y~) THE WORLD BANK WORLD BANK OPERATIONS EVALUATION DEPARTMENT (DED 25952 May 2003 Debt---Relief for the Poorest An OED Review of the HIPC Initiative * r, r- *:.l-4 - i l - 2 | ~. _ _ f~~ | r- 7.ct ;; 'V--D ;}w g gi.]T. .~~~ ' «S4:4Nr:; ~ .tt OPERATIONS EVALUATION DEFARTMENT ENHANCING DEVELOPMENTEFFI.ECTIVENESS THROUGH EXCELLENCEANM INDEPENDENCE IN EVALUATION The Operations Evaluation Department (OED) is an independent unit withlin the World Bank; it reports directly to the Bank's Board of Executive Directors. OE:D assesscs what works, and what does not; how a borrower plans to run and maintain a project; and the lasting contribution of the Bank to a country's overall development. The goals of evaluation are to learn frem experience, to provide an objcctive basis for assessing the results of the Bank's work, and to provide accountability in the achievement of its objectives. It also improves Bank work by identifying and disseminating the lessons learned from experience and by framing recommendations drawn from evaluation findings. WORLD BANK OPERATIONS EVALUATION DEPARTMENT ___ Debt Relief for the Poorest An OED Review of the HIPC Initiative Madhur Gautam 2003 THE WORLD BANK http://vwww.worldbank.org/oed Washington, D.C. © 2003 The Intcrnational Bank for Reconstruction and Development / The World Bank 1818 11 Street, NW Washington, DC 20433 Telephone 202-473-1000 Internet www.worldbank.org E-mail feedback(@lworldbank.org All rights reserved Manufactured in the United States of America First printing April 2003 1 2 3 4 03 02 01 The findings, interpretations, anci conclusions expresscd herc are th se of the author(s) and do not necessarily reflect the views of the Board of Fxecutive Directors of ,he World Bank or the governments they represent. The World Bank cannot guarantee the accura(y of the dala inclided in this work. 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All other queries on rights and licenscs, including subsidiary ngfhts, should be addressed to the Office of the Publisher, World Bank, 1818 I Street NW, Washington, DC 20433, USA fax 20 '-522-2422, e-mail pubrightsQvworldbank.org. Cover photo by Eric Miller, World Bank Photo Library Maputo harbor workers offloading rice imports from cranes in Mo'.ambicue. ISBN 0-8213-5521-X e-ISBN 0-8213-5520-1 Library of Congress Catalogirg-in-Publication data has bee-i applictd for. *0 Prnted on Recycled Paper Contents vii Acknowlegments ix Foreword ix Foreword ix Prefacio xi Preface xi Pr6logo xiii Executive Summary xiii Executive Summary xiii Resumo Executivo xix Resume analytique xix Resumen xxvii Abbreviations and Acronyms 1 1. Introduction 2 Progress and Current Status 3 Evaluation Design 5 2. Evolution of Debt and the Debt Problem 5 Evolution of the HIPC Debt Burden 8 The Consequences of an Excessive External Debt Burden 9 3. The HIPC Initiative 9 Background 10 The Political Economy of HIPC 11 The HIPC Objectives 11 The Process 15 4. Design of the Initiative 15 Background 15 Consistency of the Design with Overall Objectives 18 Debt Sustainability 23 Performance Criteria DEBT RELIEF FOR THE POOREST. AN OED REVIEW OF THE HIPC INITIATIVE 25 Creditor Participation 25 Capacity Building 27 5. Implementation Experience 27 Pace of Implerrentatiori 27 Debt Sustainability Analysis 30 Performance Criteria 34 Creditor Participation 35 Institutional Developrrent: Capacity Building for External Debt Managemert 37 6. Likely Outcomes-Preliminary Findings 37 Debt Sustainability 42 Progress Toward Performance Criteria 46 Incremental Resource Tlr-ansfer 50 Debt Management Capacitv 51 Likely Outcomes 53 7. Findings and Recommendations 53 Relevance 55 Efficacy and Efficiency 56 Sustainabilitv 56 Institutional Development 57 Recommenrcations 59 Annexes 61 A: HIPC Initiative: Status of Country Cases Considered under the Initiative, July 2002 63 B: The Objectives and Guiding Principles for the HIPC Initiative 65 C: HIPC Debt initiative: Flow Chart 67 D: Evaluation Approach 69 E: Change in Net Transfers to HIPCs, by Source 71 F: How Does a Large Debt Stock Affect Economic Performance? 73 G: Debtor Country Perspectives on the Heavily Indebted Poor Country (HIPC) Initiative 77 H: Creditor Country Perspect ves on the Heavily Indebted Poor Country (HIPC) Initiative 81 1: Synthesis of Main Finding, from Case Studies 87 J: Constraints to Growth as Identified by OED Country Assistance Evaluations 89 K: Management Response 95 L: Chairman's Summary: Cornmittee on Development Effectiveness (CODE) 99 Endnotes 105 References Figures 6 2.1 Evolution of the HIIPC Debt Burden 7 2.2 Net Resource Transfers to IIlPCs Hlave Outpaced Debt Service 20 4.1 HIPC Target for Debt-to-Export Ratio Compared with Other Poor Countries Iv CONTENTS 21 4.2 What Would Be a Good Debt-to-GDP Target? 30 5.1 Structural Adjustment Compliance Fosters GDP Growth 40 6.1 Projected Debt-to-Export Ratios (2000-10) 40 6.2 Projected Debt Service Ratios (2000-10) 41 6.3 Key Factors Affecting Debt Sustainability: Status of E-HIPC Completion Point Countries 44 6.4 Average Policy Performance Scores of Early Entrants, the "Millennium Rush" Group, and Late Entrants 48 6.5 Declining Aggregate Net Transfers to HIPCs 48 6.6 Sharply Declining Aggregate Net Transfers to All Developing Countries (excluding Asian crisis countries) 49 6.7 HIPCs' Growing Share of Aggregate Net Resource Transfers Tables 5 2.1 External Debt as Percentage of GDP (period average) 12 3.1 The Original and Enhanced HIPC Frameworks in a Nutshell 29 5.1 Comparison of DSA Export Growth Projections and Historical Performance 38 6.1 Debt Sustainability Indicators for O-HIPC Graduates 39 6.2 Debt Sustainability Indicators for E-HIPC Graduates 43 6.3 Countries with Difficulties Staying on Track with Macroeconomic and Structural Programs in 2001 Boxes 2 1.1 Status of the 42 Eligible HIPCs (as of August 2002) 16 4.1 Uganda's Influence on the Design of the HIPC Initiative 32 5.1 Debtor Countries Endorse the Links Between the HIPC Initiative and the PRSP 35 5.2 PERs Highlight Absorptive Capacity Constraints in the Social Sectors in HIPCs 36 5.3 Increasing World Bank Involvement in Debt Management Capacity Building 42 6.1 Topping-Up and the Prospects for Debt Sustainability for Burkina Faso Acknowledgments his report was prepared by a team led by Devarajan, Sumana Dhar, Geske Djikstra, William Madhur Gautam. Members of the core Dorotinsky, Ceri Edmonds, Ibrahim Elbadawi, .1 team were Georgia Wallen, Shonar Lala, Mahyar Eshragh-Tabary, Gerald Flood, Indermit and Yusuf Ahmad. Victoria Elliott provided over- Gill, Romilly Greenhill, Jo Marie Griesgraber, all guidance to the team as manager of the Cor- Bernhard Gunter, Sanjeev Gupta, Maria lonata, porate Evaluation and Methods Group, with Keith Jay, Kadima Kalonji, Nawal Kamel, Jeffrey substantial input into the formulation of the Katz, Heinz Kaufmann, Tony Killick, Jeni Mug- final report. Professors Thomas M. Callaghy and man, Matthew Martin, Calvin McDonald, Rob Jonathan Eaton contributed key background pa- Mills, John Mitchell, Ashoka Mody, Catherine pers and have advised the team at critical stages Pattillo, Ann Pettifor, Malvina Pollock, Robert of the review. Magdalene Apenteng, William Bat- Powell, Doris Ross, Alison Scott, Kathy Selvaggio, taile, Sunday Khan, Michael Lav, and Mirafe Mar- Sudhir Shetty, Veena Siddharth, Miriam Tamane, cos contributed to the country case studies. Melissa Thomas, Rachel Turner, D. C. van der Additional inputs were provided byJudith Hahn, Hoek, Nicholas Vaughan, Jian-Ye Wang, Howard Robert Keyfitz, Carlos Reyes, and P. A. Shara- White, Alexandre Widmer, John Williamson, and fudheen. Parveen Moses provided administrative Hanspeter Wyss. sup?ort, with assistance from Annisa Cline- OED is grateful to the Swiss Agency for De- Thomas and Julia Ooro. William Hurlbut and velopment Cooperation for financial assistance Caroline McEuen edited the report. to support a number of activities, including the T.-ie evaluation has benefited from discus- multistakeholder workshop and background re- sions, comments, and assistance from numerous search. OED also thanks the U.K. Department people. Special thanks are due to former and cur- for International Development for sponsoring rent staff of the World Bank's HIPC unit, in par- the Lilongwe and London workshops, Debt Re- ticular Mark Dorfman, Francis Earwaker, Anthony lief International for organizing the workshops, Gaeta, Charlene Adam Gust, Young Chul Kim, and the finance ministers and their representa- Jacob Kolster, Vikram Nehru, and Axel van Trot- tives from the 24 HIPCs who participated in senberg, for their cooperation at all stages of these two workshops for their time and invalu- the review. Inputs from the following persons are able inputs. The evaluation benefited greatly acknowledged with gratitude: Lisandro Abrego, from the feedback from the World Bank's ex- Masood Ahmad, Oliver Buston, John Cady, ecutive directors and their advisers from 14 Punam Chuhan, Stijn Claessens, Shantayanan creditor countries on their perspectives on the viI DEBT RELIEF FOR THE POOREST AN OED REVIEW OF THE HIPC INITIATIVE initiative. Thanks are due to tie governments cf the multistakseholder technical workshop held Cameroon, Guyana, Malawi, Uganda, and Zam- in Washington in September 2002 for their time bia for agreeing to be case study countries for and inputs. this review, and to the numerous government The study was published in OED's Partner- officials and civil society and donor represen- ships and Knowledge Group, under the direction tatives interviewed in these countries. The coun- of Osvaldo Feinstein, by the Outreach and Dis- try case studies also benefited significantly fro m semin ation staff of the Knowledge Management the assistance and inputs of the respective World Unit, incluaing Patrick Grasso, lead knowledge Bank and IMF country teams. Finally, the eval- management officer, Caroline McEuen, editor; uation team is grateful to the participants of and Juicy Qureishi-Huq, team assistant. Durector-Ceneral, Operations Evaluation: Gregory K Ingram Director, Operations Evaluation Department (Acting): NilsFostvedt M'Ltnager, Corporate Evaluation and Methods: Victoria Elliott TAsk Manager: Madbur Gautamn viii FOREWORD FOREWORD PREFACIO The creation of the Heavily Indebted Poor Countries A criagio da Iniciativa para as Paises Pobres Muito |HIPC) Debt Initiative marked a turning point in the evolu- Endividados (PPME) marca uma viragem na evolugio do fi- atin of developmentfinance. The HIPC Initiative has been nanciamento do desenvolvimento. A iniciativa para os a catalyst for far-reaching changes in the processes sur- PPME tem sido catalisadora de mudangas de longo al- rounding development assistance, reflecting the coming cance nos processos que rodeiam a assistencia ao desen- of age of a new authorizing environment with the active volvimento, o que reflecte a maturasao de uma nova participation of civil society. It has introduced greater conjuntura que autoriza a participagao activa da socie- transparency and accountability in the sovereign debt dade civil. Ela introduziu uma maicr transparencia e res- regime and raised development cooperation to a higher ponsabilidade no regime da divida estatal e elevou a plane, including between the World Bank and the Inter- cooperagio para o desenvolvimento a um nivel mais alto, national Monetary Fund. inclusivamente a cooperagio entre o Banco e o FMI. This review by the Operations Evaluation Department Esta analise realizada pela OED mostra que a iniciativa finds the HIPC Initiative highly relevant in addressing para os PPME e muito pertinente para abordar um grande a key obstacle facing many poor countries. If the an- obstaculo que enfrentam muitos paises pobres. Se o ali- .icipated debt relief is delivered in full, the initiative will vio previsto da divida for prestado na sua totalidade, a ini- succeed in substantially achieving its fundamental goal ciativa conseguira alcancar substancialmente o seu of reducing the excessive debt burden of the qualifv- objectivo fundamental de reduzir o encargo excessivo da ing countries. But the legitimizing process that helped divida dos paises qualificados. Mas o processo de legiti- make the initiative a reality has also expanded its ob- mayo que contribuiu para que a iniciativa se tomasse uma jectives. The initiative seeks to provide a "permanent" realidade tambem ampliou os seus objectivos. A inicia- exit from debt rescheduling, promote growth, and re- tiva procura proporcionar uma saida "permanente" do re- lease resources for social expenditures targeted at escalonamento da divida para promover o crescimento poverty reduction. Achieving these objectives will re- e desbloquear recursos para as despesas sociais dirigidas quire actions by donors and the HIPC governments a reduco da pobreza. Para atingir estes objectivos sern that are beyond the scope and means of the initiative. necessario que os doadores e os governos dos PPME Unmanageable debt is a problem that needs to be tomeem medidas que vao para alem do alcance e dos effectively dealt with, but it is also a result of economic meios da iniciativa. and political factors constraining growth and poverty A divida descontrolada e um problema que tem que reduction. The HIPC Initiative is thus an important ser tratado efectivamente, mas tambem e o resultado but small part of the overall development assistance de factores econ6micos e politicos que constrangem o framework. Having provided the HIPCs with an op- crescimento e a reduc,io da pobreza. A Iniciativa para os portunity for a "fresh start," the international com- PPME 6, portanto, uma parte importante, porem pe- munity still faces a challenge in helping these countries quena, de toda a estrutura de assist&ncia ao desenvolvi- set out on a sustainable path for growth and poverty mento. Tendo proporcionado aos PPME a oportunidade reduction. This requires actions by the HIPC govern- de `come,ar de novo", a comunidade internacional en- ments to adopt sound policy frameworks and a bal- frenta ainda o desafio de ajudar os paises que estao no anced development strategy. It also requires actions by trilho do crescimento e da reduc,ao da pobreza. Isso re- the international community to assist the countries to quer que os governos dos PPME tomem medidas para enhance their exports and build needed institutional adoptar um s6lido quadro de politicas e sigam uma es- capacities. A further challenge for donors, consistent trategia de desenvolvimento equilibrado. Tambem re- DEBT RELIEF FOR THE POOREST. AN OED REVIEW OF THE HIPC INITIATIVE with one of the initiative's main guiding prin- quer quc a cornunidade internacional empreenda ciples, is to provide adequate resources to meet uma acj;io para auxiliar os paises a incrementar as the development priorities of HIPCs as well as- suas exportacoes e a edificar as capacidades ins- other poor countries, and ersure that the HIPC titucionais que sao necessarias. Urm desaflo adi- debt relief is truly additional to other aid flows. cional para os doadores, que e coerente com um The review makes four recomrmcndatiors - dos graiides principios orientadores da iniciativa, addressing the strategic issues faciing the ini- 6 o de proporcionar recursos adequaclos para tiative. The first is to clarify and comrnmuciica.e cumprir as prioridades de desenvolvimento dos the purpose and objectives of the initiative and ensu -e PPME, assim co mo as de outros paises pobres, e o de as- that its design is consistent with these objcctives. The segurar que o alivio da divida dos PPME se venha verda- second recommendation is to make explicit the cleiramcnte a(licionar aos outros fluxos de ajuclas. methodology and economic models underlying the Esta analisc formula quatro recomenda,ces para abor- debt projections used in the debt sustainability analy- dar as questo Zs estrategicas que se colocam a iniciativa. ses and make the economic forecasts more realistic to A primeira e esclarecer e comunicar quais sao a finalidade assess better the prospects and risks facing individaal e os objectivos da iniciativa e assegurar que ela seja con- countries. Third, the initiative should maintain the ccbida de ma.neira coerente com esses objectivos. A se- standards for HIPCs' policy performance to ensure guncda recornendacao & tornar explicita a metodologia e that the risks to achieving and maintaining the initia- os mocielos ccon6micos subjacentes as projeccoes da di- tive's objectives are minimized. And when flexibility is vida usados nas analises de sustentabilidade da divida e desirable, there should be a clear and transparent ra- fazer com quie as orevisoes economicas sejam mais rea- tionale for relaxing the criteria. Finally, the review rec- listas para se poder avaliar bem as perspectivas e os ris- ommends a greater focus on pro-poor growth to cos que os paises individuais enfrentam. Em terceiro provide a better balance among development priori- Ilugar, a inic ativa deveria manter os padroes do desem- ties relative to the current emphasis on social ex,)en- penho de p')litica dos PPME para assegurar que os riscos ditures. de alcancar e manter os objectivos da iniciativa sejam mi- nimin7ados. E' quando for desejavel uma maior flexibilidade, deverd havc r raz6es claras e transparentes para suavizar os criterios. Finalmente, esta analise recomenda que haja uma maior focalizacao no crescimento em prol dos po- hres para estabe,ecer um melhor equili'brio entre as prio- ridadces do desenvolvimento e o enfase actualmente dado as despesas sociais. FOREWORD PREFACE PROLOGO La cr6ation de l'lnitiative en faveur des pays La Iniciativa para la Reducci6n de la Deuda de los pauvres tres endettes (Initiative PPTE) a marque un tour- Paises pobres Muy Endeudados (PPME) representa un punto nant dans I'evolution du financement du developpement. de inflexi6n en la evoluci6n del financiamiento para el de- L'nitiative a joue un role de catalyseur pour l'introduction sarrollo. Ha actuado como agente catalizador de profundos de r6formes de grande portee dans les processus qui en- cambios en los procesos relacionadas con la asistencia teurent I'aide au developpement, traduisant ia maturation para el desarrollo, lo que denota que un nuevo ordena- d'un nouvel environnement reglementaire auquel la societe miento ha alcanzado la mayoria de edad, con la participa- civile participe activement. Elle a introduit une plus grande cion activa de la sociedad civil. La iniciativa ha introducido transparence et une plus grande responsabilisation dans mayor transparencia y ha reafirmado la obligaci6n de ren- le regime de la dette souveraine et elle a hausse le niveau dir cuentas en el regimen de la deuda soberana, y ha lle- de la cooperation pour le developpement, notamment entre vado a un piano superior la cooperaci6n para el desarrollo, la Banque et le FMI. especialmente entre el Banco Mundial y el Fondo Mone- A l'issue de l'examen qu'il a effectue, l'OED conclut tario Internacional. que l'Initiative PPTE a ete un moyen tres efficace de s'at- En este examen del DEO se Ilega a la conclusi6n de taquer a un obstacle crucial auquel sont confrontes de que la Iniciativa para los PPME es de gran importancia para nombreux pays pauvres. Si les allegements de dettes abordar un obstaculo al que se enfrentan muchos paises pre6vus sont accordes dans leur totalit6, l'Initiative aura pobres. Si se concede la totalidad del alivio previsto de atteint son objectif fondamental, qui est de reduire le la deuda, la iniciativa lograra alcanzar su objetivo funda- pcids excessif de la dette des pays qui reunissent les mental de reducir la carga excesiva de la deuda de los pa- conditions requises. Mais le processus de legitimation ises que reunan los requisitos pertinentes. Sin embargo, qui a contribue a faire de l'Initiative une realite en a el proceso de legitimaci6n que ayud6 a hacer realidad la aussi elargi les objectifs. La finalite de l'Initiative est de iniciativa tambien ha ampliado sus objetivos. La Iniciativa permettre une sortie - definitive , des operations de procura otorgar una salida "permanente" de la repro- reechelonnement de la dette, de promouvoir la crois- gramaci6n de la deuda, promover el crecimiento y libe- sance et de liberer des ressources afin de pouvoir ac- rar recursos para que puedan aplicarse al gasto social croitre les depenses sociales consacrees a la lutte destinado a la reducci6n de la pobreza. A fin de alcanzar contre la pauvret6. Pour atteindre ces objectifs, les estos objetivos sera preciso que los donantes y los go- bailleurs de fonds et les gouvernements des PPTE de- biernos de los PPME adopten medidas que trascienden vront prendre des mesures qui d6passent la portee et el alcance y los medios de la iniciativa. les moyens de l'Initiative. Una deuda de proporciones ingobernables es un pro- Un endettement ing6rable est un probleme qui re- blema que debe abordarse con eficacia, pero tambien es quiert un traitement efficace, mais c'est aussi la conse- producto de factores econ6micos y politicos que limitan quence d'un ensemble de facteurs economiques et el crecimiento y obstaculizan la reducci6n de la pobreza. pol tiques qui pesent sur la croissance et la lutte contre Por ello, la Iniciativa para los PPME es una parte impor- la pauvrete. L'Initiative PPTE est donc un element im- tante pero menor de la asistencia para el desarrollo en portant quoique modeste du dispositif global de l'aide su conjunto. Despues de ofrecer a los PPME la oportu- au dcveloppement. Apres avoir donne aux pays pauvres nidad de "empezar desde cero", la comunidad interna- tres endett6s la possibilite de prendre un << nouveau de- cional se ve aun ante la dificultad de ayudar a esos paises part ,, la communaute internationale n'en est pas a