external debt management and the hipcs thorvaldur gylfason
TRANSCRIPT
It dependsIt dependsIf foreign borrowing is used well,If foreign borrowing is used well,
to finance to finance profitable investmentsprofitable investments, , etc.,etc.,
then borrowing may be a good thingthen borrowing may be a good thing
Many countries have developed with Many countries have developed with the aid of external loansthe aid of external loansThis is how the US built its railways This is how the US built its railways
and how Korea managed to develop and how Korea managed to develop so rapidly from the 1960s onwardsso rapidly from the 1960s onwards
Both countries Both countries paid backpaid back their debts their debts
Debt: Good or bad?Debt: Good or bad?
Many other countries have fared less Many other countries have fared less well with their external debt well with their external debt strategies because ...strategies because ...... they did ... they did notnot use their foreign loans use their foreign loans
wellwell
Too often, countries have borrowed Too often, countries have borrowed abroad to finance consumption, not abroad to finance consumption, not investmentinvestmentConsumption does not increase the Consumption does not increase the
ability of indebted countries to service ability of indebted countries to service their debts, nor does low-quality their debts, nor does low-quality investmentinvestment
But But high-quality investmenthigh-quality investment does does
Debt: Good or Debt: Good or badbad??
If the world interest rate is lower If the world interest rate is lower than the domestic interest rate, than the domestic interest rate, the country will be a the country will be a borrowerborrower in in world financial markets world financial markets
Domestic firms will want to borrow Domestic firms will want to borrow at the lower world interest rateat the lower world interest rate
Domestic households will reduce Domestic households will reduce their saving because the domestic their saving because the domestic interest rate moves down to the interest rate moves down to the level of the world interest ratelevel of the world interest rate
Conceptual Conceptual frameworkframework
Real interest rate
0 Saving, investment
Saving
Investment
World interest rate
World equilibrium
Domesticsaving
Domesticinvestment
Domestic equilibrium
Borrowing
Conceptual Conceptual frameworkframework
0
Saving
World interest rate
Investment
World equilibrium
Domestic equilibrium
A
B
C
D
Borrowing
Conceptual Conceptual frameworkframework
Real interest rate
Saving, investment
0
Saving
Investment
World equilibrium
Domestic equilibrium
A
Consumer surplusbefore borrowing
C
B
Producer surplusbefore borrowing
Real interest rate
Saving, investment
Conceptual Conceptual frameworkframework
0
Saving
World interest rate
Investment
World equilibrium
Domestic equilibrium
A
Consumer surplusafter borrowing
B D
CProducer surplusafter borrowing
Borrowing
Conceptual Conceptual frameworkframework
Real interest rate
Saving, investment
The area D shows the increase in total surplus and represents the gains from borrowing
Before trade After trade Change
Consumer surplusConsumer surplus A A + B + D + (B + D)
Producer surplusProducer surplus B + C C - B
Total surplusTotal surplus A + B + C A + B + C + D + D
Conceptual Conceptual frameworkframework
Borrowers are better off and Borrowers are better off and savers are worse offsavers are worse off
Borrowing raises the economic Borrowing raises the economic well-being of the nation as a whole well-being of the nation as a whole because the gains of borrowers because the gains of borrowers exceed the losses of saversexceed the losses of savers
If world interest rate is If world interest rate is aboveabove domestic interest rate, savers are domestic interest rate, savers are better off and borrowers are worse better off and borrowers are worse off, and nation as a whole still off, and nation as a whole still gainsgains
Gains from trade: Gains from trade: Three main Three main conclusionsconclusions
Debt stockDebt stockUsually measured in dollars or other Usually measured in dollars or other
international currenciesinternational currenciesbecause because debt needs to be debt needs to be
servicedserviced in foreign currency in foreign currency
Debt ratioDebt ratioRatio of external debt to GDPRatio of external debt to GDPRatio of external debt to exportsRatio of external debt to exports
More useful for some purposes, More useful for some purposes, because because export earnings reflect the export earnings reflect the ability to service the debtability to service the debt
External debt: External debt: Key conceptsKey concepts
External debt: External debt: Key Key conceptsconcepts
Debt burdenDebt burdenAlso called Also called debt service ratiodebt service ratio
Equals the ratio of amortization Equals the ratio of amortization and interest payments to and interest payments to exportsexports
q = debt service ratioA = amortizationr = interest rate DF = foreign debtX = exports
X
rDAq
F
Interest burdenInterest burdenRatio of interest payments to Ratio of interest payments to
exportsexports
X
Aa q = a + bq = a + b
Amortization burdenAmortization burdenAlso called Also called repaymentrepayment burden burden
Ratio of amortization to Ratio of amortization to exportsexports
X
rDb
F
External debt: External debt: Key conceptsKey concepts
Magnitude of the debtMagnitude of the debtDebt should not become too largeDebt should not become too large
How large is too large?How large is too large?
