Debt Relief and Debt Sustainability Introduction to Global Issues Course 27 September 2006

1. Debt Relief and Debt Sustainability Introduction to Global Issues Course 27 September 2006 Dana Weist (dweist@worldbank.org)

2. Context What multilateral debt relief has been provided and what has it achieved? How do we ensure debt sustainability and avoid future debt crises?

3. Debt relief is part of international aid • Includes technical cooperation, emergency and distress relief, contributions to NGOs, admin costs • Source: OECD DAC

4. 250% 200% HIPC Countries 150% 100% 50% Low-Income Countries 0% 1970 1974 1978 1982 1986 1990 1994 1998 2002 In the 1990s, some low-income countries experienced debt crises Share of External Debt to GDP (in NPV terms)

5. Alternative Debt Scenarios for LICs Historical 5% Growth 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.

6. 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 countriespotentially eligible for relief Estimated debt relief: US$61 billion (end-2005 NPV terms)

7. 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: US$50 billion (end-2005 NPV terms)

8. 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 Malawi Central African Rep. 9 Mali Comoros Mauritania Burundi Cote d’Ivoire 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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10. 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 • Hasn’t 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