Debt Relief

The G-8 Multilateral Debt Relief Initiative (MDRI) is the next step of the Highly Indebted Poor Countries Initiative (HIPC). There are two reasons why MDRI is unlikely to help poor countries. First, the amount of money at stake is trivial. The roughly $2 billion of annual debt payments to be relieved under MDRI amounts to roughly 0.01 percent of the GDP of the OECD countries%u2014a mere one-seventieth (1/70) of the quantity of official development assistance agreed to by world leaders on at least three separate occasions (1970, 1992, 2002). Second, the existence of debt overhang is a necessary condition for debt relief to generate economic gains. Since the world's poorest countries do not suffer from debt overhang, debt relief is unlikely to stimulate their investment and growth. The principal obstacle to investment and growth in the world%u2019s poorest countries is the fundamental inadequacy in these countries of the basic institutions that provide the foundation for profitable economic activity. In light of these facts, the MDRI 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.

Debt relief as a platform for reform: the case of Nigeria's virtual poverty fund

In June 2005 the Paris Club group of creditors announced a US$30 billion debt relief package for the Nigerian government, which included a US$18 billion debt write off. This paper describes how these debt relief savings have been managed and spent, with a focus on the development and implementation of a comprehensive tracking system that aimed to effectively monitor debt relief expenditures. The paper argues that the Nigerian case implies debt relief can be a valuable tool for supporting public sector reform

Aid Effectiveness, Debt Relief and Public Finance Response: Evidence from a panel of HIPC Countries

Through the Heavily Indebted Poor Countries (HIPC) Initiative, substantial amounts of debt relief have been granted to a set of low-income countries as an alternative instrument of aid delivery. The theoretical (and moral) arguments in favour of debt relief are well established. However, the question whether debt relief is a more effective instrument of development assistance in practice is an empirical question. Hence, in this paper we investigate, for a panel of 28 decision point HIPC countries, the intertemporal linkages between debt relief and other fiscal variables such as current expenditure, government investment, taxation and domestic borrowing, in comparison to the effects of more traditional forms of development assistance, namely (non-debt relief) grants and concessional loans. To do so, we estimate a panel VAR and look at impulse response functions. Overall, we find that HIPC (only) debt relief impact on fiscal variables to follow fairly complex dynamics. For example, debt relief initially reduces government investment, but the effect becomes positive after two years, well outperforming other modes of aid delivery.

What Has 100 Billion Dollars Worth of Debt Relief Done for Low- Income Countries?

Between 1989 and 2003, low-income countries received $100 billion in debt relief. The stated objectives for much of this debt relief have been to reduce debt overhang and to free up recipient government resources for development spending that would otherwise have been used for debt service. In this paper we empirically assess the extent to which debt relief has been successful in meeting these objectives, using a newly-constructed database measuring the present value of debt relief for 62 low-income countries. We find little evidence that debt relief has affected the level and composition of public spending in recipient countries. We also do not find evidence that debt relief has raised growth, investment rates or the quality of policies and institutions among recipient countries. Although we cannot rule out the possibility that our failure to find evidence of positive impacts of debt relief is due to a variety of data and statistical problems, the evidence reported here does suggest that some skepticism is in order regarding the likely benefits of further large-scale debt relief.Debt Relief, HIPC, Low-Income Countries, Debt

Who gets debt relief ?

The authors use preliminary results from an ongoing effort to construct estimates of debt relief to study its allocation across a sample of 62 low-income countries. They find some evidence that debt relief, particularly from multilateral creditors, has been allocated to countries with better policies in recent years. Somewhat surprisingly, conditional on per capita incomes and policy, more indebted countries are not much more likely to receive debt relief. But countries that have large debts especially to multilateral creditors are more likely to receive debt relief. The authors do not find much evidence that debt relief responds to shocks to GDP growth. Finally, most of the persistence in debt relief is driven by slowly changing country characteristics, indicating that it may be difficult for countries to"exit"from cycles of repeated debt relief.External Debt,Banks&Banking Reform,Strategic Debt Management,Foreign Direct Investment,Economic Theory&Research

