By David Chance
LONDON, (Reuters) - Some of the poorest countries of the former Soviet Union could see their debts cut by up to two thirds and be given more grants and loans in exchange for economic reforms under proposals lenders will consider this week.
The likes of Armenia, Georgia, Kyrgyzstan, Moldova and Tajikistan, which have $4.3 billion in debts, could join the Heavily Indebted Poor Countries debt scheme according to proposals from the World Bank and IMF to be discussed in London.
Without debt relief, economic reform and more grants and loans, these countries, which have levels of poverty comparable to those of some African countries, will not have enough to spend on basic healthcare and education, said a report for the meeting.
"The impact of the debt on the budget remains a matter of concern in all countries except possibly Armenia, and some debt flow rescheduling may be required if social expenditures are not to be squeezed," said the International Monetary Fund/World Bank report.
Of seven countries to be discussed at meetings between creditor countries and the bank and fund, Armenia, Georgia and Kyrgyzstan have debts in net present value terms in excess of 150 percent of exports, an economically unsustainable level.
For Georgia, Kyrgyzstan, Moldova and Tajikistan, the level external debt to government revenues is in excess of a crippling 250 percent, while for Armenia it is 168 percent.
RUSSIANS KEY TO DEBT DEAL
Any meaningful debt reductions will have to secure the agreement of the Russians, who account for 14 percent of the $4.3 billion of government and government-guaranteed debt owed by Armenia, Georgia, Kyrgyzstan, Moldova and Tajikistan.
Russia has typically not been involved in sovereign debt discussions as a creditor, but as a debtor.
"It is vital for any package put together to involve Russia," said a European official involved in the talks.
Discussions could include reductions in Russia's debt to the Paris Club of sovereign creditors in exchange for Russia writing off the debts of the five countries, or debt for environment swaps and debt for energy swaps. Bilateral debts owed to the Paris Club of sovereign creditor countries excluding Russia are 10 percent of the total and another four percent is owed to other countries.
CONFLICT, POLICY MISJUDGEMENTS MADE SITUATION WORSE
As in parts of Africa, some of the problems in Armenia, Georgia and Tajikistan have been caused by prolonged armed conflict since the fall of the Soviet Union, the study said. The less developed countries of Central Asia and Moldova also suffered from the 1998 Russian financial crisis. Policy mistakes and lack of reform, mismanagement of the energy sector and corruption have also led to a burgeoning of debts and economic problems.
But the report said the international financial community also misjudged the situation, overestimating the ability of the newly independent states to change their economies and in the belief that the poorest parts of the former Soviet Union would follow the same path as the economies of eastern Europe.