Debt relief initiatives 20 years on and implications of the new development finance landscape

ABSTRACT

Having been on the verge of falling off development practitioners and analysts’ radar for nearly a decade, concerns about the ability to meet external obligations are rising, especially in those developing countries that benefited from debt relief in the past decade. This article reviews these issues by taking stock of some of the achievements of the Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI) to date and by reflecting on the extent to which the ‘new’ debt-creating development finance flows – emerging lenders, international sovereign bonds, and public–private partnerships – may jeopardise debt sustainability and the results achieved so far.

KEYWORDS:

• Debt sustainability
• aid
• development finance

Notes

1. IMF, “The Good, the Bad, and the Ugly”; IMF, “Regional Economic Outlook: SSA”.

2. This picture has been changing though. UNCTAD, “Economic Development in Africa Report” and Jubilee Debt Campaign, “State of Debt” analyses and media articles (Financial Times, “Alarm sounded”) find that servicing debt obligations has become more expensive in several Sub Saharan Africa (SSA) countries.

3. Severino and Ray, “End of ODA”; Shafik, “The Future of Development Finance”.

4. Greenhill et al., “Age of Choice”.

5. This paper focuses on the case of external debt only and factors that could bring to its further accumulation. Domestic debt is likely to grow in importance as domestic savings increase and governments seek to develop domestic debt markets with the active support of the international financial institutions and other international organisations. See Mustapha and Prizzon, “Debt sustainability in HIPCs” for a discussion of future trends in domestic debt and implications for debt sustainability.

6. With the enhanced HIPC Initiative, the debt sustainability threshold was lowered to 150% net present value (NPV) of debt as a ratio of exports.

7. This refers to when beneficiary countries receive 100% relief on eligible debt from the IMF and other participating creditors. In the enhanced HIPC Initiative, countries were eligible for part of debt relief after having reached completion point.

8. Thomas et al., “African Debt since Debt Relief”

9. The ability of a country to avoid debt defaults, determined by the country’s repayment history, indebtedness level, and history of macroeconomic stability.

10. Reinhart et al., “Debt Intolerance”.

11. In Figure 2, we compare external public and publicly guaranteed debt in HIPCs and other developing countries and general government debt for advanced economies, given the lack of comparable annual measures for both groups (World Bank external debt statistics are available for advanced countries as well but data are presented in a quarterly format only). In other words, data reported in Figure 2 for advanced economies capture both domestic and external debt; developing country data are restricted to external debt.

12. Prizzon, “Fallout from the Financial Crisis”.

13. OECD, “Aid to Developing Countries Rebounds”.

14. IMF, “Managing Capital Flows”.

15. Baduel and Price, “Evolution of Debt Sustainability”.

16. They measured an adverse impact on debt ratios in short to medium term though.

17. A DSA is a standardised analytical tool to monitor debt sustainability for a particular country. It is part of the Debt Sustainability Framework (DSF), a standardised tool introduced by the World Bank and the IMF in 2005 to inform the borrowing decisions of LICs, to provide guidance for creditors’ lending and grant allocation decisions and to inform IMF and World Bank analysis and policy advice. All DSAs include an external risk rating – an explicit assessment of a country’s risk of external debt distress.

18. IMF, “Public Debt Vulnerabilities”.

19. The analysis and measurement of fiscal space goes well beyond the scope of this paper. For its definition and assessment, see Heller, “Understanding Fiscal Space”.

20. There is limited evidence on the impact of debt relief on social spending, with most papers analysing data pre-MDRI. According to Alun, “Do Debt Service Savings and Grants Boost Social Expenditure?”, debt relief has a small but significant influence on social spending: a fall of 1% in debt service increases social spending by 0.4%. Depetris Chauvin and Kraay, “What Has 100 Billion Dollars’ Worth of Debt Relief Done” do not find any significant relationship between debt relief and social spending.

21. Poverty-reducing expenditure usually includes education, health and social protection spending.

22. IDA and IMF, “HIPC Initiative and MDRI Statistical Update”.

23. IDA and IMF, “HIPC Initiative and MDRI Statistical Update”.

24. By debt sustainability we consider the IMF definition of a country that is able to finance its policy objectives and service the ensuing debt without unduly large adjustments, which could otherwise compromise its stability.

25. IMF, “List of LIC DSAs for PRGT-Eligible Countries”.

26. Concessionality measured on the basis of the DAC rule of 25% grant element based on a 10% discount rate.

27. World Bank , “IDA Terms”.

28. Moss and Leo, “IDA at 65”.

29. World Bank, “Major Terms and Conditions of the IBRD Flexible Loan”.

30. World Bank, “Africa since Debt Relief”.

31. For those countries that are eligible for loans under the DSF.

32. Baduel and Price, “Evolution of Debt Sustainability”.

33. Te Velde, “Sovereign Bonds in Sub-Saharan Africa”.

34. Prizzon et al., “Age of Choice for Development Finance”.

35. Greenhill et al., “Age of Choice”; Prizzon, “Age of Choice: Zambia in the New Aid Landscape”.

36. Te Velde, “Sovereign Bonds in Sub-Saharan Africa”.

37. Sy, “First Borrow”.

38. Te Velde, “Sovereign Bonds in Sub-Saharan Africa”.

39. Presbitero et al., “Sovereign Bonds in Developing Countries”.

40. IMF, “Regional Economic Outlook: SSA”.

41. According to IMF (2013), however, the main effect of bond issuances to date has been on the composition of public debt, rather than levels. For the non-restructuring cases, the immediate impacts on the size of total debt are modest, although Ghana and Senegal saw their debt ratios rising after their bond issuances. For the debt-restructuring cases, debt ratios declined significantly, with the new international sovereign bonds replacing debt in default or restructured.

