World Economic Outlook 2023 policy lessons from the experience of Jamaica, Cyprus, Seychelles, Belize and Mozambique

Durrant Pate/Contributor

Jamaica has been listed as a case study in debt restructuring in the World Economic Outlook 2023, which was released Tuesday (April 11) by the International Monetary Fund (IMF).

The World Economic Outlook 2023 sought to derive granular policy lessons from the experience of countries that experienced a debt restructuring drawing on five specific cases: (1) Cyprus, 2014–19; (2) Jamaica, 2010–18; (3) Seychelles, 2009–15; (4) Belize, 2012–19; and (5) Mozambique, 2016–19. The case studies are divided into those in which the debt restructuring managed to reduce the debt-to-GDP ratio and those in which it did not.

According to the IMF report, “a key insight from the episodes is that public debt restructuring is a complex process that involves burden sharing among domestic residents, domestic creditors, and foreign creditors. In external debt restructurings, the burden is primarily shared between residents and foreign creditors (for example, Seychelles), while in domestic debt restructurings, it is mostly shared between residents and domestic creditors (mainly banks; for example, Cyprus and Jamaica)”.

The report notes that restructurings with external creditors often occur post-default and may involve face value reductions (possibly for both official and private creditors as, for example, in the case of Seychelles), which immediately lower debt ratios. In restructurings with domestic creditors, financial stability concerns play a role, and they are typically implemented through cash flow relief with no face value reduction.

Success in reducing public-debt-to-GDP ratios

Therefore, reductions in debt ratios tend to be gradual but regardless of the type, the World Economic Outlook 2023 posits one key lesson for the future is that restructuring needs to be deep to improve its chances of success. Success in reducing public-debt-to-GDP ratios declined substantially in Jamaica and Seychelles and modestly in Cyprus.

In Seychelles, the debt ratio had reached 180 per cent in 2008, concomitant with twin balance of payments and debt crises, and a sharp exchange rate depreciation. Debt ratios in Jamaica and Cyprus also reached above 140 per cent and 100 per cent, respectively.

According to the report, “a sharp exchange rate depreciation combined with low growth during the global financial crisis played an important role in the increase in the debt ratio in Jamaica. In turn, a deterioration in the fiscal stance and financial assistance to the banking sector were key factors affecting increases in the debt ratio in Cyprus”.

In Seychelles, the ratio declined rapidly and sharply to 84 per cent in 2010. This happened immediately after debt restructurings with both official Paris Club and private external creditors that involved a large reduction in face value of debt. The World Economic Outlook 2023 observed that, “prudent fiscal policy combined with high inflation helped in sustaining the reduction in debt ratios. In Cyprus and Jamaica, debt ratios did not fall immediately after domestic debt restructurings (2013 for Cyprus and 2010 and 2013 for Jamaica), which did not involve face value reductions. Yet in the case of Jamaica, the cash flow relief from restructuring was deep and was saved, with the debt-to-GDP ratio declining significantly to 100 per cent by 2018. In contrast, the cash flow relief from restructuring was only modest in Cyprus, and the debt-to-GDP ratio declined by less, to about 90 per cent by 2019″.

Fiscal consolidation employed

Fiscal consolidation contributed in both cases, as the debt service relief was partly saved. A recovery in GDP growth in Cyprus and high inflation in Jamaica played important roles in debt reduction, though the positive contribution of nominal interest expenses almost offset the impact of inflation in Jamaica.

“To summarise, in successful cases, debt restructurings contributed significantly to reducing public debt ratios, either directly (through face value reduction, for example, by 25 per cent in Seychelles) or indirectly (through debt service relief and fiscal consolidation in Cyprus and Jamaica), the IMF report said. The possibility of success of (deep enough) preemptive restructuring executed through cash flow relief, rather than face value reductions, is illustrated by the case of Jamaica.

Economic growth also contributed to reducing debt ratios in all these experiences—by more than 20 per cent in both Cyprus and Seychelles and by seven per cent in Jamaica. Finally, inflation also played an important role, contributing to the reduction by 50 per cent in Seychelles and by 70 per cent in Jamaica, though the positive contribution of nominal interest expenses offset the impact on debt—partly in Seychelles and completely in Jamaica.

Failed cases of debt restructuring

It is instructive to review experiences of countries that did not succeed in reducing debt, as these may offer a cautionary tale for countries currently struggling with high public debt. Public debt in Belize and Mozambique remained elevated despite two sequential debt restructurings in both (2012–13 and 2016–17 in Belize, 2015–16 and 2016–19 in Mozambique). Debt ratios remained above 90 per cent in both countries as of 2019.