Measurement of the debtMeasurement of the debtGross or net?Gross or net?
May subtract foreign reserves in excess May subtract foreign reserves in excess of three months of imports of three months of imports
Composition of the debtComposition of the debtFDI, portfolio equity, long-term loans, FDI, portfolio equity, long-term loans,
short-term loansshort-term loans
External debt: External debt: Magnitude and Magnitude and compositioncomposition
Composition of the debtComposition of the debtForeign direct investmentForeign direct investment
Least likely to flee, most desirableLeast likely to flee, most desirable
Portfolio equityPortfolio equity
Long-term loansLong-term loans
Short-term loansShort-term loansMost volatile, least desirableMost volatile, least desirable
As a rule, outstanding short-term As a rule, outstanding short-term debt should not exceed foreign debt should not exceed foreign reservesreserves
External debt: External debt: Magnitude and Magnitude and compositioncomposition
Indonesia Indonesia
and Korea and Korea
broke this broke this
rule in rule in 19961996
How can we figure out a How can we figure out a country’s debt burden?country’s debt burden?Divide through definition of Divide through definition of qq by by
incomeincomeNow we have expressed Now we have expressed the debt service ratio in the debt service ratio in terms of familiar terms of familiar quantities: the interest quantities: the interest rate rate rr, the debt ratio , the debt ratio DDFF/Y/Y, and the export , and the export ratio ratio X/YX/Y as well as the as well as the repayment ratio repayment ratio A/YA/Y
Y
XY
Dr
Y
A
q
F
External debt: External debt: NumbersNumbers
Suppose that Suppose that r = 0.06r = 0.06
DDFF/Y = 0.50/Y = 0.50
A/Y = 0.05A/Y = 0.05
X/Y = 0.20X/Y = 0.20
4.02.0
08.0
0.2
5.006.005.0q
Here we have a Here we have a country that has to country that has to use use 40% of its export 40% of its export earningsearnings to service to service its external debtits external debt
Heavy burden!Heavy burden!
Y
XY
Dr
Y
A
q
F
Numerical exampleNumerical example
African countries:African countries: External External debtdebt 2001 2001 (% of exports(% of exports))
0 200 400 600 800 1000 1200 1400
E quator ial GuineaBotswanaSwazi land
MozambiqueE r i tr ea
South Af r icaLesotho
Cape Ver deT anzania
Gambia, T heGabon
AngolaBenin
Niger iaKenya
SenegalMal i
UgandaGhana
Congo, Rep.ZimbabweCamer oon
GuineaChad
Bur kina FasoCote d'Ivoi r e
Comor osNiger
MalawiE thiopia
Maur i taniaZambia
RwandaCentr al Af r ican
Sao T ome and P r incipeGuinea-Bissau
Sier r a LeoneCongo, Dem. Rep.
