The Prospects For Foreign Debt Sustainability In Post-Completion Point Countries: Implications Of The HIPC-MDRI Framework

Transcription

1 The Prospecs For Foreign Deb Susainabiliy In Pos-Compleion Poin Counries: Implicaions Of The HIPC-MDRI Framework Jacina Nwachukwu, February Insiue for Developmen Policy and Managemen The Universiy of Mancheser BWPI Working Paper 26 Brooks World Povery Insiue ISBN : Creaing and sharing knowledge o help end povery

2 Absrac The Enhanced HIPC Iniiaive was launched in 1999 o reduce he NPV of poor counry foreign deb o a susainable hreshold of 150 percen of heir expors. This paper applies a simple growh-wih-deb model o sixeen pos-compleion poin HIPCs o assess wheher or no his goal will be me by Our somewha opimisic base case projecions sugges ha paricipaion in he curren Enhanced HIPC-MDRI iniiaive will only reduce he NPVs of heir exernal deb as a whole o 176 percen of expors by his dae. Sensiiviy ess which expose hese counries o adverse exogenous shocks help draw aenion o policies ha could ensure ha unsusainable deb levels are no again accumulaed by he world s poores counries. Keywords: Africa, deb susainabiliy, growh, Enhanced HIPC, Mulilaeral deb relief Acknowledgemens I am indebed o Nicholas Snowden and o a referee from his journal for deailed commens in his paper. The usual disclaimers apply. Dr. Jacina Nwachukwu is a lecurer in he Insiue for Developmen Policy and Managemen a he Universiy of Mancheser. 1

3 The prospecs for foreign deb susainabiliy in pos-compleion poin counries: implicaions for he HIPC-MDRI framework In Sepember 1999, calls for a comprehensive approach o address he excessive exernal deb burden of he world s poores saes culminaed in he revision of he original Highly Indebed Poor Counries (HIPC) Iniiaive framework. I hen became known as he Enhanced HIPC Iniiaive (HIPC II). The HIPC II Iniiaive was expeced o benefi around fory low-income counries, of which weny-wo had reached heir Compleion Poin and had sared o receive irrevocable deb relief by April Compared wih he original HIPC I, he enhanced iniiaive esablished a sronger link beween deb relief and he Millennium Developmen Goals (MDGs)(I have added his should i be here?) by making relief condiional on he progress made by qualifying counries in he preparaion and implemenaion of social policies and sraegies for reducing povery. An imporan milesone in he hisory of deb relief programmes was he launch of he Mulilaeral Deb Relief Iniiaive (MDRI) in July 2005 by he leaders of he group of G-8 counries a heir summi in Gleneagles in Scoland. Under his proposal, counries ha had reached, or would evenually reach he Compleion Poin under he HIPC II Iniiaive would receive 100 percen deb cancellaion from hree mulilaeral insiuions, he IMF, he Inernaional Developmen Associaion (IDA) of he World Bank and he African Developmen Fund (AfDF) of he African Developmen Bank. The full wrie-off covered he debs owed o each insiuion a he end of By he end of January 2006 here was an agreemen by he Execuive Board of he IMF, he IDA and he AfDF ha seveneen pos-compleion poin HIPCs had me he policy qualificaion crieria and should be provided wih MDRI relief. Unlike he HIPC Iniiaive and numerous radiional deb relief programmes before i, he MDRI was no based on he principle of proporional burden sharing on he par of official bilaeral or of privae crediors, or of oher mulilaeral agencies beyond he hree seleced insiuions. Noneheless, in January 2007 he Governors of he Iner-American Developmen Bank (IADB) agreed o exend similar assisance o heir qualifying member saes, even hough hey were no included in he original G-8 proposal. Bolivia, Guyana, Honduras and Nicaragua are four counries ha have now qualified o receive MDRI assisance from he IADB. Bu in recen years, he HIPC II-MDRI has been subjeced o criicism, in paricular wih respec o is choice of he deb indicaors available for judging susainabiliy and reamen of domesic deb. Despie he reservaions of several auhors, noably Peer Hjerholm (2003), our analysis neverheless akes as given he indicaors of deb susainabiliy as defined by he sponsors of he HIPC II Iniiaive. There is some meri in using he IMF-World Bank deb susainabiliy framework, if only for comparison of oucome purposes. Even so, he resuls of deb susainabiliy analyses under he curren HIPC II Framework should be inerpreed wih cauion. 1 See he for key feaures of he HIPC Iniiaive. 2

4 This is paricularly he case in many Souh and Cenral American counries where he inclusion of governmen domesic deb in he overall liabiliies of he public secor could lead o a markedly differen classificaion of deb disress. The objecives of his paper, hen, are hreefold: Firs, i assesses he impac of Enhanced HIPC-MDRI financing on he exernal deb of hose pos-hipc counries ha qualified for MDRI assisance by he end of January These economies included: Benin, Bolivia, Burkina Faso, Ehiopia, Ghana, Honduras, Madagascar, Mali, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania, Uganda and Zambia sixeen in all. The sudy excludes Guyana because is expors plus impors were oulying a 180 percen of GDP averaged from 1980 o This was roughly four imes he corresponding average raio of rade o GDP for he group of seveneen economies classified as heavily indebed in he World Bank Developmen Indicaors for Moreover, daa showed ha domesic deb as a proporion of GDP in Guyana was considerably higher han in he oher pos-hipc counries included in our sample. Second, we invesigae he inerrelaionship beween key indicaors of macroeconomic managemen and projeced exernal deb levels in counries ha me he policy qualificaion crieria for MDRI assisance by he end January We uilize a simple growh-wih-deb model ha is capable of demonsraing he effec of major srucural policy variables on he evoluion of exernal deb obligaions in borrowing counries. The resuls may conribue o he coninued debae for a re-enhanced fron-loading of fuure deb relief o HIPC counries wih good policies in suppor of he aainmen of he Millennium Developmen Goals (MDGs). (is his echnically he 2nd ime i is menioned?) Third, in he pas in many HIPCs, he failure o persis wih he se of complex IMF and World Bank macroeconomic sabilisaion and srucural policies conribued o he build-up of exernal liabiliies o unsusainable levels. This paper highlighs he impac of such slippages in policy reforms on indebedness in pos-hipc counries and suggess policy acions for achieving and mainaining long-erm deb susainabiliy beyond he delivery of MDRI relief assisance. The aricle is organised as follows: Secion 1 specifies he growh-wih-deb model and associaed key parameer values o be used in our baseline simulaion of he indicaors of foreign borrowing commimen. Secion 2 relaes his basic growh-deb framework o each of he sixeen pos-hipc-mdri economies in our sample over he perspecive-plan period 2005 o Secion 3 focuses on he implemenaion of Enhanced HIPC-MDRI programmes. I looks a he exen o which a full cancellaion of all mulilaeral deb sock ousanding a he end of 2004 provides a basis for pos-hipc saes o achieve and mainain susainable deb levels over he medium and long-erms. Secion 4 presens sensiiviy ess in order o assess he impac of possible failure in he implemenaion of srucural adjusmen on he exernal deb susainabiliy oulook of our sixeen pos-hipc counries and o qualify our basic opimisic sylized assumpions. 3