transitar una senda sostenible de crecimiento y reduc- moins confrontee a une gageure, qui est d'aider ces ci6n de la pobreza. Para lograrlo, los gobiernos de los xi DEBT RELIEF FOR THE POOREST AN OED REVIEW OF THE HIPC INITIATIVE pays a s'engager dans la voie d'une croissance PPME deben adoptar marcos normativos racio- durable qui leur permettra de faire reculer la nales y una estrategia de desarrollo equilibrada. La pauvrete. Pour cela, il faut que les clirigeants des corn unidad internacional, por su parte, debe ayu- PPTE adoptent un cadre de politique Ccono- 3 dar a esos paises a aumentar sus exportaciones y mique rationnel et une strategie de d6velop- fortalecer su capacidad institucional. Los donan- pement equilibree. II faut aussi que la tes enfrentan ademas otro desafio, congruente communaut6 internationale prenne des mz- con uno ce los principios rectores de la iniciativa: sures pour aider les pays a accroitre leurs ex- sumtnistrarrecursos suficientes para que los PPME portations et a se doter des capacites institutionr elles y otros pai.es pobres puedan atender las prioridades en necessaires. Les bailleurs de fonds doivent relevc: une materia de desarrollo, y cerciorarse de que el alivio de la autre gageure, qui s'inscrit dans la logique des grands deuda de los PPME se sume, sin lugar a dudas, a otras cD- principes de l'Initiative, et qui est de fournir des res- r-ientes dc ayuda. sources suffisantes pour faire face aux priorites de dc- En el examen se formulan cuatro recomendaciones veloppement des PPTE et d'autres pays pauvres, et de sobre las cuestiones estrat6gicas que se plantean a la ini- veiller a ce que les allegements de dette accordcs aux ciativa. La )rimera es aclarar y comunicar el propcsito y PPTE soient vraiment des concours additionnels aux los objetivos de la iniciativa y garantizar que su disefno autres apports d'aide. guarde colaerencia con estos objetivos. La segunda ccn- L'examen debouche sur quatre recommandations siste en explicar la metodologia y los modelos economicos pour traiter les problemes strategiques 1- s a l'Initiative. en que se basar. las proyecciones de la deuda utilizacas La premiere est de clarifier et de faire connaltre la fi- en los anc'.Iisis de sostenibilidad de esta y realizar pro- nalite et les objectifs de l'Initiative, en veillan. a ce n6sticos econ6imicos mas realistas para evaluar mejor las que le plan d'action qu'elle comporte soit coherert avec perspectivas y los riesgos que cada pais tiene ante si. En les objectifs poursuivis. La deuxieme est d'explicite - la tercer lugar, la iniciativa debe mantener las normas para methodologie et les modeles economiques qui sous- el cumpliiniento de las poifticas por parte de los PPNIE, tendent les projections de la dette sur lesquel'es re- a fin de reilucir al minimo el riesgo de que no se pueclan posent les analyses du degre d'endettement tolcrable, alcan7zar y mantener los objetivos de la iniciativa. Y cuando et de faire des projections 6conomiques plus rc'alistes sea conveniente actuar con flexibilidad, de-De existir una afin d'apprecier plus justement les perspectives d'evo- justificaciin clara y transparente para aplicar con menos lution des differents pays consideres et les risques rigor los criterios pertinentes. Por ultimo, en el examen auxquels ils sont confrontes. La troisicme recomman- se recomi nda dedicar mas atencion a un crecimiento que dation est de maintenir les criteres de performance de beneficie a los pobres, a fin de hallar un equilibrio mas I'action gouvernementale des PPTE afin de minim- ser satisfactoijo entre las prioridades en materia de desarrollo les elements de risque qui pourraient campro -nettre en relaci(dn con la importancia que se atribuye actual- les objectifs de l'Initiative ou rendre ses r6sultats pre- mente al gasto social. caires. Et s'il faut assouplir les criteres etablis, une jus- tification claire et transparente doit etre fournie. Enfin, les auteurs de l'examen demandent de mettre davan- tage l'accent sur une croissance qui reponde aux be- soins des pauvres afin d'etablir un meilleur equilibre entre les priorites de d6veloppement par rapport a la politique actuelle, qui privilegie les depenses sociales. 744z-t_ Gregory K. Ingram Director-General Operations Evaluation xii EXECUTIVE SUMMARY EXECUTIVE RESUMO SUMMARY EXECUTIVO The Heavily Indebted Poor Countries (HIPC) Debt A lniciativa para a Divida dos Paises Pobres Muito Initiative marks a major innovation in the development fi- Endividados (PPME) constitui uma inovagio importante no nance regime. Relative to past efforts, it is more concerted regime de financiamento do desenvolvimento. Em relatio across creditors and more comprehensive in its attempt to aos esforgos do passado, ela reflecte um maior acordo reduce the high external debt-including, for the first entre os credores e revela-se mais abrangente na sua ten- time, multilateral debt-of many of the poorest countries. tativa de reduzir uma divida externa elevada-inclusiva- llt has made the processes surrounding the sovereign debt mente, e pela primeira vez, a divida multilateral-de muitos r egime more open and accountable. The initiative also paises mais pobres. Ela tornou os processos circundantes mnarks a significant break with the past in how develop- do regime da divida soberana mais abertos e responsa- rnent aid is approached. Its design embodies lessons of ex- veis. A iniciativa marca igualmente uma quebra significa- perience linking aid effectiveness with the policy tiva em relagio ao passado na maneira como sao abordadas environment and aid coordination, conditionality with as ajudas ao desenvolvimento. A sua concepgao incorpora ownership, and social impacts of macroeconomic policy os ensinamentos da experiincia, estabelecendo uma Ii- rnforms with public expenditure prioritization. gagio entre a eficicia das ajudas e a conjuntura politica Public concern with excessive debt burdens to- e a coordenagio da assistencia, entre as condicionalida- gether with declining aid resources and poor per- des e os programas executados sob os auspicios dos pai- fcrmance in poverty reduction provided the impetus ses e entre os efeitos sociais das reformas de politica for debt relief. With the vocal support of advocacy macro-econ6mica e a definigio das prioridades das des- nongovernmental organizations, these concerns came pesas publicas. to be shared by pragmatic policymakers in donor gov- A preocupaco puiblica com os encargos excessivos da ernments and international financial institutions. The divida, com o decrescimo dos recursos das ajudas e com overarching poverty reduction mission of the devel- o fraco desempenho em materia de reduc,o da pobreza, opment community became the core justification for deram o impeto ao alfvio da divida. Com o apoio sonoro the HIPC Initiative, with considerable political reso- das organizacoes nao governamentais (ONG) defensoras, nance in the wake of the Jubilee campaign. By 1999, essas preocupacoes passaram a ser partilhadas pelos de- the enhanced HIPC explicitly identified debt sustain- cididores pragmAticos de politica dos governos doado- ability and poverty reduction as its twin objectives. res e das institui,coes financeiras internacionais. A The HIPC Initiative was triggered by a confluence incumbencia primordial de reduqco da pobreza extra- of factors including the ascendancy of international civil ordinaria da comunidade dedicada ao desenvolvimento society organizations and their growing influence on tornou-se a justifica,co basica da Iniciativa para os PPME, major creditors, and a change in the World Bank's que teve uma ressonancia politica consideravel na se- leacership. Debtors had no explicit role in the design quencia da campanha do Jubileu. Em 1999, a Iniciativa of the original initiative and limited influence on the para os PPME reforcada identifica explicitamente a sus- design of the enhanced initiative, even though they are tentabilidade da divida e a redu,co da pobreza como central to its implementation. sendo os seus objectivos gemeos. Thlie specific objectives of the initiative have evolved.' A Iniciativa para os PPME foi provocada por uma con- The original goal in 1996 was to remove the debt over- fluencia de factores, nos quais estao incluidos a as- hang as a constraint to economic growth and poverty cendencia das organizaco internacionais da sociedade civil reduction. The modifications introduced in 1999 e a sua influencia crescente sobre os maiores credores, e brought not only deeper, broader, and faster debt re- uma mudan§a de lideranca no Banco. Os devedores nao xiii DEBT RELIEF FOR THE POOREST AN OED REVIEW OF THE HIPC INITIATIVE lief, but also a more ambitious andl expanclecl set tinham urn papel explicito na concepcEo da ini- of objectives-to provide a "permanent" exit ciativa original, e uma infQuencia limitada na con- from debt rescheduling, promote growth, and cepc,o da iriciativa reforcada, embora eles sejam release resources for higher social spending cruciais para a sua implementacao. targeted at poverty reduction. The need to cre- Os objectivos especificos da iniciativa evolui- ate fiscal space for social expenditures was a Cit- E r am. I () objectivo original em 1996 era o de remo- ical prerequisite of broad-based support for the vera dividancumulada que era um constnangimento initiative among donors and has had a major im- ao crcscimento economico e a redu,co da po- pact on the objectives of the initiative, its design, and breza. As modificagoes introduzidas em 1999 trouxeram its implementation. nao s6 um alivio da divida mais profundo, mais amplo e If the anticipated debt relief is delivereci, the initia- mais rapido, 'nas tambem um conjunto de objectivos mais tive will succeed in substantially reducing most HIPCs' ambiciosos e extcnsos- para oferecer uma "saida" per- external debt stocks and their debt service (on average) nianente ao reescalonamento da divida, para promover o to below the levels of other poor countries. Thus, the crescirnento, e para desbloquear recursos permitindo initiative is likely to achieve its original goal-to rcduce rnaiores gascos seciais dirigidos a reducao da pobreza. A the external debt burden of several of the poorest coun- necessidadc de criar um espaco fiscal para as despesas sc- tries and give them a "fresh start." But to simultaneously ciais era urma cordicao sine qua non crftica do apoio d& achieve all three objectives-specifically to free up re- bases ampls a Iniciativa entre os doadores, e tem tido um sources for increased social expenditures-the initiative efeito imnpcrtante sobre os objectivos da inicLativa, sobre would have to transfer additional real resources to the a sua conccpcAo e sobre a sua implementacao. countries. And to do this without diverting aid resources Se o alivio da divida previsto for proporcionado, a iri- from poor but not highly indebted countries, the over- ciativa vai conseguir reduzir substancialmente a divida ex- all level of aid resources would have to increase. Al- terna acuriulada da maioria dos PPME e o servico da though the initiative's objectives are predicated on the divida (em media) para um nivel inferior ao de outros pa- assumption that (other things being equal) past a;d lev- ises pobres. Assim, a iniciativa atingira provavelmente o els would be maintained, so that HIPC resources wvould seu objectivo o^ginal-reduzir o encargo da dfvida ex- be additional, the initiative's design cannot ensure that terna de varios pafses mais pobres, e dar-lhes a possibi- this will happen. The initiative thus faces the risk of lidade de "comecarem de novo". Mas, para alcancar os promising outcomes (related to its multiple objectives) seus objectivos actualmente declarados-sustentabili- that it cannot deliver by itself. dade da cdivida crescimento e despesas sociais acresci- In fact, there was a sharp decline in global net re- das--a iniciathva teria que transferir recursos reais source transfers starting about the time the initiat-ve was adicionaics para os pafses. E, para fazer isso sem desviar created. As a result, although the HlPCs as a group are recursos das ajudas dos pafses pobres mas nao muito en- getting an increasing share of declining global aic. re- dividadof, o nfivel global dos recursos da ajuda teriam que sources relative to other poor countries, they are not aumentar. Embora os objectivos da iniciativa se funclem receiving additional funds in absolute terms compared na suposicao cle que (sendo todas as coisas iguais) os nf- with what they were receiving before the creation of the vei, pass ados das ajudas seriam mantidos, para que os re- initiative (that is, until 1995). Because net transfers cursos para os PPME fossem adicionais, a formulac,o da were depressed in the years immediately before most iniciativa nao pode assegurar que isso acontega. A iniciativa countries qualified for debt relief, these years are not corre portanto o risco de prometer resultados (relacio- the most appropriate benchmark for establishing ad- nados com os seus multiplos objectivos) que ela nao ditionality. It is too early to quantitatively determine pode proporcionar por si mesma. whether there is a reversal in the recent declining De facto, houve uma diminuicdo acentuada dos re- trend. To the extent that the initiative has succeeded cursos dlas ajudas, em termos globais, aproximadamente in protecting the HIPCs' share of aggregate aid flows, a partir do momento em que foi criada a Iniciativa. Em it may be judged to be a limited success. However, it conseq-encia, embora os PPME como unm grupo estarem appears that the share of other poor countries has de- a receber urra parte crescente dos recursos mundiais de- xlv EXECUTIVE SUMMARY clined correspondingly. The resulting redistrib- clinantes das ajudas em relac,ao a outros paises po- ution conflicts with the principle of performance- bres, eles nao estao a receber fundos adicionais based allocation and could reduce the overall em termos absolutos, comparado com aquilo que efficiency and effectiveness of aid. This outcome estavam a receher antes da criac,io da iniciativa is a direct consequence of funding limitations, (isto e, em 1995). Visto os fluxos das ajudas terem and it cannot be overcome through design im- baixado nos anos imediatamente anteriores a provements internal to the initiative as currently majona dos paises estarem habilitados para re- conceived. A clear acknowledgment of the lim- ceber o alivio da dfvida, esses anos nao sao a re- itations imposed by past and current aid levels would ferencia mais apropriada para estabelecer uma facilitate the realignment of the initiative's basic ob- adicionalidade. E demasiado cedo para determinar quan- jectives with the resources actually available. titativamente se existe uma inversao da recente tenden- A key element in assessing the initiative's likelihood cia decrescente. Na medida na qual a iniciativa foi bem of achieving its core objective of debt sustainability is sucedida ao proteger a parte dos fluxos agregados das aju- the projection of debt indicators. The initiativc uses a das dos PPME, isso pode ser considerado como um exito debt inventory methodology for assessing current debt limitado. Contudo, parece que a participacao de outros levels that is a clear improvement over past practice and paises pobres decresceu de maneira correspondente. A a sound basis for calculating the amount of debt relief consequente redistribuicao estA em conflito com o prin- for individual countries. The initiative also projectsfu- cipio de distribuicdo com base no desempenho e pode- ture debt levels to assess each country's likelihood of ria reduzir a eficiencia e a eficacia globais. Este resultado achieving debt sustainability The methodological basis e uma consequencia directa das lirnitacbes do financia- underlying these projections in the debt sustainability mento, e nao pode ser superado atraves de melhora- arnalyses (DSAs) has not been made transparent, and the mentos internos da iniciativa, como ela e actualmente growth assumptions maintained in the DSAs have been concebida. Um reconhecimento claro das limitac6es im- overoptimistic in relation to historical growth rates. postas pelos niveis das ajudas, passados e actuais, facili- Debt indicators are influenced by how future debt lev- taria um realinhamento des objectivos hasicos da iniciativa els, exports, and other macroeconomic aggregates com os recursos actualmente disponiveis. ev/olve. The economic model behind these projections Um elemento fundarrental para avaliar a probabili- needs to be made explicit, and the economic forecasts dade de a Iniciativa alcancar os scus objectivos basicos de that are the basis of projections should become more sustentabilidade da divida e a projeccao dos indicadores realistic. In particular, they need to better capture the da divida. A iniciativa usa uma metodologia de inventario potential effects of volatility in export earnings-a key da dfvida para avaliar os niveis actuais da divida, o que e risk factor. Improved risk analysis would provide a bet- um melhoramento evidente em relag,o a pratica do pas- ter assessment of each country's likelihood of meeting sado, e e uma base s6lida para calcular o montante do all- the initiative's debt sustainability threshold. This would vio da divida para os paises individualmente. A iniciativa not by itself improve the prospects for debt sustainabiiity, tambem projecta os nfveisfuturos da dfvida para avaliar but it might foster a more informed debate about the a probabilidade de cada pafs alcangar a sustentabilidade policy changes needed in donor and recipient countries da divida. A base metodol6gica subiacente a estas pro- alike-as well as greater realism in setting objectives and jeccbes nas analises de sustentabilidade da dfvida (ASD) funding arrangements for the initiative. nao foi transparente, e as hip6teses de crescimento man- Meeting the objective of debt sustainability will be tidas nas ASD foram demasiado optimistas em relacao as a challenge for the HIPCs on both the debt and revenue taxas hist6ricas de crescimento. Os indicadores da dfvida sides. These countries may need to continue to bor- sao influenciados pela maneira na qual os niveis futuros row to meet their development needs, especially in the da divida, as exportac6es e outros agregados macro-eco- absence of adequate grants. Their main challenge is to n6micos evoluem. 0 modelo econ6mico por detras des- ensure that the funds are invested productively and ef- tas projeccoes tem que ser explicitado, e as previsoes ficiently to promote repayment capacity. To do so re- econ6micas que sao a base das projecc6es deveriam ser quires improved public expenditure management mais realistas. Em especial, elas precisam de captar mel- xv DEBT RELIEF FOR THE POOREST AN OED REVIEW OF THE HIPC NITIATIVE along with intensified and sustained efforts to hor os eFeitos potenciais de instabilidade nas re- accelerate economic growth. On the revenu cI cettas dc exportaco-urn factor principal de risco. side, the fiscal base is narrow and the export Uina anilise de riscos melhorada poder; indicar base is typically concentrated in a few cor- que niveis-limiar de indicadores da divida, dife- modities subject to highly volatile market con- rentes Cos que foram anteriormente estabelecidos, ditions. These countries need to address fiscal - definiriam melhor a sustentabilidade. Isto per se constraints and other policy obstacles to more nao me lhoraria as perspectivas de sustentabili- rapid, broad-based growth and diversified cx- dade d:i divida, mas poderia encorajar um debate ports. In turn, this may require improved trade facili- mois informaclo sobre as alteracoes de politica necessd- tation services and better access to developed country rias, tarto nos pai,es doadores como beneficidrios- markets. assim como um maior realismo na fixacao dos objectivos A necessary condition for accelerated economic e nos arranjoS de financiamento da Iniciativa. growth is adoption of a sound policy framework that Atingir o cbjectivo de sustentabilidade da divida serd will produce economic stability, effective public ex- urn desafio para os PPME, do ponto de vista da divida penditure management, and efficient and. nondistort- como dos rendimentos. Esses paises talvez necessitem ing revenue generation. A main requirement for de continuar a contrair empr6stimos para satisfazeras suas qualification for HIPC relief has from the start been a n.cessidades de desenvolvimento, especialmente quando track record of strong policy performance. The appli- nao ha doayc,es adequadas. 