Bur undiMadagascar
Liber ia
Ceiling
African countries:African countries: External External debtdebt 2001 ( 2001 (%% of GNPof GNP))
0 50 100 150 200 250 300 350 400 450 500
BotswanaT anzania
UgandaSouth Af r ica
Swazi landMozambique
Bur kina FasoE r i tr ea
BeninKenyaChad
Cape Ver deZimbabwe
RwandaLesotho
E quator ial GuineaMadagascar
E thiopiaSenegal
NigerCentr al Af r ican Republ ic
Mal iGuinea
Camer oonGambia, T he
GhanaComor osNiger iaMalawiGabon
Bur undiCote d'Ivoi r eSier r a Leone
ZambiaAngola
Maur i taniaCongo, Rep.
Congo, Dem. Rep.Guinea-Bissau
Sao T ome and P r incipeLiber ia
Ceiling
African countries: African countries: External External debt servicedebt service 2001 (% of 2001 (% of exportsexports))
0 20 40 60 80 100 120
E quator ial GuineaLiber ia
BotswanaCongo, Dem. Rep.
E r i tr eaSudan
Seychel lesSwazi land
MozambiqueComor os
Congo, Rep.Gambia, T heCape Ver de
T ogoNiger
ZimbabweMaur i tius
UgandaMalawi
BeninChadMal i
T anzaniaRwanda
Bur kina FasoSouth Af r ica
ZambiaCentr al Af r ican
Niger iaGuinea
LesothoCamer oon
GhanaSenegal
Cote d'Ivoi r eGabonKenya
E thiopiaMaur i tania
Sao T ome andAngola
Bur undiGuinea-Bissau
MadagascarSier r a Leone
Ceiling
African countries:African countries: ExportsExports 2001 (% of 2001 (% of GDPGDP))
0 20 40 60 80 100
BurundiRwanda
Burkina FasoUganda
Central Af rican RepublicSudanChad
BeninEthiopia
TanzaniaComoros
NigerSierra Leone
Congo, Dem. Rep.Eritrea
MozambiqueZimbabwe
Cape VerdeKenya
MalawiZambiaGuinea
South Af ricaMadagascar
SenegalMali
CameroonTogo
LesothoMauritania
Sao Tome and PrincipeCote d'Ivoire
Guinea-BissauNigeria
BotswanaGhana
NamibiaGambia, The
GabonMauritiusSwaziland
AngolaCongo, Rep.Seychelles
Average
African countries:African countries: Current Current account balanceaccount balance 2001 (% of 2001 (% of GDPGDP))
-50 -40 -30 -20 -10 0 10 20
Sao Tome and PrincipeMozambique
ChadMalawiEritrea
SeychellesCape Verde
Burkina FasoGambia, The
LesothoNiger
Tanzania
RwandaUgandaSenegal
Ghana
EthiopiaSudan
SwazilandAngola
Burundi
BeninKenya
GuineaCameroon
Cote d'Ivoire
MadagascarSouth Af rica
Central Af rican RepublicMauritius
Mauritania
BotswanaGabon
Average
African countries:African countries: Gross Gross foreign reservesforeign reserves 2001 (months 2001 (months of imports)of imports)
0 5 10 15 20 25 30
GabonEquatorial Guinea
Congo, Rep.Sudan
SeychellesZimbabwe
AngolaZambia
BurundiGhana
NamibiaCameroon
Cape VerdeChad
MozambiqueSierra Leone
TogoGuineaMalawi
NigerSouth Af ricaCote d'Ivoire
SenegalSwaziland
EthiopiaKenya
MaliGambia, The
MauritiusSao Tome and Principe
Burkina FasoRwandaLesotho
TanzaniaNigeriaUganda
Guinea-BissauBenin
Central Af rican RepublicComoros
BotswanaMadagascar
Floor
African countries:African countries: Short-term Short-term debtdebt 2001 (% of foreign 2001 (% of foreign reserves)reserves)
0 500 1000 1500 2000 2500
BotswanaLesotho
MadagascarUganda
E thiopiaBenin
RwandaT anzania
Bur kina Faso
ChadGuinea-Bissau
Niger iaMal i
Gambia, T heCentr al Af r ican Republ ic
MalawiNiger
Comor osSwazi land
Cape Ver deSenegal
Sier r a LeoneSao T ome and P r incipe
MozambiqueKenya
GhanaGuinea
Zambia
South Af r icaCote d'Ivoi r e
Camer oonBur undi
AngolaZimbabwe
GabonCongo, Rep.
