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Debt Relief for Poor Debt Relief for Poor Countries: Rationale and Countries: Rationale and

Expectations Expectations

Christina DasekingChristina DasekingDeputy Division ChiefDeputy Division Chief

Policy Development and Review Policy Development and Review Department, IMFDepartment, IMF

The views expressed in this presentation are those of the author and should not be The views expressed in this presentation are those of the author and should not be attributed to the International Monetary Fund, its Executive Board, or its management.attributed to the International Monetary Fund, its Executive Board, or its management.

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Slide 1: Main Arguments for Debt Slide 1: Main Arguments for Debt Relief to Poor CountriesRelief to Poor Countries

Moral argumentMoral argument Financing argumentFinancing argument Debt overhang/growth argumentDebt overhang/growth argument ““Evergreening”/efficient lending Evergreening”/efficient lending

argumentargument

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Slide 2: The Moral ArgumentSlide 2: The Moral Argument

Poor countries should not devote Poor countries should not devote scarce resources to pay rich creditorsscarce resources to pay rich creditors

But...But...• No debt service means no borrowingNo debt service means no borrowing• Smaller overall aid envelopeSmaller overall aid envelope• How pessimistic should we be? How pessimistic should we be?

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Slide 3: Are poor countries doomed Slide 3: Are poor countries doomed to stay poor?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

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Slide 4: The Financing ArgumentSlide 4: The Financing Argument

Debt relief generates additional Debt relief generates additional predictable resources in support of the predictable resources in support of the MDGsMDGs

But...But...• Additionality cannot be taken for grantedAdditionality cannot be taken for granted• There may be better ways to provide MDG There may be better ways to provide MDG

financing, as debt relief is:financing, as debt relief is: BackloadedBackloaded Allocated based on past lending decisionsAllocated based on past lending decisions Small relative to new development assistanceSmall relative to new development assistance

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Slide 5: Debt Service and ODA for 28 Slide 5: Debt Service and ODA for 28 Post-Decision-Point HIPCs, 1999-2003Post-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)

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Slide 6: The Debt Slide 6: The Debt Overhang/Growth ArgumentOverhang/Growth Argument

As a high debt burden weakens incentives As a high debt burden weakens incentives to invest, debt relief will foster growthto invest, debt relief will foster growth

But...But...• Growth effect beyond financing controversial: Growth effect beyond financing controversial:

Is high debt ratio Is high debt ratio causecause or or symptomsymptom of low of low growth?growth?

• HIPC Initiative has already removed large HIPC Initiative has already removed large portion of debtportion of debt

• Other factors are likely to be much more Other factors are likely to be much more important (trade deal, policies, institutions)important (trade deal, policies, institutions)

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Slide 7: The “Evergreening”/Efficient Slide 7: The “Evergreening”/Efficient Lending ArgumentLending Argument

Debt relief removes roll-over concerns, Debt relief removes roll-over concerns, allowing creditors to allocate new allowing creditors to allocate new resources more efficientlyresources more efficiently

But...But...• Allocation of debt relief resources itself Allocation of debt relief resources itself

benefits heavy borrowersbenefits heavy borrowers• Performance-based lending already possiblePerformance-based lending already possible• Debt relief may create incentive problems of Debt relief may create incentive problems of

its own by raising expectations for moreits own by raising expectations for more

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Slide 8: ConclusionsSlide 8: Conclusions

All arguments for debt relief have All arguments for debt relief have some appeal and meritsome appeal and merit

But none is without caveatsBut none is without caveats Bottom-line: Don’t expect too much!Bottom-line: Don’t expect too much! Debt relief generates predictable aid, Debt relief generates predictable aid,

but it cannot generate sustainable but it cannot generate sustainable growth.growth.