5 1. Model Specificaion and Daa Descripion The framework underlying our exernal deb-wih-growh simulaions in his sudy is he original Chenery-Srou (1966) dual-gap heoreical model which, despie numerous criicisms, remains he basis of much of he deb susainabiliy analyses performed by he saff of he World Bank and he IMF. The objecions o such radiional financing-gap models has cenered mainly on Lucas (1976) argumen ha srucural relaionships prediced by convenional financing-gap mehods across random shifs in policy regimes could be highly unsable. Furher, in a criical assessmen of financing-gap models, William Easerly (1997) noed ha financing-gap calculaions hemselves creaed perverse incenives since a counry s domesic savings performance may well deeriorae following a commimen by donors of more exernal funds. Under hese circumsances, he parameer values underlying he financing-gap mehodology migh vary subsanially from simulaions which embody slippage in he implemenaion of reforms (Easerly, 2006). The implicaions for exernal deb susainabiliy oulook in pos-hipc- MDRI counries of exogenous shocks in economic fundamenals are explored in Secion 4. A se of ables available from he auhor, bu no given here, repor he values of he principal variables o be used in our baseline projecions for he sock of foreign loans implied by a arge growh in real gross domesic produc of five-and-a-half percen 2. The more han five-percen growh in GDP is needed o preven an increase in povery levels, paricularly in Sub-Saharan Africa (SSA) by 2015 (World Bank a, 2000). To remain consisen wih his arge growh rae, he parameers underlying our simulaions have been arbirarily seleced so as o ensure ha he dual gap model requiremens for a seady downward rend in he gross domesic saving and foreign exchange gaps are obained in each of our counries. The marginal rae of savings is projeced o rise from a low level of abou 6 percen of GDP and hen o level off a a consan figure of beween 26 and 29 percen by he year This peak raio of savings o GDP is comparable o he general level currenly obaining in he more rapidly advancing counries of Eas Asia. The implicaions for exernal deb accumulaion of he raher opimisic assumpion ha he less populous agriculural African HIPCs, such as Benin, Mali, Rwanda, Senegal, Tanzania and Uganda, will achieve hese comparaively high savings o GDP raios of beween 26 and 29 percen of GDP in he weny-five years from 2005 o 2030 are explored furher in our sensiiviy ess in Secion 4. We also presume ha he projeced marginal impor rae will firs rise slowly from an iniial raio of 15 percen of GDP in 2004 and hen level off a beween 30 and 33 percen in he year 2030 and beyond. The implici assumpion here is ha he agriculure and manufacuring secors should by hen be producing some of wha is currenly being impored, such as food and oher consumer iems like clohing and shoes. This could resul in a decline in he marginal propensiy o impor and we have assumed a perhaps opimisic one-o-one relaionship beween oupu growh and impors of goods and non-facors services beginning from Furhermore, he real rae of growh of expors of goods and non-facor services is expeced o rise from a figure which is generally below 4 percen o reach is peak of beween 7 and 10 2 The ables are available from he auhor on reques a: Jacina.nwachukwu@mancheser.ac.uk 4

6 percen in he year I is hen expeced o decline slowly from 2031 and o level off a a consan figure equal o he arge growh rae in GDP of five-and-a-half percen. As noed by Avramovic (1964), McDonald (1982) and Nissanke and Ferrarini (2001), a successful progression hrough he exernal deb-cycle model requires ha he projeced marginal domesic savings rae should exceed he fixed invesmen raio required by he arge rae of growh. This should ensure ha deb evenually begins o decline. Oher long-erm deb susainabiliy provisions subsumed in our baseline growh-wih-deb model include he requiremen ha he anicipaed rae of growh of impors should no be more han he real growh rae of expors. We also assume ha he esimaed growh of exernal deb and ineres paymens does no coninuously exceed he real rae of growh of expors and income, as well as a need for he marginal produc of foreign capial o be greaer han he inernaional cos of borrowing. I is agains such ambiious susainabiliy hreshold values ha he auheniciy of he resuls of our projecions for indicaors of foreign indebedness in he sixeen pos-hipc-mdri counries of sudy will need o be judged. Following Feder (1980) and Feder, Jus and Ross (1981), we define he inerrelaionships a he end of a ime period beween he projeced requiremens for new exernal loans EBFC, he associaed defici on curren accoun NFC, he ne inflow of oal new disbursemens NFEB and he face value of he sock of foreign deb ousanding SEB as follows: NFC = EBFC + PPI + FDI + AID + REM...( 1.1) EBFC = CEBFC + NCEBFC = GEB AD iseb 1... ( 1.2) EBFC + iseb 1 = GEB AD = NFEB = ΔSEB = SEB SEB 1... ( 1.3) SEB = EBFC + iseb 1 + SEB 1 = NFEB + SEB 1... ( 1.4) EBFC + iseb 1 NFEB ΔSEB = = SEB SEB SEB ΔSEB SEB ΔSEB SEB 1 ΔY Y 1 EBFC + iseb = SEB ΔX X EBFC + iseb = SEB ΔY...(1.5) Y ΔX X...(1.6) SEB Y = SEB Y 1 1 EBFC + iseb 1+ SEB 1 1 ΔY... Y 1 ( 1.7) SEB X = SEB X 1 EBFC + iseb 1+ SEB 1 1 ΔX X 1...(1.8) where PPI is he anicipaed ransfer of ne foreign privae porfolio invesmen a a given ime period, FDI is he projeced ne foreign direc invesmen flow including real esae 5

