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The authors would like to thank Philip Lane, John Odling Smee, and several colleagues in the former EUII department for helpful comments, and Gohar Abajyan and Emily Conover for research assistance.
These countries are referred to in this paper as the CIS-7. The paper does not discuss in any detail the other members of the CIS (Belarus, Kazakhstan, Russia, Turkmenistan, and Ukraine).
See Easterly (2001) on how developing countries became highly indebted in the early 1980s and Reinhart and others (2003) on the experience of the newly independent Latin American countries in the 1820s.
We follow the country classification used in the World Bank’s Global Development Finance, our main data source in this section. Specifically, low-income developing countries are defined on the basis of a gross national income (GNI) per capita of less than US$745 while heavily indebted low-income developing countries have either an external debt-to-exports ratio of 220 percent or more or an external debt-to-GNI ratio of more than 80 percent.
Among the CIS-7 countries, Azerbaijan, the Kyrgyz Republic, and Tajikistan stand out with shares below average, which largely reflects higher shares of privately owned debt related to export credits and foreign direct investment.
Per capita incomes in CIS-7 countries are comparable to those in low-income developing countries. This qualifies them for external financing on concessional terms from various sources, including from the IFIs.
Relative to the CIS average, Tajikistan and Uzbekistan, where reform efforts have been lagging, have relatively smaller shares of debt owed to the IMF and the World Bank, whereas faster reformers, especially Armenia and the Kyrgyz Republic, have higher shares.
Strictly speaking, there is also a third factor, US dollar inflation, as discussed in the Appendix. However, this factor is outside the control of the transition countries, and its contribution to the debt dynamics has been small.
The obvious exception to this timing convention concerns the changes in the debt-to-export ratios, which are based on the end-of-period debt ratios in t0.
Among the CIS-7 countries, the distribution is very uneven. Azerbaijan, the oil-producing country, received three times the CIS-7 average, while the slow reformers, Tajikistan and Uzbekistan, received very little FDI.
The attribution of the overall error to the components had to be approximated, as the latter enter the debt-to-GDP ratio nonlinearly. We used a first-order approximation (Appendix). Even though in the case of large errors in components (for example, unanticipated large real depreciation) the second-order terms become significant, we do not report them here as the first-order approximation is sufficient to illustrate our main arguments.
We were unable to perform the analysis for the early programs in the Kyrgyz Republic given the information provided in staff reports.
The prediction error for the growth rate of US dollar GDP is the sum of the errors for real GDP growth, real exchange rate changes, and US dollar inflation. Errors in the latter were minor compared to the first two so that the difference between the errors for US dollar GDP growth and those for real GDP growth is a rough measure of the prediction errors for the real exchange rate.
In the case of Moldova, the reporting in program documents does not allow for the use of identical time spans for the calculation of the forecast errors, which explains the varying number of years in the forecast errors for GDP.
Berg, Borensztein, Sahay, and Zettelmeyer (1999) confirm this finding but show that the effect of the initial conditions declines over time, while policy performance becomes increasingly important.
We report the results only for the early transition years since our main interest is in understanding how debt built up so quickly at the start of the transition.
To be precise, we tested for the joint exclusion of all variables that did not meet the 10 percent benchmark significance levels before excluding them.
We experimented with other specifications as well. For example, we estimated equations that used the change in official financing (as a percent of GDP) rather than the level. The main conclusions remain similar. We also respecified our original equation using 2-year rather than 4-year averages for the regressors and the dependent variable. Interestingly, disbursements by multilateral institutions now appear more important in explaining the adjustment dynamics during the first two two-year periods, while the general government balance becomes insignificant.
As a caveat, we note that the averages for the early years of the transition exclude the data for some CIS-7 countries, as these countries did not report national accounts data by expenditure in the early phases of the transition.
On closer examination, a large part of this consumption appears to be related to energy products.
Exports or government revenues are other, frequently used denominators.
This term only contains the first-order terms of what actually amounts to an approximation of the change in external debt as a fraction of GDP. Hence, the residual term zt now also encompasses higher-order approximation terms, which are typically very small.