Debt Relief and Debt SustainabilityIntroduction to Global Issues Course
27 September 2006
Dana Weist ([email protected])
Context
What multilateral debt relief has been provided and what has it achieved?
How do we ensure debt sustainability and avoid future debt crises?
Debt relief is part of international aid
43.343.5
40.231.9
23.0
4.2
2004 2005
Other special purpose grants*
"Programmable" ODA
Debt relief$79.6 billion
$106.5 billion
•Includes technical cooperation, emergency and distress relief, contributions to NGOs, admin costs
Source: OECD DAC
In the 1990s, some low-income countries experienced debt crises
0%
50%
100%
150%
200%
250%
1970 1974 1978 1982 1986 1990 1994 1998 2002
HIPC Countries
Low-Income Countries
Share of External Debt to GDP (in NPV terms)
Low growth led to unsustainable debt burdens, fueled by poor policies, inadequate debt management and shocks
Note: Source: World Bank Global Development Finance Statistics.
Historical
5% Growth
0
20
40
60
80
100
120
140
160
180
1980 1985 1990 1995 2000
Alternative Debt Scenarios for LICs
Development community concerned that excessive debt levels were a drag on economic growth and stifling efforts to reduce poverty
HIPC: 1st comprehensive global debt reduction initiative
Rationale– The “HIPC Initiative” funds debt relief for all Highly Indebted Poor Countries (HIPCs)
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– Encourages countries to undertake policy reforms and use savings to accelerate pro-
poor growth 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– 40 countries potentially eligible for relief
Estimated debt relief: US$61 billion (end-2005 NPV terms)
Multilateral Debt ReIief Initiative (MDRI)
Overview– Multilateral framework proposed by G8 countries in 2005– WB/IDA, IMF and AfDF provide 100 percent debt relief on eligible
debts to countries that have completed HIPC process
Objectives– Further reduce debts of HIPCs– Provide additional resources to achieve Millenium Development
Goals
Estimated debt relief: US$50 billion (end-2005 NPV terms)
29 countries are receiving debt relief; 11 countries have yet to benefit
Zambia
Post-HIPC
UgandaTanzaniaSenegalRwandaNigerNicaragua
Mauritania
Madagascar
Guyana
Ethiopia
Bolivia
Mozambique
Mali
Honduras
Ghana
Burkina Faso
Benin
20
Interim-HIPC
Sierra LeoneSao Tome & Principe
Congo, Republic of
Guinea-BissauGuineaThe Gambia
ChadCongo DRC
9
Pre-HIPC
TogoSudanSomalia
Kyrgyz RepublicLiberia
HaitiEritrea
ComorosCote d’Ivoire
Central African Rep.11
Causes Conflict Arrears Weak governance
Burundi
Cameroon
Malawi
Nepal
9
Ensuring debt sustainabilityand avoiding future debt crises
• Debt Sustainability Framework (DSF) for low-income countries ensures that governments do not borrow more than they are able to pay back
• Debt relief is not enough– Hasn’t permanently reduced debt burdens – nor can it
– Need accelerated growth in incomes, exports and repayment capacity as well as better debt management
– Underlying development challenges: establishing appropriate government policies, institutions and governance; minimizing vulnerability to shocks
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