Ceiling
African countries:African countries: Short-term Short-term debtdebt 2001 (% of foreign 2001 (% of foreign reserves)reserves)
0 100 200 300 400 500
BotswanaLesotho
MadagascarUganda
EthiopiaBenin
RwandaTanzania
Burkina FasoChad
Guinea-BissauNigeria
MaliGambia, The
Central Af rican RepublicMalawi
NigerComoros
SwazilandCape Verde
SenegalSierra Leone
Sao Tome and PrincipeMozambique
KenyaGhana
GuineaZambia
South Af ricaCote d'Ivoire
CameroonBurundiAngola
Zimbabwe
Ceiling
AgainAgain
Debt accumulation is, by its Debt accumulation is, by its nature, a nature, a dynamicdynamic phenomenon phenomenonA large stock of debt involves high A large stock of debt involves high
interest payments which, in turn, interest payments which, in turn, add to the external deficit, which add to the external deficit, which calls for further borrowing, and so calls for further borrowing, and so on on Debt accumulation can develop into a Debt accumulation can develop into a
vicious circlevicious circle
How do we know whether a given How do we know whether a given debt strategy will spin out of control debt strategy will spin out of control or not?or not?To answer this, we need a little To answer this, we need a little
arithmetic arithmetic
External debt External debt dynamics dynamics
Recall balance of payments Recall balance of payments equation:equation:BOP = X – Z + FBOP = X – Z + F
wherewhere
FF = capital inflow = capital inflow = = DDFF where where
DDFF = foreign debt = foreign debtCapital inflow, F, thus involves an Capital inflow, F, thus involves an
increase in the stock of foreign increase in the stock of foreign debt, Ddebt, DFF, or a decrease in the stock , or a decrease in the stock of foreign claims (assets)of foreign claims (assets)
So, F is a So, F is a flowflow and D and DF F is a is a stockstock
External External debtdebt dynamicsdynamics
Now assumeNow assumeZ = ZZ = ZNN + r + rDDFF
ZZ = total imports= total importsZZNN = non-interest imports = non-interest importsrrDDFF = interest payments = interest payments
Further, assumeFurther, assumeX = ZX = ZNN
BOP = 0BOP = 0 A flexible exchange rate maintains A flexible exchange rate maintains equilibrium in the balance of payments at equilibrium in the balance of payments at
all times all times
Then, it follows thatBOP = X – Z + BOP = X – Z + DDFF = = 00so that
DDFF = = rDrDFF
In other words:
rD
ΔDF
F
External External debtdebt dynamicsdynamics
So, now we have:
rD
ΔDF
F
Now subtract growth rate of output from both sides:
g-rY
ΔY
D
ΔDF
F
Y
Yg
External debtExternal debt dynamicsdynamics
But what is
This is proportional change in debt ratio:
Y
ΔY
D
ΔDF
F
??
Y
D
Y
DΔ
Y
ΔY
D
ΔDF
F
F
F
This is an application of a simple rule of arithmetic:
%%(x/y) = (x/y) = %%x - x - %%yy
External debtExternal debt dynamicsdynamics
z = x/yz = x/y
log(z) = log(x) – log(y)log(z) = log(x) – log(y)
log(z) = log(z) = log(x) - log(x) - log(y)log(y)
But what is But what is log(z) log(z) ??
So, we obtain
z
Δz
z
1
dt
dz
dt
dlog(z)Δlog(z)
y
Δy
x
Δx
z
Δz
Q.E.D.
