Bolivia to Cancel Commercial Debt

A FIRST FOR DEVELOPING COUNTRIES

BOLIVIA, South America's poorest country, should soon become the first developing nation to cancel all its commercial bank debt, which stood at $1 billion three years ago. It will still be in debt to international agencies, however. Government ministers in La Paz say they have now received commitments from foreign countries of $30.5 million. The donations will enable them to buy back - by June at the latest - the remaining $270 million of commercial debt on the secondary market, where Bolivian debt is sold at around 11 cents on the dollar.

Bolivia's first stage of debt buybacks was initiated in 1987. It canceled around $450 million using donations from West European governments and through deals with Peru and Brazil. The 130 creditor banks only accepted the buybacks on condition that the money came from donations (not exports or monetary reserves) and was paid into a specific International Monetary Fund account.

According to Fernando Illanes, the former minister responsible for debt negotiation, the main reasons for Bolivia's special treatment were that ``we were considered a basket case which was never going to pay its debt. Our private debt was small in the context of third world debt, and each creditor bank's exposure was slight.''

Bolivia was also favored by its ``golden boy'' status among multilateral lenders and in the State Department, who regularly applaud the tough free-market solution introduced at great social cost five years ago. Inflation was brought down from a peak of 24,000 percent in 1985 to 17 percent last year, but unemployment doubled to 20 percent.

The Inter-American Development Bank ``rewarded'' Bolivia with $161 million in new loans last year, a record for low-income Latin American countries. And Robert Gelbard, US ambassador in Bolivia, eulogizes the current economic policies, claiming they are ``an example for the rest of Latin America.''

But the Bolivian government could still be in for some tough bargaining with its 50 remaining creditor banks. Planning Minister Enrique Garcia returned from a January visit to Washington, describing the negotiations as ``dealing with tough cookies.'' Bolivia's main creditor bank, Citibank, to whom it owes $26 million, was cited by local press reports as putting up major obstacles.

Jos'e Maria Lasa, the vice president of Citibank in La Paz, admits Bolivia's Bank Advisory Committee is looking for alternatives to straight buybacks, ``particularly exit bonds or better terms on debt for equity schemes.'' Citibank has swapped debt for straight investments in neighboring Chile, but Mr. Lasa complains ``the terms are not good enough and the rules not clear enough'' for similar debt for equity swaps to materialize in Bolivia.

Bolivia has succeeded in reducing its total debt from $4.2 billion in 1987 to its current figure of $3.455 billion (see graph) through the debt buybacks and an innovative debt swap with Argentina completed last August. Bolivia agreed to forgive Argentina's $300 million arrears in natural gas payments in exchange for the Menem government's forgiving Bolivia its $800 million bilateral debt.

In December the government also succeeded in negotiating a deal with its other giant neighbor, Brazil, by which it will pay back some of its $100 million arrears with Brazilian debt paper, which currently trades at around 25 cents on the dollar on the secondary market. If all the plans work well, optimistic government projections predict a total debt of just over $3 billion by year end - a possible 30 percent reduction in three years and, officials claim, a record in Latin America.

But despite Bolivia's apparent success in reducing its debt, the country still paid out $264 million in debt servicing in 1988 - worth 45 percent of exports, and another $231 million last year. The reason is that 90 percent of its debt is owed to multilateral agencies like the World Bank, and Western governments.

At its forthcoming meeting with its Club of Paris creditors in March, a special negotiating team will argue that Bolivia deserves the same treatment from Western governments as Sub-Saharan countries get, i.e. a 25-year repayment period, a drop in interest payments, and some interest and principal forgiveness.