Debt Sustainability in Low-Income Countries World Bank Economic Policy and Debt Department May 2006.
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Transcript of Debt Sustainability in Low-Income Countries World Bank Economic Policy and Debt Department May 2006.
Debt Sustainability in Low-Income Countries
World BankEconomic Policy and Debt Department
May 2006
Debt and Debt Relief in the World Bank
“Sector Units”
Finance, Private Sector, Infrastructure
Environment and Socially Sustainable
DevelopmentHuman
Development
Poverty Reduction and Economic Management
Economic Policy and Debt
2
Outline
1. Why is debt relief a global issue?
3. How did the international community respond?
4. How can we avoid debt distress in future?
2. What led to debt distress in the 1990s?
Why is debt relief to low-income countries a global issue?
Despite access to highly concessional financing, many low-income countries have needed significant debt relief
The need to meet the MDGs has led many to question why the poorest countries should pay debt service to rich creditors
4
The Main Arguments for Debt Relief*
Moral argument
Financing argument
Debt overhang or growth argument
“Evergreening” or efficient lending argument
5
* Acknowledgement: the following 8 slides are adapted from work by Christina Daseking; all views expressed are those of the current presenter and should not be attributed to the IMF, its Executive Board, or its management.
The Moral Argument
Poor countries should not devote scarce resources to pay rich creditors
But... No debt service means no borrowing Smaller overall aid envelope How pessimistic should we be?
6
Are poor countries doomed to stay poor?
Per Capita Income in U.S. dollars
Ghana
Thailand
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
7
The Financing Argument
Debt relief generates additional predictable resources in support of the MDGs
But... Additionality cannot be taken for granted There may be better ways to provide MDG
financing, as debt relief is: Backloaded Allocated based on past lending decisions Small relative to new development assistance
8
Debt Service and ODA for 28 Post-Decision-Point HIPCs, 1999-2003
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Total OfficialDevelopment
Assistance($68 billions)
Total Debt Service($14 billion)
9
The Debt Overhang or Growth Argument
As a high debt burden weakens incentives to invest, debt relief will foster growth
But... Growth effect beyond financing controversial: Is high
debt ratio cause or symptom of low growth? HIPC Initiative has already removed large portion of
debt Other factors are likely to be much more important
(trade deal, policies, institutions)
10
The “Evergreening” orEfficient Lending Argument
Debt relief removes roll-over concerns, allowing creditors to allocate new resources more efficiently
But... Allocation of debt relief resources itself benefits
heavy borrowers Performance-based lending already possible Debt relief may create incentive problems of its
own by raising expectations for more
11
“Caveat Emptor”
All arguments for debt relief have some appeal and merit…
… but none is without caveats
Bottom line: don’t expect too much!
Debt relief generates predictable aid, but it cannot generate sustainable growth
12
What led to debt problems in the 1990s?
Debt burdens in some low-income countries rose dramatically from 1973 to 1993
14
0%
50%
100%
150%
200%
250%
1970 1974 1978 1982 1986 1990 1994 1998 2002
HIPC Countries
Low-Income Countries
The Share of External Debt to GDP (in NPV terms)
Low Growth is the Main Cause of Debt Distress
Note: Source: World Bank Global Development Finance Statistics. The graph shows the actual unweighted average of debt-to-GDP ratios across LICs versus the simulated ratio had all countries grown at 5% in dollar terms, a performance achieved by just over one in three LICs during the period. 15
Average External Public Dyanamics, 1980-2002(NPV, percent of GDP)
0
20
40
60
80
100
120
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Actual
Simulated 5% growth
Developing countries are dependent on commodities
Commodities’ Share of Exports
Commodities’Share of GDP
Major Commodity
Zambia 99.8% 23.4% Copper
Mauritania 99.5% 39.4% Iron Ore
Guinea Bissau 97.7% 23.7% Cashew Nuts
Benin 93.7% 16.1% Cotton
Uganda 90.5% 11.1% Coffee
0
50
100
150
200
250
300
350
400
1970 1975 1980 1985 1990 1995 2000
Crude oil
Cotton
Copper
Coffee
0
50
100
150
200
250
300
350
400
1970 1975 1980 1985 1990 1995 2000
Crude oil
Cotton
Copper
Coffee
Commodity Price Trends
16
Other factors played a part…
Waste of resources due to weak institutions, poorly designed projects, corruption
Poor debt management and unrestrained non-concessional borrowing; “loan pushing” by creditors
Wars, civil strife, conflict
17
How did the international community respond?