7 purchases and AID refers o developmen grans-in-aid, including hose for echnical cooperaion and oher donaions by inernaional aid agencies as well as non-governmenal organisaions. The symbol REM represens ne remiances received from abroad. The sum of ne foreign porfolio invesmen PPI, foreign direc invesmen FDI, foreign grans-in-aid wih echnical cooperaion AID and ne remiances REM approximae o he flow of non-deb creaing iems on he exernal balance of paymens a he end of period. The erm CEBFC refers o he esimaed new foreign concessionary borrowing from all crediors, including mulilaeral insiuions, bilaeral governmens and privae crediors. On he oher hand, NCEBFC is he corresponding esimae for new inernaional liabiliies conraced on commercial erms and issued o boh he public and privae secors. The erm GEB is, herefore, a represenaion of he likely oal amoun of new foreign loans ha may be required by each of our pos-hipc-mdri counries in financing he arge growh rae in gross domesic oupu of five-and-a-half percen a a given ime period. This poenial amoun of gross new exernal loan ransfers is assumed o be forhcoming wihou inerrupion hroughou he growhwih-deb cycle. The AD erm is he scheduled oal concessionary and non-concessionary foreign loan amorisaion paymens, while iseb 1 is he poenial ineres expendiure on he nominal sock of concessionary and non-concessionary exernal deb ousanding a he beginning of he period 1. The SEB 1 symbol is he nominal or face value, as opposed o he ne presen value of he sock of concessionary and non-concessionary exernal deb accumulaed a he sar of a given period in consan 2000 US dollars and Δ SEB is he change in he face value of he sock of foreign loans. The face value of he sock of exernal deb ousanding a he beginning of period is approximaed by he level of concessionary and non-concessionary foreign deb accumulaed a he end of he previous period 1. We also assume ha some new foreign lending will be available hroughou he projecion period a a consan concessional rae of ineres of i CONS per annum. This is approximaed by he annual average nominal rae of ineres on mulilaeral and bilaeral concessionary deb ousanding in he period 1990 o Daa derived from he World Bank s Global Developmen Finance for 2007 (World Bank b, 2007) show ha he concessional rae of ineres 6

8 i CONS is significanly lower han he corresponding ineres raes on mulilaeral, bilaeral and privae non-concessionary foreign loans i NCONS Real ineres raes are cusomarily used in he growh-deb lieraure, deploying eiher he dollar impor or expor uni value indices for an individual debor naion as he foreign price deflaor. Of course, a fuure rise in any of hese foreign price indices will resul in esimaes of real ineres raes ha are lower han he nominal raes which prevailed during he 1990 o 2004 ime period. On he oher hand, using expor uni values as he inernaional price deflaor resuls in unsusainably high real ineres raes for many of our SSA counries. This is because of he decline in he expor prices of mos primary commodiies in he lae 1990s o early 2000s. In view of he uncerainies involved in he fuure erms of rade, and recognizing he relaively low inernaional inflaion environmen in he 1990s by comparison wih he lae 1970s and 1980s, he prospecive annual real rae of ineres on concessionary, i CONS, and non-concessionary foreign loans, i NCONS, are assumed o be equal o he corresponding annual average nominal rae observed in he decade 1990 o The Y symbol refers o he absolue dollar value of gross domesic producs in consan year 2000 prices which are expeced o grow a he consan annual growh arge Y 1 ΔY of five-and-ahalf percen. The erm X is he value of expors of goods and non-facor services in consan 2000 US dollars. In his sudy, i is assumed ha he rae of growh of expor earnings per annum ΔX X 1 for all of our sixeen counries in he nex couple of decades will have risen somewha higher han he proposed arge annual rae of growh in GDP. 2. The Exernal Deb Susainabiliy Analysis of Pos-HIPC-MDRI Counries The purpose of his secion is o jusify he discussion of he challenges of mainaining long-erm deb susainabiliy in pos-hipc-mdri counries by highlighing he linkages beween he key deerminans of exernal indebedness. Analyically, he susainabiliy of a counry s exernal deb posiion depends on hree main facors and on heir developmen over ime. They are: (i) he exising sock of deb ousanding a a given ime period, (ii) he prospecive volume and erms of new exernal borrowing and (iii) he developmen of fiscal and exernal repaymen capaciy. This las is closely relaed o he oulook for a counry s gross domesic oupu and expor growh raes wih domesic savings herefrom. 7

