Debt Relief Research Articles

Climate change and external debt vulnerability: the case of Sub-Saharan Africa

This study examined the influence of climate change vulnerability on the external debt vulnerability of Sub-Saharan Africa, with a focus on the Vulnerable Twenties (V20s), utilizing panel data spanning from 2015 to 2020. The climate readiness, climate vulnerability, and external debt vulnerability indices were derived via principal component analysis (PCA). The results from the system GMM analysis indicate that climate readiness exhibits a negative and significant impact across short- and long-term periods for the overall sample. However, for the V20s, the negative effect of climate readiness shifts to a positive and significant one over both short and long terms, with the long-term effect being more notable. These findings highlight a vicious cycle between debt and climate crises within the V20s. Thus, prioritizing debt relief over climate finance loans, decarbonizing greenhouse gas emissions, redirecting funds for climate goals, improving debt practices, and investing in public services would break nations’ vicious cycle of debt and climate vulnerability.

External Debt and Economic Growth of BRICS Nations: How can BRICS Integration help them?

This study examines the relationship between external debt and economic growth in the BRICS countries. It explores how BRICS integration can aid these economies and newly joined countries in solving the debt problem. Using the latest panel data techniques and country experiences, we employed the panel mean group method (PMG) and interrupted time series analysis (ITSA) for South Africa, who joined in 2010. Results show a negative relationship between external debt and economic growth at the group level, with mixed results for individual countries. Using individual country experiences, valid implications are drawn for debt-stressed countries like Ethiopia and oil-rich nations like Saudi Arabia. Integrating new member countries in BRICS can overhaul the existing system towards broader perspectives of reforms in global financial institutions. Integration into the BRICS association can benefit these countries through reforms in global financial institutions, fairer debt restructuring, joint investment projects, macroeconomic coordination, debt management knowledge sharing, innovative financing, and collective advocacy for debt relief to enhance stability and resilience.

The Long-Run Effects of Individual Debt Relief

Abstract Individuals with extensive debt may be granted debt relief in court. We provide a comprehensive evaluation of the Danish debt relief program with data from court records linked to nationwide register data. Using event-study methods and quasi-random assignment of applicants to court trustees with varying admission rates, we show that debt relief leads to a large increase in earned income, employment, assets, real estate, secured debt, home ownership, and wealth that persists for more than 25 years after a court ruling. The net transition of workers into employment accounts for two thirds of the increase in earned income.

Political Consequences of Consumer Debt Relief

Abstract Many democracies operate consumer debt relief programs. These are often implemented or adjusted during the election cycle, but their political effects are not well-understood. We investigate if debt relief can influence high-stakes elections. We utilize quasi-experimental variation generated by a very large privately-funded debt relief program enacted in the Republic of Georgia during the presidential election in 2018 that affected every sixth voter. We estimate that the program helped the incumbent candidate win that election, and that its effects persisted. Overall, we show how economic power can translate into political power in a democracy.

Debtor (Non-)Participation in Sovereign Debt Relief: A Real Option Approach

Abstract Developing countries have recently proved reluctant to participate in sovereign debt moratoria and debt relief initiatives. This paper argues that debtors’ (non-)participation decisions can be understood through the lens of real options. Eligible countries compare the net benefits of participating in a debt relief initiative now with the value of waiting to potentially execute their participation option later, when they may have more information on benefits and costs. The analysis corroborates the real option framing with anecdotal evidence and through a survival analysis showing that debtor countries with larger expected debt service savings or higher pre-existing risks of debt distress were quicker to apply for the Debt Service Suspension Initiative, which provided temporary debt moratoria during the COVID-19 pandemic. The paper discusses policies that can make participation in debt relief initiatives more attractive to debtor countries.