0 desafio principal 0 o de as- cation of this requirement was progressively reduced segurar que os fundos sao investidos produtivamente e in the enhanced HIPC, particularly for the "millennium cficientemente para promover a capacidade de reem- rush" countries that qualified in the second half of bolso. Para isso e necess'ria uma melhorgestlo das des- 2000. Many of these countries have yet to demonstrate pesas publicas, juntamente com esforcos mais intensos an ability to put such frameworks in place, which raises e continuados para acelerar o crescimento econ6mico. concerns about the achievement of the HIPC objectives. Do ponto de vista dos rendimentos, a base fiscal 6 estreita The initiative's guidelines for increased public ex- e a base das exportacoes estd normalmente concentracta penditures emphasize social sectors reiative to other em alguns produtos sujeitos a condic,es de mercaco sectors where public expenditures can also help en- muito inst.veis. Esses paises necessitam de abordas os hance economic growth. There are two disadvantages constrangimentos fiscais e os outros obstaculos de poli- to this. First, the performance criteria emphasize ex- tica que se colocam a um crescimento mais rdpido de penditures rather than outcomes or impacts, )et in- bases amplas e a exportag,es diversificadas. Por seu creased expenditures may encounter diminishing turno, isso podera requerer servigos melhorados de fa- returns in the short and medium run. T'he capacity of cilitacao do com6rcio e um melhor acesso aos mercac.os education and health ministries to manage increased dos paises desenvolvidos. budget resources efficiently is often weak, a substan- t'ma condi§0o necessaria para o crescimento econ6- tial share of aid resources is already targeted at social mico acelerado 6 a adopc,o de um bom quadro de poli- expenditures, and the World Bank's own public ex- ticas que produza estabilidade econ6mica, uma gestao penditure reviews indicate that financing is not always efectiva (las despesas publicas e uma gerac,o de rendi- the primary constraint to achieving outcornes. Ab- mentos eficiente e sem distorcoes. Um requisito princi- sorptive capacity constraints in the targeted sectors and pal para :)s PPME estarem habilitados ao alivio da divida the need for investment to promote growth may war- tem sido desde o inicio demonstrar um forte desem- rant a different balance between social and other sec- penho d.> politica. A aplicac,o deste requisito foi reduzida tors, especially infrastructure and rural development. progressivamente na Iniciativa reforcada para os PPME, es- Second, the inflexibility in allocation of HIPC rcsources pecialm2nte para os paises da "corrida do mil6nio" que is a major concern voiced by debtor-country repre- estavarm habilitados no segundo trimestre de 2000. Mui- sentatives. They note that the external strictures on tos desses paises ainda nao demonstraran a capacidade their resource allocation can weaken budget discipline para in:staurar essas estruturas, o que suscita preocu- and domestic ownership. Debtor governments believe pacdo acerca de eles alcancarem os objectivos dos FPME. xvi EXECUTIVE SUMMARY that these two issues are undermining the Asdirectrizesdainiciativaparamaioresdespesas achievement of the main HIPC objectives. publicas faz ressaltar os sectores sociais em relacao To sum up, excessive debt creates problems, aos outros sectores nos quais as despesas publi- and must be dealt with effectively. Yet unman- cas tamb6m podem reforcar o crescimento eco- ageable debt is a symptom of deeper structural n6mico. Isto tem duas desvantagens. Primeiro, o problems. While providing much-needed - crit6rio de desempenho destaca as despesas em respite, as the initiative appears likely to do, debt vez dos resultados ou dos efeitos, mas no entanto relief is not a panacea for broader economic de- as despesas podem levar a uma diminuicao dos velopment problems, nor is a one-time debt reduction rendimentos a curto e medio prazo. A capacidade dos mi- a guarantee that the problem will not reemerge. The nist6rios da educacao e da saude para administrar recursos biggest challenge facing the initiative is the expectations orcamentais acrescidos eficientemente 6 frequentemente of what it can achieve at current funding levels, given d6bil, uma parte importante dos recursos das ajudas ja policy and institutional constraints. Achieving its mul- estao dirigidas para as despesas sociais, e as pr6prias tiple objectives requires actions that are well beyond analises do Banco das despesas publicas indicam que o the scope and means of the initiative. The achievement financiamento nao 6 sempre o principal constrangimento and sustainability of the individual objectives require para conseguir os resultados. Os constrangimentos da ca- actions by HIPC governments to promote exports and pacidade de absor,ao nos sectores alvejados e a neces- broad-based growth, together with human capital de- sidade de investimentos para promover o crescimento velopment, for sustained poverty reduction. podem justificar um equilibrio diferente entre os secto- The review makes four recommendations. Thefirst res sociais e os outros sectores, especialmente em ma- is to clarify the purpose and objectives of the initiative, t6ria de infra-estruturas e de desenvolvimento rural. ensure that its design is consistent with these objec- Segundo, a inflexibilidade da distribui,co dos recursos aos tives, and communicate both the objectives and how they PPME 6 uma grande preocupacao que foi expressa pelos are to be achieved clearly to the global community. The representantes dos paises devedores. Eles fizeram notar second recommendation is to improve the transparency que as restric5es externas a sua distribuigao de recursos of the methodology and economic models underlying podem debilitar a disciplina orcamental e a adesao aos the debt projections and the realism of the economic seus programas. Os governos dos paises devedores acre- growth forecasts in the DSAa, to guide decisionmaking ditam que essas duas questoes dificultam o alcance dos through a better assessment of the prospects and risks principais objectivos dos PPME. facing individual countries. The third recommendation Em suma, a divida excessiva cria problemas e deve ser is to maintain the standards for policy performance. tratada de maneira efectiva. Por6m, a divida que nao And when the established criteria are to be relaxed, pro- pode ser gerida 6 um sintoma de problemas estruturais vide a clear and transparent rationale to ensure that the mais profundos. Embora proporcionando uma folga risks to achieving and maintaining the initiative's objec- muito necessaria, como a iniciativa parece fazer, o alivio tives are minimized. Finally, the review recommends that da divida nao 6 uma panaceia para os problemas mais am- there needs to be a greater focus on pro-poor growth to plos de desenvolvimento econ6mico, nem uma reducao provide a better balance among development priorities da divida 6 uma garantia de que o problema nao ressur- relative to the current emphasis on social expenditures. girn. 0 maior desafio que enfrenta a iniciativa sao as ex- pectativas daquilo que ela pode alcancar nos niveis actuais de financiamento, tendo em conta os constrangimentos de politica e institucionais. Para atingir os seus multi- plos objectivos 6 preciso tomar medidas que vao muito para al6m do alcance e dos meios da iniciativa. 0 al- cance e a sustentabilidade dos objectivos individuais re- querem que os governos dos PPME tomem medidas para promover as exportacoes e o crescimento de bases amplas, juntamente com o desenvolvimento do capital xvii DEBT RELIEF FOR THE POOREST AN OED REVIEW OF THE HIPC INITIATIVE human) para que haja uma reducdo continuada E da pob-eza. Esta avaliacao formula quatro recomendayJoes. A primeira c a de esclarecer a finalidade e os ob- - - jectivo<.i da iniciativa, assegurar que ela foi conce- - bida cld maneira coerente com esses ohjectivos, -, c comunicar a comunidade mundial tanto os ob- jectivcs como a maneira clara como eles devem ser atingidos. Asegunda recomendacao e a de melhorar a Eransparnncia da metodologia e dos modelos econ6- micos subjacentes as projecnces da divida, e o realismo nas previsoes do crescimento econ6mico nas analises da sustentabilidade cia divida, para orientar a tomada de decisoes, atraves de uma melhor avaliacao das perspec- tivas e dos riscos que enfrentam os paises mndividual- mente. A terc eira recomendaco e a de manter os padroes de clesempcnho de politica. E quando os criterios esta- belecidos fc rem atenuados, proporcionar razoies claras c transparentes para assegurar que os riscos em atingir • manter os objectivos da iniciativa sejam minimizados. 1t1nalhente, a avaliacao recornenda que e necessario que haja urma maior focaliza,co no crescimento a favcr dos pobres para estabelecer um melhor equilibrio entre as priorida(les do desenvolvimento em relacao ao des- taquc dadc, actualmente as despesas sociais. xviiI EXECUTIVE SUMMARY RESUME RESUMEN ANALYFIQUE - _ L'nitiative en Faveur des Pays Pauvres Trbs En- La Iniciativa para la Reducci6n de la Deuda de los dettes (Initiative PPTE) marque une innovation majeure Paises Pobres Muy Endeudados (PPME) constituye una im- dans le r6gime du financement du d6veloppement. Par portante innovaci6n en el regimen de financiamiento del de- rapport aux mesures passees, elle implique une concer- sarrollo. En relaci6n con esfuerzos anteriores, esta permite tation plus grande entre las cr6anciers et un programme una mayor concertaci6n entre los diferentes acreedores y (I'action plus global pour tenter de r6duire l'endettement una mayor integraci6n en el intento de reducir los eleva- exterieur eleve-et en particulier pour la premiere fois dos niveles de deuda externa de muchos de los paises mas 1'endettement multilateral-de nombreux pays qui comp- pobres, con inclusi6n por primera vez de la deuda multila- tent parmi les plus pauvres de la planete. Grace aux dis- teral. Ha representado una mayor apertura y rendici6n de positions qu'elle comporte, les processus qui entourent le cuentas en los procesos que rodean al regimen de deuda regime de la dette souveraine sont plus ouverts et davan- soberana. Otra novedad en relaci6n con el pasado es la tage bases sur le principe de la responsabilite. Uinitiative forma en que se plantea la ayuda para el desarrollo. Su di- marque aussi par rapport au pass6 une rupture impor- seno plasma las ensenianzas de la experiencia qua esta- tante dans la fa9on de concevoir l'aide au developpe- blecen una relaci6n entre la eficacia de la ayuda y el ment Sa philosophie repose sur les legons de l'experience, entorno normativo y la coordinaci6n de Ia ayuda, entre liant l'efficacite de l'aide au contexte global de l'action des condicionalidad y protagonismo y entre los efectos socia- pouvoirs publics et a la coordination de l'aide, la condi- les de la reforma de las politicas de alcance general y el tionnalitd a la necessite pour le pays concern6 d'adherer establecimiento de prioridades en el gasto publico. pleinement au programme d'action convenu et les effets La preocupaci6n p6blica por una carga de la deuda ex- scciaux des reformes de la politique macroeconomique a cesiva, junto con la disminuci6n de los recursos de la 1'etablissement des priorit6s dans le domaine des de- ayuda y los escasos progresos en la lucha contra la po- penses publiques. breza han dado impulso al alivio de la deuda. Con el de- Les preoccupations que suscitait dans le public le cidido apoyo y promoci6n de algunas organizaciones pcids excessif de la dette, conjugu6es a la diminution no gubernamentales (ONG), estas preocupaciones son des ressources d'aide et aux maigres resultats obtenus ahora compartidas por las autoridades pragmaticas de los sur le front de la pauvrete, ont et les elements mo- gobiernos donantes y las instituciones financieras inter- teurs du mouvement en faveur d'un allegement de la nacionales. La misi6n global de reducci6n de la pobreza dette. Avec le soutien d'organisations non gouverne- que recae sobre la comunidad del desarrollo fue la jus- mentales (ONG) militantes qui ont su se faire en- tificaci6n basica de la Iniciativa para los PPME, con con- tendre, ces preoccupations ont trouve un echo parmi siderable resonancia polItica a raIz de la campaAXa del les responsables pragmatiques de l'action gouverne- Jubileo. Para el afio 1999, la Iniciativa reforzada para los mentale des pays bailleurs de fonds et des institutions PPME se fijaba como objetivos paralelos la sostenibilidad financieres internationales. La mission premiere de de la deuda y la reducci6n de la pobreza. lutte contre la pauvrete que s'est fixee la communaute La Iniciativa para los PPME fue desencadenada por una du developpement est devenue la justification essen- confluencia de factores: importancia creciente de las or- tielle de l'Initiative PPTE, avec la resonance politique ganizaciones internacionales de la sociedad civil, su cre- considerable que lui a donnee le Jubile de l'an 2000. ciente influencia en los grandes acreedores y un cambio En 1999, un double objectif a &6 fixe pour l'Initiative en la direcci6n del Banco Mundial. Los deudores no in- PPTE elargie: ramener l'endettement a un niveau to- tervinieron expresamente en el disefio de la Iniciativa ori- lerable et faire reculer la pauvrete. ginal y tuvieron escasa influencia en el disefno de la xIx DEBT RELIEF FOR THE POOREST: AN OED REVIEW OF THE HIP_ INITIATIVE L'Initiative PPTE a e' d6clench6e par la iniciativa reForzada, aun cuando ocupan un lugar conjugaison de plusieurs facteurs-la monl6e 3 importante en la ejecuci6n. en puissance des organisations de la societc ci- Los, objetivos especificos de la iniciativa han vile internationales, leur influence grandissante evolucionadol. El objetivo original, en 1996, era eli- - auprcs des principaux crcanciers, et un chan- minar la deuda pendiente en cuanto obstaculo al gement dans la direction de la Banque Mon- crecirniento economico y la reduccion de la po- diale. Les debiteurs n'avaient jouc aucun rolc breza. Las modificaciones introducidas en 1999 explicite dans la conception de l'initiative ini- aportaron rio s6lo un alivio de la deuda mas pro- tiale et ils n'ont eu que peu d'influence sar la concep- findo, mas r mplio yms rapido sino tambi6n un conjunto tion de l'initiative elargic alors qu'ils jouent un r6le rnas arnhicioso y amplio de objetivos: ofrecer una salida central dans sa mise en cmuvre. "perr anenle" de la reprogramaci6n de la cleuda, prc- Les objectifs specifiques de l'initiative ont 6volu6'. mover- el crecimicnrto y liberar recursos para aumentar los En 1996, le but initial de l'entreprise etait dc rcduire gastos sociales orientados a la reducci6n de la pobreza. le poids excessif de la dette, qui faisait obstacle A la La nccesidad de crear un espacio fiscal para los gastos so- croissance economique et a la rcduction de la pauvretc. ciales era un requisito fundamental con el fin de conse- Les modifications introduites en 1999 n'ont pas seu- guir entre los donantes un apoyo de amplia base a ia lement aboutit a la mise en place d'un programmc d'al- iniciativa, con importantes repercusiones en sus objeti- legement de la dette plus profond, plus large et plus vos, diseifo y aplicaci6n. rapide, elle ont aussi conduit a fixer un ensemb,e Si se obtiene el alivio de la deuda previsto, la iniciativa d'objectifs plus ambitieux et plus vastes-qui ctaient conseguir-i reducir sustancialmente la mayor parte de la de permettre une sortie << d0finitive , des operations deudaextcrnaacumuladadelosPPMEydesuserviciode de reechelonnement de la dette, de prornouvoir la la deuda (por t6rmino medio) a niveles infer ores a los de croissance et de libe)rer des ressources afin de pouvoir otros paises pobres. Asi pues, es probable que la inicia- accroitre les depenses sociales consacrc'es a la lutte tiva consiga su objetivo origiLnal: reducir la carga de la deuda contre la pauvret6. La necessitc de cr6er un espace bL cl- exter-na dc varios de los paises mas pobres y ofrecerles la getaire pour les d6penses sociales etait une condi- posibilidad de "comenzar de nuevo". Pero para consegair tion sine qua non pour obtenir des bafleurs de fonds los objetivos actualmente propuestos-sostenibilidad de un soutien multiforme a l'initiative, et elle a eu un im- la deuda, crecimiento y aumento de los gastos sociales- pact majeur sur les objectifs du programme c]'action, la iniciatiN a tendria que transferir recursos reales adicio- son contenu et sa mise en ovuvre. nales a los paises. Y, para hacerlo sin desviar los recursos Si les allegements de dette prevus se mat6rialiscnt, clestinad ,s a ayudar a los paises pobres pero no muy en- l'initiative permettra de r6duire de facon substantielle deudados, habria que aumentar el volumen general de los le stock de la dette ext6rieure de la pl upart des PPTE recursos (le la oyuda. Aunque los objetivos de la iniciativa et le service de leur dette, pour les ramener (en estan baKados en el supuesto de que (en igualdad de moyenne) a un niveau inf&rieur a ceux cies autres pays condiciones) se mantendrian los niveles de ayuda del pa- pauvres. L'initiative va donc prohablement atteindre sado, de Forma que los recursos para la iniciativa fueran son objectif initial, qui etait de recluire la dette exte- adicionalcs, el disefno de esta no puede garanti7ar que vaya rieure de plusieurs des pays les plus d6munis de la pla- a ocurrir asi. Por ello, la iniciativa corre riesgo de prome- nete et de leur permettre de prendre un << nouveau ter result ados (relacionados con sus m6ltioles objetivos) depart >. Mais, pour atteindre les objectifs dcflares ac- que no puede conseguir por si sola. tuels, qui sont de ramener l'endettement a un niveau De hecho, durante las mismas fechas en que se cre6 tolerable, de dynamiser la croissance et d'accroitre la iniciativa se produeo un fuerte descenso de los recur- les depenses sociales, il faudra que l'initiative per- sos mundiales disponibles para la ayuda. En consecuen- mette de transferer des ressources reelles supple- cia, en comparaci6n con otros paises pobI-es, el conj anto mentaires aux pays concern6s. Et, pour pouvoir le de los PMME esta recibiendo una parte mayorde unos re- faire sans penaliser pour autant les pays pauvres mais cursos rmundiales en descenso: no estan recibiendo fon- non lourdement endett6s, Il faudrait que le niveau dos adicionales en cifras absolutas con respecto a lo que xx EXECUTIVE SUMMARY global des ressources d'aide augmente. Les ob- percibian antes de la iniciativa (es decir, hasta jectifs de l'initiative reposent sur l'hypothese 1995). Como el volumen de la deuda disminuy6 que (toutes choses egales par ailleurs) les ni- inmediatamente antes de que la mayor parte de veaux d'aide passes seront maintenus pour que los paises reunieran los requisitos para acogerse les concours apport6s aux PPTE soient des a las medidas de alivio de la deuda, ese perfodo concours additionnels, mais la strategie qui .f precedente no es el punto de referencia mas in- sous-tend l'entreprise ne permet pas de ga- dicado para establecer la adicionalidad. Es toda- rantir que c'est ce qui arrivera. L'initiative risque via demasiado temprano para determinar en forma c-onc de faire esperer des resultats (lies a ses multiples cuantitativa si se ha producido una inversi6n de la reciente cbjectifs) qu'elle ne pourra concretiser par elle-meme. tendencia descendente. En la medida en que la iniciativa En fait, les ressources globales consacrees a l'aide ha conseguido proteger la cuota de los PPME en el con- ont fortement diminu6 a peu pres a partir du moment junto agregado de los flujos de ayuda, puede calificarse ou l'initiative a ete lancee. De ce fait, meme si, com- como un 6xito limitado. No obstante, la participaci6n de parativement aux autres pays pauvres, les PPTE en otros paises pobres ha disminuido en proporci6n se- tant que groupe beneficient d'une part croissante des mejante. Esta redistribuci6n esta en contradicci6n con el apports d'aide, qui ne cessent d'ailleurs de diminuer, principio de asignaci6n basada en el desempefio y podria ils ne recoivent pas de fonds additionnels en valeur ab- reducir la eficiencia y eficacia global del ayuda. Este re- solue par rapport a ce qu'ils obtenaient avant la mise sultado es consecuencia directa de las limitaciones de fi- en place de l'initiative (c'est-a-dire, jusqu'en 1995). nanciamiento, y no puede superarse con mejoras internas Comme il y a eu un tassement des flux d'aide dans les del disefio de la iniciativa en su formulaci6n actual. Un annees qui ont immediatement prec6d6 l'epoque ou reconocimiento claro de las limitaciones impuestas por la plupart des pays ont reuni les conditions requises los niveles anteriores y actuales de la ayuda facilitaria la pour obtenir un allegement de la dette, ces annees ne armonizaci6n de los objetivos basicos de la iniciativa con constituent pas une base de reference appropriee pour los recursos realmente disponibles. de-erminer si les apports d'aide sont reellement des Un elemento clave para evaluar la probabilidad de apports additionnels. Il est trop t6t pour determiner que la iniciativa alcance su objetivo basico de sostenibi- si, quantitativement, il y a une inversion de tendance lidad de la deuda es la proyecci6n de los indicadores de dans l'evolution baissiere recente. Dans la mesure ou la misma. La iniciativa utiliza una metodologia de inven- l'initiative a permis de maintenir la part des PPTE dans tario de la deuda para determinar los niveles de la deuda le volume global des flux d'aide, on peut estimer que cormiente, lo que representa una clara mejora con respecto c'est d6ja un element positif. Mais il apparait que la part a las practicas anteriores y ofrece una s6lida base para cal- des autres pays pauvres a diminue d'autant. Cette re- cular el total del alivio de la deuda para los distintos pa- distribution est contraire au principe de la r6partition ises. La iniciativa presenta tambien proyecciones de los bas6e sur la performance et elle risque de r6duire l'ef- niveles de deuda futura para determinar la probabilidad ficience et l'efficacite de l'aide en general. Ce resultat de cada pais de alcanzar la sostenibilidad de la deuda. La est une consequence directe des restrictions qui pe- base metodol6gica en que se sustentan estas proyec- sent sur les financements, et il n'est pas possible de re- ciones en los analisis de sostenibilidad de la deuda (ASD) m6dier au probleme par des amenagements internes no se ha hecho transparente, y los supuestos de creci- du dispositif qui sous-tend l'initiative telle qu'elle est miento mantenidos en los ASD han sido excesivamente concue actuellement. La reconnaissance claire des li- optimistas en relaci6n con las tasas de crecimiento del mita-ions qu'imposent les niveaux passes et actuels de pasado. Los indicadores de la deuda dependen de la