9 An assessmen of exernal deb susainabiliy in our sample of pos-hipcs in his paper will involve wo measures of exernal obligaions. They are (i) he nominal sock of foreign loans expressed in consan US dollars and (ii) he dollar sock of deb ousanding measured in erms of ne presen value. However, o accoun for he effec of growh in he fiscal and repaymen capaciy of he borrowing counries, hese measures of deb burden have been relaed o developmen in domesic oupu and expor earnings. Of course, he usefulness of hese esimaes of deb-o-expor raios, paricularly as indicaors of deb susainabiliy, will ulimaely depend on he availabiliy of heir foreign exchange earnings o a governmen and on he degree of openness of he economy. For ease of exposiion, our discussion and represenaion are limied o he rend in he unweighed mean for our group of sixeen pos-hipc-mdri economies 3. Figure 1 illusraes he prospecive mean for he nominal value of he exernal sock ousanding a a given ime period for our group of sixeen-pos HIPC-MDRI counries on he lef verical scale. The corresponding esimae for he unweighed mean value of exernal deb sock expressed as a percenage of he prior-hree year average GDP is on he righ verical scale. I shows ha he hrea of defaul builds up ineviably when he process of growh is financed by foreign loans over ime. The oal exernal indebedness ousanding for our sample of sixeen pos-hipcs as whole is projeced o grow o a consan 2000 US$11 billion by he end of he Millennium Developmen Goals (MDGs) in 2005 in he absence of MDRI relief. This is almos four imes he iniial deb sock of US$3 billion observed a he base year In erms of GDPs, he increase is much less pronounced. The face value of he sock of deb was projeced o almos double from 67 percen of GDP in 2004 o 117 percen in I was hen expeced o reach 144 percen of average GDP, equivalen o US$30 billion in The corresponding year-on-year projecions for each of he sixeen counries of sudy are available on reques. 8

10 Figure 1: Projeced Sock of Exernal Deb (Aggregae for 16 HIPC-MDRI Economies) $70, % $60, % Sock of exernal deb (consan 2000 US$) $50,000 $40,000 $30,000 $20,000 Sock of exernal deb (lef verical scale) Exernal deb o GDP raio (righ verical scale) $10,000 20% $0 0% Time period in years % 100% 80% 60% 40% Sock of exernal deb (% 3-yr average GDP) The increase in he absolue value of he sock of exernal indebedness for our group of pos- HIPC counries is largely due o he accumulaion of subsanial new disbursemens which are expeced o increase from US$503 million in 2004 o US$711million in 2015, rising o US$932 million by he end of The poenial annual ineres charges payable on hese new exernal borrowings are likely o more han quadruple from circa US$38 million in 2004 o US$166 million in They are projeced o reach US$588 million by In his way, our sixeen pos- HIPCs as a whole are expeced o obain a ne addiion o heir exernal borrowing commimens amouning o US$877 million in 2015, rising o US$2 billion by he end of Ineresingly, our simulaions show ha he foreign deb sock expressed as he raio of previous hree-year average GDPs for Benin, Burkina Faso, Mali, Mozambique, Rwanda, Tanzania and Uganda are likely o fall o below 100 percen by he end of he MDGs in However hese exernal financing projecions are ypically ambiious. Any delay in disbursemens due o absorpion problems in recipien counries or o bureaucracy and adminisraive difficulies on he par of he crediors may subsanially raise he projeced deb-sock o GDP raio. By conras, he exernal deb oulook in Ghana, Madagascar, Nicaragua and Zambia is projeced o worsen hroughou our planning period. Their poenial raios of deb-o-gdp were persisenly higher han he comparable mean for our group of sixeen pos-hipcs. This is in spie of our sylized assumpion of he counries coninuing good record of saisfacory performance on IMF srucural adjusmen programs and he implemenaion of he povery reducion sraegies subsumed in our opimisic parameers. 9

11 Furher, we illusrae on he righ verical scale of Figure 2 below he year-on-year baseline calculaions for he unweighed average NPV of foreign loan socks a he end of a given year expressed as a fracion of he previous hree-years average expors for our sixeen pos-hipc- MDRI economies as a whole. The oulook for deb susainabiliy for our pos-hipcs as a group is expeced o worsen significanly up o The NPV of heir unweighed mean sock of deb is projeced o rise from 74 percen of average expors (or US$885 million in consan 2000 prices) in 2004 o 236 percen of expors (represening US$5 billion) in 2015, before reaching is peak of 281 percen (or US$9 billion) in However, we projeced ha by he end of he planning period in 2030, he exernal deb sock for our group of HIPCs will decline somewha o reach 260 percen of expor earnings (equivalen o US$13 billion). This is sill more he 150 percen of he expor susainabiliy benchmark. Bu, despie he elevaed foreign deb raios in he early sages of he growh-deb cycle, he poenial mean NPV of exernal deb sock for our group of sixeen pos-hipcs is expeced o fall o he susainabiliy hreshold of 150 percen of expors in We can herefore foresee a ime in he fuure when hese HIPCs will be able o mee heir deb service commimens from heir own expor earnings. Figure 2: Projeced NPV of Exernal Deb Sock (Aggregae for 16 HIPC-MDR1 Economies) $30, % NPV of exernal deb (consan 2000 US$) $25,000 $20,000 $15,000 $10,000 $5,000 NPV of exernal deb sock(lef verical scale) NPV deb o expors (righ verical scale) $0 0% Time period in years % 200% 150% 100% 50% NPV of exernal deb (% 3-yr average expors) Neverheless, here is concern ha he heavy exernal loan burden obaining in many HIPC economies a he sar of heir developmen process may pu off poenial domesic and foreign invesors. Prospecive privae invesors may be worried ha a governmen migh finance is onerous deb-servicing obligaions hrough disorionary policies such as he increasing of he domesic money supply and higher axes. In addiion some auhors, including Corden (1989), 10

