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Africa: Debt Relief Update
AfricaFocus Bulletin
May 30, 2006 (060530)
(Reposted from sources cited below)
Editor's Note
Debt relief has become a significant vehicle of resource transfer
to countries under the World Bank/IMF HIPC program, concludes a new
internal World Bank evaluation. But in eight countries completing
the program, debt ratios already again exceed the Bank's
sustainability level of 150 percent debt-to-exports ratio.
The report notes that net transfers to HIPC countries doubled from
$8.8 billion in 1999 to $17.5 billion in 2004. These additional
resources have increased budget flexibility on supporting social
programs. But changes in exchange rates as well as new borrowing
have left program graduates Rwanda, Ethiopia, Uganda, Tanzania,
Mauritania, Burkina Faso, Ghana, and Mali with newly unsustainable
levels of debt.
This AfricaFocus Bulletin contains brief excerpts from the report
"Debt Relief for the Poorest: An Evaluation Update of the HIPC
Initiative" by the World Bank Independent Evaluation Group. The
full report is available at http://www.worldbank.org/ieg.
Other recent reports on the current status of debt relief can be
found at the Eurodad website (http://www.eurodad.org). A study of
the current status of debt relief and related economic policies in
Zambia, by the Jesuit Centre for Theological Reflection in Zambia,
is available on Eurodad and also at the Centre's website
(http://www.jctr.org.zm).
For earlier AfricaFocus Bulletins on Africa's debt, visit
http://www.africafocus.org/debtexp.php.
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Debt Relief for the Poorest
An Evaluation Update of the HIPC Initiative
The World Bank Independent Evaluation Group
http://www.worldbank.org/ieg
2006
[excerpts only. For full text visit http://www.worldbank.org/ieg.]
Main Messages
- HIPC has channeled additional resources to qualifying countries.
- HIPC has reduced debt ratios to half their levels before debt
relief. But debt ratios have increased since completion point, and
in eight countries, once again, exceed HIPC thresholds.
- Six of eight post-completion-point countries with a new debt
sustainability analysis have only a moderate risk of debt distress.
But all eight remain vulnerable to export shocks and still require
highly concessional financing and prudent debt management.
- Debt sustainability requires policy actions by governments and
external partners to improve repayment capacity.
- Countries that are not yet at completion point face serious
challenges in managing their economies that will affect their
prospects for reaping the potential benefits of debt reduction.
- In future debt relief efforts, donors will have to ensure that
the resulting allocation of concessional resources rewards
better-performing countries overall.
Executive Summary
In the past decade, debt relief has become an increasingly
significant vehicle for delivering development aid, with emerging
debt reduction proposals now aiming to provide 100 percent debt
cancellation. This review updates the March 2003 evaluation of the
Heavily Indebted Poor Countries Initiative (HIPC), Debt Relief for
the Poorest: An OED Review of the HIPC Initiative, ...
Since the 2003 evaluation, 12 countries have progressed to
receiving irrevocable debt relief and two more countries have
qualified for relief. About $50 billion has been committed in
nominal debt service relief under the Enhanced HIPC Initiative2 to
decision-point countries, of which $15.4 billion has been committed
since the previous evaluation. This update builds on the 2003
evaluation and finds that many of its conclusions remain relevant
for the HIPC Initiative and are potentially instructive for future
debt relief initiatives.
Debt Sustainability.
The Enhanced HIPC Initiative has reduced $19 billion of debt in 18
countries, thereby halving their debt ratios. But in 11 of 13
post-completion-point countries for which data are available, the
key indicator of external debt sustainability has deteriorated
since completion point. In eight of these countries, the ratios
once again exceed HIPC thresholds. Changes in discount and exchange
rates have worked to increase debt ratios. The effect of improved
exports and revenue mobilization on debt ratios has been offset by
new borrowing. Six of eight post-completion-point countries with
new debt sustainability analyses are considered to have only a
moderate risk of debt distress, but all remain vulnerable to export
shocks and still require highly concessional financing and sound
debt management. Debt reduction alone is not a sufficient
instrument to affect the multiple drivers of debt sustainability.
Sustained improvements in export diversification, fiscal
management, the terms of new financing, and public debt management
are also needed, measures that are outside the ambit of the HIPC
Initiative.
Policy Performance.
Countries past the completion point started out with higher scores
on key policy ratings than other low-income countries and they
still score higher. Countries not yet at completion point both
decision-point and pre-decisionpoint countries have, on average,
the lowest ratings of all low-income countries and face serious
challenges in managing their economies that will affect their
prospects for reaping the potential benefits of debt reduction.
Even though the initiative has granted poorer performing countries
more time to begin a reform program supported by the World Bank and
the IMF, they are held to the same track record requirements as
countries that became eligible earlier. Fiscal and debt management
are areas of particular weakness in many HIPC countries.
Poverty Reduction.
