Debt Relief and Debt Sustainability

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Debt Relief and Debt Sustainability Introduction
to Global Issues Course 27 September 2006 Dana
Weist (dweist_at_worldbank.org)
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Context
What multilateral debt relief has been provided
and what has it achieved?
How do we ensure debt sustainability and avoid
future debt crises?
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Debt relief is part of international aid

• Includes technical cooperation, emergency and
  distress relief, contributions to NGOs, admin
  costs
• Source OECD DAC

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In the 1990s, some low-income countries
experienced debt crises
Share of External Debt to GDP (in NPV terms)
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Low growth led to unsustainable debt burdens,
fueled by poor policies, inadequate debt
management and shocks
Development community concerned that excessive
debt levels were a drag on economic growth and
stifling efforts to reduce poverty
Note Source World Bank Global Development
Finance Statistics.
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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 US61 billion (end-2005
  NPV terms)

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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 US50 billion (end-2005
  NPV terms)

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29 countries are receiving debt relief 11
countries have yet to benefit
20
Benin
Bolivia

• Causes
• Conflict
• Arrears
• Weak governance

Burkina Faso
Cameroon
Ethiopia
Ghana
Guyana
Honduras
Madagascar
11
Central African Rep.
Malawi
9
Mali
Comoros
Mauritania
Cote dIvoire
Burundi
Mozambique
Chad
Eritrea
Nicaragua
Congo DRC
Haiti
Niger
Congo, Republic of
Kyrgyz Republic
Rwanda
The Gambia
Liberia
Senegal
Guinea
Nepal
Tanzania
Guinea-Bissau
Somalia
Uganda
Sao Tome Principe
Sudan
Zambia
Sierra Leone
Togo
Interim-HIPC
Pre-HIPC
Post-HIPC
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9
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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
• Hasnt 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