12 have argued ha high levels of exernal deb may discourage governmens from underaking difficul reforms, like he rade liberalisaion and fiscal adjusmens subsumed in our opimisic baseline performance parameers. I follows ha as he financial posiion of hese counries improves wih srucural adjusmen, hey will almos ineviably come under increasing pressure from foreign crediors o repay heir large sock of loans in heir enirey. This means ha he anicipaed effec on economic growh of high exernal indebedness in he early sages of he deb-cycle in some HIPCs, such as Ghana, Madagascar, Nicaragua and Zambia, may no only be via a lower han expeced volume of invesmen, bu also hrough a poorer policy environmen which will affec he efficiency of physical and human capial. 3. MDRI Deb Relief and he Exernal Indebedness of Pos-HIPCs The focus of his secion is o examine he impac of he newly proposed MDRI relief on he overall sock of he exernal deb burden in our sixeen pos-hipcs ha qualified for assisance under his Iniiaive by he end of January To simplify our analysis, we have assumed he anicipaed full deb wrie-off under he MDRI Program by he paricipaing financial insiuions will be for all ypes of mulilaeral deb sock ousanding a he end of This corresponds o he year when he qualifying pos-hipc counries began o receive assisance from he IMF under he MDRI framework. The growh-wih-deb ideniies in equaions 1.1 o 1.8 oulined earlier in Secion 1 show ha a high level of exising sock of deb and associaed deb services is one of he major deerminans of deb disress in many low-income counries. The Enhanced HIPC Iniiaive wih he supplemenary MDRI relief was designed primarily o achieve and mainain susainable exernal deb levels in he medium o long-erm by providing a one-off sock-of-deb cancellaion for qualifying counries. Figure 3 presens he resul of our year-on-year calculaions for he unweighed mean NPV of deb sock expressed as a percenage of expors for our sample of sixeen saes wih and wihou he proposed MDRI relief. As wih our previous represenaion in Figure 2, he resuls are predicaed on a baseline scenario of opimisic performance parameer values for each of our sixeen counries. For breviy, much of he argumen here will be resriced o projeced mean raios of he NPV of foreign deb o expors observed in he eleven years from 2005 hrough 2015 for our sample of sixeen pos-hipcs as a whole. This final period is he year in which he originaors of he MDGs sough o address such issues as exreme povery eradicaion, HIV/AIDS, universal primary educaion, gender equaliy, child moraliy reducion and maernal healh improvemens. 11

13 300.00% Figure 3: Projeced Sock of Exernal Deb o Average Expors (Aggregae for 16 HIPC-MDR1 Economies) Sock of exernal deb (% 3-year average expors) % % % % 50.00% NPV of deb-expors (wihou MDRI deb relief) NPV of deb-expors (wih MDRI deb relief) 0.00% Time period in years The projecions in Figure 3 show ha he delivery of MDRI relief in 2004 would no provide an assurance of susainable levels of exernal indebedness in he subsequen eleven years for our group of sixeen pos-hipcs. In his Figure, he unsusainable exernal deb posiion is defined in erms of a coninuing NPV of foreign deb sock of more han he HIPC II hreshold of 150 percen of average expors. On average, he NPV of exernal deb relaive o average expors for our group of sixeen pos-hipc economies, assuming a provision of MDRI relief in 2004, is expeced o rise from an iniial raio of 22 percen in 2004 o 176 percen in I is projeced o reach is peak of 242 percen in 2026 and o decline o a susainable raio of 149 percen in 2044 compared o 2047 in he absence of mulilaeral deb cancellaion. The impac of he proposed mulilaeral deb relief on deb susainabiliy oulook in our sample of HIPCs, i seems, is only a marginal hree final years. This implied benefi of a one-off MDRI deb relief is paricularly insignifican if he resources saved in hese las hree years are discouned o he base year We may herefore infer ha he oulook for long-run growh and deb susainabiliy in hose pos-hipcs ha failed o qualify for a 100 percen cancellaion of heir mulilaeral deb sock ousanding in 2004 will no be significanly differen from ha of our sample of sixeen saes which did qualify in January This observaion is, of course, predicaed on he assumpion ha hose pos HIPCs ha did no qualify for addiional assisance under he MDRI arrangemen will coninue o say wih heir economic sabilizaion programmes and srucural reform in a manner similar o ha subsumed in our base case scenario. Such furher underscores he imporance of improvemens in policy and insiuional environmens in aaining and mainaining susainable exernal deb levels in he medium o long-erm in HIPCs. 12

14 Ineresingly, he rapid build-up in he overall exernal deb burden o unsusainable levels of more han 150 percen from 2013 for our sample of he pos-hipcs, despie any MDRI deb relief operaion in he early sages of heir growh process, is no as an assumed resul of he poor economic managemen ha has plagued hese economies in he pas. Afer all, our baseline projecions are based on opimisic growh-enhancing policy reforms ha should augmen fiscal balances as well as expand and diversify expor producion. Raher, he anicipaed sharp rise in foreign deb-o-average expor raios is largely due o heir coninuing requiremen for oal new exernal disbursemens, EBFC, of around US$564 million per annum averaged from 2005 o This is despie he fac ha heir overall annual ineres payable on ousanding deb, ISEB 1, afer MDRI relief is cu by 31 percen on average from US$99 million o US$69 million beween 2005 and 2015 when compared wih obligaions under he base case scenario. By conras, such anicipaed reducions in ineres paymens brough abou by implemenaion of MDRI deb relief are projeced o significanly lessen he expeced addiions o exernal deb flows for Benin, Burkina Faso, Mali, Mozambique, Rwanda, Tanzania and Uganda. As a resul, heir poenial sock of exernal liabiliies is likely o remain below he HIPC II criical value of 150 percen of expors hroughou he period 2005 o This offers a good saring poin from which hese saes can depar permanenly from deb rescheduling and/or forgiveness. According o an IMF and World Bank sudy (IMF-Bank, 2001a), he incidence of rescheduling for developing counries, such as hose lised immediaely above, wih prospecive ne presen values of foreign deb sock o expor raios below 150 percen was only 12 percen. Noneheless, numerous challenges sill remain for hese relaively low-populaed agrarian Sub- Saharan African (SSA) HIPCs and heir mulilaeral crediors o ensure ha unsusainable deb levels are no accumulaed once again. Mos imporanly, crediors should coordinae heir lending approaches o deal wih he so-called free rider problem emphasized in numerous HIPC/MDRI documens. This refers o a siuaion where commercial banks in paricular may aemp o ake advanage of he lower risk of defaul in pos-hipc-mdri economies by exending new loans on non-concessional erms, leading o a furher need for deb relief in he fuure. The creaion of an appropriae deb susainabiliy framework ha involves all bilaeral, mulilaeral and privae crediors should ensure ha he lending space creaed by progressive reducions in he levels of deb under he Enhanced HIPC-MDRI Program is no filled by nonconcessionary borrowing from he commercial secor and/or bilaeral donors. 13