Household finances, debt overhang and consumption patterns

This paper studies the effect of household debt on consumption throughout the business cycle. We use household-level data for Spain in a period, 2002–2017, characterized by significant fluctuations in leverage, consumption, and asset prices. We find that high levels of debt have a negative effect on consumption during recession periods, while previous debt accumulation does not significantly influence consumption. When considering heterogeneities across types of debt, we observe that households adjust their spending faster in response to debt not associated with real estate assets. By exploiting explicit information on household credit constraints, we find no evidence suggesting that they play a significant role in shaping the debt-consumption nexus. We conclude that in a situation of high leverage and financial stress, debt overhang decreases household consumption. In this context, policies aimed at preventing households from leveraging excessively during expansions, and policies providing debt relief during recessions, can help mitigate consumption shocks.

The Myth (or Folly) of African Debt

Despite past debt relief initiatives, the external debt of Africa is rising again, and it has some new worrying features: diminishing concessionality and a rising private creditor. Sub-Saharan African countries devote a significant portion of their fiscal resources to service the debt, and this prevents them from increasing development expenditures (generally imports of strategic goods that can't be produced domestically). By adding a human development factor to the Geometry of Debt Sustainability model (GDS) (Vaggi and Prizzon 2014) and following the analytical framework of Pasinetti (1998), we assess how external debt sustainability changes when countries increase the foreign currency purchasing of health and education goods and services. Not only these types of human development expenditures are central to the Sustainable Development Goals (SDGs), but they have become even more important due to impact of the Covid-19 pandemic on many low income countries (LICs). We evaluate external debt sustainability in two African contexts: Kenya and a composite country, called Ubuntu, which is representative of Sub-Saharan Africa average indebtedness conditions. The results confirm the existence of a trade-off between debt service and human development expenditures. Even before the Covid-19 pandemic, the Sub-Saharan African countries were on unsustainable debt trajectories as the debt-to-GDP ratios would stabilize only at extremely high values.

Do debt relief and fiscal rules improve public debt sustainability? The experience of sub-Sahara African countries

The sub-Sahara African (SSA) region accounts for 33 of the 39 Highly Indebted Poor Countries (HIPCs) with many of these countries facing challenges in public debt management. This paper examines issues that are key to improving the debt situation in the region. Specifically, the study investigates two key questions namely whether the adoption of fiscal rules and debt relief improve public debt sustainability. What factors reduce the public debt of SSA countries? Interestingly, the findings reveal that while debt relief improves debt sustainability, the imposition of fiscal rules threatens the debt sustainability of the region. Further, higher economic growth and increasing government balance are instrumental to reducing public debt. These findings have far-reaching policy implications for public debt management in developing countries.

Blame, Policy Feedback, and the Politics of Student Debt Relief Policy

Blame, Policy Feedback, and the Politics of Student Debt Relief Policy

Borrow now, pay even later: A quantitative analysis of student debt payment plans

In the U.S., student debt is currently the second largest component of consumer debt. Households are required to repay these loans early in their lifecycle, when marginal utility is particularly high. We study alternative contracts that offer partial or full payment deferral until later in life. We calibrate an economy with the current contracts, and then solve for counterfactual equilibria. The alternative contracts yield large welfare gains, which are robust to assumptions about the behavior of the lenders and borrower preferences. The gains are similar to those that could come from the debt relief program currently being considered in the U.S., but without its adverse fiscal implications.

Re-thinking the sustainability of sovereign debt

Abstract This article explores the contributions that law can make to the development of a holistic approach to sovereign debt sustainability. We focus on debt sustainability assessments (DSAs) conducted by the International Monetary Fund (IMF), which are linked to the IMF’s surveillance and lending functions, and determine whether it is necessary to restructure the debt of a country in debt distress and the timing, process, and terms of such a debt restructuring. While the precise causes of each country’s debt situation are unique, all countries are grappling with the rising costs and growing risks posed by climate change and other environmental and social factors. We suggest that the IMF’s current treatment of these environmental and social factors is opaque, unpredictable, and hard for the citizens of affected countries and other outsiders to understand. It also obscures the true burden that debt obligations impose on a sovereign and the country’s residents, and, thus, the amount of debt relief that it may need in order to achieve a sustainable debt position. To address these shortcomings, we identify financial, economic, environmental, and social (FEES) factors that we contend should be incorporated in the design of the frameworks governing DSAs and the operating principles and practices of the IMF through which DSAs are conducted. We argue that the IMF should draw on various hard and soft sources of international and transnational law to develop a FEES-based approach to sovereign debt sustainability that is more consistent, predictable, and legitimate than the current approach.

