Results of International Debt Relief

1. Results of International Debt Relief Geske Dijkstra Erasmus University Rotterdam dijkstra@fsw.eur.nl Evaluation of Dutch debt relief for IOB (Policy & Operations Evaluation Department) Ministry of Foreign Affairs, Netherlands Full report: www.euforic.org/iob

2. Presentation overview • Design of the evaluation • Results: stock, flow and conditionality effects of debt relief • Some remarks on HIPC

3. The Evaluation • 8 country studies, out of which 3 field studies • Nicaragua, Bolivia, Jamaica, Peru • Mozambique, Tanzania, Uganda, Zambia • Literature survey on debt problem and creditor responses • Econometric study • Study of Dutch policies • Period: 1990s • Approximately Euro 1.5 billion of Dutch aid money

4. Stock Flow Conditionality Inputs Different modalities Policy conditions Outputs Reduction of debt stock Increase in flow of resources Policy change Outcomes Stock effects: debt overhang, creditworthiness, private investment Flow effects: government expenditure, social indicators Impact Economic growth Logframe, theory-based

5. Financial inputs:modalities of debt relief Three distinctions: • Relief on debt service (flows) or on debt stocks • Restructuring versus forgiveness • Type of creditor: • Bilateral: aid loans or export credits (“commercial”) • Multilateral • Private

6. Debt overhang:The debt Laffer curve

7. Results: stock effects • Output (efficiency): limited reduction in stocks: annually only 1-4% • Outcomes on private investment, capital inflows: only in Peru, to some extent Jamaica and Bolivia • Debts not sustainable in any country in 1999 • Long-term propects for sustainability: bad

8. Results: flow effects (1) Outputs: limited reduction in actual payments: • Debt service would not have been paid otherwise • Debt stock reductions increased actual payments • New loans, so new debt payments Outcomes: some in Bolivia and Jamaica, on government budget

9. Flow effects (2): Additionality • Debt relief mostly not additional to regular aid from donor viewpoint …. • But largely additional for recipient countries: • Part of debt relief from creditors who are no donors anymore • Debt relief substitutes for aid to other countries, with lower debts

10. Flow effects (3): bailing out Multilaterals are bailed out by bilaterals • Bilateral grants used for multilateral debt relief • Preferential creditor status lowers value of bilateral claims  more Paris Club debt relief  Moral hazard with IFIs, so more new loans  Inefficient use of aid money: grants to IDA Replenishment fund etc. to allow loans, then debt relief on same IDA credits

11. Results: Conditionality effects Until 1999 condition: IMF agreement Limited effectiveness: • Governments do what they intended to do anyway; domestic political economy decisive • Pressure leads to cosmetic implementation Many IMF programmes delayed or “off-track”, but always new agreement in HIPC countries IMF: seal of good behaviour, so new aid  IMF is at the same time beneficiary of, and gatekeeper for international finance, so lack of selectivity

12. Conclusions Limited efficiency and effectiveness, so limited impact on economic growth (relevance) Why? • Faulty diagnosis: most countries had solvency problem, not liquidity problem • Too little debt relief, and wrong modalities • Too many new loans, also by moral hazard of IFIs • Official creditors do not write-off bad loans • IMF conditionality does not work, so adverse selection, also in aid policies

13. Changes with HIPC? • More debt relief, larger % forgiveness, but sufficient? • Abundant new loans from IFIs, still moral hazard • Conditionality more extensive than ever: • PRSP is added on (ownership?, participation?) • “Use” of debt relief often does not make sense • No change in decision making on debt relief and aid  still adverse selection