15 4. Adverse Shocks and he Enhanced HIPC-MDRI Framework: A Sensiiviy Analysis The projecions in Figure 3 sugges ha he unweighed mean NPV of deb-o-expors for our group of sixeen HIPCs is likely o show a downward rend from he end of 2025 and o fall below he 150 percen criical value by he end of 2047 in he absence of furher deb relief from he mulilaeral agencies. Of course, he observed improvemens in he developmen of exernal deb indicaors is largely a reflecion of he opimisic assumpions underlying our deb susainabiliy analyses, especially wih respec o he fuure course of heir marginal domesic savings raes and exernal rade condiions. While such hopeful projecions are useful in informing policy makers of he likely rend in economic growh wih associaed new exernal borrowing under favourable economic condiions, researchers are increasingly worried ha he long-erm economic forecass underlying Fund and Bank HIPC deb susainabiliy analyses are ofen oo ambiious (see Easerly, 2006). Generally, projecions under he curren Enhanced HIPC-MDRI framework are heavily relian on he successful implemenaion of a se of complex economic and srucural reforms. The deerioraion in he sock of deb indicaors for Uganda soon afer reaching is Compleion Poin in 2000 seems o have been largely a consequence of a slowdown in global demand for primary commodiies wih an associaed decline in is expor prices in he early 2000s. Alhough he coninuing increase in he prices of commodiies in he las hree years should improve he deb oulook of mineral commodiy exporers, in paricular hose of Uganda, Zambia, Ghana and Bolivia. Then oo, many SSA HIPCs, like Zambia and Uganda, have raes of HIV/AIDS infecions ha are amongs he highes in he world. An adul HIV/AIDS epidemic, hrough is effec on he skilled labour force and on public secor finances in paricular, can reduce expors and real GDP growh, hereby weakening a counry s repaymen capaciy. These uncerainies illusrae he need for he design and applicaion of condiionaliies allied o deb-relief iniiaive o be flexible and adapable o changes in individual counry characerisics. In fac, Fund and Bank Decision Poin assessmens for he wors HIV/AIDS affeced Souhern African saes like Zambia included Compleion Poin riggers for opping up relief assisance in order o conain and/or reduce he poenial macroeconomic effec of heir relaively high adul HIV/AIDS infecion raes. There are also Compleion Poin riggers for addiional relief for counries ha are experiencing a balance of paymens difficulies caused by shocks ha are beyond heir conrol, including deerioraing erms of rade and naural disasers. 14

16 To gain a clearer undersanding of he implicaions of hese exogenous facors and less opimisic assumpions for he curren Enhanced HIPC-MDRI deb susainabiliy framework, we conduced sensiiviy analyses of he underlying deerminans of he evoluion of exernal indebedness in each of he sixeen pos-hipcs in our sudy. Specifically, we recalculaed he respecive NPV of he foreign sock of loans resuling from a en-percen adverse movemen in he following key indicaors of deb susainabiliy: (i) he marginal gross domesic savings rae, (ii) he real rae of growh in expors, (iii) he share of non-deb creaing flows in gross exernal resources, (iv) he share of mulilaeral deb in new exernal disbursemens, (v) he share of concessionary loans in new exernal borrowings, (vi) he ineres rae on concessionary and non-concessionary loans and (vii) he gran elemen in new foreign disbursemens. Assessmen of a counry s vulnerabiliy o hese seleced exogenous shocks is based on a comparison of he updaed foreign deb sock indicaors wih he measures of deb burden projeced under he base case assumpion of sound macroeconomic policies and a favourable exernal environmen. Figure 4 presens he resuls of our sensiiviy analyses of he unweighed average percenage change in he NPV of he sock foreign loans for our sample of sixeen HIPCs as whole. The graphical represenaion and he discussion which follows are for he base case growh-wihdeb process wihou he delivery of MDRI deb relief. This is because our simulaions show ha here was lile difference in projecion oucomes wih or wihou he delivery of mulilaeral deb relief a he end of Moreover, he promised MDRI assisance is condiional upon he reforms which underlie our baseline scenario. Therefore, sensiiviy ess which presume any slippage in policy reforms leading o an adverse movemen in he baseline parameer values violaes he erms under which MDRI relief was provided o our pos-hipcs. The key findings of our basecase sensiiviy ess may hen be summarised as follows: Firs, a reducion in he baseline marginal rae of domesic savings by en-percen annually over he period 2005 o 2030 is likely o be associaed wih a rise of more han en-percen of he corresponding baseline NPV deb o GDP figure for our sixeen pos-hipcs as a whole. We esimae ha our sample of HIPCs will experience an average annual increase of 29 percen in heir unweighed mean raio of he NPV of deb-o-gdp following a en-percen reducion in heir marginal savings raes over he period 2005 o Figure 4 shows ha his anicipaed increase in exernal deb sock is higher han he effec of a en-percen reducion in he oher key indicaors of domesic policy and exernal environmen. Such an oucome furher emphasises he imporance of he need for HIPCs o ake acion o improve heir savings performance by reducing fiscal deficis, as well as by liberalizing heir financial secors. 15

