Debt Relief in poor countries

Transcription

1 Debt Relief in poor countries Was the HIPC Initiative successful? Andrea F. Presbitero Pagina web: Dipartimento di Economia Universit Politecnica delle Marche Corso di Economia dello Sviluppo This initiative (HIPC) is a breakthrough... It deals with debt in a comprehensive way to give countries the possibility of exiting from unsustainable debt. It is very good news for the poor of the world World Bank President, James D. Wolfensohn The danger is that Gleneagles declaration may amount to a Pyrrhic victory: a symbolic win for advocates of debt relief that clears the conscience of the rich countries, but leaves the real problems of the poor countries unaddressed Serken Arslanalp, and Peter B. Henry

2 1 The debt crisis Solutions? The debt crisis Solutions? External financing to poor countries For decades, concessional lending has been an important element of international assistance to developing countries. Poor countries were not sufficiently creditworthy to attract commercial lending. Hence they had to rely on official finance, which comes as bilateral (export credit and ODA) and multilateral concessional loans. Many countries built up large amount of external public debt, because of worldwide (oils shocks, commodity prices, interest rates) and domestic (deficits, wars, poor governance) factors. Despite these favorable terms, many poor countries have had increasing difficulty making payments on their debts, mainly because they have not grown as rapidly as had been hoped.

3 The crisis The debt crisis Solutions? Beginning in the late 1980s, when the stock of debt became potentially unmanageable, bilateral creditors and the Paris Club have worked together to provide progressively easier repayment terms for poor countries struggling with their debts and implementing policies to increase growth. Increasingly concessional relief was provided on countries existing debt to fund policy reforms in the hope that these countries could grow their way out of trouble. Nevertheless, many countries continued to have problems and found themselves facing a debt service crunch. The debt crisis Solutions? Evolution of external debt stocks and flows By 1992, the 33 nations identified as the most severely indebted low-income countries faced a massive debt-servicing crisis. In the 10 years to 1992, the net present value of debt to exports ratio had deteriorated from 266 to 620%.

4 The debt crisis Solutions? The International Community response In time, it became clear that countries repayment problems were not just temporary and that a more comprehensive solution was needed. In the Nineties, bilateral donors (Paris Club) started to negotiate debt reduction programs, at first limited to debt repayment flows and, subsequently, expanded also to debt stock reductions. In 1996, debt relief programs were boosted by the Highly Indebted Poor Countries (HIPC) Initiative, launched by the World Bank and the IMF. In 1999, as a response to a number of criticisms raised by NGOs activists, the Initiative (now Enhanced HIPC) was modified in order to: 1 enlarge the number of countries potentially eligible for debt cancelation, 2 granting faster debt relief, and 3 create a stronger relationship between resources freed by debt relief and poverty reduction strategies. Debt and economic development Interest repayments The flow effects of debt on economic performance are due to the so-called Crowding Out of public investment: debt service discourages public investment (as well as social and health expenditures). Debt Stocks A large stock of external debt has a negative effect on economic growth because of: Debt Overhang: a large debt disincentive investment. Uncertainty: macroeconomic instability reduces investment and growth.

5 Targets The HIPC has two main targets: 1 reaching long-term debt sustainability 2 assuring poverty reduction. Elements of novelty 1 Debt owed to multilateral institutions, which represents a large share of total debt held by HIPCs, is included in debt reduction programs; 2 Debt relief is focused on debt stocks, which should be reduced up to a point low enough to reach debt sustainability. Its relevance The Initiative was intended to resolve the debt problems of the most indebted and poor (originally 41 countries), with total debt nearing 200 billion USD. Currently, the HIPC Initiative covers 40 countries, mainly African, with a total population of more than 550 millions of people (in 2005), with half living on less than 1$ per day, with poor health condition, low school enrolment rates and a widespread poverty. Per capita GDP, measured at PPP, is just 1285 USD, with many countries well below the 1000 dollars threshold, while life expectancy is only 49 years.

6 How it works Eligibility A country is considered potentially eligible for debt relief if the following conditions are satisfied: 1 It is IDA only and PRGF eligible 2 Its end December 2004 debt burden indicators are above these thresholds: exports 150 percent for the ratio of the net present value of debt (NPV) to exports revenues 250 percent for the ratio of NPV to fiscal revenue. 3 To qualify under the second criterion a country must have ratios of exports of goods and services to GDP and fiscal revenue to GDP above 30 percent and 15 percent, respectively. The NPV of debt is the sum of all the future debt service obligations interest and principal on existing debt, discounted at the market interest rate. How it works Debt Sustainability Sustainability A country can be considered to achieve external debt sustainability if it is expected to meet its current and future external debt-service obligations in full, without recourse to debt relief, rescheduling of debts, or the accumulation of arrears, and without unduly compromising growth. The debt sustainability analysis (DSA) is defined on a case-by-case basis, depending on policies and institutional quality. Accounting approach A fiscal deficit is considered sustainable if it generates a constant debt to gdp ratio As long as the economy grows at a rate higher than the interest rate, it is possible to run a sustainable primary deficit.