l'aide faciliterait une remise a plat des objectifs fon- forma en que evolucionen los niveles de la deuda futura, damentaux de l'initiative en fonction des ressources ef- las exportaciones y otros agregados macroecon6micos. fectivement disponibles. El modelo econ6mico en que se basan estas proyeccio- Pour evaluer les probabilites qu'a l'initiative d'at- nes debe formularse explicitamente, y los pron6sticos eco- teindre son objectif fondamental, qui est de ramener n6micos en que se basan las proyecciones deberian ser la dette a un niveau tolerable, les elements cl6s sont mas realistas. En particular, deben reflejar mejor los po- xxI DEBT RELIEF FOR THE POOREST AN OED RE/IEW oc THE HIPC IN TIATIVE les projections relatives aux indicatcurs tic la sibles cfectos de la inestabilidad de los ingresos de- dette. L'initiative se base sur une mc thctiologic rivac ios de ta exportaci6n, factor de riesgo funda- fondee sur le stockl de la dette pour c valucir les mentil. Un analisis de riesgo ma.s adecuado puedc niveaux de la dette au moment Mtitdiei, cc qui indicir que la sostenibilidad se definiria mejor represente une amelioration evidente par rar, utili/.zundo umbrales de los indicadores de la deuda port aux methodes passees; c'est aussi une difercntes de los establecidos previamente. Ello no bonne base pour calculer le montant die I'allc- s6lo mncjorarfa las perspectivas de sostenibilidadi gement de la dette pour chaque pays consi- dce la dceuda, sino que podria fomentar un debate derr. L'initiative etablit aussi dtes projections rela.ivcs con mayor conocimiento de causa sobre los cambios au niveau futur de la dette afin de dctermincr Ics normativos necesarios tanto en los paises donantes como chances qu'a un pays de ramener sa clet.zc a un niveau cn los reccptores, asi como mayor realismo en la for- tolerable. La base mc thodologique utilis6c pour )cs pro- mulaciemn cle objetivos y mecanismos de financiamiento jections sur lesquelles repose ['analyse tlu dcegrc cl'e- para la Iniciativa dettement tolerable reste opaque et les hypoth&scs cle El logro del objetivo de sostenibilidad de la deuda rc- croissance retenues pour ces analyses pechcnt par presenta un desafio para los PPME tanto en lo que res- exces d'optimisme si l'on en juge par les taux tic crois- pccta a la clcuda como a los ingresos. Estos paises quiza sance passes. Los indicateurs de la tiette varient en fonc- necesiten continuar solicitando pr6stamos para atender tion de la facon dont civoluent les niveaux tci sus neccsidades de desarrollo, sobre todo en ausencia de I'endettement futur, les exportations et ti'autres ag -c- clonaciont's en volumen suficiente. Su principal pro- gats macroeconomiques. Le modiele tconomitlue cLui blema es parantizar que los fondos se invierten en forma sous-tend ces projections doit ctre precise et Ies pre- protuctiva y eficiente para promover la capacidad de re- visions iconomiques sur lesquelles se fondent Ics pro- embolso. Para ello se necesita una mejor gestion del jections doivent etre plus realistes. En particulicr, ccs gasto puiblico, asi como esfuerzos intensos y sostenictos prcvisions doivent mieux tenir compte tces effets no- para acelc rar el crecimiento econ6mico. En lo que se re- tentiels de la volatilite tdes recettes d'exnortation - vo- fiere a los ingresos, la base fiscal es estrecha y la base de latilite qui est un facteur de risque crucial. U'ne analyse exportaciones suele estar concentrada en un reducido nui- plus fine des risques indiquera peut-C trc qu'i; serait pos- meio tce productos bdsicos sujetos a la fuerte inestabili- sible de mieuxd6finir le degr d'tindetticnint tolkrahlc dad ccl mercado. Estos paises tleben superar los si on retenait des seuils diff6rents pour les indicatcurs obstkculos fiscales y otros problemas normativos para de la dette. Certes, cola n'ameliorerait pas en soi les poder conscg [irun crecimiento ra.pido y tie amplia base chances qu'ont les pays de ramener leur enduttement y tilversilicar las exportaciones. A su vez, ello quiza re- a un niveau tolerable, mais cela pour-rait permettre quiera rrejoras en los servicios de promocion del co- aux pays bailleurs de fonds cornme aux pays hbntif- mtrcio mayor acceso a los mercados dti los paises ciaires d'examiner en meilleure connaissance de cause ciesarrol1ados. les reformes a engager - et de fixer les objectifs et les Una condici6n necesaria para acelerar el crecimiento modalites de financement de l'initiative avec plus cie econ6im,co es la adopci6n de un marco normativo stilido realisme. que consiga la estabilidad econ6mica y la gesti6n eficaz Les PPTE auront bien du mal a attein6re l'objectif dcel gasto publico y permita generar ingresos en forma efi- de l'endettement toltirable, que l'on considere le cCutti ciente y sin distorsiones. Un requisito importante para de la dette ou le c6te des recettes. Ces pays devront poder acogerse a la iniciativa ha sido, desde el principio, eventuellement continuer a s'entet-er pour Faire face contar c(on u'1 historial normativo satisfactorio. La apli- a leurs besoins de developpement, cn particulier s'ils cacitin dle este requisito se redujo progresivamente en la ne peuvent obtenir des financemr.nts suffisants sous iniciativa reforzada para los PPME, sobre todo para los pa- forme de dons. Le grand probhlme qui se posera a eux ises que pudieron acogerse a las medidas aceleradas en sera de veiller a ce que les fonds soient invcstis de fagon el contexto dcl milenio, en la segunda mitad de 2000. Mu- productive et efficace pour mainterir leur capacitti dc chos de esos paises tienen que demostrar todavia su ca- remboursement. Encore faut-il am6liorer la gestior. pacidadi de poner en marcha dichos marcos, lo que xxii EXECUTIVE SUMMARY des depenses publiques et intensifier durable- suscita inquietud acerca del logro de los objetivos ment les efforts pour accelerer la croissance de la iniciativa. economique. En ce qui concerne les recettes, Las orientaciones de la iniciativa acerca del au- la matiere imposable est 6troite et, en regle g6- - mento del gasto publico hacen hincapie en los nerale, les exportations reposent pour 1'essen- sectores sociales, en relaci6n con otros sectores -3 tiel sur un petit nombre de produits de base donde el gasto publico puede ayudar tambien a au- pour lesquels la situation du marche est extre-- mentar el crecimiento econ6mico. Ello representa mement volatile. Ces pays doivent lever les dos desventajas. En primer lugar, los criterios de contraintes budgetaires et d'autres obstacles lies aux desempeno hacen hincapi6 en los gastos mas que en los interventions de l'Etat, qui les emrp&chent de s'enga- resultados o efectos, pero el aumento de los gastos puede ger dans la voie d'une croissance plus rapide et large- provocar la disminuci6n de los rendimientos a corto y me- ment repartie, et sur la diversification des exportations. diano plazo. La capacidad de los ministerios de educaci6n Pour cela, il faudra eventuellement prendre des me- y salud para administrar con eficiencia unos recursos pre- sures pour ameliorer des services de facilitation des supuestarios crecientes es con frecuencia debil, una parte echanges et elargir l'acces aux marches des pays de- considerable de los recursos de la ayuda estan ya orien- veloppes. tados a gastos sociales y los examenes del gasto publico Pour accelerer le rythme de la croissance 6cono- del mismo Banco Mundial indican que el financiamiento rnique, il est indispensable que les pays concernes no es siempre el obstaculo principal para el logro de los adoptent un cadre de politique economique rationnel, resultados. Los problemas de capacidad de absorci6n en qui leur permette de jeter les bases de la stabilit6 6co- los sectores seleccionados y la necesidad de inversi6n para nomique, de gerer efficacement les depenses pu- promover el crecimiento pueden justificar una distribu- b. iques et de gen&rer des recettes dans de bonnes ci6n diferente entre los sectores sociales y los demas sec- conditions d'efficience, sans introduire de distorsions. tores, en particular la infraestructura y el desarrollo rural. Depuis le debut, la presentation d'un bilan solide en En segundo lugar, la falta de flexibilidad en la asignaci6n matiere de politique economique est la principale de los recursos de la iniciativa es un grave motivo de pre- ccndition exigee pour obtenir un allegement de la ocupaci6n manifestado por los representantes de los pa- dette au titre de l'Initiative PPTE. L'application de ce ises deudores. Estos senalan que las irnposiciones extemas critere a ete progressivement assouplie dans l'initiative para la asignaci6n de sus recursos pueden debilitar la renforc6e, en particulier s'agissant des pays 6ligibles disciplina presupuestaria y la identificaci6n nacional con au second semestre 2000 pour lesquels les dossiers ont las medidas. Los gobiernos deudores creen que estas dos ete instruits plus rapidement. Beaucoup de ces pays cuestiones estan dificultando el logro de los objetivos doivent encore administrer la preuve qu'ils sont ca- principales de la Iniciativa. pables de mettre en place ces cadres de politique eco- En resumen, una deuda excesiva crea problemas, lo nomique, ce qui suscite des doutes quant a la realisation que significa que debe gestionarse con procedimientos des objectifs de l'Initiative PPTE. eficaces. No obstante, una deuda inmanejable es sin- Les directives 6noncees dans le cadre de l'initiative toma de problemas estructurales mas profundos. La ini- pour accroitre les depenses publiques privilegient les ciativa ofrece al parecer un alivio necesario, pero ni este secteurs sociaux par rapport aux autres secteurs, ou les es la panacea para resolver problemas de desarrollo eco- depenses peuvent aussi contribuer a stimuler la crois- n6mico de caracter mas amplio ni una reduccion ocasional sance economique. Cela presente deux inconvenients. de la deuda puede garantizar que el problema no vuelva Premierement, les criteres de performance mettent plantearse. El principal desaffo que se presenta a la ini- I'accent sur les depenses plutot que sur les r6sultats ciativa es la expectativa de lo que puede conseguir con ou sur l'impact, alors que l'augmentation des depenses los actuales niveles de financiamiento, dados los obsta- peut se heurter a la loi des rendements d6croissants culos normativos e institucionales. El logro de sus mul- a court ou moyen terme. Les ministeres de l'6ducation tiples objetivos requiere intervenciones que superan los et de la sante sont dans bien des cas mal armes pour medios que tienen a su disposici6n. El logro y la soste- gerer efficacement un budget important, une partie nibilidad de los distintos objetivos requieren interven- xxiii DEBT RELIEF FOR THE POOREST: AN CED REVIEW OF THE HIPC INITIATIVE substantielle des ressources d'aide est cija af- ciones de los gobiernos de los PPME para pro- fectee a des depenses sociales et les examens - mover las exportaciones y un crecimiento de am- des d6penses publiques effectu6s par la Banque plia base, junto con el desarrollo del capital montrent que le financement n'est pas tou- humarno, para conseguir una reducci6n sostenida jours la principale contrainte qui emp&che d'ob- (le la pobreza. tenir les r6sultats voulus. Les problemes de En la evaluaci6n se formulan cuatro recomen- capacite d'absorption dans les secteurs cibl6s et daciones. Laprimera es la de aclarar el prop6sito la necessite d'investir pour promouvoir la crois- y los objetivos de la iniciativa, asegurar que su di- sance justifient parfois un recentrage entre les sec- sefno sea coMpatible con dichos objetivos y comunicar teurs sociaux et les autres secteurs, en particulier c_ux a la comunidad mundial tanto los objetivos como la de l'infrastructure et du developpement rural. Deuxie- forma en que se pueden conseguir. La segunda reco- mement, la rigidite de l'allocation des ressources est rmendaci6n consiste en mejorar, por un lado, la transpa- un sujet de preoccupation majeur que soulignen: les rL-ncia de la metodologfa y los modelos econ6micos en representants des pays debiteurs. Ils font observer clue se basan las proyecciones de la deuda asi como por que les restrictions externes qui pesent s-ur l'allocation el otro, el realism-no de las previsiones sob.e el creci- de leurs ressources peuvent 6roder la discipline bucl- rniento economico empleadas en los ASD, czn el fin de getaire et inciter les dirigeants nationaux a passer 'a orientar la toma de decisiones mediante una evaluaci6n main. Les pays debiteurs estiment que ces Ceux pro- nas adecuada de las perspectivas y riesgos (le cada uno blemes compromettent la realisation des principaux o0- de los paiscs. La tercera recomendaci6n es mantener los jectif de l'Initiative PPTE. niveles de desempefio normativo y, cuando haya que En somme, le poids excessif de la dette engendre flexibilizar los criterios establecidos, ofrecer una justifi- des problemes et c'est une question qui doit etre trai- cacion clara y transparente que contribuya al logro y el t6e de maniere efficace. Mais un endettement ingerable mantenim ento de los objetivos de la Iniciativa. Final- est le sympt6me de problemes structurels plus prco- mense, se r ecomienda una mayor concentraci6n en el cre- fonds. Si L'Initiative PPTE apporte un repit plus que ne- cimiento) cn favor de los pobres, para conseguir un mayor cessaire, comme cela parait etre le cas, ;'allegement de equilibrio entre las prioridades de desarrollo, frente a la la dette n'est pas une panacee pour les problernes de insistencia actual en el gasto social. developpement economique plus larges, et une re- duction unique de la dette ne saurait garantir non plus que le probleme ne resurgira pas. Le grand danger pour l'initiative tient aux attentes qu'ele suscite quant aux resultats qu'elle peut obtenir avec les niveaux de financement actuels, compte tenu des contraintes liees a l'action gouvernementale et aux structures institu- tionnelles. Pour atteindre les multiples objectifs de- clares, il faut un plan d'action qui depasse largement la portee et les moyens de l'initiative. S'ils veulent rea- liser les objectifs individuels et inscrire les resultats ob- tenus dans la duree, les gouvernements des PPTE doivent prendre des dispositions pour promouvoir les exportations et une croissance diversifi6e. et favo- riser la mise en valeur du capital humain afin de faire reculer durablement la pauvrete. L'examen debouche sur quatre recommandations. Lapremiere est de clarifier la finalit6 et les objectifs de l'initiative, en veillant a ce que le programme d'action soit coherent avec les objectifs poursuivis, et d'indiquer xxiv EXECUTIVE SUMMARY clairement a la communaute internationale les objectifs retenus et les moyens mis en couvre pour les atteindre. La deuxieme recommanda- tion est d'ameliorer la transparence de la m&- thodologie et des modeles economiques sur lesquelles reposent les projections de la dette et les previsions de croissance economique qui sous-tendent les analyses du degre d'endette- ment tolerable, afin de guider les prises de decisions grace a une evaluation plus realiste des perspectives d'evolution des differents pays consideres et des risques auxquels ils sont confrontes. La troisie,me recomman- dation est de maintenir les criteres de performance de l'action gouvernementale. Et s'il faut assouplir les cri- teres etablis, une justification claire et transparente doit etre fournie afin de minimiser les elements de risque qui pourraient compromettre les objectifs de I' nitiative ou rendre ses resultats precaires. Enfin, les auteurs de l'examen soulignent qu'il est necessaire de mettre davantage l'accent sur une croissance qui re- ponde aux besoins des pauvres afin d'etablir un meilleur equilibre entre les priorites de developpe- ment par rapport a la situation actuelle, qui fait une large place aux depenses sociales. xxv ABBREVIATIONS AND ACRONYMS CAE Country Assistance Evaluation CAS Country Assistance Strategy CDF Comprehensive Development Framework CEMLA Center for Latin American Monetary Studies CODE Committee on Development Effectiveness CP completion point CPIA Country Policy and Institutional Assessment DAC Development Assistance Committee DFID Department for International Development (U.K.) DP decision point DRI Debt Relief International DRS Debtor Reporting System DSA debt sustainability analysis E-HIPC enhanced HIPC Initiative ESAF Enhanced Structural Adjustment Facility EURODAD European Network on Debt and Development GAO General Accounting Office GDF Global Development Finance GDP gross domestic product GNI gross national income GNP gross national product HIAL Higher Impact Adjustment Lending HIPC heavily indebted poor country IBRD International Bank for Reconstruction and Development IDA International Development Association IEO Independent Evaluation Office IFI international financial institution IMF International Monetary Fund I-PRSP Interim Poverty Reduction Strategy Paper LIBOR London interbank offered rate LIC low-income country LMI lower-middle-income MDBs multilateral development banks MEFMI Macroeconomic and Financial Management Institute of Eastern and Southern Africa MIC middle-income country NGO nongovernmental organization NIEO New International Economic Order NPV net present value ODA official development assistance OECD Organisation for Economic Co-operation and Development OED Operations Evaluation Department O-HIPC original HIPC Initiative PAF Poverty Action Fund PEAP Poverty Eradication and Action Plan PER Public Expenditure Review PPG public and publicly guaranteed external debt PPP purchasing power parity PREM Poverty Reduction and Economic Management Network xxvII DEBT RELIEF FOR THE POOREST. AN OED REVIEW OF THE HIPC INITIATIVE PRGF Poverty Reduction and Growth Facility PRSP Poverty Reduction Strategy Paper SILICs severely indebted low-income countries SPA Strategic Partnership with Africa WAIFEM West African Institute of Financial and Economic Management SSA Sub-Saharan Africa UNCTAD United Nations Conference on Trade and Development xxviii Introduction A fter almost two decades of repeated attempts to relieve many low- income countries of their external debt burdens, in 1996 the World Bank and the International Monetary Fund (IMF) proposed the Heavily Indebted Poor Country (HIPC) Debt Initiative to provide comprehensive debt relief to some of the world's poorest and most heavily indebted countries. The initiative was formally agreed to by governments around the world in September 1996 and "enhanced" in 1999. The objectives of the initiative have subtly evolved since its conception. In response to intense pressure to make debt re- solvency rather than illiquidity and recognizing lief broader, faster, and deeper, the goals of the the need for different actions from those taken initiative were markedly modified in 1999. But in the past. It is designed as a concerted and com- fundamentally the initiative still aims to reduce, prehensive approach to deal with the external within a reasonable time, the external debt bur- debt of poor countries in its entirety, and with den of qualifying countries to "sustainable" lev- an explicit objective of resolving it in a sustain- els. The underlying and plausible premise is that able way. For the first time, it includes multilat- excessive debt is an impediment to the broader eral creditors and broadens the scope of development goals of sustainable economic performance requirements to include social cri- growth and poverty reduction. teria along with the macroeconomic and struc- The HIPC Debt Initiative marks an important tural policy reform conditionality of traditional innovation in the development finance regime, debt relief mechanisms. with significant changes in the relationships of The emergence of the original HIPC (O-HIPC) the World Bank and IMF with member coun- Initiative in 1996, and-even more-the en- tries and development partners. It represents a hanced HIPC (E-HIPC) Initiative of 1999, has significant shift in the strategy to deal with the been enormously influenced by nongovern- persisting debt crises and associated repayment mental organizations (NGOs) and civil society problems facing low-income countries, ac- groups around the world. TheJubilee 2000 move- knowledging the HIPCs' problem as one of in- ment was particularly effective in making the DEBT RELIEF FOR THE POOREST: AN OED REVIEW CF THE H-1'C INITIATIVE enhanced initiative a political reality in creditor have reachied their completion points and are re- capitals at a time of declining aid resources. The ceiv ng (or should be receiving) the full benefit process of legitimizing ancd promoting th-e ini- fronm HIPC relief (see box 1.1). Another 20 cour- tiative forged a direct link hetween dcbt relief and tries have reached the decision point and are poverty, but it also gave rise to unrealistic ex- benefiting from interim relief under the E-HIPC. pectations of wlhat the initiative could achieve. Of tlae remaining 16, 4 are considered potentially While every stakeholder group accepts that debt susi ainable after receiving relief from traditional relief is only part of the solution in a broader at- me,chanisms and 8 are conflict-affected coun- tack on the obstacles to sustainedl poverty re- tries facing particularly difficult challenges .n The HIPC Initiative has duct on, it is striking how coming to their decision points under the cur- critical many commentators rert framework. become a lightning rod are with respect to tbe ac- The total amount of debt relief committed for broaderpolicy tual or anticipated achieve- (that is, to countries past their completion disagreements. ments of the initiative. In point and the potential estimated relief to coun- effect, the EIIPC Initiative triLs that are past their decision points, in- has become a lightning rod for broader policy cluding those that qualified under the O-HIPC disagreements regarding equitable and sustain- In tiative) is US$41.52 billion in nominal debt able development and tlhe role oF aid. service relief over time, equivalent to US$25.1 biRlion in net present value (NPV) terms (Annex Progress and Current Status A). Of this amount, the cost of debt relief to the Under the original framework, from a group of six countries that reached their completion 41 countries a total of 29 were cxpected to qual- points under the O-HIPC is US$6.97 billion in ify for relief. Of these, seven reached their deci- nominal terms, or US$3.46 billion in NPV terms.' sion points and six reached their completion A}-cording to current estimates, ,he total cost points. The number of countries expected to o Lthe initiative is expected to be about US$37.2 qualify under the E-lIIPC Initiative expanded to billion in 2001 NPV terms, with the World Bank 36 in 1999, at the time it was launched (from a a-counting for some US$8.2 bill'on. This esti- group of 41 countries, although eligibility was nmate excludes the potentially sustainable cases open to all countries meeting the E-HIPC eligi- (Angola, Kenya, Vietnam, and Yemen) and bility criteria). I iberia, Somalia, Sudan, and Lao People's De- By August 2002, the number of countries el- rriocratic Republic (PDR) ,2 It also excludes po- igible for debt relief increased to 42; of these. 