Bilateral creditors have forgiven increasing amounts of debts owed to them
50%
67%80%
33%
90%
Toronto (1988)
London (1991)
Naples (1994)
Lyon (1996)
Cologne (1999)
Proportion of Grant Element in Paris Club Forgiveness
Note: The forgiveness listed is the reduction in the NPV of the rescheduled debts owed to the Paris Club members.19
Traditional debt relief reduced bilateral and commercial debt; not multilateral debt
0%
5%
10%
15%
20%
25%
30%
35%
40%
1970 1974 1978 1982 1986 1990 1994 1998 2002
Note: “Traditional Debt Relief” includes that of the Paris Club (bilateral debt owed to donor governments) and the London Club (commercial debt). Source: World Bank Global Development Finance 2005.
Share of Multilateral Debt of Overall External Debt
20
HIPC Was the First Comprehensive Global Debt Reduction Initiative to Include Multilateral Debt
Objectives Reduce external debts owed by HIPC governments Finance increase in government spending on poor people
Design Eligibility is based on external debts and income per
capita Requires government to formulate a poverty reduction
strategy paper (PRSP) through local consultation Requires satisfactory performance based on an IMF
program Then irrevocably provides debt relief – up to a pre-defined
threshold
21
Multilateral Institutions Have Provided Half of All HIPC Debt Relief Committed
Total Amount of Debt Forgiven (USD bn)
Note: The figures of committed debt relief are current as of April 2005 measured in end-2004 NPV terms, and include 38 HIPCs as of 2005. 22
13.8
3.6
0.93.0
7.69.2
Paris Club Other Bilaterals Commercial World Bank IMF OtherMultilaterals
Irrevocab
le d
eb
t relie
fThe HIPC Process
Decision Point
Determination of:- NPV of debt - Debt Relief- Triggers
Country fulfills HIPC
Eligibility
Criteria
- Meeting triggers
Completion Point
Interim period
- Satisfactory Performance under PRGF- Implementation of PRSP for one year
PreliminaryDiscussion
23
March 2006: 29 Countries are receiving debt relief, nine countries had yet to benefit…
Zambia
Post-HIPC
Uganda
Tanzania
Senegal
Rwanda
Niger
Nicaragua
Mauritania
Madagascar
Guyana
Ethiopia
Bolivia
Mozambique
Mali
Honduras
Ghana
Burkina Faso
Benin18
Interim-HIPC
Sierra Leone
São Tomé & Principe
Malawi
Guinea-Bissau
Guinea
The Gambia
Chad
Congo, Dem. Rep.
Cameroon
11
Pre-HIPC
Togo
Sudan
Somalia
Myanmar
Liberia
Lao PDR
Congo, Rep.
Comoros
Côte d’Ivoire
Central African Rep.9
Causes Conflict Arrears Weak governance
24
Burundi
May 2006: “Ring-Fencing” has identified four potentially eligible countries that may opt in…
Zambia
Post-HIPC
Uganda
Tanzania
Senegal
Rwanda
Niger
Nicaragua
Mauritania
Madagascar
Guyana
Ethiopia
Bolivia
Mozambique
Mali
Honduras
Ghana
Burkina Faso
Benin19
Interim-HIPC
Sierra Leone
São Tomé & Principe
Malawi
Guinea-Bissau
Guinea
The Gambia
Chad
Congo, Dem. Rep.