17 Figure 4: Ne Presen Value of Toal Exernal Deb Sock o GDP Raio (Ten Percen Change from Comparable Baseline Figures) Lower iniial expor-gdp raio 0.36% Lower iniial savings-gdp raio Higher ineres raes 2.68% 4.11% Deviaion from base case NPV of deb o GDP raio (%) Lower share of concessionary deb 3.09% Lower share of mulilaeral deb 0.10% Lower share of non-deb flows 7.94% Lower average gran elemens 15.56% Lower expor growh rae 21.99% Lower domesic savngs rae 29.08% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% Sensiiviy Tess: Deviaion from he baseline esimae (percenage) However, his aggregae resul masks significan variaion in he vulnerabiliy of our counries individually o a fall in he marginal savings rae. A one end, Ghana and Nicaragua wih an annual increase in NPV of deb-o-gdp of 14 and 19 percen respecively are he wo leas sensiive counries in our sample. A he oher exreme, an esimaed annual average increase in he NPV of deb-o-gdp raio of up o, or more han four imes he original en-percen reducion in he marginal domesic savings rae is obained for Mali, Uganda and Mozambique. This is parly a reflecion of he fac ha he proposed en-percen reducion in he domesic savings rae will reduce he annual average for his figure o well below he required raio of fixed invesmen o GDP of almos 20 percen implied by he arge growh rae of five-and-a-half percen. We herefore projec ha around one-half of he addiional gross resource requiremens will be financed from new foreign loans wih consequen increases in he ousanding sock of deb. Second, a en-percen cu in annual expor earnings averaged from 2005 o 2030 will be relaed o a 22 percen increase in he projeced mean raio of NPV of deb-o-gdp for our sixeen pos- HIPCs as a whole (see Figure 4). The en counries in our sample mos a risk o any adverse shock in expors named in ascending order of heir vulnerabiliies are: Madagascar, Bolivia, Niger, Honduras, Tanzania, Benin, Burkina Faso, Mali, Uganda and Mozambique. We may noe, however, ha inspie of is high suscepibiliy o adverse rading shocks, he raio of he NPV of deb sock o GDP for Mozambique is projeced o remain a 28 percen vis-à-vis he mean raio of 71 percen observed for a group of sixeen pos-hipcs. Mozambique appears o 16

18 be in a good posiion o mainain susainable deb levels despie any worsening of is expors. I is also noeworhy ha beween 2001 and 2004, ha counry acually achieved a real expor growh rae of 26 percen per annum following he coming ino producion of is aluminum projec and as a consequence of he ending of is civil war. Such enhancemen in is expor producion should help improve is deb susainabiliy oulook. Third, resuls in Figure 4 reveal ha a en-percen reducion in he average gran elemen of new exernal borrowing is likely o lead o an increase of jus under 16 percen in he mean NPV of deb-o-average GDP for our sixeen pos-hipc counries as a whole. Counries which are paricularly vulnerable o reducions in he level of concessionaliy in new foreign disbursemens are in ascending order: Mali, Mozambique and Rwanda. However, despie he anicipaed adverse effec of a lowering in he aid componen of new loans o hese hree economies, our resuls sugges ha heir poenial NPV of foreign deb sock will endure a below he HIPC II hreshold of 40 percen of average GDP. This suggess ha no every HIPC counry which experiences a rise in is NPV of exernal deb sock will face a fundamenal worsening in is deb susainabiliy oulook. Noneheless, i is imporan o emphasise ha our baseline projecions are enaive as hey are derived from simulaion exercises and depend criically on he underlying sylized assumpions. One such conjecure is ha all crediors are willing o engage in defensive lending by rolling over heir ousanding claims as hey fall due. Addiionally, hey are presumed o be conen o coninue o provide new financing o help HIPCs fill he larger of heir invesmen minus savings or foreign exchange gaps and o cover deb service paymens on he erms and condiions ha prevailed from 1990 o Bu he oulook for he global capial marke is uncerain, as are our esimaes of he indicaors of deb sock which hey deermine. Conclusions and Policy Recommendaions The high indebedness of world s poores counries has been recognised as an imporan problem which needs o be resolved if hey are o achieve heir MDGs by In his paper we have addressed concerns regarding wheher he curren HIPC-MDRI framework will be able o assis in reaching and mainaining long-erm exernal deb susainabiliy in sixeen ou of he seveneen counries ha me he policy eligibiliy crieria of he MDRI Program in January The main findings and consequen policy opions may be summarised as follows: Firs, i is unlikely ha any of our sixeen pos-hipcs will reach a sage in he nex wo and a half decades a which hey can afford o pay ou of heir own domesic savings (or foreign exchange receips) for all he invesmen, impors and deb servicing required o achieve and susain he 17

19 annual growh in real gross domesic produc needed o mee boh he Unied Naions MDGs by 2015 and he HIPC II deb susainabiliy hresholds. This is in spie of he fac ha, under our baseline assumpions, heir poenial gross domesic savings and foreign exchange gaps are expeced o decline gradually from The projeced build-up in he absolue dollar value of he ne inflow of new exernal loans is such ha he addiions o he sock of exernal deb burdens will coninue o rise hroughou he weny-five year perspecive-plan period from 2005 o As a resul, he esimaed mean for he NPV of exernal deb sock for our sixeen pos- HIPCs as a whole is likely o more han riple from 74 percen in 2004 o 236 percen of expors a he end of 2015 in he absence of he proposed MDRI deb relief. Second, he impac on he deb susainabiliy oulook of he proposal o cancel all mulilaeral deb ousanding a he end of 2004 is only marginal. I is expeced o cu he ime aken for our group of pos-hipcs o reach he deb susainabiliy hreshold of 150 percen of expors by no more han hree years. Wha is more, he reducion in he prospecive NPV of deb sock of our sixeen pos-hipcs a he end of he MDGs following a 100 percen cancellaion of all mulilaeral deb ousanding a he base year 2004 was only 25 percen, from 236 percen o 176 percen of average expors. The delivery of a one-off MDRI deb relief early on in he planned growh process, i seems, will simply leave our group of sixeen pos-hipcs wih an NPV of deb relaive o expors in 2015 slighly higher han he 150 percen hreshold and comparable o he raio hey aained a end of This oucome suggess ha programmes for achieving and mainaining susainable deb levels in pos-hipc counries, including he provision of furher assisance under he proposed MDRI framework should be complemened by iniiaives aimed a encouraging he inflow of long-erm non-deb creaing flows, in paricular foreign direc invesmen and emigran remiances. Third, he resuls of our sensiiviy analysis sugges ha policy iniiaives which address he problems faced by pos-hipc-mdri counries in erms of a low marginal savings rae would be mos effecive in helping hem o reach and mainain susainable exernal deb levels. As par of a well-designed sraegy o raise aggregae domesic savings raes, HIPC governmens should improve ransparency in heir collecion, reporing and managemen of public resources. They should also remove subsidies and deregulae prices o provide user charges which cover he cos for public uiliies. Admiedly, however, he implemenaion of he foregoing fiscal adjusmen policies, while beneficial in he long erm, could adversely affec he lower income secions of sociey and lead o an iniial rise in povery levels. Bu he financial cos of avoiding such difficul reforms bearing on he low domesic savings rae in many HIPCs may be high in erms of required new disbursemens from abroad. The willingness of donors o provide he 18