6 tentia. topping-up costs. Reachedcompletionpointi i(Bolivia, Burkina Faso, Mauritania. Not yet at decision point 12 (Burundi,* Central African Repub- Mozambique, Tanzania, Uganda). lic,* Comroros, Democratic Republic of Congo,* Republic of Congo,* C6te d'lvoire, Lao People's Democratic Republic, Reached decision point and receiving interim reliel:20 (Beniri, Liberia,' Myanmar,* Somalia,* Sudan,* and Togo). Cameroon, Chad, Ethiopia, The Gambia, Ghana, Guinea, Guinea- Bissau,* Guyana, Honduras, Madagascar, Malawi, Mali, Potentially sustainable without HIPC assistance: 4 (Angola,* Nicaragua, Niger, Rwanda,* Sao Tome and Principe, Senegal, Kenya, \fietnam, Yemen). Sierra Leone,* Zambia). * Conflict-affected countries. 2 INTRODUCTION For the 34 countries (that is, excluding the 4 is to assess the prospect of the initiative achiev- sustainable cases, and Liberia, Somalia, Sudan, ing its intended immediate objectives-reduc- and Lao PDR), the share of the costs is roughly ing debt to sustainable levels and creating the evenly divided between bilateral and multilateral fiscal space for increased spending for poverty creditors. The World Bank Group's share is 22.3 reduction-and the potential for contributing to- percent (the share of the International Devel- ward its underlying development goals-sus- opment Association (IDA] is 20.3 percent of the tainable economic growth and poverty total). The share of the Paris Club creditors is reduction. Using the objectives-based evalua- higlhest at 38.6 percent. Non-Paris Club creditors tion framework of the Operations Evaluation account for 8.8 percent of the costs, and com- Department (OED), this review seeks to an- mercial creditors for 4.2 percent. swer the following overarching questions cor- responding to the framework's principal Evaluation Design assessment criteria: In light of the increased interest in financing for *Relevance: Is the HIPC Initiative's design ad- development, as well as the impact of the recent global economic slowdown on the prospects for equate and appropriate to achieve its stated o?- the sustainability of external debt of poor coun- jectives and intended outcomes? tries, this is an appropriate juncture to review the progress and prospects of the HIPC Initiative ence so far, is the HIPC Initiative achieving or with a view to informing and, if necessary, strength- likely to achieve its objectives, and to achieve ening its ongoing implementation. With 6 coun- them efficiently? tries past their completion point, and another 20 * Sustainability: How resilient to risks are the ex- past their decision point, increasing concerns are pected outcomes of the HIPC Initiative? being voiced about, on the one hand, the pace at * Institutional development To what extent which the initiative is progressing, and, on the does the design of the initiative help build other, the likely outcomes of the initiative. country capacity to ensure that the HIPC ob- The guiding principles and the building blocks jectives are achieved and can be sustained? of the original and the enhanced HIPC frame- Coordination with the IMF works provide the basis for assessing whether the In preparing this review, OED has interacted process being followed and the implementation not only with World Bank staff and manage- of the initiative are consistent with its objectives ment but also with the IMF's Independent Eval- and design. The stated objectives and guiding uation Office (IEO) and the staffs of the IMF's principles endorsed by the Interim and Develop- Policy Development and Review Department ment Committees are given in Annex B and the and Fiscal Affairs Department. The key back- flow diagram describing the HIPC process is given ground papers were shared with IMF staff for in Annex C. The details of the evaluation approach critical comment, and they participated in sem- adopted for this review are given in Annex D. inars to discuss the findings of the background papers, along with the staff of the World Bank's Main Evaluative Questions HIPC unit. IMF staff also participated in the This review focuses on the design and imple- technical workshop held in Washington, D.C., in mentation of the HIPC Initiative. The purpose September 2002. 3 Evolution of Debt and the Debt Problem T his chapter briefly discusses the evolution and magnitude of the debt problem and past responses to it. It then presents the main findings from a review of the literature on the likely consequences of a large debt stock. Evolution of the HIPC Debt Burden combined with serious economic, social, and The 42 HIPCs accounted for about 14 percent of structural constraints to rapid and broad-based the developing world's population in 2000 but growth, resulted in a long and persistent eco- only about 5 percent of the total gross national nomic decline-lasting until the early 1990s. Oil income (GNI).ITheirshareoftotalexternaldebt shocks, declining terms of trade, and highly of all developing countries, approximately 8 per- volatile commodity markets led to a spiral of fis- cent, is small relative to their share of population, cal imbalance brought about by declining rev- but large in relation to the size of their economies enues, resistance to painful fiscal adjustments, (table 2.1). and heavy reliance on borrowing to meet the The large stock of debt in the HIPCs has a long deficit. Large inflows and mounting arrears led history, but it did not start out as large. Follow- to the rapid accumulation of debt (Daseking ing a decade of good growth in the 1960s (after and Powell 1999). Figure 2.1 shows how the independence for a large number of the African nominal stock of debt of the 42 IliIPCs has ex- states), the economic shocks of the early 1970s, ploded relative to exports since about 1980. The Category 1980-84 198589 1990-94 1995-00 HIPC 38 70 120 103 Other IDA countries 21 33 38 33 Other lower-middle-income countries 22 30 27 26 Source Global Development Finance and World Development Indicators 5 DEBT RELIEF FOR THE POOREST. AN OED REVIEW OF THE HIP1_ INITIATIVE Percentage (of exports) 1,200 l,0OW0 Total stoclks (nominal) 800 -t--' - A 600 - / .'PPG stocks nominal) 400 - /+ Present va ue 20 /' PFG sto6s 200 O CN toD 0 1:s1 In CO d D t 1 CD cn m r- Cs OD X cn C, On c~ci m CN ut PPG = Public a7d publ cly uaranteed extermal debt Source GlobalDevelopmentFnance, WorldDeveropmentindicotDrs, and NPVcalculations ~o Eas:arlv 20D'a debt burden, measured in terms of the NPV of tcriorating terms of trade led to increasing debt external debt-to-exports, also increased sharply service problems and mounting arrears. Many until the mid-1980s.2 LICs wcre unable to fully service their debts; in The debt of low-income coun'ries (LICs) cs- 1993, those then classified as severely indebted calated even as major initiatives waere under way low-income countries (SILICs) paid only 40 per- to solve .he middle-income coul'try (MIC) debt cant of the scheduled debt service (World Bank crisis of the 1980s. But the two groLups have im- 1994) .' Under the circumstances, additional portant tliTerences (Cline fl:)ws of credit would not have been justifiable The official creditors -1997). For LICs, and es- under commercial financing practices-as evi- were not operating pecially for the llII3Cs, hi- denced by the early exit of commercial creditors under commercial lateral and multilateral (other than state-sponsored export credits). The princip s -reditors have been the official creditors, however, were not operating trznczp eS- primary sources for the under commercial principles. Often driven by po- past two decades. The MIC debt of the 1980s litical concerns and domestic commercial con- arose largely from private commercia! sources. .,iderations, they eventually committed to And while the MICs experienced large negative naintaining positive net transfers. As figure 2.2 net transfers during t'he crisis period, the L]Cs ihows, official net transfers have been twice the have consistently had positive and substontial net ievel of total debt service, and gross inflows have resource transfers (figire 2.2).- Thz official crzd- been three times (or more) the total outflows. itors have had a long-standing commitmeni to The positive net transfers have been main- ensuring positive net transfers to ihe HIPCs, de- tained using various mechanisms: initially spite the latter's generally low productivity through rescheduled debt payments, then by growth, high debt-scrvice levels, and, in some substituting concessional loans and grants for cases, virtual insolvency (World Bank 1994). nonconcessional loans. The figure in Arnex E The prolonged economic decline, vNith an- shows how the sources of net transfers to HIPCs nual per capita growth rates averaging -2.2 for have changed since 1980. Nonconcessional lend- Sub-Saharan Africa (SSA) during 1980-89, and de- ing from the International Bank for Recon- 6 EVOLUTION OF DEBT AND THE DEBT PROBLEM US$ billions 16 Aggregate net transfers 14 12 10 80 7 , ,=/ Official net transfers Official debt service 2 0 . . . . . . . . . . . . . . . . . . . . 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Scurce Global Development Finance struction and Development (IBRD) and other duction of the Special Program of Assistance for multilateral sources was replaced by conces- Africa in 1987, debt buybacks through the IDA sional lending from the International Develop- debt reduction facility, fifth-dimension grants to ment Association (IDA) and other multilateral help former IBRD borrowers to meet their in- institutions. Thus, although net transfers from the terest payments, and the establishment of the En- IBRD turned negative in the late 1980s, overall hanced Structural Adjustment Facility (ESAF), a transfers from the World Bank have remained concessional arm for IMF assistance to LICs. positive. Similarly, starting in the mid-1980s, These actions, especially those to relieve debt most bilateral donors reduced nonconcessional (starting in 1988), did have an impact in check- lending, progressively curtailed concessional ing the rise of the debt burden, as shown by the lending, and sharply increased grants. flattening of the NPV of debt- The rising share of With a persistent debt crisis and the increas- to-exports ratio in figure 2.1. ing acceptance that it reflected the insolvency of Additional Paris Club actions multilateral debt most IlIPCs, actions to relieve the debt burdens with successively increasing service posed of poor countries have progressively intensified.5 relief elements and, eventu- potentially severe Major bilateral lenders switched from noncon- ally, the pick-up in growth ac- cessional rescheduling to concessional resched- count for the decline in the problems uling, and finally to debt stock reduction actions ratios of both the nominal and through the Paris Club.6 Multilaterals were more NPV of debt stock-to-exports in the mid to late limited in their options, reflecting a combina- 1990s. An important consequence of the multi- tion of the relatively small proportion of the over- lateral actions, particularly the expansion of con- all debt burden (in present value) owed to them, cessional finance, was the shift in the concern about maintaining their financial in- composition of debt outstanding and the cor- tegrity, and their continued treatment of the responding debt service obligations. The share HIPC debt problem as one of liquidity7 Never- of official sources, particularly multilateral con- theless, the increasing recognition of the strains cessional debt, increased significantly. imposed by debt service and the emerging mul- The rising share of multilateral debt service tilateral debt service problem led to the intro- posed potentially severe problems, because these 7 DEBT RELIEF FOR THE POOREST: AN O-D REVIEW OF THE HIP_ INITIATIVE institutions did not offer an option of resched- the irvestnment climate, including the policy en- uling or debt relief, and dire consequences were vironment and structural and social constraints. In associated with falling into arrears on mu ltilateral the continued presence of these factors, a reduc- debt. At the same time, the increased fr.quency tion in debt stock by itself is unlikely to lead to sig- of debt restructurings with the Paris Club made nific2 nt increases in private investment. it apparent that the existing mechanisms were A more plausible argument is that high debt inadequate to deal with the problcm. Eveentu ally, service payments crowd out high-priority pub- a comprehensive solution wvas sough-t to addlress lic expenditures. Despite the large positive net the insolvency of HIPCs, which actions merely de- tran:,fers, the fiscal space may be too small to signed to provide temporary relief or to check a simt.ltaneously accommodate large c.ebt service rise in debt burdens could not resolve. obligations and to fund the necessary infra- structure and social investments for broad-based The Consequences of an Excessive and equitable growth. This partly reflects the External Debt Burden inefficiercy of existing aid processes (such as It is generally accepted that a large debt stock can project finance and tied procurement), but it impair development, but there is less agreement also reflects insufficient efforts to increase budg- on how this impact might occur, particularly in the etary revenues, inefficient management of pub- case of HlPCs. Annex F summarizes the main find- lic expenditures, or both. To effectively reduce ings from a review of the research and acac.emic thc fiscal strain would require not only debt re- literature on this topic. The duction (to lower the debt service obligations), It is generally accepted dominant theory underlying but also concurrent actions on the policy front that a large debt stock the adverse consequences of by donors and recipients alike. can impair an excessive dlebt stock is the Furthermore, the positive net transfers have development, but "debt overhang" hypothesis.8 been maintained through a complex and inef- developmen, ' This was the straightfcrward ficient restructuring and negotiation process there is less agreement strategic rationale for the (see Annex F). The uncertainty surrounding on how this impact HIPC Initiative as ori-ginally the process and the general inefFiciency asso- might occur conceived ard operational- ciated with high debt stocks can have a nega- ized (World Bank ard IMF tive influence on both the level of investrrent 1998, 1999). But as cliscussed a id the effective use of existing capacity. There in Annex F, this has not been clermonstratecl coI1- i'.C sorre evidence suggesting this might be a vincingly for the HIPCs. Low clomestic investment, more important channel through which ex- capital flight, and limited flows of boreign direct in- C essive debt stocks can affect economic per- vestment reflect a combination of factors affectinig formance in the HIPCs. The HIPC Initiative T his chapter provides a brief review of the rise of the HIPC Initiative. After a short background summary, it describes how the political pressures underlying the changing international financial governance and emerg- ing alliances of civil society groups brought the initiative into being. The chapter then presents the key objectives and characteristics of the HIPC process. Background large number of its poorest borrowers, particu- In the mid-1990s, increasing poverty and a gen- larly in the Africa Region. At first the voices were eral perception of development failure in many disjointed; they were also discounted under the of the least developed countries, primarily in presumption that the poor countries had a short- Sub-Saharan Africa, coincided to intensify the term cash-flow constraint that was readily pressure for a strategy to deal with the LIC debt amenable to policy reform. The major tool in this crisis. The complex relations between heretofore strategy was structural adjustment programs, relatively distinct groups of actors started to which provided the resources to get through come together and influence official thinking the short-run problems and targeted much- on the issue (Callaghy 2002).' The growing in- needed policy reforms. By the early 1990s, how- fluence of civil society, with NGO networks at its ever, it had become clear that structural forceful core, transformed the international debt adjustment programs were not working as ex- regime through political reach into the higher pected. Lack of ownership of reform programs echelons of international governance, especially combined with governance dysfunctions; weak with the G-7 governments and the Development public expenditures management; and inade- and Interim Committees of the Bretton Woods quate emphasis on infrastructure, private sector institutions. The alliance's efforts led to a call by development, and agricultural productivity had the governing body of the World Bank at its an- hindered supply responses to macroeconomic nual meetings in 1994 and 1995 to study multi- policy adjustment-and they still do. lateral debt and develop an effective strategy to To address increasing concerns about LIC deal with the issue. debt, especially the rapidly increasing multilat- Within the World Bank, concern was already eral debt, the World Bank established a working growing about the rising debt problem for a group to assess the magnitude of the multilateral 9 DEBT RELIEF FOR THE POOREST: AN OED REVIEW OF THE HIPC INITIATIVE debt problem and clevelop possible mechanisms corrupt and oppressive governments, weak do- to deal with it. The group sought to comple- mest c capacities, civil conflict and war, environ- ment the NVorld Bank's existing instruments mental degradation, and disintegratirg physical (noted in Chapter 2) and existing ("tratiitional") and i ocial infrastructure. All of this is reinforced mechanisms for providing -clief for hilateral and by limited access to private international capitai commercial debt. The mechanism pro-oscdt by flow:,, despite the implicit bargain with the in- the group, a "multilateral debt fund,' was de- ternational community that such access would liberately designed to be a concerted and com- sustain economic reform efforts. prehensive effort to effectiveiy cleal with the Thie major evolution of the treatment of sov- HIPC debt problem. erei gn debt was the move from debt collection, When a draft working paper prepared by the to cebt rescheduling, to aid and structural ad- group was leakecl to the press in 1995, it had an justment, to debt "sustainability," to forgiveness unexpected catalytic effect. The developrment and poverty reduction-what one G-7 official community quickly embraced the idea, which called the "slippery slope of debt." The slippery soon translated into the proposal for the HIPC Ini- slo )e was expertly greased by the strategy tiative put forth by the World Bank and thc IMF adopted, and very effectively implemented, by in 1996. Through more uniform rules, the HIPC major acvvocacy NGOs in ratcheting up the de- The HIPC Initiative Initiative marked a significanit ad- bate and ultimately winning groundl on debt re- vance from traditional debt re- lief. The resulting momentum brought about the transformed the lief mechanisms for eligible LICs original HIPC Initiative and the E-HIPC. debt regime toward It transformed the debt regime Stakeholders agree that debt relief is essen- more open and alare more open and acc ount- tially a political issue. It has significant economic able norms, ancl introduced consequences, but to deal with the debt prob- accountable norms, some key innovations, inclucding, lem requires political commitment and resolve. and introduced for the first time, a systematic Thiis is evident in the evolution of the debt some key treatment of multilateral debt, rcgime. Not surprisingly, these changes were the notion of debt sustainability, brought about by a confluence of factors: innovations. and the focus on poverty recluc- . Slow and uneven learning by bilateral and mul- tion. The evolution of the "multilateral debt func" tilateral creditors about the existence of a to the final form of the HIPC Initiative, and the various oressures that have influe nced its emer- from structural adjustment, while greatly in- gence and design, are discussed in detail