Cameroon
10
Pre-HIPC
Togo
Sudan
Somalia
Liberia
Congo, Rep.
Comoros
Côte d’Ivoire
Central African Rep.
11?
25
Burundi
Eritrea
Haiti
Kyrgyz Rep.
Nepal
HIPC has substantially reduced debts and pro-poor spending has increased
Notes: 1) Debt stocks of 28 decision point countries, USD billion 2004 NPV terms. 2) Projected debt service obligations of 28 decision point countries. 3) Debt service to government revenue for 28 decision point countries. 4) Ratio of poverty-reducing expenditures to government revenue. 26
Debts have been reduced1…
30
84Before Traditional Relief
After Add. Bilateral Debt Relief
and so have payments to creditors2…
1
2
3
4
5
6
2001 2002 2003 2004 2005 2006
USD
Billio
ns
Before HIPC Relief
After HIPC Relief
and increasing pro-poor spending4.
40.9%47.6%
1999 2003
reducing budget spent on debt payments3…
21.8%
13.4%
1999 2003
Pre-Conditions for Effective Debt Relief
Priority Sectors MDGs
HIPCCreditors
Gov’tBudget
Donors
Debt ServiceAid In
flows
1. Additional toaid inflows
2. Beyond arrears clearance
Debt in Arre
ars3.
Economically significant
HIPC Initiative
MDRI
Preliminary Results: Debt Relief and Priority Sector Spending
Debt Relief vs. Education (top) and Health (bottom) Expenditures
y = 0.292x + 0.0349
R2 = 0.1711
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%
ED
UC
/GD
P
Debt Relief vs. Poverty-Reducing Expenditures(IMF definition)
y = 0.9989x + 0.0501
R2 = 0.2329
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%DR/GDP
PR
E/G
DP
DR/GDP
y = 0.2073x + 0.0158
R2 = 0.2097
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%
HEA
LTH
/GD
POther measures of poverty-reducing expenditures are also increasing with debt relief
Institutions and policies are better in countries that have gone through HIPC
Note: Post, interim and pre-HIPC refer to the countries that are at the pre-decision point (10 countries), decision point (10 countries) and completion point (18 countries) as of end 2005. The first bars refer to 1998, the second bars to 2003. 29
HIPCs: Evolution of CPIA ratings (1998 and 2003)
2.00
2.20
2.40
2.60
2.80
3.00
3.20
3.40
3.60
3.80
Post-HIPC Interim-HIPC Pre-HIPC
CP
IA r
ati
ng
s
Further Debt Cancellation for HIPCs
30
1
2
3
HIPCs will receive 100 percent debt cancellation from IDA, AfDF and the IMF under Multilateral Debt Relief Initiative
Debt relief is to be provided at HIPC completion point
Average debt/export ratios in post-completion point HIPCs would fall from about 140 percent to 50 percent in present value terms
Donors will compensate IDA and AfDF for reflows lost due to debt relief. This should result in approximately $50 billion in additional flows to low-income countries
4
MDRI significantly reduces debt stock ratios in HIPCs(18 CPs: NPV of Debt to Exports, Post MDRI)
0
50
100
150
200
250
300
Ugand
a
Burki
na F
aso
Mau
rita
nia
Benin
Zam
bia
Moz
ambi
que
Nig
er
Rwan
da
Ethi
opia
Tanz
ania
Mad
agas
car
Mal
i
Sene
gal
Ghana
Boliv
ia
Nicar
agua
Hon
dura
s
Guyan
a
Prior to MDRIPost MDRI
31
Debt service reduction due to MDRI
(18 completion point HIPCs)
0.0
0.5
1.0
2006 2011 2016 2021 2026 2031 2036 2041
$ billions
AfDF
IMF
IDA
32
How MDRI Affects IDA Allocations
Source: IDA staff estimates
Composition of IDA Assistance to 18 completion point HIPCs, FY07-FY26 (SDR Million)
0
100
200
300
400
500
600
700
800
900
1000
FY07FY09
FY11FY13
FY15FY17
FY19FY21
FY23FY25
Tota
l d
eb
t re
lief
1500
1550
1600
1650
1700
1750
1800
1850
1900
Tota
l N
ew
ID
A c
om
mit
men
t
Total debt relief
Total new IDA commitments
33
How do we avoid future debt problems?