Proof Proof
We have shown thatWe have shown that
grd
Δd
where
Debt ratio
Time
r r g g
r = gr = g
r r g g
Need economic Need economic
growth to keep growth to keep
the debt ratio the debt ratio
under controlunder control
Y
Dd
F
Debt, interest, and Debt, interest, and growth growth
It is important to keep It is important to keep economic economic growthgrowth at home at home aboveabove – or at least – or at least not far below – the not far below – the world rate of world rate of interestinterest
Otherwise, the debt ratio keeps rising over Otherwise, the debt ratio keeps rising over timetime
External deficits can be OK, even over External deficits can be OK, even over long periods, as long as external long periods, as long as external debt does not increase faster than debt does not increase faster than output and the debt burden is output and the debt burden is manageable to begin with manageable to begin with
A rising debt ratio may also be OK as A rising debt ratio may also be OK as long as the borrowed funds are long as the borrowed funds are used efficientlyused efficiently
Once again, Once again, high-quality investment high-quality investment is keyis key
What can we learn What can we learn from this? from this?
Let us now study the interaction Let us now study the interaction between trade deficits, debt, and between trade deficits, debt, and growthgrowth
Two simplifying assumptions:Two simplifying assumptions:DDtt = aY = aYt t (omit the superscript F, so D = (omit the superscript F, so D =
DDFF))
Trade deficit is constant fraction Trade deficit is constant fraction aa of of outputoutput
YYtt = Y = Y00eegtgt
Output grows at constant rate Output grows at constant rate gg per per yearyear
Y
t
Exponential growth
Debt dynamics: Debt dynamics: Another look Another look
Y
time
Exponential growth implies a linear logarithmic growth path whose slope equals the growth rate
log(Y)
time
1
g
Pictures of growth Pictures of growth
dteaYdtΔDDT
0
gt0
T
0
tT
T
0
tT dtΔDD at time T
DebtDebt as the sum of as the sum of past deficits past deficits
dteaYdtΔDDT
0
gt0
T
0
tT
gt0
T
0
gt0
T
0
tT eg
1aYdteaYdtΔDD
Evaluate this Evaluate this integral integral between 0 and between 0 and TT
T
0
tT dtΔDD at time T
DebtDebt as the sum of as the sum of past past deficitsdeficits
dteaYdtΔDDT
0
gt0
T
0
tT
gt0
T
0
gt0
T
0
tT eg
1aYdteaYdtΔDD
Evaluate this integral between 0 and T
1eg
1aYe
g
1aYdteaYdtΔDD gT
0gt
0
T
0
gt0
T
0
tT
T
0
tT dtΔDDSo, as T goes to So, as T goes to infinity, Dinfinity, Dtt becomes becomes infinitely large.infinitely large.But that may be quite But that may be quite OK in a growing OK in a growing economy!economy!
at time T
Debt as the sum Debt as the sum of past deficitsof past deficits
T
0gt
0
T
T
Y
YeY
g
a
Y
D
T
0
T
0gt
0
T
T
Y
Y1
g
a
Y
YeY
g
a
Y
D
Debt as the sum of Debt as the sum of past deficits past deficits
T
0gt
0
T
T
Y
YeY
g
a
Y
D
T
0
T
0gt
0
T
T
Y
Y1
g
a
Y
YeY
g
a
Y
D
gT
T
0
T
0gt
0
T
T e1g
a
Y
Y1
g
a
Y
YeY
g
a
Y
D
Debt as the sum of Debt as the sum of past deficits past deficits
So, as T goes So, as T goes to infinity, to infinity, DDTT/Y/YTT approaches approaches the ratio the ratio a/ga/g
T
0gt
0
T
T
Y
YeY
g
a
Y
D
T
0
T
0gt
0
T
T
Y
Y1
g
a
Y
YeY
g
a
Y
D
gT
T
0
T
0gt
0
T
T e1g
a
Y
Y1
g
a
Y
YeY
g
a
Y
D
g
a
Y
D
T
Tlim T
Debt as the sum of Debt as the sum of past deficits past deficits
SupposeSupposeTrade deficit is 6% of GNPTrade deficit is 6% of GNP
a = 0.06a = 0.06
Growth rate is 2% per yearGrowth rate is 2% per yearg = 0.02g = 0.02
Then the debt ratio approachesThen the debt ratio approachesd = a/g = 0.06/0.02 = 3d = a/g = 0.06/0.02 = 3
This point will be reachedThis point will be reached regardless of the initial regardless of the initial position ...position ...... as long as ... as long as aa and and gg remain remain
unchangedunchanged
Debt ratio
Time
3
Numerical Numerical example example
Must adjust policiesMust adjust policies
Must eitherMust eitherReduce trade deficitReduce trade deficit by stimulating by stimulating
exports or by reducing imports, orexports or by reducing imports, or
Increase economic growthIncrease economic growth
Otherwise, the debt ratio will reach Otherwise, the debt ratio will reach unmanageable levels, unmanageable levels, automaticallyautomaticallyNo country can afford an external No country can afford an external
debt equivalent to three times debt equivalent to three times annual outputannual output
What to conclude?What to conclude?