42. IMF, “Regional Economic Outlook: SSA”.

43. For example, the Ghanaian government has suspended Eurobond issuances due in spring 2014 because of the high large spread associated with high fiscal deficit (see http://www.africanbondmarkets.org/news-events/article/update-2-ghana-puts-1-bln-eurobond-on-hold-till-markets-improve-46413/). More recently, Zimbabwe failed to secure funding on international markets owing to concerns about its national debt overhang (see http://allafrica.com/stories/201404240530.html?aa_source = nwsltr-debt-en).

44. Sy, “First Borrow”.

45. Te Velde, “Sovereign Bonds in Sub-Saharan Africa”.

46. Ibid.

47. Seychelles was not eligible under HIPC assistance.

48. Sy, “First Borrow”.

49. The default led to debt restructuring and government spending cuts.

50. OECD, “From Lessons to Principles for the use of Public-private Partnerships”.

51. Greenhill et al., “Age of Choice”.

52. Hammami et al., “Determinants of Public-private Partnerships in Infrastructure”.

53. UNDESA, “Public-private Partnerships and the 2030 Agenda”.

54. Caliari, “Post-2015 Infrastructure Finance”.

55. Under this initiative, groups of private investors manage the design, build, finance and operation (DBFO) of public infrastructure.

56. HM Treasury, “A New Approach to Public Private Partnerships”.

57. Ellmers and Hulova, “New Debt Vulnerabilities”.

58. Trebilcocka and Rosenstocka, “Infrastructure Public–Private Partnerships in the Developing World”.

59. DG for External Policies of the Union, “Financing for Development Post-2015”; Hall, “Why Public-private Partnerships Don’t Work”; Martin, “Forestalling Risks from Contingent Liabilities”; Romero, “What Lies Beneath?”.

60. Martin, “Forestalling Risks from Contingent Liabilities”.

61. Hall, “Why Public-private Partnerships Don’t Work”.

62. A review of the case of the Queen Mamohato Memorial Hospital in Lesotho, which opened in 2011 and used PPPs to deliver all clinical services, revealed that running costs were three times higher than for the old public hospital, estimated at half of the government health budget, and not matched by improved outcomes (Oxfam, “Dangerous Diversion”).

63. Greenhill and Prizzon, “Who Foots the Bill after 2015?”; Mwase and Yang “BRICs’ Philosophies”.

64. Both China and India not only offer a mix of concessional and non-concessional financing but also have a long history of debt forgiveness. In fact, a common response from Chinese scholars to the question of the risk of a debt build-up for African countries is that China does not expect African countries to pay back if it is a government-to-government loan, and that China will cancel debts if borrowing governments face pay back difficulties (Davies, “China and the End of Poverty in Africa”). China also regularly cancels African loans, usually extended at zero interest, without policy conditionalities attached (Brautigam and Gaye, “Is Chinese Investment Good for Africa”; Sautman and Hairong, “African Perspectives on China-Africa Links”). In some cases, China has provided debt relief that exceeds the HIPC Initiative (Mwase and Yang,“BRICs’ Philosophies”). Moreover, India offers bilateral debt relief (by 2008, India had written off debt totalling $24 million) (Kragelund, “The Potential Role of Non-Traditional Donors’).

65. Jansson, “Recipient Government Control under Pressure”.

66. Greenhill et al., “Age of Choice”.

67. Brautigam, “Chinese Development Aid in Africa”; Davies, “Debt Sustainability”; Mwase and Yang “BRICs’ Philosophies”; Reisen and Ndoye, “Prudent versus Imprudent Lending”.

68. Kaberuka, interview.

69. Mwase and Yang, “BRICs’ Philosophies”.

70. Brautigam, “Chinese Development Aid in Africa”.

71. Prizzon, “The New Development Finance Landscape: The Case of Ghana”.

72. Reisen and Ndoye, “Prudent versus Imprudent Lending”.

73. Melina et al., “Debt Sustainability, Public Investment, and Natural Resources”.

74. Reisen and Ndoye, “Prudent versus Imprudent Lending”.

75. IMF, “List of LIC DSAs for PRGT-Eligible Countries”.

76. Brautigam, “Chinese Development Aid in Africa”; Davies, “Debt Sustainability”; Mwase and Yang “BRICs’ Philosophies”; Reisen and Ndoye, “Prudent versus Imprudent Lending”.

77. Beddies et al., “Debt Sustainability in Low-income Countries”; Ellmers and Hulova, “The New Debt Vulnerabilities”; UN, “Report of the Independent Expert”; Vaggi and Prizzon, “On the Sustainability of External Debt”; Yang and Nyberg, “External Debt Sustainability in HIPC Completion Point Countries”.

78. IMF, “Public Debt Vulnerabilities”.

79. China Daily “China’s Foreign Aid (White Paper)”; Strange et al., “Tracking Under-Reported Financial Flows”.

80. UNDESA, “Sovereign Debt Restructuring”.

81. IDA and IMF, “HIPC Initiative and MDRI Statistical Update”.