in a creasing their debt loads in the process background paper to this review (Callaghv 2002). * The growing pressure, influence, and effec- The Political Economy of HIPC tiveness of a new set of actors in international HIPC is a response to the central structural economic governance-networks of NGOs that believed the existing situation for these dilemma of recent times-the emergence of a g states was unjust and untenable, and that had group of weak states andl economies that have not nwiesadpooaso hi w,wt been able to benefit easily or quickly from eco- ias and to of them up nomic reform and globalization. This dilemma social movement to back them up * The influence of a group of economists, both poses important difficulties for the functioning inside and outside creditor institutions, in- and evolution of the international olitical e cluding in the World Bank, who provided omy, and ultimately for international peace. The knweg,avc,ndthialuer casso hssrcua iimi r ay on knowledge, advice, and technical under- causes of this structural dilemma sre many, com- sadn nti su plex, and ver-y deeply rooted-developedl cooun- standing on this issue p The leadership of a group of small creditor try policies, external trade prtterns and other states, and eventually several G-7 memb)ers external shocks, heavy reliance on primary com- . New leadership at the World Bank modities, weak formal economies, flagging cco- . The successful efforts by negotiators of key nomic reform efforts, poor in estment climates, ' 0c oeditor countries and donor institutions, both 10 THE HIPC INITIATIVE bilateral and multilateral, to work through the promoting growth by removing the debt over- complex and often politically contentious details, hang has been retained, the transformation, cv- Many of the ideas inherent in HIPC were pro- ident in the stated objectives and the guiding posed by southern states during the New Inter- principles (see Annex B), took place in two di- national Economic Order (NIEO) events of the late mensions: (a) a shift in focus of the original ob- 1970s and early 1980s, but nothing came of this in- jective related to debt sustainability and (b) the tense and polarized state-to-state bargaining. One addition of an explicit twin objective. of the striking things about the rise of IIIPC is The objective related to debt sustainability precisely that the debtor states were not a major became more ambitious: from reducing debt as driving force behind the innovation. Rather, it was part of a broader strategy to achieve long-run made possible by NGOs that shifted the battle sustainability in 1995; to reducing debt to sus- from the corridors of power into the domestic po- tainable levels and thus providing a durable exit litical arenas of the Organisation for Economic strategy from the rescheduling process in the Co-operation and Development (OECD) industrial original formulation of the initiative in 1996; to democracies. The weak power position of the providing a "robust" exit from clebt reschedul- debtor states and the concomitant strong influence ings and the achievement of debt sustainability of the NGOs help to explain how the HiIPC Initia- in 1998 (World Bank ancl IMF 1998); to a "per- tive eventually became focused almost exclusively manent" exit from the on a particular approach to poverty reduction.3 rescheduling process The objectives were One of the main complaints by almost all debtors and a "clear" exit from expanded to specifically and many of the creditors is that this is very often unsustainable debt in target the freed resources at the expense of broader developmental con- 1999 (World Bank and cerns (see Annexes G and H for summaries of IMF 1999). to social spending consultations with the two groups). The objectives were expanded to specifically target the freed resources to social spending, The HIPC Objectives ostensibly suggesting that debt relief would gen- The main features of the HIPC Initiative, for erate additional resource flows. T'he addition of both the original and the enhanced frameworks, this objective had a significant impact on the im- are g ven in table 3.1. A full statement of the ob- plementation of the initiative. To strengthen the jectives and the guiding principles of the initia- link between HIIPC relief and poverty reduction, tive are given in Annex B. the performance criteria were broadened to in- The original framework had a straightforward clude the requirement of a Poverty Reduction focus on the key issue that the initiative was cre- Strategy Paper (PRSP).' And, while the perform- ated t v address-to reduce the debt stock. 4 The ance criteria to reach the completion point in the strategic rationale for this was that it would remove 0-f IIPC framework included both structural and the disincentive effects on private investment of social measures, it was decided in the E-HIPC to a "debt overhang" and allow progress toward the "give more weight than under the [original] underlying development goal of economic growth framework to social and poverty-related reforms" and poverty reduction. The initiative was viewed in the assessment of performance to reach com- as one element of an overall strategy to achieve pletion point (World Bank and IMF 1999). debt sustainability for the HIPCs. At the same time, the "savings" from reduced debt service, to The Process the extent that they were actually realized, would The current HIIPC process is described in detail generate the much-needed fiscal space in the in the flow diagram in Annex C. The primary HIPC governments' budgets to pursue economic qualification criteria and the core building blocks growth and poverty reduction. of the process, along with the modifications to Over time, the objectives evolved, in subtle the specific elements of the design from the 0- ways at first and then significantly with the launch HIPC to the E-HiIPC framework, are given in of the E-HIPC in 1999. While the original goal of table 3.1. Among the qualification criteria, the DEBT RELIEF FOR THE POOREST: AN OED REVIEW OF THE HIF'C INITIATIVE Element Original Enhanced Stated objectives To bring the country's debt down to sustainable Nlaintairis the original focus to remove the debt overhang levels, subject to satisfactory policy performa3rce and provide a permanent exit from reschedulrng, plus f-ee up lesources for higher social spendins a&med at poverty reduction to the extent that cash debt-service payments are reduced Qualification criteria IDA-onliy countries (poverty) ^ 'ame Appled retroactively to include countries already Unsustainable level of debt after ful use of )ast decision or completion points under the ariginal traditiona rmechanisms framework Strong record f policy pe ormance 41 eligible in 1999, currently 42, of which 38 are expected 41countrieseligible, 29 expected to qualify t to qualify Debt sustainability Guiding principle. Target o1vetall debt sustainiitiy- Principle for changc Provide a clear exit from to provide a iurable exit strategy from the unsustainable debt burden to reniove the debt overhancs rescheduling process and provide an appropriate cushion against exogenous shocks Indicators: Targets Target range for main indicator: Uniform application of single target NPV debt-to-exports: 201-250% NPV debt-to-exports 150% NPV debt-to-revenue: 280 with export/GOP: 40%; NPV cebt-to-revenue 250% witn export/!CDP 30%, revenue/GDP: 20% - revenue/GDP 150h Calculation of relief Fixed at completion point, based on projecti7ons oJf Fixed at decision point, using actual data on NPV debt for debt indicatoT for completion point year prior to decision point and 3-year averagce for exports Time of relef delivery Completion point ICPR, irrevocable commitment Decision point on an annual basis, inter m relief is bulk of anticipated post-CP relief, it is irrevocable Forwvard-looklng Debt sustainability analysis to project profile of Same assessments key debt indicators Performance criteria Guiding prirwiple: Action only after the debtor has Principle for change To strengthen the incentives for showon through a track record, the abilityto put to debtor countries to adopt stron g progranis af adjustment good use whatever relief is provided and reform For decision point 3-year track record of macroeconomic stabHiity and Sante plus policy reform interim or full PRSP For completion point Further 3-year track record or macroecoilomic stability Maintenance of macroeconomic stabl ity and policy reform Cornpletion of PRSP, plus one-year PRSP implementation for E-HIPC Performance benchmarks for structura aid social ref orms Interim period 3 years Flexible, with the introduction of floating CP Creditor participation Guiding principle: Comprehensive debt relief action: Principle for change Same coordinated among all credtors involved with broad pIus debt relief should be additional to reinforce the and equitable participation wider tools of the international community to promote New extemal finance to be on appropri ately sustainable development and poverly reduction concessional terms 1 2 THE HIPC INITIATIVE focus on poverty is straightforward: only coun- multilateral creditors is simpler, with debt relief tries that are eligible for concessional loans from generally taking the form of reduced debt serv- IDA qualify for HIPC relief, excluding the IDA- ice payments, cancellation of credits, or the pro- IBRD blend countries. The second and third vision of grants. The World Bank's HIPC unit cri.eria are linked to two main building blocks estimates the amount of relief due from each that define debt sustainability and policy per- multilateral creditor, although the delivery modal- formance. The focus of this review is the three ities still vary across creditors. building blocks of the process: debt sustain- The financing of the debt relief is straight- ability, performance criteria, and creditor par- forward for the bilateral creditors. It is compli- ticipation. cated for the multilateral creditors, given their The total amount of assistance provided by the status as preferred cred- Processes involved in HIPC Initiative, in the form of debt service relief itors. To finance the over the next 30 years or so, is divided roughly multilateral share of the accessing debt relief at evenly between the multilateral and bilateral relief, the World Bank the country level are more creditors. The processes involved in accessing established the HIPC protractedfor bilateral debt relief at the country level are more pro- trust fund in 1996. The pror fortilateral tracted for bilateral than for multilateral creditors. trust fund is structured than for multilateral Although the amount of debt relief from the to allow multilateral creditors. Paris Club is determined in the context of the creditors to participate HIPC Initiative and is not subject to subsequent in the initiative in ways that are consistent with negotiation, the HIPCs are obliged to meet with their financial policies, and it also helps address the Paris Club after the decision point to agree resource constraints for certain multilateral cred- on the broad terms of the debt relief to be de- itors. The two main sources of financing for the livered by the participating creditors. After this trust fund have been bilateral contributions and agreement, the HIPCs must reach a formal agree- transfers from IBRD net income and surplus; ment with individual Paris Club creditors on the contributions from other multilaterals are also modalities of debt relief. They also have to secure permitted. The trust fund either prepays, or pur- comparable treatment from non-Paris Club bi- chases a portion of the debt owed to a multilat- lateral creditors and commercial creditors. The eral creditor and cancels the debt, or pays the process of accessing debt relief from the major debt service as it comes due. 13 Design of the Initiative T his chapter assesses whether the design of the initiative is appropriate to achieve its goals. It first assesses the consistency of the initiative's over- all design with its objectives, and then reviews the three key elements of the design as discussed in table 3.1: debt sustainability, performance crite- ria, and creditor participation. Then it briefly touches on the lack of capacity building in the initiative's design. The discussion draws on a background paper to t:his review (Eaton 2002), a review of HIPC documents, and data analysis. Background design of the process may affect the initiative's The dlesign embodies the emerging empirical outcomes. evidence and lessons of experience on the link Nevertheless, adaptive "learning" among par- between aid effectiveness and policy environ- ticipants has been a strong feature of the evolu- ment conditionality and ownership, social im- tion of the HIPC Initiative's design and the pacts of macroeconomic policy and public processes for implementation. As the first coun- expenditure reforms, and aid coordination. try to qualify under both the O-HIPC and E-IIIPC While the original design was essentially de- frameworks, Uganda has been a valuable learn- veloped by the staffs of the World Bank and ing ground (see box 4.1). The interactive process the IMF, the broad participatory process with stakeholders, in particular the NGOs, and adopted to review and then enhance the HIPC their suggestions and inputs have helped to for- framework in 1999 was critical to the evolution mulate new ideas-from process issues, to the in- of the nitiative, given the key role played by the troduction of the participatory poverty reduction international NGO community. The debtors strategy concept, to technical issues such as retro- had no explicit role in the O-HIPC design, and fitting the sustainability thresholds. limiteci influence on the E-HIPC. This is note- worthy, since the HIPC process envisages the Consistency of the Design with Overall debtor government and the civil society in poor Objectives countries firmly taking the driver's seat and The HIPC Initiative has acquired three distinct owning the process. Their limited input into the objectives: 1 5 DEBT RELIEF FOR THE POOREST: AN CED REVIEW OF THE HIF'C INITIATIVE 1. Debt sustainability by " [ providing] a perma- resoi irce tr-ansfers to the HIPCs-"additionality." nent exit from rescheduling"' The Impact of debt forgiveness on net resource 2. Raising long-term growtb rates by "removing tranm fers to countries must be viewed in the con- the debt overhang" text of overall aid flows. For net resource trans- 3. Poverty reduction by "[freeing) uip resou]-ces fers Lo these countries to increase as a result of for higher social spending . . . to thCe exLent debt relie, donors need to maintain the levels cf that cash debt-service payments are dfcluced."2 othur aid flows. 3 Equally important, the impact of cebt relief on the availability of other aid An increase in net resource Altho)ugh each of sho aid be assessed both at the level of the indi- transfers is necessary to free these objectives is vidiial HIPC and at the global level for aid recip- clear, the design of ient countries in the aggregate. up resources for higher the init1ative does not For the individual countries eligible for HIPC social spendingfor poverty ensure that all three relief, an increase in net resource transfers is reduction. goals can be met si- nec essary to achieve the third objective-to free multaneously fnspe- up resoirces for higher social spending for cific contexts and given limited grant resources, pov.erty reduction. The design of the initiative the goals may instead conflict with one another. cannot ensure that this increase will in fact take The central issue is whether the cdebt relief pro- place. Evidence suggests that past dtebt relief zf- vided by the initiative results in an increase n net forts were not additional (Birdsall and Williamson As the first country to qualify for HIPC debt relief, Uganda has Uganda was quick to commit itself to linking debt relief to served as a valuable learning ground to refine the parameters for poverty reduction under the O-HIPC. and it was first among determining debtsustainability. The main debtsustainability in- LIGs to successfully formulate a national poverty reduction dicators used in the initiative are the NPV of debt-to-exports strategy, long before the advent of the PRSP. These successes ratio and the debt service-to-exports ratio. Initial HIPC propos- have strongly influenced the design of the E-HIPC by the World als used a single years export earnings to calculate the key ra- Bank and IMF. Uganda's poverty reduction strategy-known as tios and, consequently, to determine debt relief and debt the Poverty Eradication Action Plan (PEAP-vwas formulated sustainability. Ugandan authorities opposed the use of a single in 1997following an 18-month-long consultation involving stake- year's exports, arguing that it would not adequately capture the holders that included central and local governments, NGOs, civil extreme volatility of Uganda's export earnings. The authorities society, donors, and academia. The consultative process was were concerned that a decision point that coincided with un- subsequently broadened to include a diagnostic of poverty usually high intemational pricesfor coffee or other commodities, through direct consultations with the poor, carried out jointly and therefore higher export receipts, could potentially lower by the government and civil society through a Participatory the amount of debt relief they would receive. Underlying their con- Poverty Assessment Project. In 1998-99, the glovernment es- cern was the rapid tapering off of the 1994-95 and 1995-96 boom tablished the Poverty Action Fund fPAF)-a virtual fund within in the international price of coffee. They favored a six-year ex- the budgeitto finance expenditures identified as priority poverty- port average, butthatwas not acceptable to the World Bank andl reducing areas in the PEAP-to 'ring-fence" debt relief funds, the IMF. According to the Ugandan authorities, a six-year back-- including donor budget support, in support of PEAP objectives. ward-looking average (in 1995-96) would have almost doubled Uganda's PEAP has become the model for the IPRSPs. the amount of debt relief Uganda could receive. The World Bank and IMF eventually settled on a three-year export average as a basis for the debt-to-export calculation for all countries." a. Based on information obtained from interviews with Ugandan authorities and the Austtian Development Cooperation (19951). 1 6 DESIGN OF THE INITIATIVE 2002). As will be seen in Chapter 6, while it is too certainty about the outcome of the negotiations, early to assess the additionality of HIPC debt re- which generates economic instability. A second lief, the evidence so far on the net resource gain would be to allow creditors to be more se- transfers to the HIPCs shows a declining trend. lective in their lending. The initiative involves To achieve the initiative's first objective-a more coordination among creditors, and this could permanent exit from rescheduling"-the in- lead to a rationalization in the use of funds for el- creased net transfers would also need to be sus- igible countries. The third would be to foster tainable. That is, their terms need to be greater ownership of the country's development sufficiently concessional to obviate the need for program by allowing governments to pursue their future rescheduling. If additionality can be ownprioritiesbyputtingresourcesmoredirectly achieved only by transfers in the form of loans, in their hands. This would result, for example, by the objective of a "permanent exit from resched- replacing project lending with general budget uling" will be more difficult to achieve. With lim- support and reducing economic costs associated ited grant resources, there is thus a tension with tied aid.5 Finally, a transfer-neutral reduction between the first and third objectives: the more in aid would lessen the transactions cost associated the initiative achieves toward the first objective, with external financing. All the less it may do to accomplish the third, of these effects have the po Whether or not HIPC The means of achieving the second objec- tential to enhance growth debt relief is additional tive, growth, may also create a tension with the and tax revenues.6 to overall aid flows has first objective. If the intent is to eliminate the It should also be men- crowding-out effects of debt service, additional tioned that if the initiative important implications rescurces will be needed to allow growth-pro- does not entail any addi- for the distributional moting fiscal expenditures or public investment. tionality, then the total impact of the initiative. The "debt overhang" argument, that debt scares "cost" of the program away private investment, remains speculative would be less than the direct costs estimated by given other factors affecting the investment cli- HIPC documents. The initiative would not incur mate. To the extent it does induce private in- additional costs if the overall level of financial as- vestment, however, debt reduction may lead to sistance were maintained by giving up debt serv- higher growth even if there is no additionality.4 ice payments, but also simultaneously reducing But for this argument to hold, private investors the provision of transfers, including those for fi- would have to be attracted by creating enclaves nancing the debtors' debt service obligations. To to protect their investments, while foreign pri- the extent this occurs (as argued by Birdsall, vate lenders must have the confidence that, at Claessens, and Diwan 2001 and Sachs and oth- some time in the future, they will be able to ers 1999), there are efficiency gains from ending take their returns out of the country-that is, the this "shell game" or "forced lending," but it is country will start making net resource transfers cost-neutral to the international donor com- to creditors. This has not happened historically munity. Nevertheless, debt forgiveness might If the primary goal of the initiative is to facili- end up reshuffling obligations among individual tate an exit from debt rescheduling while not af- donor/ creditors, making the discussion of ap- fecting overall aid or redirecting aid resources propriate "burden sharing" important. away f:om other poor countries and toward the At the global level, whether or not HiIPC debt HIPCs, then the lack of additionality is not a prob- relief is additional to overall aid flows has im- lem. If there is no increase in transfers as a result portant implications for the distributional impact of the HIPC Initiative, then what are the gains of the initiative between the highly indebted from reducing the debt stock? The gains are what and non-highly indebted poor countries. As Birdsal] and Williamson call "efficiency" gains. One the Report of the ligh-Level Panel on Financ- is the elimination of complex debt negotiations, ing for Development notes, the issue of addi- which require the extensive involvement of sen- tionality is a key factor in appraising the iorgovernment officials, and a reduction in the un- desirability of debt relief in overall development 1 7 DEBT RELIEF FOR THE POOREST: AN OED REVIEW OF THE HIPC INITIATIVE finance, as it determines who actually pays for country in maintaining the future debt burden it (United Nations 2000). If the puruose of the at a sustainable level. initiative were solely to "end the cycle of peri- odic reschedulings," with-out requiri g acldi- The Debt Sustainability Criteria tional resources, as was the main objcctve in the The eligibility of countries to qualify for HIPC as- O-HIPC, then such distributional issues would sistance and the amount of relief are based on ac- not arise. Aid allocation would remain inde- tual and historical data.7 The main criterion to pendent of the initiative. But to the eactnt that judge eligibility and calculate the amount of debt the program results in addctional transfzrs to the relief is the ratio of NPV of debt-to-exports. The HIPCs, it expands the commitment of aid re- NPV of debt is estimated using a detailed debt- sources to these countries. Unless overall aid re- invcntory methodology, which aggregates the sources increase, less will be avaitab e for the debt service payments, scheduled for each ou.