Because the debt burden then Because the debt burden then becomes becomes unbearableunbearableRecall our earlier numerical Recall our earlier numerical
exampleexampleWhere we looked at the relationship Where we looked at the relationship
between the between the debt ratiodebt ratio and the and the debt debt burdenburden
Korea is a case in pointKorea is a case in pointIts Its export-oriented growth strategyexport-oriented growth strategy
reduced the numerator and increased reduced the numerator and increased the denominator of the debt ratio, the denominator of the debt ratio, thereby quickly reducing the country’s thereby quickly reducing the country’s debt burden debt burden
An An import-substitution strategyimport-substitution strategy would would reduce both numerator and denominator reduce both numerator and denominator with an ambiguous effect on the debt with an ambiguous effect on the debt burdenburden
And why not?And why not?
Suppose that r = 0.06 (as before)
D/Y = 3D/Y = 3 (our new number)
A/Y = 0.05 (as before)
X/Y = 0.20 (as before)
Here we have Here we have a country a country whose entire whose entire export export earnings do earnings do not suffice to not suffice to service its service its debtsdebtsHeavy Heavy burden, burden,
indeed!indeed!
15.10.2
30.060.05q
Y
XY
Dr
Y
A
q
F
Numerical example, Numerical example, againagain
Suppose that r = 0.06 (as before)
D/Y = 2D/Y = 2 (our new number)
A/Y = 0.05 (as before)
X/Y = 0.20 (as before) Heavy Heavy burden, still!burden, still!
85.00.2
20.060.05q
Y
XY
Dr
Y
A
q
F
Numerical example, Numerical example, againagain
Suppose that r = 0.06 (as before)
D/Y = 1D/Y = 1 (new number)
A/Y = 0.05 (as before)
X/Y = 0.20 (as before) Heavy Heavy burden, still!burden, still!
55.00.2
10.060.05q
Y
XY
Dr
Y
A
q
F
Numerical example, Numerical example, againagain
Suppose that r = 0.06 (as before)
D/Y = 0.4D/Y = 0.4 (new number)
A/Y = 0.05 (as before)
X/Y = 0.20 (as before) Heavy Heavy burden, still!burden, still!
37.00.2
4.00.060.05q
Y
XY
Dr
Y
A
q
F
Numerical example, Numerical example, againagain
Suppose that r = 0.06 (as before)
D/Y = 0.4D/Y = 0.4 (as before)
A/Y = 0.05 (as before)
X/Y = 0.30 (new number)Heavy burden, Heavy burden,
but but manageable!manageable!
