HIPC Expenditures, Ownership and the Role of

Donors

Robrecht Renard

University of Antwerp

I. Introduction

Financial flows between low-income countries and public donors consist of

outflows of debt service payments

plus

inflows of grant aid and new loans

resulting in considerable net inflows

Net transfers to SSA countriesbillions $

1980 1990 1995 1996 1997 1998 1999 2000 2001Long-term official debt

New loans 4.2 7.2 5.9 5.3 4.9 4.3 3.8 3.8 4.6Principal reimbursement -0.7 -2.6 -3.0 -3.3 -3.0 -3.1 -3.2 -2.7 -3.4Interests -0.7 -2.7 -2.0 -2.7 -2.1 -2.0 -2.0 -1.6 -2.1Net transfers 2.9 1.9 0.9 -0.7 -0.1 -0.9 -1.4 -0.4 -1.0

Grants 3.6 12.0 11.4 10.2 9.6 10.4 10.8 10.3 9.9Technical assistance 2.7 5.0 5.0 4.9 4.4 3.9 3.4 3.7 3.6IMF net transfers 0.7 -0.5 0.1 -0.1 -0.6 -0.4 -0.1 -0.1 -0.2Official Net Transfers* 9.9 18.4 17.3 14.4 13.3 13.0 12.6 13.6 12.3Long-term private debt

New loans 6.3 2.5 5.2 4.3 7.2 3.4 4.3 4.4 5.8Principal reimbursement -2.1 -2.1 -4.1 -5.5 -7.0 -4.8 -5.0 -4.9 -5.6Interests -1.7 -1.7 -2.0 -2.2 -1.6 -1.8 -1.6 -1.6 -1.7Net transfers 2.5 -1.2 -0.9 -3.3 -1.4 -3.2 -2.3 -2.1 -1.5

Foreign investmentNet flows 0.0 0.8 9.3 6.5 9.7 7.0 11.8 7.6 14.3Dividends -2.9 -1.7 -4.4 -4.2 -3.9 -4.2 -4.5 -4.8 -5.9Net transfers -2.9 -0.9 4.9 2.3 5.8 2.8 7.3 2.8 8.4

Private Net Transfers -0.4 -2.1 4.0 -1.1 4.3 -0.4 5.0 0.7 6.9Total Net Transfers 9.5 16.3 21.3 13.3 17.6 12.7 17.7 14.3 19.2* : inclusive of technical assistance and IMF

Source: Global Development Finance 2002

Financial conditions

unweighted averages for HIPCs for which data are availabe1970 1980 1990 1995 1999

OFFICIAL CREDITORSAverage interest (%) 2.6 3.6 2.5 1.9 1.1Average grant element (%) average 58 47 59 66 73 maximum 83 91 83 81 83 minimum 23 11 20 6 8Average maturity (years) 31 26 31 33 37Average grace period (years) 9 7 8 9 9ALL CREDITORSAverage interest (%) 3.5 4.8 2.9 2.0 1.5Average grant element (%) average 49 38 56 63 69 maximum 83 91 83 81 83 minimum 14 -6 14 5 3Average maturity (years) 27 22 29 31 35Average grace period (years) 7 6 8 8 9

source: Global Development Finance 2001, World Bank

• Notwithstanding positive net transfers and high loan concessionality,

• many recipients have difficulty servicing their old debts,

• while facing severe administrative and managerial constraints in absorbing new aid,

• suggesting a recurrent fiscal constraint• and a mismatch of aid instruments (project aid

versus budget support) and financial conditions (soft loans versus grants).

Debt relief isakin to budget support

• and has similar advantages– relieves the recurrent fiscal constraint– enhances fiscal ownership– has low transaction costs for the recipient

• and then some more– is predictable– is not pro-cyclical– reduces debt overhang

Debt reliefas an instrument of aid makes extra sense

in view of the fact that

• LICs might be unable to absorb the extra new aid required to achieve the MDGs

• donor public opinion favours debt cancellation over identical new flows

Extra ODA to achieve MDGs

Additional aid levels required to halve poverty (income growth) Current

ODA levels 1999

($ billion)

Additional ODA

required

“On Track” countries 33 -- “Uphill” countries 24 54 Adequate policies and institutions 19 39 Weak policies and institutions 5 15* Official development assistance 57 54* Total aid (% of DAC GNP) 0.25 0.49 * assuming improved policies and institutions source: World Bank

Debt relief also has some disadvantages, such as • moral hazard,

• adverse selection,

and it raises complex issues of creditor burden sharing

All in all, one would expect a substantial effort at debt

cancellation

Does HIPC live up to the expectation?

II. Characteristics of HIPC

G-8 meeting reduction modalities creditors Toronto (1988) 33% service bilateral London (1991) 50% service bilateral Naples (1995) 67% stock bilateral Lyon (1996) HIPC I

80% stock bilateral+ multilateral

Cologne (1999) HIPC II

>80% stock bilateral+ multilateral

HIPC II eligibility criteria

• low-income country

• unsustainable debt

• track record of sustained adjustment– up to decision point: 3 years– up to completion point: variable

• PRSP

Unsustainable debt

%150Exports

debtofNPV

%15GDP

revenueFiscaland%30

GDP

Exports

if

%250revenueFiscal

debtofNPV

Situation September 2002

• 26 countries reached their decision point

• of which 6 countries their completion point

• debt relief of > $40 billion (nominal)

• debt as a per cent of GDP from 56% to 30%

• debt service requirements cut by one-third

• $1.3 billion annual savings

III. Some topics for discussion

• Is debt relief really additional?

• Should donors extend deeper debt relief?

• Is the conditionality right?

Is aid additional?

• virtual or illusory resources?– compared to effective debt service, or– compared to contractual debt service

• additional to other aid

• EURODAD

“ a glorified accounting excercise”

Fungibility could undermine additionality

Fungibility caused by evasive action on behalf of the aid recipient (in the case of project aid)

Fungibility caused by evasive action on behalf of the aid donor (in the case of debt relief)

Pressure from Donor, in form of project conditionality

International public opinion, in the form of moral exhortation

Purpose of pressure Implement the project, with a view of increasing investment in the sector concerned

Grant debt relief, with a view of increasing net transfers

Defensive tactic Accept project, reduce own effort in same sector

Accept to provide debt relief, reduce aid effort elsewhere

Outcome what you see is not what you get: the project is there, but the intended sector impact is missing

What you see is not what you get: debt relief has been granted, but without an increase in net transfers

Share of Debt Relief in DAC Members' Total Net ODA in 2000

Net ODA (US$ million) 53,737Net ODA Debt Relief (US$ million) 2,236of which: Bilateral 1,988Debt Relief as per cent of Net ODA 4.2NetODA Debt Relief for HIPC countries (U$ million) (a) 1,180HIPC Debt Relief as per cent of Net ODA 2.2source: DAC(a): including multilateral contributions to the HIPC Initiative

ODA from DAC countries

(billion US$ - 1998 prices)

20

30

40

50

60

70

1960 1970 1980 1990 2000

years

bill

ion

US

$

ODA inclusive debt relief ODA exclusive debt relief

Should donors go further?

• by moving the cut-off date forward in time?

• by redefining sustainability?

• by radically cancelling all public debt to low-income countries?

The sustainability debate

• present definition is – arbitrary– non developmental

• proposal by anti-debt campaigners– consider debt relief as an aid instrument– take MDGs seriously– define sustainability with respect to fiscal

spending for development

Which conditionality for HIPC?

• ex ante: adjustment plus pro-poor spending

• ex post: pro-poor expenditure tracking– virtual funds– comprehensive– who should do the tracking?