- non-HIPC countries. Whether and how this star cling loan, discounted by the prevailing cur- might be affecting the two groups of countries renry-denominated market interest rate. Although is discussed in Chapter 6. cumbersome, this accounting procedure is nec- To sum up, each of the three stated objectives essary to arrive at a robust estimate of a country's To meet all tbree of the initiative is h ghly external debt burden, and its introduction is a very desirable. But to meet positive feature of the initiative. Fcr very open objectives them simultaneously re- econom,es, a fiscal criterion is used-defined as simultaneously requires quires actions beyonndl the thc ratio of NPV of debt to government revenues actions beyond the scope of the initiative. In (u4,ing the same debt-inventory methodology). particular, to free up re- The indicators have remained the same from the scope of the initiative. sources for higher social O-HIPC to the E-HIPC, but the threshold levels spending, it is necessary (thoJgh not sufficient' were modified to deliver deeper relief and to to transfer additional resources. Th e inittative, cover more countries, as detailed in table 3.1. Crit- however, has no means of ensuring this, espe- icisms have been leveled against three elements cially with fixed or declining aicd resource en- of the dzbt sustainability criteria: the choice of the velopes. Nor is it clear how the initiative could pi imary indicator, threshold levels at which debt have been designed to provide such surety. The is judged to be unsustainable, and the exclusion initiative is a limited instrument. A clear public oi domestic debt from the analysis. acknowledgment of this reality and a prioritiza- tion of its principal goals and how they are to he Tie Choice of Primary Indicator achieved in specific contexts would help create The main indicator is the ratio of NPV of public the correct expectations of what the initiative can and publicly guaranteed long-term external debt realistically achieve. to the average of the past three years of exports cf goods and nonfactor services. Several NGOs Debt Sustainability tci not think that this stock-based approach ad- Debt sustainability was the core objective in the equately captures the burden of debt service on O-HIPC and remains a central objective in the E- the government.8 Nor do they consider exports HIPC. It is assessed through the debt susta.n- as relevant to the governments' overall repay- ability analysis (DSA) conducted jointly by the rnent capacity. They suggest using the debt-serv- World Bank, the IMF, and the country authori- ice-to-revenue ratio (Oxfam 2001). The ties. There are two key comporenLs of the DSA. alternative "sustainable development" approach First, the debt sustainability criteria are critical is also linked to government revenues (pro- in determining which countries become eligible posed by EURODAD 2002) .9 But to use revenues for HIPC relief and the level of relief to he pro- as the basis for judging eligibility, sustainability, vided in each case. Second, the forward-looking and the amount of debt relief presents several debt projections are the main instrument to as- challenges. The data on government revenues sess the likely success of the init-ative for each are notoriously poor. The HIPCs' low level of rev- DESIGN OF THE INITIATIVE enues relative to gross domestic product (GDP) ria could have better targeted the initiative to partly reflects their poor economic condition, but maximize its impact on global poverty. But this also inadequate revenue collection efforts, as would be the case only if the initiative provides many OED evaluations have found. In many additional flows. To the extent that there is re- countries, a large part of the revenues is kept off distribution toward the HIPCs, the initiative will budget (Thomas 2001). But most important, in- be disadvantageous to the non-HIPCs that have cluding revenue as a qualifying indicator would regularly serviced their debt and/or have prac- reward governments with poor revenue collec- ticed more prudent debt and macroeconomic ticn efforts, as argued by Birdsall and Williamson management, thus raising moral hazard issues. (2002), and provide adverse incentives to re- In fact, the manner in which poverty reduction form the revenue systems. is targeted in the HIPC design is to earmark debt An alternative indicator is the debt-service-to- relief "savings" for poverty reduction. This has GDP ratio, which overcomes the problems as- been translated to conditions that require sub- sociated with a revenue-based indicator stantial allocations of debt relief resources for (suggested by Birdsall and Williamson 2002). social expenditures or include targets for social This indicator also raises some concerns about spending in government budgets. These condi- incentives for policy formulation and imple- tions are a result of the demand by the advocacy men-tation. It is easier to measure and is less di- NGOs, who have equated poverty reduction with rectly manipulable than government revenue, but social expenditures (Jubilee 2000 Coalition 1999). depending on how it is measured in individual countries, it may be more difficult to compare The Threshold Levels across countries. And depending on the struc- The O-HIPC thresholds were criticized as being too ture of the economy, it may not accurately reflect high. The lower E-HIPC thresholds, while wel- the country's external debt burden or repay- comed by NGOs and other critics, are still judged ment capacity. Nevertheless, the relative merits by many to be too high. Moreover, critics con- of using GDP versus exports need to be studied sider them arbitrary and lacking a scientific basis. in more detail.'0 Different indicators have their While there is no theoret- advantages and disadvantages. From a design ical basis for the ratios, they These conditions are perspective, the less manipulable the indicator were based on empirical in- a result of the the better; thus, for practical and operational vestigations of historical data demand b the reascns, the NPV of debt-to-exports is preferable (Underwood 1990; Cohen to other indicators. That said, alternative indi- 1996). The analysis deter- advocacy NGOs, who cators convey useful information and need to be mined that the range of have equated poverty regularly monitored and reported. This is done 200-250 percent for the NPV reduction with social in the HIPC progress reports. of debt-to-exports ratio was Finally, although the E-HIPC has poverty re- "about right" and the corre- expenditures duction as an objective, its primary indicators re- sponding ratio for NPV of debt-to-GDP was 50 late to debt, not to poverty criteria such as health percent. 13 These findings provided the rationale or nutrition (Sachs and others 1999). The eligi- for adopting the 200-250 percent range as the bility criterion that relates to poverty is that threshold for eligibility to the 0-HIPC. In the re- countries must be IDA-only borrowers-that is, view of the HIPC Initiative, which resulted in have a per capita income of US$875 or less. II IDA- the E-HIPC in 1999, to a large extent under pres- only borrowers constitute the poorest 76 of the sure from civil society groups and advocates for world's 117 developing nations.'2 Dagdeviren deeper debt relief, the ratio was lowered to 150 and Weeks (2001) show that that HIPCs house percent-in order to provide countries a cush- only 9-12 percent (5-6 pcrcent in purchasing ion to absorb exogenous shocks. power parity [PPP] terms) of the world's poor, Using the same argument as before, but more and argue that the aggregate impact on poverty formally estimating the level of debt stocks at would be limited. It is likely that different crite- which countries are more likely to run into debt- DEBT RELIEF FOR THE POOREST. AN OED REVIEW OF THE HIPC INITIATIVE servicing problems, Cohen (2301) estima:es export performance. These variables are influ- thresholds of 200 percent of NPV of debt-to-exports ence l by exogenous and behavioral parameters. and 50 percent of NPV of deht-to-GDP as Lhe turn- To assess whether the 150 percent target for ing points. Other analyses arc less cefiritive but the XPV-to-debt ratio provides the HIPCs a rea- generally supportive. Using an alternative methocl- sona le chance of attaining debt sustainability. ology, Elbadawi, Ndulu, and Ndung'u (1997) find figure 4.1 compares the ratio for HIPCs with the turning point for the debt-induced growth that of other poor but non-highly indebtecd Laffer curve for a sample of African countries to he countries. The comparison is made with non- quite high (97 percent of debt-to-GDP ratio). Pat- lIlP(. IDA countries and non-HIPC lover-middle- tillo, Poirson, and Ricci (2002) estimate the tirn- inccme countries. The figure shows that, on ing point to be 160-170 percent from one statistical average, other IDA countries have sustained technique, but find a wicle range of turn Xng points debt-to-export ratios of over 150 percent. The using alternative techniques. non-HIPC lower-middle-income countries have Thesefindingssupporttheshift downfronmthe sus ained up to 250 percent debt ratios.'4 200-250 percent range but clo not challenge 150 Through the 1990s, both groups maintained lev- percent as the appropriate thresholcd. They els unde- 150 percent, with IDA countries aver- There is no particular demonstratc the diffi- aging 148 percent for 1998 and LNII countries culty in establishing a averaging 135 percent. Thus there is some h,s- level that can guarantee truly scicntific basis for torical justification for the 150 percent target. debt sustainability. such a number. To An alternative measure of the debt burden is some extent, it is in- thc NPV of debt-to-GDP ratio. As shown in fig- evitable that such a threshold will be arh,trary. ure 4.2, the average for this indicator for the There is no particular level that can guarantee debt non-HIPC IDA countries remained between 30 sustainability-which is a function not only of and 40 percent in the 1990s, although earlier it debt reduction, but also of the volume, pace, ancl w. s lower. The ratio for the LMI countries has his- termsofnewborrowings,aswellaseconomicancl torically been above 50 percent and stayed NPV debt-to-exports (%) 550 - 500 - - 450 - All HIPCs S S \i 400 - 350- / -\ 300 A- 250 - 200 - 150 | 100 | ^Other IA 50 0 I 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 Source Global Development Finance and WNorld Development Indicators 20 DESIGN OF THE INITIATIVE NPV debt-to-GDP (%) 100 - 90 ~ All HIPCs & 80 70 - 60 - 40- 30 - 20 -, 20 - Other IDA 10 - 0 - 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 S9urce Global Development FInance and World Development Indicators aroind 40 percent in the 1990s. It would seem, that "ensures" debt sustainability with any cer- then, that 30 to 40 percent would he a good tar- tainty. The ratios are composites of variables sub- get to bring the HIPCs to a position comparable ject to the future decisions and behavior of the to that of other poor countries. Based on the NPV country and its creditors, in the case of the debt of debt reductions offered by the E-HIPC, the av- stock, and unpredictable exogenous factors, in erage NPV of debt-to-GDP is expected to be re- the case of exports. The completion of the initia- duced to 30 percent. Thus, although the NPV of tive cannot guarantee that a country will avoid debt-to-GDP ratio is not explicitly used as an in- further debt-servicing prob- If the initiative dicator in the initiative, the actions envisaged are lems down the road. succeeds in delivering expected to bring the debt burden of the HIPCs, Maintaining debt at sus- as measured in this way, down to a level com- tainable levels requires pru- the envisaged amount parable to other poor countries. Similarly, the in- dent debt management, a key of relief, the HIPCs dicators for the ratio of debt service-to-exports, element missing in most will be atpar or GDP, and revenues also show that if the initiative HIPCs in the past, and a needc succeeds in delivering the envisaged amount of for close and continuous below the current relief, the HIPCs will be at par or below the cur- monitoring of the debt in- ratios for other poor rent ratios for other poor countries. ventory, including domestic countries. While any specific number may be arbitrary, in debt, to ensure that the coun- the interest of transparencyand equity of treatment try continues to remain on a sustainable debt it is politically necessary (although not always the path. The country and its creditors should ensure optimum in specific circumstances) to use a sim- that the extent and nature of future loans are con- ple, uniform rule. This is a lesson learned from the sistent with HIPC targets. dissatisfaction with the "case-by-case" approach that governed the earlier debt regime, which was The Exclusion of Domestic Debt perceived as being too "political." More important, Domestic debt is excluded from the analysis but it shouId be clear that there is no current debt level some, including many debtors, have criticized 21 DEBT RELIEF FOR THE POOREST. AN OED REV,E\N OF THE HIPC INITIATIVE this, arguing that servicing domestic debt ad:ls who h lds clomestic debt and what the likely dis- as much to a government's fiscal burdlen as se-v- tributional implications are. icing external debt. But integrating domestic creditors into the process would be unwieldy (-hor Do DSA Projections Provide a Robust Forecast? instance, when applying the principle of equal The forward-looking component of the DSA burden-sharing) because they are likely to bh a projects the key indicators for debt sustainabil- very diverse group. Moreover, :he level of do- ity ustng forecasts for key macroeconomic vari- mestic debt is more open to manipulations. De- ahles. These projections do not have any impact vising mechanisms to avoid moral haza -d issues on tl-e eligibility criteria or the amount of relief would be challenging. For example, a govcrn- that will go to individual countries. The projec- ment can easily increase its cdomestic debt (such tion are L sed to assess whether, after receiving as by taking over a failed bank). Finally, rec uc- HIPC relief, the profile of a country's debt bur- ing domestic debts might wreak havoc on f-ag- den is likely to remain within the prescribed ile domestic financial markets. range over the next 10 to 20 years, and therefore In view of these characteristics of domestic to d,monstrate whether the initiative is likely to debt, the decisiorn to include only external tlebt achieve its main objective. Debt projections can for the HIPC Initiative is appropriate. Yfet the ef- be cvaluated both in terms of the methodology fective management of domestic debt can be an they employ to connect endogenous variables to important prerequisite for the success of the exogenous variables, and the assumptions they HIPC Initiative. Therefore, the levels and char- make about the exogenous variables themselves. acteristics of domestic debt need to be monitored The former is assessed here; the assumptions will and reported at the decision ancl completion be discussed in the next chapter, "Implementa- points, and more routinely through World Bank tiont Fxperience." It would be useful to and IMLF monitoring- This review sought to assess the models un- for instance, in the con- derlying the forward-looking DSA projections, provide an explicit text of the Poverty no zably the consistency with which they are ap- statement of how the debt Reduction and Growth pliod and their sensitivity to selected assurrp- projections, including Facility (PRGF) review. tions. Key components of the debt projections Further, to the extent for each country are the balance of payments pro- their balance of payments that the external initia- jec tions, derived from the IMF's macroeconomic andfiscal components, tives add to fiscal bur- framework. Because the methodological basis of are arrived at. dens, care muit be th_ose projections was not made available, it is not taken that these tlo not possible to attest to the consistency between lead to excessive domestic debt. the balance of payments projections and the One issue raised in the debtor feedback work- analysis of debt sustainability. In particular, .t is shops was to allow increased flexibility in the cur- unclear how the initiative itself is incorporated rent framework so that :HIPC debt relief cc,uld be ir to projections of imports and net resou,rce used to deal with domestic debt servicing (al- transfers, or how the debt projections are inte- though not to include domestic debt in the cal- grated with the macroeconomic framework. It culation of IHIPC relie). 