25.00.3
4.00.060.05q
Y
XY
Dr
Y
A
q
F
Numerical example, Numerical example, againagain
African countries:African countries: External External debtdebt 2001 2001 (% of exports(% of exports))
0 200 400 600 800 1000 1200 1400
E quator ial GuineaBotswanaSwazi land
MozambiqueE r i tr ea
South Af r icaLesotho
Cape Ver deT anzania
Gambia, T heGabon
AngolaBenin
Niger iaKenya
SenegalMal i
UgandaGhana
Congo, Rep.ZimbabweCamer oon
GuineaChad
Bur kina FasoCote d'Ivoi r e
Comor osNiger
MalawiE thiopia
Maur i taniaZambia
RwandaCentr al Af r ican
Sao T ome and P r incipeGuinea-Bissau
Sier r a LeoneCongo, Dem. Rep.
Bur undiMadagascar
Liber ia
Ceiling
RecapRecap
African countries: African countries: External External debt servicedebt service 2001 (% of 2001 (% of exportsexports))
0 20 40 60 80 100 120
E quator ial GuineaLiber ia
BotswanaCongo, Dem. Rep.
E r i tr eaSudan
Seychel lesSwazi land
MozambiqueComor os
Congo, Rep.Gambia, T heCape Ver de
T ogoNiger
ZimbabweMaur i tius
UgandaMalawi
BeninChadMal i
T anzaniaRwanda
Bur kina FasoSouth Af r ica
ZambiaCentr al Af r ican
Niger iaGuinea
LesothoCamer oon
GhanaSenegal
Cote d'Ivoi r eGabonKenya
E thiopiaMaur i tania
Sao T ome andAngola
Bur undiGuinea-Bissau
MadagascarSier r a Leone
Ceiling
RecapRecap
Borrowers often renegotiate the Borrowers often renegotiate the terms of their loans in mid-terms of their loans in mid-stream so as tostream so as to Delay repayments, that is, extend Delay repayments, that is, extend
the maturity of the loans, or tothe maturity of the loans, or toReduce interest payments by Reduce interest payments by
replacing high-interest loans by replacing high-interest loans by loans with lower interestloans with lower interest
Debt rescheduling vs. debt Debt rescheduling vs. debt forgivenessforgivenessRescheduling on concessional terms Rescheduling on concessional terms
involves an element of debt involves an element of debt forgivenessforgiveness
But debt relief is But debt relief is not a substitute for not a substitute for sound and sustainable economic sound and sustainable economic policiespolicies
Debt relief and the Debt relief and the HIPCs HIPCs
Remember: our Remember: our
formula formula d = a/g d = a/g
holds in the holds in the
long run long run
regardless of regardless of
initial initial conditionsconditions
HIPC initiative from 1996 and HIPC initiative from 1996 and 19991999Aims to bring debt to sustainable Aims to bring debt to sustainable
levels, thus eliminating the need for levels, thus eliminating the need for continued debt relief, rescheduling, continued debt relief, rescheduling, and arrearsand arrears
Requires demonstrated capacity to Requires demonstrated capacity to put debt relief provided to good use put debt relief provided to good use
Objective: Bring net present value of Objective: Bring net present value of debt down to 150% of exports, and debt down to 150% of exports, and 250% of government revenue if250% of government revenue ifExports exceed 30% of GDPExports exceed 30% of GDPRevenues exceed 15% of GDPRevenues exceed 15% of GDP
Floating completion pointsFloating completion pointsTied to key structural reformsTied to key structural reforms
Debt relief and the Debt relief and the HIPCsHIPCs
External borrowing is a necessary External borrowing is a necessary and natural part of economic and natural part of economic developmentdevelopmentThis requires countries that borrow to This requires countries that borrow to
invest the funds borrowed in invest the funds borrowed in high-high-quality capitalquality capital
This is necessary to be able to service This is necessary to be able to service the debt the debt
If debt burden becomes too heavy, If debt burden becomes too heavy, must either must either reduce deficitreduce deficit or or spur spur growthgrowthIt is always desirable anyway to do It is always desirable anyway to do
everything possible to encourage everything possible to encourage economic growtheconomic growth
Rapid growth allows more foreign Rapid growth allows more foreign borrowing without making the debt borrowing without making the debt burden unmanageable burden unmanageable
In conclusion