The WHO Pandemic Agreement should be more specific about when and how to enable global access to technology

Timeliness is repeatedly referenced in the World Health Organization (WHO) Pandemic Agreement negotiation draft, published in March 2024. However, the draft remains vague with regard to what is considered timely. Health policymaking should be much more conscious of the time scales it evokes and implements in order to support global equity and solidarity. The Pandemic Agreement negotiation draft could be made more specific to foster global synchronicity by: (1) replacing ‘best endeavor’ language with enforceable timelines, particularly for benefit sharing mechanisms, (2) mandating an automatically triggered time-bound IP waiver for pandemic health technologies to accelerate manufacturing and distribution scale-up to global levels, and (3) strengthening the pandemic fund and debt relief mechanisms to safeguard financial resources to enable global synchronicity for future pandemic prevention, preparedness, and response. In summary, global solidarity during a pandemic requires more attention to synchronicity by ensuring the simultaneous implementation and rollout of measures to prevent, contain, or end a pandemic in different countries or regions.

Loan repayment behavior of beneficiary farmers in primary agricultural cooperative societies in Haryana (India)

Abstract Subject and purpose of work The study examined the loan repayment behavior of beneficiary farmers in Primary Agricultural Cooperative Societies in the State of Haryana, India. Material and methods The findings were based on primary as well as secondary data. The secondary data was collected for the period of 2006-2007 to 2018-2019. The primary data was collected in the second quarter of 2022. Results The study concluded that year-wise the maximum percentage of defaulter farmers was 34.97% in 2008-2009 due to the debt relief scheme announced by the Government of India in 2008. Furthermore, it revealed that about 75% of beneficiary farmers repaid their loans regularly after receiving the benefit of interest subvention at 7% by the government of India and the state government. The findings on primary data concluded that most farmers have been repaying their loans regularly, and less than 10% of beneficiary farmers defaulted. The main reason for the default was a loan without security and the anticipation of a loan waive-off scheme. About 19% of beneficiary farmers have been repaying their loans irregularly due to the short time within which loan repayments needed to be made. Conclusions The short time of loan repayment is the main cause of irregular loan repayment behavior. The period of repayment of loans should be extended for one year and it should be considered from the loan issuance date.

China’s role in sovereign debt restructuring

As the world’s largest bilateral lender to low- and middle-income countries (LMICs), China faces challenges dealing with some sovereign borrowers in debt distress under the Belt and Road Initiative (BRI). The current global sovereign debt landscape suggests that the fundamental challenge of sovereign debt restructuring in the developing world is not China, but rather how to equitably address unsustainable debt owed to multiple categories of creditors. Nonetheless, by offering early-stage debt relief, China can alleviate the burden on borrowers who disproportionately owe significant debt to China and prevent trapping itself in unpaid debts. China’s policy decision will determine whether it can avoid the same mistake that Western creditors made of eventually losing all financial claims on many debt-distressed, heavily indebted poor countries (HIPCs) by the mid-2000s. Furthermore, a considerate approach by China is key to achieving the dual goals of mitigating LMICs’ debt distress and vulnerabilities to climate change by applying a climate-centered approach toward sustainable socio-economic development. China can contribute to creating better global debt governance, which should go hand in hand with global environmental governance and have critical economic, political, and social implications.

A Review of the Federal Student Loan Debt Relief Plan

The Biden-Harris Administration's federal student loan debt relief plan aims to relieve student loan debt burdens from the United States. Their relief plan impacts the overarching national economy with multifaceted effects on the economy and attainment of vital life milestones. This paper explores the multifaceted effects and their impacts. It utilizes a Cost-Benefit Analysis to assess the potential limitations and transformative impact the plan could have on America’s socio-economic landscape. The contents of this paper highlight the complex interplay between the economy and societal well-being and the many factors that affect policymaking.