7 How it works A two step procedure Decision Point Eligible countries can reach the decision point (DP) once they have a track record of macroeconomic stability and have prepared a Poverty Reduction Strategy Paper (PRSP). At this point (interim period), countries starts receiving interim relief on a provisional basis. Completion Point Once a country has maintained macroeconomic stability under the IMF s Poverty Reduction and Growth Facility (PRGF) program, implemented a PRSP and carried out structural and social reforms for at least one year, it can reach completion point (CP), which implies that the full amount of debt relief becomes irrevocable. How it works A two step procedure Review of the HIPC process Decision point requirements Floating completion point requirements Country fulfills HIPC Eligibility Criteria Preparation of an interim PRSP Satisfactory performance under PRGF Possible topping up determined on a case by case basis Pre-decision point Satisfactory performance under PRGF Interim period Conditional interim relief Implementation of PRSP for one year Meet Structural reform triggers Post-completion pt. Irrevocable debt relief

8 HIPC countries Completion Point NPV debt Decision Point NPV debt Pre-Decision Point NPV debt Benin 113 Burundi 203 Central African Rep. 599 Bolivia 136 Chad 79 Comoros 276 Burkina Faso 203 Dem. Rep. of Congo 131 Cote d Ivoire 170 Cameroon 72 Congo, Rep. 356 Eritrea 154 Ethiopia 144 Gambia, The 231 Kyrgyz Republic 173 Ghana 76 Guinea 186 Liberia 2133 Guyana 65 Guinea-Bissau 779 Nepal 119 Honduras 68 Haiti 76 Somalia n.a. Madagascar 170 S. Tome & Principe 459 Sudan 625 Malawi 186 Togo 191 Mali 98 Mauritania 186 Mozambique 54 Nicaragua 78 Niger 156 Rwanda 150 Senegal 61 Sierra Leone 188 Tanzania 115 Uganda 162 Zambia 112 How it works The costs Potential Costs of the HIPC Initiative by Creditor Group (Total cost: $41.7 billion, end-2005 NPV terms) 1 IaDB $1.4 billion (3%) AfDB/AfDF $3.6 billion (9%) IMF $3.1 billion (7%) Other Multilateral Creditors $3.0 billion (7%) Paris Club $15.3 billion (37%) World Bank Group $10.0 billion (24%) 1 29 HIPCs. Commercial Creditors $1.5 billion (4%) Other Official Bilateral Creditors $3.8 billion (9%) Potential Costs of the MDRI by Creditor and Country Group (In billions of U.S. dollars, in nominal terms) IDA IMF AfDF Estimated nominal cost for all 40 HIPCs Nominal cost for all 20 post-completion point HIPCs Sources: Country authorities; and IDA, IMF, and AfDF staff estimates.

9 Evaluation Achievements 1 Debt relief approved for 29 countries amounting to over $56 billion in nominal debt service relief countries have reached CP and have been granted $37 billion in unconditional debt service relief. 3 NPV of external debt of 29 approved HIPCs cut by approximately two-thirds. 4 Social expenditures are increasing substantially. Poverty-reducing spending is projected to rise from less than twice that of debt-service payments to more than four times. Evaluation Achievements of the HIPC Initiative and the MDRI Debt stocks of the 29 HIPCs that have reached the decision point are reduced by almost 90 percent. NPV of Debt of 29 decision point countries, in US$ billion (2005 NPV terms) Before Traditional Relief 88 After Traditional Relief 75 After HIPC Relief After MDRI 10 After Additional Bilateral Debt Forgiveness Average projected debt service obligations of post-decision point HIPCs have already been cut in half and are expected to decline further as HIPCs qualify for MDRI debt relief. 26 post-decision-point countries (weighted averages)* 1999 r 15.1% % Debt service/exports 1999 Debt service/gov. revenue 22.2% Debt service/gdp 3.5% % 8.8% * Does not include Burundi, DRC, and Rep. of Congo (due to lack of data for 1999).

10 Evaluation Main criticisms Major drawbacks Thresholds based on historical data about Latin American crisis and not on any theoretical model of debt sustainability. Debt service burden is not considered, even if many countries spend a large share of their revenues to service their debt. Debt Sustainability Analysis DSA Based on the financial sustainability approach, excluding domestic debt: 1 Resources required for basic social spending are ignored. 2 Interest rates and other macro variables are taken as exogenous. 3 Relies on overly optimistic projection of GDP and exports growth. The Macro adjustment reached good results in monetary policy coupled with lagging fiscal adjustments.

11 The consequences Internal financing in HIPC is due to: 1 Lack of access to international capital markets 2 Asymmetries in monetary and fiscal adjustments (in very poor countries substantial fiscal adjustments are bound to generate strong political and social opposition) The need for the government to keep financing its expenditures in the context of rapidly declining inflation led to a steep increase in real interest rates. The unintended consequences of this wrongly-timed policy mix are: 1 An increase of the cost of financing, 2 Lower economic growth 3 Undermined overall debt sustainability Domestic Debt Over , the stock of debt almost doubled (18% of GDP). Domestic interest payments become the largest share (more than 2%) of overall interest expenditure.

