Debt Relief for the Poorest: An Evaluation Update of the HIPC Initiative

Victoria ElliottShonar Lala

ODI: Re-Examining Sovereign Debt Series

July 11, 2006

www.worldbank.org/ieg/hipc

2

Builds on findings of IEG’s 2003 evaluation

• Clarify the objectives and how they are to be achieved

• Debt relief must be additional, but not yet enough evidence to determine this

• Prospects for debt sustainability tenuous or poor in the majority of completion point countries

• Maintain policy standards for qualification

3

HIPC Initiative’s objectives remain largely unchanged

• Key objective is “to provide eligible countries a base from which to achieve debt sustainability and exit the rescheduling cycle”

• Has maintained its objective of “freeing up resources for poverty reduction”

• Some stakeholders consider poverty reduction the primary objective of debt relief

4

Debt relief has been additional

0

5

10

15

20

1990

2000

2004

Net

Tra

nsfe

rs (b

illio

ns o

f $s)

Total Net Transfers Non-Debt Relief Transfers

Trend: -3% grow th rate

Actual: 11% grow th rate

5

… so HIPC countries get a larger share of aid

1994 - 1999 1999 - 2004

Other Developing Countries38 HIPCs

Share of Net Resource Transfers

40%

60%

54%

46%

6

…even though HIPC countries have weaker policies and institutions

2.5

3

3.5

4

1999 2000 2001 2002 2003 2004

Ove

rall

CPIA

Sco

re

38 HIPCsOther Developing Countries

7

Debt ratios have regressed for many HIPC beneficiaries

• Relief granted under E-HIPC reduced debt ratios to half their initial levels in 18 countries

• But debt ratios have deteriorated subsequently in 11 out of 13 countries with current data

• In 8 countries, they exceed HIPC thresholds

Mean Debt Ratios(NPV of debt to

exports/revenues)Export Fiscal

Before relief

310% 445

After relief

142 181

Current estimate (2003)

174 218

of 150% or 250%

8

Why have post-completion point countries’ debt ratios risen?

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

Factors Affecting Debt Ratios

Cha

nge

in D

ebt R

atio

s (%

)

Early Later

DiscountRates

ExchangeRates

New Borrowing

Export /Fiscal Revenues

Total

9

HIPC beneficiaries continue to be vulnerable

Risk of debt distress

Vulnerabilities

Burkina Faso Moderate Needs to remain macro-economically stable and continue to mobilize revenues

Double trade shock; hinges on highly concessionalfinancing

Poor export performance or less favorable terms of donor financing; a nominal depreciation

Fiscal policy slippages and external shocks

Poor export performance or less favorable terms of donor financing

Heavy reliance on donor support; macroeconomic shocks and imprudent debt management

Terms of new borrowing and export shocks in particular; but sensitive to most stress tests

Needs highly concessional financing and swift diversification of exports

Ghana Moderate

Mali Moderate

Tanzania Moderate

Uganda Moderate

Mauritania Moderate

Ethiopia High

Rwanda High

Source: Low Income Country Debt Sustainability Analyses

10

Post-completion point countries have grown the fastest in recent years

Real GDP Growth Rates Old (1980–93) Early (1994–1998) Recent (1999–2003) 18 Post-completion point 1.7 4.3 4.3 30 Non-HIPC IDA only 1.1 3.5 3.8 10 Decision point 2.2 1.2 2.7 10 Pre-decision point 0.5 7.0 2.7 Source: World Development Indicators

11

…and still score highest on key policy ratings

2

2.5

3

3.5

4

1999 2000 2001 2002 2003 2004

Over

all C

PIA

Scor

e

Post CP HIPC DP HIPC

Non HIPC IDA Only Pre DP HIPC

12

Modest progress on MDGs in 18 post-completion point countries

Countries with data

Progress: 1999 to 2004

Reduce child mortality 18 Improvement

Promote gender equality and empower women

4 Improvement

Achieve universal primary education 13 Modest improvement

Ensure environmental sustainability 17 Modest improvement

Combat HIV/AIDS, malaria and other diseases

14 No change

Develop a global partnership for development

11 Modest improvement

Eradicate extreme hunger and poverty 1 No change

Improve maternal health 0 UNKNOWN

13

HIPCs not yet at decision point have the worst governance of all low-income countries

-2-1.5

-1-0.5

0

Post CPHIPC

Non HIPCIDA only

DP HIPC Pre DP HIPC

Gove

rnm

ent E

ffect

iven

ess

(KKM

) 1996 2004 1996 2004 1996 20041996 2004

14

Debt management capacity has worsened in all low-income countries

2

2.5

3

3.5

4

4.5

1999 2000 2001 2002 2003 2004

Debt

Ser

vice

and

Deb

t Man

agem

ent

(CPI

A)

Post CP HIPC DP HIPC Non HIPC IDA Only Pre DP HIPC

15

Summary

• HIPC is affecting the overall allocation of concessional resources

• Debt relief alone does not guarantee debt sustainability

• Countries not yet at decision point face serious challenges in managing their economies

• HIPC countries need help in improving their debt management capacity