Low debt ratios in HIPCs could result in “free riding” by
commercial creditors Debt Burden Indicators - Post MDRI Debt Relief:
18 CP HIPCs vs. Selected Lower Middle Income Countries
HondurasMauritania
Guyana
BoliviaNicaragua
Syria
Guatemala
China
Jordan
EcuadorBrazil
Peru
Thailand
Philippines
0
50
100
150
200
250
300
350
400
0 10 20 30 40 50 60 70 80 90 100
NPV of debt-to-GDP
NP
V o
f d
eb
t-to
-Exp
ort
s
18 CP HIPCsLower Middle Income Countries
35
Reaching the MDGs must not create a new debt problem
The Debt Sustainability Framework for Low-Income Countries (DSF) tries to ensure that countries receive financing on terms that are commensurate with their ability to service debt
The DSF determines up front the mix of World Bank (IDA) loans and grants Countries with high risk of a debt crisis only receive grants Over 40 low-income countries will now receive either 100% or
50% of their World Bank finance in the form of grants Countries with low debts receive more resources
The DSF is an “ex-ante” tool for addressing issues related to debt sustainability.
36
Notes: Thresholds apply to public and publicly guaranteed (PPG) external debt, only. The Country Policy and Institutional Assessment (CPIA) assesses the quality of a country’s present policy and institutional framework. “Quality” means how conducive that framework is to fostering sustainable, poverty-reducing growth and the effective use of development assistance.
Institutional strength and quality of policies
Weak
CPIA<3.25
Medium
3.25<CPIA<3.75
Strong
CPIA>3.75
NPV of debt-to-GDP 30 40 50
NPV of debt-to-exports 100 150 200
NPV of debt-to-revenue 200 250 300
Debt service-to-exports 15 20 25
Debt service-to-revenue 25 30 35
Sustainable levels of debt burden depend on a country’s institutions and policies
37
+10%
-10%
Threshold
High Risk100% Grants
Medium Risk50% Grants
Low Risk100% Soft Loans
Debt burdens determine the mix of world bank loans and grants
38
From July 2006, grants will be based on debt sustainability analyses under the LIC DSF
Accurate debt data Macroeconomic and
financing assumptions Baseline scenario and
standardized stress tests Staff judgment
NPV of debt-to-GDP ratio
0
10
20
30
40
50
60
70
80
2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026
Baseline
Historical scenario
Most extreme stress test
Threshold
NPV of debt-to-exports ratio
0
50
100
150
200
250
2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026
Baseline
Historical scenario
Most extreme stress test
Threshold
Debt service-to-exports ratio
0
5
10
15
20
25
30
35
40
2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026
Baseline
Historical scenario
Most extreme stress test
Threshold
39
Conclusions
1
3
4
Debt reduction under the HIPC Initiative has reduced external debts (multilateral and other) by two-thirds. It has helped increase pro-poor spending and promoted economic reform
Debt cancellation under the Multilateral Debt Relief Initiative will have a beneficial impact on HIPC debt ratios and provide additional resources for all IDA-only borrowers
Low-income countries experienced debt repayment difficulties due to a variety of factors, both exogenous and endogenous
Going forward, the World Bank has adopted an ex-ante frameworkto promote debt sustainability in low-income countries
5
40
Debt relief is only one part of the solution to financing needs and policy dialogue: expectations should be realistic about what it can deliver
2
A wealth of information is available on the World Bank website
http://www.worldbank.org/debt
41
Q & A