt and debt-for-development swaps were widely discussed.3 For reasons of brevity, we will summarize the key points. First, Spain has fulfilled the commitment made in international fora to cancel poor countries’ debts, and has taken the lead in some areas, such as the debt-for-education swaps. Secondly, a law on foreign debt was passed, linking debt management with poverty reduction. 4 Thirdly, the government has showed in practice little interest in debt sustainability in its concessions of further loans to countries that have recently graduated from programmes of debt restructuring or forgiveness.5 Fourth, the new law establishes shared powers over debt management and credit concessions between the Ministry of Finance on the one hand and the Ministry of Foreign Affairs and Cooperation on the other, as well as channels of information (debt forecast has to appear in the Annual Cooperation Plans PACI) and consultation (expected debt levels and new credits have to be reported to the Development Commission and Development Council). This opens the space for further vigilance by civil society. Fifth, the law stipulates that the controversial Development Aid Credits (FAD) will be revised in one year’s time – another advocacy opportunity for NGOs, with enough time for coalition-building with those parts of government committed to development. All in all, this is a significant step forward.