12 The Multilateral Debt Relief Initiative MDRI In June 2005, the G-8 proposed a 100% write-off of debt by IMF, WB and AfDB for countries that have reached, or will eventually reach, the CP under the HIPC Initiative. Under the MDRI, started on July 2006, IDA is expected to provide $37 billion in debt relief over 40 years. Debt disbursed before end-december 2004 (IMF and AfDF) and end-december 2003 (IDA) and still outstanding at the time of qualification (after HIPC Initiative debt relief) is cancelled. Donors are expected to provide additional resources because of the higher costs on IDA and IMF, which could undermine their lending capacity. HIPC vs MRDI Main Characteristics of the HIPC Initiative and the MDRI Country coverage Participating creditors Debt relief provided Total costs of committed debt relief HIPC INITIATIVE IDA-only, PRGF-eligible countries with debt indicators above the HIPC Initiative thresholds, which have been engaged in qualifying IMFand IDA- supported programs. All multilateral, official bilateral and commercial creditors. External public and publicly guaranteed debt is reduced to the HIPC Initiative thresholds, as calculated at the time of the decision point. US $41.7 billion in end-2005 NPV terms US $61.6 billion in nominal terms MDRI HIPC countries having reached completion point. International Development Association (IDA), International Monetary Fund (IMF) and African Development Fund (AfDF). Debt disbursed before end-december 2004 (IMF and AfDF) and end-december 2003 (IDA) and still outstanding at the time of qualification (after HIPC Initiative debt relief) is cancelled. US $18.9 billion in end-2005 NPV terms US $36.9 billion in nominal terms Countries that have benefited from relief Remaining potentially eligible HIPCs 29 decision point and completion point HIPCs 20 completion point HIPCs 11 pre-decision point HIPCs 20 decision point and pre-decision point HIPCs

13 Challenges Establishing a good track record of reform in the 10 pre DP countries. Many of them are affected by conflict and/or have protracted arrears problems. Ensuring full participation by all creditors to support the countries efforts towards debt sustainability. Maintaining long-term debt sustainability will require efforts by the HIPCs and the international community to ensure prudent borrowing practices, suitable concessional financing, sustained and broad based growth, a more diversified export base and increased access to markets in developed countries. Approaches to debt relief Sachs view NGOs and civil society call forth a complete cancellation of external debt and for a poverty approach to debt relief. A 100% debt cancellation without increased foreign aid is not enough to meet the basic health expenditures. Debt reduction should be linked to an assessment of debtor specific requirements for meeting their essential needs. Easterly s view The World Bank and the IMF, as well as part of economic literature (Easterly), are concerned about corruption and poor governance. They call for conditionality and selectivity. Debt relief given to irresponsible governments is not only ineffective, but it is also a lost opportunity to help better governed countries eradicate poverty.

14 More commitments... More commitments... L Italia ha clamorosamente mancato gli obiettivi prefissati di generosit internazionale (aiuti allo sviluppo pari allo 0,33% del Pil 2006). Le donazioni ai PVS dell Italia non hanno superato lo 0,20% del Pil, e tale percentuale scende allo 0,11% al netto della cancellazione del debito. Nel 2002, gli allora 15 membri Ue presero l impegno di raggiungere insieme lo 0,39% del Pil con un obiettivo minimo, per ciascuna nazione, pari allo 0,33% del Pil La maggior parte dei partner Ue dell Ocse ha raggiunto il traguardo minimo, con l eccezione di Grecia, Italia e Portogallo. L Italia cosi si piazza al terzultimo posto tra i 22 Paesi erogatori per incidenza degli aiuti rispetto al PIL: peggio hanno fatto solo USA (0,17%) e Grecia (0,16%). Il panorama internazionale è contraddistinto da un calo generale nel tasso di generosità. Nel 2006 l ammontare dei fondi destinati allo sviluppo è diminuito ( 5, 1%) a milioni di USD: un arretramento accentuato dal venir meno di precedenti tagli al debito di alcuni Paesi che ricevono i sussidi, in particolare Nigeria e Iraq. Depurando i dati dagli effetti di questi tagli, la riduzione effettiva degli aiuti risulta piu contenuta: 1, 8%. Non cosi per per l Italia, dove con i dati rivisti il calo risulta ancora pi evidente: 41, 4%.

15 More about debt relief... Websites The World Bank IMF Oxfam Eldis Gateway to Development Information Papers and Books Delivering on Debt Relief, Birdsall and Williamson, 2002 The Elusive Quest for Growth: Economists Adventures and Misadventure in the Tropics, Easterly, 2001 Arslanalp, S. and P. B. Henry (2006) Policy Watch: Debt Relief, Journal of Economic Perspectives La cancellazione del debito dei paesi poveri, Dalmazzo e De Blasio (Mulino, 2006)