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STORY BRIEF November 21, 2007 Dr. Joseph Lim from the University of the Philippines School of Economics urges the United Nations to launch an international campaign to change the concept of “debt sustainability” of international lending institutions particularly the Bretton Woods Institutions. To achieve debt sustainability, the UN system and the UNDP can ask the creditors not to look at the countries’ capacity to pay their debts but on how debt servicing has hampered the debtor-countries’ capacity to eradicate poverty and the other UN Millennium Development Goals (MDGs). In a study presented during the National Consultation on Financing for Development conducted by the Social Watch Philippines today, Dr. Lim said this would change the Paris Club rules and allow a bigger chunk of bilateral debts to be reduced or converted without jeopardizing the country’s credit worthiness and rating. Bilateral debt conversions and debt treatments are constrained under the IMF and Paris Club Rules. The eligible debts for the Philippines are debts incurred before the cut-off date of April 1, 1984. Under the existing rules, very little debt is eligible for debt reduction and debt conversion for the Philippines. The new debt sustainability concept identifies a country requiring debt relief if it is found lagging behind in meeting at least one of the MDG targets, debt service payments have reduced the potential and actual budget for social and economic services vital to meet the MDG targets or foreign exchange outflows to pay debt service impede the economic and social development of the country and retarding the progress to achieve the MDG targets.. Dr. Lim presented in the forum that the government’s principal and interest debt servicing is equivalent to 87.2 percent of GDP in 2006, almost doubling the 2000 level at 44.3% of the GDP. These funds can go to education, health, social and economic services and rural infrastructure. Among the critical MDG targets, the country is lagging behind in hunger mitigation, has low survival rate in elementary education and deteriorating social health insurance programs. To complement this proposal, Dr. Lim also urges the government to offer feasible MDG projects and programs where bilateral debts or grants can be re-channeled to, within or outside the Paris Club rules. The civil society groups can help identify development and anti-poverty plans that are in dire need of financing and/or have become the victims of tight budget or fiscal constriction as a result of debt servicing allocation. The countries targeted for debt conversions, debt reduction and grants are Germany, Italy, Switzerland, US, Finland, Spain, France, Canada, United Kingdom, Denmark, Belgium, and Netherlands; non-Paris Club countries such as China, Taiwan, Singapore, Korea, Hong Kong and India; and Muslim countries such as Malaysia, Brunei, Kuwait,

Libya, Saudi Arabia. The Philippines can ask for grants from countries that are averse to debt conversions such as Japan and Australia. According to Dr. Lim, another strategy but requires mutual obligation and accountability is to attract the bilateral creditors with projects and programs that will advance the MDGs, based on a system of prioritization of programs that is consistent with the Philippine Medium Term Development Program. The Philippines and the creditors or donors should ensure transparency and accountability as well as efficient absorptive capacity of the programs to ensure that the funds are appropriately and efficiently channeled to achieve the MDGs. The developed countries should strive to achieve their commitments of providing external development assistance equivalent to at least 0.7% of their GNP including funds from debt reduction, and their pledge to finance vital MDG projects and programs, including those of low and middle income countries outside the Heavily Indebted Poor Countries (HIPC). So far only Norway, Denmark, Luxemburg, Netherlands, and Sweden have complied with this commitment. Japan and US, two of the world’s and the Philippines’ top donors have very dismal records. Japan spent only 0.2% of its GNP for external development assistance in 2003, while the US spent only 0.15% of its GNP for external development assistance for the same year. Dr. Rosario Manasan estimates the financing gap for MDGs in the Philippines in 2006 is between P600 billion to P800 billion, or between $12 billion to $17 billion (roughly around 1% of annual GDP). This is around 1/4 to 1/3 of the total external debt of the Philippines as of end of 2005 and around 40% to 50% of the government external debt of the same period. -30-

NCFfD Debt Problem and MDGs November 2007  
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