Earnest struggles: structural transformation, government finance and the recurrence of debt crisis in Senegal

Faced with a more multipolar world, scholars of International Political Economy are sharpening their tools to make sense of the longue durée of post-colonial institutions, international financial subordination and the quest for self-determination. This article develops the notion of ‘earnest struggles’ in Senegal’s postcolonial history and shows that successive governments have indeed tried to move their country forward against the odds. The focus is on three struggles: First, the attempts at transforming the Senegalese economy away from colonial cash crops and the influence of the French from 1960 to 1980. Second, the struggle of grappling with Global South debt crisis and the devaluation of the Franc CFA by 50% between 1980 to 2004. Third, the struggle to expand the Senegalese economy with newfound fiscal space and novel forms of external debt since international debt relief in 2004 until today. Based on financial data and interviews in Dakar and Paris, I argue that these struggles have led to some structural transformation. However, the danger of debt crisis has not gone, and economic self-determination has remained precarious. Dependence on foreign finance has stayed and reached record levels in recent years. Relative delinking and the search for regional complementarities offers a more promising avenue to break out of the structural condition of international financial subordination.

Student Debt Relief and Racial Wealth Gaps

The Biden-Harris Administration released a plan to cancel federal student loans for 43 million borrowers on August 24, 2022. While the Supreme Court struck down the Biden-Harris student debt relief plan on June 30, 2023, the White House is now planning to use the Higher Education Act of 1965, a federal law that governs the student loan program, to bring about relief for student borrowers. This article estimates the potential impact of broad-based student debt relief on racial and ethnic wealth gaps. On average, federal student debt potentially eligible for relief explains 3 percent of the White-Black wealth gaps, suggesting that broad-based student debt relief could significantly mitigate racial wealth inequities.

Belt and Road countries’ external debt and China’s new strategies

ABSTRACT Since the Belt and Road (B&R) initiative was put forward in 2013, China has signed cooperation documents with more than 150 countries and more than 30 international organizations. The Chinese government and banks have lent a large amount to B&R countries for infrastructure development, and China’s foreign contracted projects and trade with these countries have increased significantly. However, many B&R countries face severe debt repayment problems, and China has actively engaged in debt relief. To avoid debt crises, China needs to adopt new B&R development strategies, including putting B&R development firmly on commercial principles, reducing government loans to B&R countries and restructuring debt, expanding trade with B&R countries, increasing imports from debtor countries, and encouraging private enterprises’ direct investment in these countries.

From Reform to Resurgence on Somalia's Journey to Economic Stability and Global Confidence

Examining Somalia's journey from political instability to economic recovery, this analysis focuses on the significant impact of recent efforts to relieve the country's debt burden. A major achievement was Somalia's successful inclusion in the Heavily Indebted Poor Countries (HIPC) initiative, which granted the nation relief from repaying its debts. This article aims to explore the complex landscape, thoroughly examining the essential role of debt relief. It dissects the factors contributing to economic stability, evaluates the newfound global confidence, analyses elements enhancing investor appeal, and navigates the challenges and opportunities defining the nation's economic resurgence. The challenges arising from the debt write-off include the effective implementation of economic reforms, managing heightened expectations, and addressing the persistent historical political instability that requires ongoing attention. Despite these challenges, opportunities emerge, providing Somalia with the chance to strategically reallocate resources to vital sectors, enhance its attractiveness to investors, and engage in potential global collaborations. This exploration concludes by outlining policy implications for Somalia's policymakers. It emphasizes the importance of sustainable economic reforms, initiatives promoting political stability, prudent resource allocation, the implementation of investor-friendly policies, active participation in international collaborations, and targeted efforts to promote investment. Addressing these policy implications could empower Somalia to transform challenges into catalysts for sustained economic growth and development, charting a course toward a prosperous and resilient future

The Value of Student Debt Relief and the Role of Administrative Barriers: Evidence from the Teacher Loan Forgiveness Program

The Value of Student Debt Relief and the Role of Administrative Barriers: Evidence from the Teacher Loan Forgiveness Program