Ivory Coast's decision not to repay defaulted debt until at least next year is aimed at marshalling all its resources for economic recovery, the IMF country director said on Wednesday, suggesting that markets would ultimately cheer the move.
The West African nation, which has been in default for more than six months on its $2.3 billion Eurobond, said earlier this month it would not be able to service any external debt this year and would try to resume payments only next year, causing the bond price to plunge.
Some creditors and emerging market experts warned the move by Finance Minister Charles Koffi Diby risked long-term pain by cutting it off from the markets or hurting debt relief talks.
But IMF country director Wayne Camard suggested it was needed to devote maximum resources to relaunching the economy, which is expected to shrink by at least 6 percent this year.
"When I came back to Abidjan in May, uncertainty was everywhere. Would the government be able to collect taxes? What would they be able to finance this year? ... Whether to use their limited resources to meet their debt service commitments, which were piling up," he said.
"They decided that they needed a consolidation period."
Issued only last year, the Eurobond has been in default since the end of January, after Ivory Coast missed a $29 million coupon due to a bloody post-election conflict which only ended in April, and then failed to pay another in June.
"I think that the markets would be happier with a government that missed a few coupons and made it up later and had a strong recovery, than a government which met its debt service in a timely manner but failed to relaunch the economy," Camard said.
President Alassane Ouattara, himself a former IMF deputy director, is keen to kickstart the economy and relaunch badly needed infrastructure projects held back by a decade of crisis.
Camard said things could move quickly if tax revenues pick up and sovereign donors move towards completion on debt relief. Ivory Coast was on the verge of cancelling $3 billion of official debt before the crisis, which set talks back.
France this month committed $3 billion of additional aid from mid-2012 onwards.
"That's the hope: the debt relief will come from the official creditors and ... put them (Ivory Coast) in a fairly sound position by the end of next year," he said.
But he added that repayment of missed coupons may come before that, possibly early next year.
The state newspaper on Wednesday reported that tax receipts totalled 284 billion CFA francs by July 25, a third higher than expected. Camard said that was encouraging.
The deficit this year would be roughly 8.5 percent of GDP, "and most of that is foreign-financed," he said.
The government forecasts the economy will shrink 6.3 percent this year, but Camard said much of that decline was because of the crisis which ended with the arrest of former incumbent Laurent Gbagbo in April, so it was "water under the bridge".
He said industrial production was half its normal level in April, but in May it was up to 95 percent of the 2010 level.
"That's a good indication that businesses are back and the economy is starting to move again," Camard said. "A lot of businesses have gone under and won't come back, but next year will start to look more like a normal year."
The largely foreign-owned banks made large losses during the crisis when a liquidity crunch forced them to shut down, and Camard said donors like the International Finance Corporation were looking into injecting capital by buying up shares in them.
That would help government finances because banks were the main buyers of treasury bills, he said. But he warned:
"The budget situation in donor countries is very difficult. They (Ivory Coast) may not be able to count on the kind of financial assistance that they could in other circumstances."