20 addiional resources for financing such projeced increases in new borrowing arising from a widening in fiscal deficis in paricular is uncerain. Fourh, equally imporan in he mainenance of susainable deb levels in pos-hipc counries, as suggesed by our sensiiviy ess, is he growh of expors. To reduce heir vulnerabiliy o exernal rading condiions, HIPC counries should expand he share of expors in heir gross domesic producs. Appropriae expor expansion policies require ha HIPC governmens address problems relaing o he poor qualiy of infrasrucure, especially where i specifically bears upon he cos of producion and ranspor of goods. These faciliies include roads and railways, power, elecommunicaion, pors and airpors in paricular. Also, hey should ake acion o remove impedimens o privae secor developmen, noably in hose areas which relae o he earning of foreign exchange. These consrains may include he limied availabiliy of skills and capial for enrepreneurs, as well as price regulaion, corrupion and bureaucracy, an absence of law and order and a poor proecion of propery. Improvemens herein should arac foreign direc invesmen and srenghen he responsiveness of expor supplies o rading opporuniies in he world marke. Of course hese concerns also bear upon producion as a whole, bu hey are paricularly significan where he exigencies of a compeiive world expor markes are concerned. In addiion, he HIPC auhoriies should liberalize heir exchange rae regimes and rade policies by abolishing desrucive publicly-owned markeing boards, cuing axes and oher resricions on expors, as well as by improving ransparency in cusoms procedures, border conrols and police harassmen. To encourage diversificaion, small and medium scale exporers of manufacured goods and non-radiional agriculural producs, such as cu-flowers, medicinal plans and exoic frui and vegeables, should, perhaps, be given duyfree access o impored inpus including seeds, ferilizers, capial machinery and spare pars. Regional marke inegraion and moneary unions would also allow small sized counries o ake advanage of economies of scale and so o improve expor compeiiveness. Donor governmens, for heir par, should reduce barriers o, and wihin heir markes, including agriculural subsidies. By insulaing heir farmers from swings in world prices, rade-disoring subsidies are repued o have conribued o deb disress in HIPCs by exacerbaing volailiy in commodiy prices. They should also improve access o heir markes by allowing duy and quoa free enry of impors of goods from HIPCs. Such preferenial reamen should give he poores counries some incenive o persis wih he ofen difficul and complex se of srucural and insiuional reforms allied o enhanced deb relief and aid flows. Fifh, he size of he gran componen of he new disbursemen was idenified by our sensiiviy ess as anoher major deerminan of he deb susainabiliy oulook in pos-hipc- MDRI counries. This finding is relaed o he fac ha he bulk of HIPC exernal finance has 19

21 largely comprised official disbursemens from bilaeral and mulilaeral agencies direcly in loans o heir cenral governmens and o corporaions which hey own or underwrie. Given he limied capaciy of HIPC governmens o repay deb from fiscal balances, crediors should provide a significan proporion of he projeced new ransfers in he form of grans and/or on more concessional erms. Indeed, we esimae ha a leas one-half of all new finance o severely indebed counries, such as Nicaragua, should come in he form of grans-in-aid and/or loans wih an average gran elemen of a leas 50 percen. This should ensure ha he NPV of exernal deb socks relaive o expors is reduced below he 150 percen susainabiliy hreshold by he end of HIPC governmens, for heir par, should pay more aenion o he erms and condiions of new borrowing and should ensure ha hey pu resources freed-up by deb relief o good use. As par of he approach oulined in heir Povery Reducion Sraegy Papers (PRSPs), he HIPC auhoriies should honour heir commimen o channel more of any enhanced deb relief o he provision povery-reducion iniiaives like improved educaion, healh, nuriion, waer and saniaion. They should also follow more pruden deb managemen and accouning policies. This will require he srenghening of heir legal and regulaory sysems for public deb and expendiure managemen, as well as he esablishmen of appropriae deb informaion sysems for recording, rerieving and analysing daa on public deb. Such should help o improve heir overall domesic borrowing posiion and o reduce he fear ha he exclusion of such public domesic deb from he Enhanced HIPC deb susainabiliy framework will undermine he effeciveness of he srucural adjusmen policies allied o deb relief assisance. An acive deb managemen sraegy should also include he raining of public secor workers in he preparaion and use of a deb susainabiliy framework o deermine he concessionaliy and appropriaeness of new disbursemens for he counry s overall deb oulook. This should help allay concerns expressed by he sponsors of HIPC and MDRI Programs ha hey migh be cross-subsidizing oher lenders, especially newly-emerging bilaeral crediors and commercial banks ha offer non-concessional loans. Bu, o preven such free riding and moral hazard i may be necessary for sancions o be imposed on hose counries ha raise non-concessional loans a home or from abroad which breach he concessionaliy guidelines specified in heir PRSPs. The long-erm developmen objecives embodied in our simulaions of foreign deb raios in his sudy are opimisic. Thus, while he resuls repored in his aricle may be generally plausible as a measure of he magniude of he sock of exernal deb liabiliies associaed wih a arge growh of five-and-a-half percen in our sixeen pos-hipc-mdri counries, hey are enaive and need o be inerpreed wih cauion. A more comprehensive economeric analysis will be required o esablish he relaive roles and ineracions beween domesic and exernal facors in deermining foreign indebedness, as well as he required responses of he HIPC auhoriies o 20