Debt relief was intended to contribute to poverty reduction. The
requirement to develop and implement a country-owned poverty
reduction strategy has been an important and beneficial outcome of
the initiative. These strategies have tended to emphasize social
sector spending rather than a more balanced approach to growth and
poverty reduction. By continuing to track public expenditures
deemed "poverty reducing," the initiative's approach to poverty
reduction has leaned toward channeling additional resources to
social expenditures. The emphasis on expenditures has prompted the
Bank and the IMF to do more to upgrade public expenditure
management systems in HIPC countries. These efforts have resulted
in only modest improvements.
Creditor Participation.
The HIPC Initiative was innovative in its attempt to seek a
comprehensive approach among all creditors to debt reduction. The
multilaterals and Paris Club creditors have committed most of their
share of debt relief. But the initiative's structure as a voluntary
agreement has hindered efforts to achieve full participation of all
creditors. The sluggish participation of non Paris Club and
commercial creditors, who were not involved in shaping the
initiative's design, has generated a shortfall of 8 percent of
total expected HIPC assistance.
Additionality of Resources.
HIPC has channeled additional development resources to its
qualifying countries. Net transfers to HIPC countries doubled from
$8.8 billion in 1999 to $17.5 billion in 2004, while transfers to
other developing countries grew by only a third. Debt relief has
become a significant vehicle of resource transfer to HIPC
countries. In the past year, eight additional non-HIPC low-income
countries have become potentially eligible for HIPC. The repeated
extension of the deadline for eligibility has significantly
expanded the reach of the initiative. The emergence of proposals
for future rounds of debt relief suggests that debt relief is
becoming an ongoing mechanism for resource transfer.
Implications for Future Debt Relief Efforts.
The experience under HIPC suggests five lessons for future debt
relief efforts.
- Debt reduction is not sufficient for debt
sustainability. Future initiatives need to be clear about the
objectives of debt relief and how their outcomes will be measured.
In addition, to ensure debt sustainability they need to stress the
importance of other policy actions by governments and external
partners to improve repayment capacity.
- Does debt relief add to or substitute for other aid flows? To
demonstrate that future debt relief initiatives are additional,
donors will need to establish what net transfers both multilateral
and bilateral would be in the absence of debt relief.
- The initiative is delivering an increasing share of concessional
resources to HIPC countries. Since non-HIPC countries do not have
access to these resources, donors will need to ensure that the
resulting pattern of resource allocation rewards better performers
overall.
- Debtors cannot oblige creditors to participate in debt relief
under voluntary initiatives. Involving both creditors and debtors
at the design stage of proposals for debt relief can be an
important step in disseminating information about the workings of
the initiative and securing the cooperation of all creditors.
- Future debt relief initiatives may also be expected to
continually revisit and extend deadlines for eligibility.
Extensions of the deadline keep open the opportunity for countries
to receive debt relief, while holding all countries to the same
standards. On the other hand, they could provide incentives to
countries to increase their borrowing in order to avail themselves
of debt relief.
Chapter 1: Evaluation Essentials
Introduction
In the past decade, debt relief has become an increasingly
significant vehicle for delivering development aid. The
international community has recently galvanized itself to provide
another round of debt relief. This review updates the March 2003
evaluation of the Heavily Indebted Poor Countries Initiative
(HIPC), Debt Relief for the Poorest: An OED Review of the HIPC
Initiative (OED 2003).
At that time, six countries had received irrevocable debt relief
at completion point (CP) under the Enhanced HIPC (E-HIPC)
Initiative, and 20 had qualified and were receiving interim relief
at decision point (DP) (see appendix A for a description of how the
initiative works). Since then, 12 of those countries have
progressed to completion point, and two more countries have
qualified for relief. Around $50 billion has been committed in
nominal debt service relief to decision-point countries under
E-HIPC, of which $15.4 billion has been committed since the 2003
evaluation (World Bank and IMF 2003a, 2005d).
...
The 2003 evaluation found the HIPC Initiative to be highly relevant
in addressing a key obstacle facing many poor countries, and noted
that the initiative would succeed in substantially achieving its
fundamental goal of reducing the excessive debt burden of the
qualifying countries, if the anticipated debt relief was delivered
in full. But it found that achieving the expanded objectives of the
initiative a "permanent" exit from debt rescheduling, promoting
growth, and releasing resources for social expenditures targeted at
poverty reduction would require actions by donors and HIPC
governments beyond the scope and means of the initiative. HIPC
governments would need to have sound policy frameworks and balanced
development strategies, and the international community would need
to assist countries to enhance their exports and build needed
institutional capacities, while ensuring that HIPC debt relief is
truly additional to other aid flows.
...
The 2003 evaluation recommended that the Bank clarify the purposes
and objectives of the initiative, which had progressively become
more ambitious. In its first progress report issued
after the 2003 evaluation, the Bank stated that the key objective
of E-HIPC was "to deal comprehensively with the overall debt burden
of eligible countries by removing their debt overhang within a
reasonable period of time and providing a base from which to
achieve debt sustainability and exit the rescheduling cycle" (World
Bank and IMF 2003d, emphasis added). This is a less ambitious
formulation than the earlier one of providing a "permanent exit
from rescheduling."
