H IPC Expenditures, Ownership and the Role of Donors

1. HIPC Expenditures, Ownership and the Role of Donors Robrecht Renard University of Antwerp

2. I. Introduction Financial flows between low-income countries and public donors consist of outflows of debt service payments plus inflows of grant aid and new loans  resulting in considerable net inflows

4. Financial conditions

5. Notwithstanding positive net transfers and high loan concessionality, • many recipients have difficulty servicing their old debts, • while facing severe administrative and managerial constraints in absorbing new aid, • suggesting a recurrent fiscal constraint • and a mismatch of aid instruments (project aid versus budget support) and financial conditions (soft loans versus grants).

6. Debt relief isakin to budget support • and has similar advantages • relieves the recurrent fiscal constraint • enhances fiscal ownership • has low transaction costs for the recipient • and then some more • is predictable • is not pro-cyclical • reduces debt overhang

7. Debt reliefas an instrument of aid makes extra sense in view of the fact that • LICs might be unable to absorb the extra new aid required to achieve the MDGs • donor public opinion favours debt cancellation over identical new flows

8. Extra ODA to achieve MDGs

9. Debt relief also has some disadvantages, such as • moral hazard, • adverse selection, and it raises complex issues of creditor burden sharing

10. All in all, one would expect a substantial effort at debt cancellation Does HIPC live up to the expectation?

11. II. Characteristics of HIPC

12. HIPC II eligibility criteria • low-income country • unsustainable debt • track record of sustained adjustment • up to decision point: 3 years • up to completion point: variable • PRSP

13. Unsustainable debt

14. Situation September 2002 • 26 countries reached their decision point • of which 6 countries their completion point • debt relief of > $40 billion (nominal) • debt as a per cent of GDP from 56% to 30% • debt service requirements cut by one-third • $1.3 billion annual savings

15. III. Some topics for discussion • Is debt relief really additional? • Should donors extend deeper debt relief? • Is the conditionality right?

16. Is aid additional? • virtual or illusory resources? • compared to effective debt service, or • compared to contractual debt service • additional to other aid • EURODAD “ a glorified accounting excercise”

17. Fungibility could undermine additionality

18. Share of Debt Relief in DAC Members' Total Net ODA in 2000

19. ODA from DAC countries (billion US$ - 1998 prices)

20. Should donors go further? • by moving the cut-off date forward in time? • by redefining sustainability? • by radically cancelling all public debt to low-income countries?

21. The sustainability debate • present definition is • arbitrary • non developmental • proposal by anti-debt campaigners • consider debt relief as an aid instrument • take MDGs seriously • define sustainability with respect to fiscal spending for development

22. Which conditionality for HIPC? • ex ante: adjustment plus pro-poor spending • ex post: pro-poor expenditure tracking • virtual funds • comprehensive • who should do the tracking?