Debt Relief and Debt SustainabilityIntroduction to Global Issues Course

27 September 2006

Dana Weist (dweist@worldbank.org)

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