The poverty reduction objective of "freeing up resources for higher
social spending" was neither specifically included in that progress
report as an objective, nor explicitly removed.
The Bank and the IMF continue to track debt service payments and
"poverty reducing" expenditures in monitoring the HIPC Initiative,
suggesting that the freeing up of resources for poverty reduction
remains an objective. From the perspective of creditors and civil
society, poverty reduction is the primary if not the sole objective
of debt relief. It has proved challenging for the Bank to manage
the enduring expectations of the international community for the
initiative. The HIPC Initiative remains imbued with the
responsibility of not just achieving debt sustainability but
freeing up resources for achieving poverty reduction and the MDGs.
Design Allows Countries More Time to Become Eligible for Relief.
Since March 2003, design changes have allowed countries, without an
International Development Association (IDA)- or International
Monetary Fund (IMF)-supported program in place, more time to become
eligible for relief. The original two-year deadline for meeting the
E-HIPC eligibility requirements has been extended three times (see
appendix B for details). Only four of the 14 countries that
benefited from the extensions have managed to reach decision point
since 1998. Ten countries are still predecision point).
In 2004, when the deadline was extended to end-2006, the Executive
Boards of the Bank and IMF decided to close the initiative to new
entrants by "ring-fencing" a final list of countries potentially
eligible for assistance under the initiative (World Bank and IMF
2004d). In September 2005, staff identified eight potentially
eligible low-income countries (LIC) that were not on the original
list of 38 countries (World Bank and IMF 2005d).9 Staff had not
assessed these countries' eligibility earlier, mainly owing to the
lack of data on their debt.
The repeated extension of the deadline for eligibility and the
resulting increase in the number of eligible countries has
significantly expanded the reach of the initiative. The emergence
of proposals for future rounds of debt relief suggests that debt
relief is becoming an ongoing mechanism for resource transfer. This
experience under HIPC suggests that future debt relief efforts may
also be expected to continually revisit time frames for
eligibility. Extensions of the deadline keep open the opportunity
for countries to receive debt relief, while holding all countries
to the same standards. On the other hand, they could provide
incentives to countries to increase their borrowings in order to
avail themselves of debt relief.
Box 1.1. Findings from the 2003 Evaluation
Objectives and Design.
The HIPC Initiative has acquired multiple objectives, while the
instruments at its disposal have remained the same. The objective
of promoting growth by removing the debt overhang has been
maintained, the expectations of what it can deliver on debt
sustainability have increased, and creating fiscal space for
increased social expenditures has been added as an explicit
objective. Debt forgiveness does not guarantee additionality, and
without additional resources, it is unclear how the initiative, as
it is designed, will create fiscal space. Management should clarify
the objectives and ensure the consistency of the design with the
main objectives.
Commitment of HIPC Assistance and Its Additionality.
Achieving even the more modest objective of reducing debt to a
level that provides countries with a reasonable chance of
sustaining their external debts, would require full creditor
participation to deliver the promised level of relief. The HIPC
Initiative assumes that all creditors will participate, but cannot
assure this. Achievement of the objective of increased fiscal space
for social expenditures rests on the key assumption that debt
relief will be additional to other aid transfers. There is not
enough evidence yet to definitively determine the full impact of
debt relief.
Debt Sustainability.
While the use of the debt inventory methodology for assessing the
current level of debt is a positive feature of the initiative, the
methodological basis underlying the projections of future levels of
debt remains unclear. The lack of transparency of the economic
models behind these projections and the overly optimistic growth
assumptions have made debt sustainability analyses ambiguous (in
regard to their reliability as assessments of future debt
sustainability). More realistic growth forecasts and better risk
analysis of the projected debt burdens in the debt sustainability
analyses would provide a better assessment of each country's
likelihood of meeting the initiative's debt sustainability
threshold.
Maintaining Policy Performance.
The track record requirement for sustained policy and structural
reforms has been applied flexibly to bring more countries into the
program. But the progressive relaxation of the requirement for
"millennium rush" countries that qualified in late 2000 raises the
risk of not achieving the HIPC objectives, as these countries face
a tougher challenge in meeting the necessary conditions to reach
their completion point. It is critical to maintain the standards
for policy performance to ensure that the risks to achieving and
maintaining the initiative's objectives are minimized.
Balance between Pro-Poor Growth and Social Expenditures for Poverty
Reduction.
The initiative places a heavy emphasis on social expenditures as
the primary means of poverty reduction. This is evident in
conditions set for completion point and the focus in progress
reports and the IMF's Poverty Reduction and Growth Facility (PRGF)
reviews on tracking social expenditures. The initiative's
performance criteria should be better balanced between growthenhancing
and social expenditure priorities and be supported by
additional diagnostic work on the efficiency of public
expenditures, identifying sources of growth and developing
appropriate sectoral strategies as the basis of appropriate
benchmarks.
Source: OED 2003.
AfricaFocus Bulletin is an independent electronic publication
providing reposted commentary and analysis on African issues, with
a particular focus on U.S. and international policies. AfricaFocus
Bulletin is edited by William Minter.
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