Debt Relief Effectiveness and Institution Building

The history of debt relief is now particularly long, the associated costs are soaring and the outcomes are at least uncertain. This paper reviews and provides new evidence on the effects of recent debt relief programs on different macroeconomic indicators in developing countries, focusing on the Highly Indebted Poor Countries. Besides, the relationship between debt relief and institutional change is investigated to assess whether donors are moving towards and ex-post governance conditionality. Results show that debt relief is only weakly associated with subsequent improvements in economic performance but it is correlated with increasing domestic debt in HIPCs, undermining the positive achievements in reducing external debt service. Finally, there is evidence that donors are moving towards a more sensible allocation of debt forgiveness, rewarding countries with better policies and institutions.HIPC, Debt Relief, Institutions

Health Expenditures Under the HIPC Debt Initiative

One of the goals of the Heavily Indebted Poor Countries (HIPC) debt initiative is to provide additional resources for basic health care to the population of eligible developing countries. In this paper I investigate the effect of debt relief on per capita health expenditure in a sample of developing countries while controlling for other factors used in the literature. I find that debt relief has – at the margin – little or no effect on health expenditure in countries that are classified as HIPC. The level of health expenditures in HIPC countries, however, is significantly higher than in other developing countries. On the other hand, countries not classified as HIPC increase their per capita health expenditures more than proportionally if they receive debt relief. This result is surprising considering that per capita amounts of debt relief provided to HIPC countries are on average significantly higher than those to Non-HIPC countries.HIPC debt initiative, debt relief, foreign aid, public health expenditure

How did highly indebted poor countries become highly indebted? : reviewing two decades of debt relief

How did highly indebted poor countries become highly indebted after two decades of debt relief efforts? A set of theoretical models predict that countries with unchanged long-run savings preferences will respond to debt relief with a mixture of asset decumulation and new borrowing. A model also predicts that a high-discount-rate government will choose poor policies and impose its inter-temporal preferences on the entire economy. Reviewing the experience of highly indebted poor countries, compared with that of other developing countries, the author finds direct and indirect evidence of asset decumulation and new borrowing associated with debt relief. The ratio of the net present value of debt to exports rose strongly over 1979-97 despite the debt relief efforts. Average policies in highly indebted poor countries were generally worse than those in other developing countries, nor were wars more likely in highly indebted poor countries. Over time there has been an important shift in financing for highly indebted poor countries, away from private and bilateral nonconcessional sources to the International Development Association and other sources of multilateral concessional financing. But this implicit form of debt relief also failed to reduce debt in net present value terms. Although debt relief is done in the name of the poor, the poor are worse off if debt relief creates incentives to delay reforms needed for growth.Environmental Economics&Policies,Strategic Debt Management,Economic Theory&Research,Payment Systems&Infrastructure,Banks&Banking Reform,Environmental Economics&Policies,Strategic Debt Management,Financial Intermediation,Economic Theory&Research,Banks&Banking Reform

Conditionality and debt relief

Six years into the debt crisis, questions about the relevance of policy measures to alleviate the crisis still abound. Conditionality by international financial institutions and rescheduling by commercial creditors have been dismissed in favor of debt reduction as strategies for restoring the creditworthiness of heavily indebted countries. This paper argues that the combination of conditionality and new private money - if properly interpreted and correctly implemented - should not be dismissed too lightly. The paper contends that liquidity (the availability of current resources) in the debtor country is probably as important an incentive for a country to invest and adjust as having a small enough debt stock outstanding. Debt reduction alone, is not as efficient as simultaneously providing liquidity and debt reduction if liquidity were available. The combination of new money and conditionality will work if the debt stock is small enough and enough new money is available.Environmental Economics&Policies,Economic Theory&Research,Strategic Debt Management,Financial Intermediation,Housing Finance

The fragile panacea of debt relief for developing countries

The subject of debt relief for low income and highly indebted countries has risen to the fore of public debate in recent months. I review a brief history of major debt relief for low-income countries including the recent HIPC initiative and I discuss some factors that should be taken into consideration that would impact the usefulness of debt forgiveness on the affected countries. Finally, I conclude that debt relief is effective only in certain circumstances and needs to be applied with care.debt relief; low-income countries; HIPC