Commodity Prices and Debt Sustainability

We consider schemes which gear service on concessional debt to export earnings and oil import expenditures. The schemes operate by accelerating and retarding debt repayments, and are structured as overlays in which existing debt contracts are augmented by a set of floating for fixed swaps, where the swap prices are defined in terms of the world prices of the export commodities. We analyze the effectiveness of schemes through counterfactual simulation of the debt service of ten moderately or highly indebted commodity-dependent African economies. The results are mixed. The schemes do ease the debt service burden and can also offset the variability of export earnings but only to a limited extent. The explanation for this mixed performance is that changes in export earnings are not highly correlated with changes in world commodity prices – both because of differences between world prices and the prices obtained by individual exporters, and because of quantity variation.