'To the extent that would be useful for the World Bank and IMF to controlling or reducing domestic clebt or debt provide an explicit statement of how the debt service is critical for macroeconomic stability, projections, including their balance of payments such actions fall under the purview of PRGF and fiscal components, are arrived at.'5 A review arrangements within the contex; of overall fiscal of some of the analysis in the HIPC documents management. The IiIPC Initiative has recently and consultations with World Bank and IMF staff shown such flexibility. For example, in the case r aise concern that accounting identities are ei- of Ghana, a part of the HIPC debt relief is ear- i her not observed or are forced by using certain marked for domestic debt retircmcnt. However, 'ines as arbitrary "buffers." While it is necessary here again, care needs tco be exercised to assess to make assumptions in exercises such as the 22 DESIGN OF THE INITIATIVE DSA, the basis for the key assumptions needs to portive economic policies, macroeconomic sta- be documented and made explicit. bility, and sound economic management to pro- Other external reviewers have experienced mote growth and poverty reduction, as reiterated similar difficulties in seeking to comprehend in the Monterrey Consensus statement. The lack the basis on which DSAs are conducted. Ac- of sustained macroeconomic adjustment poli- cording to the U.S. General Accounting Office cies and structural reforms has contributed to (GAO 2000, appendix VI) "inconsistencies and debt buildup in the HIPCs (Brooks and others gaps in the types of information provided in the 1998). The country case studies for this review debt sustainability analyses presented challenges confirm that poor fiscal management and fail- in our analyses of the documents.""6 An inde- ure to adjust to evolving economic circumstances pendent research and advisory group, Devel- were significant con- opment Finance International (2001), makes tributing factors in all of similar points: "It is important that there is con- the country cases re- andfailure to adjust to sistency between the new borrowing assump- viewed (Annex I). evolving economic tions of the DSA and the HIPCs' PRGF limits OED's Country Assis- circumstances were and that there is an objective basis for the spec- tance Evaluations (CAFs) ified new borrowing limits of HIPCs. The debt conducted since 1997 significant contributing sustainability analysis needs to be directly linked available for 13 HIPCs, factors in all of the up to the Poverty Reduction Strategy Papers so identify significant short- country cases reviewed. one can see if debt relief (both amounts and comings in macroeco- timing) coupled with new inflows is sufficient to nomic and fiscal management and the policy achieve HIPCs' poverty reduction plans." The framework. AnnexJ summarizes the constraints reporting by the World Bank and IMF on the to growth and long-term sustainability identified implementation of the HIPC Initiative has been by the CAEs. A common cause of rising external more comprehensive and standardized in the debt has been the combination of adverse terms context of the E-HIPC. Nonetheless, a more of trade, weather shocks, and poor fiscal man- transparent, explicit, and consistent methodol- agement (lax and inefficient tax administration ogy for the debt projections that connects all the and uncontrolled expansion of unproductive relevant components of the fiscal budget, na- public expenditures, with consequent heavy re- tional accounts, financial flows, and balance of liance on external finance). Poor economic per- payments remains necessary. formance has been a result of political instability, poor macroeconomic policies, and institutional Performance Criteria constraints, including poor governance. Infra- There are two sets of performance criteria a structure, agriculture, and private sector de- country has to meet to be eligible for debt relief velopment have typically been neglected in the under the initiative. One is an ex ante require- design of poverty reduction strategies, as high- ment of the establishment of a strong track lighted by OED's independent review of IDA record of policy performance to reach the deci- 10-12 (Gwin 2002). sion point. The second is a set of conditions, OED studies of World Bank structural ad- called the completion point triggers, that must justment programs have also identified the pol- be met to reach the completion point, when icy environment and fiscal management as the the full amount of HIPC assistance promised is principal causes of poor economic performance delivered and made irrevocable. in the early years of adjustment. Where suc- cessful, adjustment operations and structural Track Record Requirement and sectoral reforms have promoted growth and There is little disagreement among researchers have been a significant factor in reducing poverty. and policymakers that growth is essential for But the studies also found shortcomings in the both debt sustainability and poverty reduction. programs, such as fragmented treatment of dif- There is also little dispute about the need for sup- ferent fiscal issues and vague or imprecise con- 2 3 DEBT RELIEF FOR THE POOREST' AN OED REVIEW OF THE HIPC INITIATIVE ditionality. A significant shortcoming was tnc complished,theprocessshouldnotdelaythede- lack of attention to the social impact o' adjust- livery of debt relief (Cline 1997). ment. The challenge has been poor compliarce with conditions and the lack of borrovier own- Comp letion Point Triggers ership of the reform program. The Higher Im- To reach the completion point, each country pact Adjustment Lending (HIAI,) operations has to comply with a set of conditions. Two sought to improve the design and enhance .he gene ic recluirements are (a) staying on track with effectiveness of adjustment lending through im- the IMF's PRGF macroeconomic stabilization proved country selection, and conctitioni that are and -eform program and (b) the development fewer and better designed, but more effective. and mplementation (for at least one year) of a These operations have had better outcornes participatory PRSP In addition, the staff of the than their predecessors and have been different World Bark and IMF, with the government, iden- in their attention to social concerns and poverty tify key structural and social development actions (OED 1999). The issues of ownership aad the cli- or reforms that would promote progress toward verse social impacts of adjustrment lending are sustainable development. Beyond the two also highlighted in reviews of ESAF (Botchwey gen_ric requirements, the design allows for the and others 1998). triggers to he tailored to suit the particular cir- Given the importance of an appropriate pol- CUtl istances of a country and expects them to be icy framework and sound macroeconomic man- designee in full consultation with its govern- agement to ensure that the relief resources are me it. Should this materialize, the foundation for well utilized, the O-HIPC Initiative requiredl a sustainable growth and poverty reduction re- total of six years of track record-three 'ears qui red by HIPC should be secured. prior to the decision point, andl tlhree yecrs to The added focus on poverty reduction led to reach the completion point. In the E-IIIPC this the inclusion of social sector policy reform and was reduced to a three-year track record before performance criteria as explicit completion the decision point (to be applied flexibly to give point tr,ggers, and very often in the allocation The initial design lacked credit for past per- of EZIPC "savings" for social expenditures. As formance), andi a ncted in Chapter 3, the modifications to the safeguards against poor floating completion HIPC framework introduced in 1999 specifi- governance . . . but actions point that wouldl cally shifted the focus of the performance as- are now being taken to allow the country to sessment by giving more weight to social and monitor HIPC "savings," undertake reforms at poverty-related reforms. its own pace. The dc- The World Bank and the IMF are required to sign incorporated lessons of experience on the monitor progress toward the triggers, but the ini- need to streamline cornditions, Y ith fewer con- ti il design did not incorporate any safeguards ditions attached to the new PRGF programs. 1T against poor public expenditure managerr,ent foster ownership, the initiative also envisages or other governance issues. The process man- the PRGF conditionality to emerge fi-om the new dated specific uses for the relief "savings," but the PRSP process, with broad participation from civil need to "track" expenditures and outcomes only society in defining and supporlting the adjust- emerged later as the realization set in that debt ment program for attaining macroeconomic sta- relief essentially amounted to budget support. bility and a sound policy framework. These issues have been recognized and actions Thus, the design of the current lramcwork is are being taken to monitor the use of HIPC 'sav- consistent with the need to focLus on the policy ings" as part of tracking overall poverty reduc- framework. The modifications to the traclc record ing expenditures by governments under regular requirements in the E-IIPC are also consistent iMF and World Bank program reviews. A rmajor with a key lesson from t'ne MIC debt crisis of the constraint in doing this is weak budget formu- 1980s: the need to focus on countries with con- latior, execution, and reporting systems. Multi- vincing policy track records, but once that is ac- donor efforts are under way to improve public 24 DESIGN OF THE INITIATIVE expenditure management systems in HIPCs bilateral creditors.17 More important, it does not (World Bank and IMF 2002a). address previously known problems with the non-participation of a number of creditors, par- Creditor Participation ticularly the commercial and non-Paris Club bi- The initiative was designed to provide a com- lateral creditors who have refused to participate prehensive treatment of the HIPCs' debt prob- in the past. Given that this is a persistent prob- lem through a concerted and uniform approach lem, the assumption of full participation main- with the participation of all creditors: the mul- tained in the DSAs is also invalid. tilateral, Paris Club and non-Paris Club bilateral, and commercial creditors. Although agreed to by Capacity Building governments, there is no formal or legal accord Debt management is an important element in debt that obliges creditors to participate. The legal sustainability. It has long been recognized by the sarctity of the loan contracts signed between a World Bank and the creditor and a debtor is not supplanted by the IMF that poor debt Capacity building for debt HIPC process. In essence, the decision to par- management, because management has not been tici oate in the HIPC Initiative is a voluntary one, of weak institutional an objective of the anc the initiative is essentially an informal agree- capacity, has been an initiative, ment among nations. Moral suasion is the main important factor exac- enforcement mechanism. erbating debt problems in many countries. But ca- AJthough the design assumes the full partic- pacity building for debt management has not been ipation of all creditors and emphasizes equal an objective of the initiative, and the design does burden sharing, the process requires individual not address any aspect of capacity development or debtors to follow up with the creditors, as was technical assistance for debt management. Decision the case with the previous Paris Club treatments. and completion point documcnts discuss debt The current design does not adequately take management issues as part of their forward-look- into account the capacity constraints faced by ing assessments for individual countries, but the ini- HIPC governments, or the inefficiency of the tiative does not address any aspect of capacity process in terms of the time and resource re- development fordebt management.18 This remains quirements to follow through with individual a design shortcoming. 25 Implementation Experience his chapter reviews how the initiative is being implemented. It assesses the extent to which the initiative is being implemented efficaciously, eq- uitably, and in accordance with its key objectives. Following brief back- grcund information on the pace of implementation, the discussion below is structured around the four key elements of the HIPC process: the debt sus- tainability analysis, application of the performance criteria, creditor participation, and. institutional development. Pace of Implementation by August 2002. The challenge of bringing the re- The O-HIPC got off to a slow start. From 1996 to maining countries to their decision points, par- 1999. only seven countries became eligible for ticularly those affected by conflict, remains. debt relief. The modifications in the process in- The late-2000 "millennium rush" reflected troduced by the E-HIPC, particularly the lower- the flexibility in the implementation of the ini- ing of the debt sustainability thresholds, made tiative, and is generally perceived to have been additional countries eligible. With continued beneficial in bringing several countries into the pressure by civil society and the impatience of process (see Annex H for creditor perspectives). the Development Committee at the seemingly At the same time, it is also perceived by many, slow pace of progress, implementation was ac- including several creditors and NGOs, as having celerated in the latter half of 2000 to meet a self- diluted adherence to the standards and process imposed challenge by the World Bank and the requirements incorporated in the design, and has IMF to bring at least 20 countries to decision raised the issue of equity of treatment. point by December 2000. With extraordinary ef- forts cn the part of the staffs of the World Bank Debt Sustainability Analysis and IMF, helped by the enhancements intro- The DSAs done at decision point, and updated at duced in 1999, the HIPC Initiative exceeded its completion point, do not have any impact on the much-publicized target, with 22 countries reach- amount of relief that a country receives under the ing their decision points by December 27, 2000, current framework. They do have profound im- The pace has since slowed down, with only an- plications for assessing the likely outcomes, and other four countries qualifying for debt relief hence the overall success of the initiative. Two as- 27 DEBT RELIEF FOR THE POOREST. AN OED REVIEW OF THE Hl'C INITIATIVE sumptions in the DSA influence the outcomes: the and almost six times the average for 1980-2000. level and terms of new financing and an assessn-ent Indi\ idually, the forecast is below the historica of future economic and export performance. estimate far 1990-2000 for only four countries, The level and terms of newv fiznanciing as- but is within statistically reasonable bounds fo - sumed in the DSAs have been criticizec, as being eight (shown by the boxed cells in the table).3 too optimistic (GAO 2000). While the interest For :he other 12 countries, the assumptions rates for loans assumed in the DSAs are lower often far exceed historical rates (Chad is an ex- than they have been in the past, they are not ception, pending the expected increase in oil rev- much lower than current levels. Further, thev are enues). Also, the lower bound is in most cases based on a survey of creditors and clonors about much lower than the assumed rate, and in many their future commitments. The level and terms cascs is negative. The high probability of such of new borrowings are also monitored under poor outcomes requires appropriate sensitivity the IMF PRGF reviews, which place restrictions analyses to reflect the real possibilities. Tle on the amount of nornconcessional borrowing DSAs, however, do not typically simulate the ef- and set limits on the minimum grant e ement for feci s of such low growth rates. a loan to be considered concessional. The findings show that there was optimism in The economic assump)tions in the DSA pro- the assumptions maintained by the DSAs done jections have been the main subject of critidism. at decision point. A similar analysis of the as- The assumptions about the futurc growth rates surnptions in updated DSAs (for 2003-08) shows of exports and GDP have been criticized as being tha.t although slightly better, the assumptions too optimistic (GAO 2000; Martin and Alami co itinue to be optimistic. In only nine cases are 2001). These concerns have also been consis- the assumptions in the updated DSAs within tently raised by the debtors and creditor officials thc reasonable (upper) bounds of confidence (in (Annexes G and H). addition to Chad, Sao Tom6 and Principe is also The overall simple To assess this criticism, table an exception for this time period, as oil exports 5.1 compares tthe export arc expected to rise significantly by about 2006). average of the growth assumptio is (for the Comparing the old and new forecasts for the growth rate assumed five years after the decision same period (2003-08) also shows that the rew in DSAs is more than point) maintain-d in the DSAs assumptions are slightly more optimistic. twice the historical with historical performrance The forecasts for GDP growth rates assumed for the 24 countries that ir the DSA are also criticized as being overly op- average for reached their decision points timistic.4 As noted in Chapter 4, assumptions 1990-2000. by end-2001.1 The projections about economic growth and low interest rates are were updated in 2002, taking irnportant for the achievement of debt sustain- into account the experience of 2000 and 2001. aa-ility in the DSAs. The projections assume that To assess how the updated projections compare if countries follow appropriate policies, the pro- with the original decision point DSA assumrn- jccted growth rates could be realized. Loosing tions, table 5.1 also gives the assumptions for at the evidence, there is some merit in the ar- the next five years (2003-08) mainuained in the E;ument. Recent analyses of countries classified original and the updated 'pro)ections. Export -s good, weak, and poor compliers with s ruc- earnings, and trade flows in general, are very tural adjustment conditiorns show that commit- volatile. To assess the degree of co)nfidence in ted st-uctural adjustment can produce tangible the forecast assumptions, table 5.1 also includes results (OED 1997; World Bank 2002). Using the the upper and lower bounds of what might be indings from the OED review of structural ad- considered reasonabie forecasts based on his- ,ustment programs, formal statistical evidence torical experience.2 shows policy compliance does matter and does The overall simple average of the growth rate result in a higher rate of growth.5 Other studies assumed in DSAs across all 24 countries is more also show that the new structural adjustment than twice the historical average for 19990-2000 prog-ams are better designed, incorporating 28 IMPLEMENTATION EXPERIENCE g G | r D v ~~~~~~Historical performanceb 200005e 2003-08 1990-2000 Q 1980-ZO Enhanced Hl,C Lower Upper Lower Upper^ decision Country Original Original New Estimate bound bound Estimate bound bound point date Eolivia 10.52 8 24 8.18 518 2.88 7 48 4.68 4 22 5.13 Feb-00 Mauritania 480 7.11 120 -2.61 501 1.88 106 2.69 Feb-00 Lganda 1007 11 15 14 8,39 2190 0.31 -205 2.67 Feb-00 Mozambique 18.98 695 21.27 1037 8.96 11 78 4.81 -257 1.35 Apr-00 Tanzania 11.51 10 50 7.70 3 35 1.72 498 0.97 -064 2.59 Apr-00 Senegal 9.02 644 6.25 -0 16 -1.85 1 54 3.14 1 53 4.75 Jun-00 Benin 7.32 819 8.74 418 1.51 6 85 4.20 3 07 5.32 Jul-00 Burkina Faso 10.89 1120 9.81 -1 20 -3,75 1 35 2.47 1 16 3.77 Jul-00 Honduras 13.72 1089 1128 9.40 1316 2.98 179 4.17 Jul-00 Mali 7.35 |9522 [, 4 93 3.01 684 3.31 212 4.49 Sep-00 Cameroon 8.04 6 74 4.89 0 63 -2.14 3 41 0.65 -0 72 2.02 Oct-00 GLyana 9416 449 | 478 8.55 5.99 1312 -0.17 -243 2.08 Nov-00 Gambia, The 7.58 6 31 4.34 0 05 -225 2 35 3.73 2 77 4.68 Dec-00 Guinea 8.54 715 7.26 -1 79 -2.73 -084 4.33 3 31 5.34 Dec-00 Gunea-Bissau 14.81 1028 9.63 11 75 3,97 1954 1,61 063 2.59 Dec-00 Madagascar 7.95 818 9.15 840 6.34 1046 0.85 -030 2.00 Dec-00 Malawi 3.72 488 5.59 213 -1.60 586 2.74 1 42 4.07 Dec-00 Nicaragua 9.56 859 10.72 1525 9.50 21 01 0.21 -2 17 2.60 Dec-00 Niger 3.41 7 61 4.86 -0 02 -2.44 2 39 -0.17 -128 0.94 Dec-00 Rwanda 15.06 14 79 12.24 0 31 -7.91 8 53 -0.14 -2 19 1.91 Dec-00 Sao Tome and Principe 10.59 9 84 67.96 5 32 2.67 7 96 -0.51 -1 30 0,29 Dec-00 Zam^bia 12.73 6 56 5.36 -2 39 -5.12 0 33 0.13 -1 28 1.53 Dec-00 Chad 65.07 6417 94.51 2 53 -1.97 7 03 4.14 2 93 5.35 May-01 Ethiopia 8.10 875 9.23 7 45 3.55 11 36 0.51 -0 81 1.82 Nov-01 Simple average 11.74 10.45 14.33 4.73 1A0 8.06 1.72 0.34 3.09 Without Chad, Sia Tome 9.37 8.04 8.25 4.80 1.49 8.11 1.71 0.30 3.12 Note 3hana and Sierra Leone qualified in 2002 and are not included in the sample because of lack of data at the time of analysis a. From HIPC database, spring 2002 b Fron data provided by the IMF Reported are coefficient estimates from a regression of natural logs of exports of goods and nonfactor services on time (year) The lower and upper boundr correspond to the 95 percent confidence interval of the estimated growth rate c Estirates for Ethiopia and Chad are from 2002-07 past lessons on ownership and streamlined con- nificant economic reforms, undertaken in the ditionality, and are performing relatively better 1990s, were associated with much improved than the programs of the 1980s (OED 1999; SPA economic performance. 2002). Evidence from country cases studies (such The IIIPC requirements of a prior policy track as Guyana, Malawi, and Uganda) shows that sig- record and continued performance in main- 29 DEBT RELIEF FOR THE POOREST AN OED REVIEW CF THE Hll'C INITIATIVE taining ard furtlhering macroeconemic nmd goo(l conmpliers have achieved higher growth structural reforms thus takc on at1decl impor- ratc. than the poor compliers, both in the short tance in future debt sus:ainahi ito, AssunLi g anc1 h 1(-ng run. The difference in the real GD13 that these policy reformrs are fully implrn entecl, growth rates between good compliers and poor as agreed to hy the countries, h': is reasonah'e to con- pliers is less than 2 percent perannum. Thus, add a "policy premium" to historical grcwth whle' pol cy-based projections are justified in as- rates for future projections. Availahle statistical suiring higher growth rates, evidence also sug- evidence suggests the magnitude cr'this growth ges ti that these projections neeed to be reasonable. premium to be between and 2 percent per [ urther, recent research findings also sug- capita real growth (Easterly 2Dt)Ja; Noorbaksh gesu- a need for conservatism in projections. and Paloni 2001). Whilevolatilityentailsboth downsideand upsidle The potential magnitucle of thc "policy pre- risks, negative shocks tend to do more harm mium" is confirmed bhy some sinml-le data onaly- th1i the good delivered by an equivalent upsi(de ses. 'he 1997 OED study of Structi-al Adiustnient shi ick. ''hat is, negative shocks in export prices Loans completed between 1988 andcl 1994 by ioun- ter d to hlave a much greater impact on growth tries in Sub-Saharan AFrica rated each couni rl hnb th, n do aositive shocks (Collier, Gunning and As- the level of corpliance with the co diJi mnalit) in- soi iates 2000; Dehn 2000; Deaton and Mil'er Whilepolicy-based eluded'C1 F]igure 5.1 19)5). At the same time, positive shocks do not shows the correlation appear to have any lasting effects, which implies projections are justified in hetweei tie deree of thi.it wirdfall gains are not being properly saved assuming higher growth comlnpiance, rate(d as ancd invested (Dehn 2000). These findings sug- rates, these projections need goodi, wea, andl poor, gcst a n eed to better incorporate volatility in and g,rowTh rates for e ports in the DSA projections, perhaps through to be reasonable. the 33 1 IIPCs inClude( nmore robust sensitivity analysis. in Lh e stud'. The trends in the growth rates for iIlPCs confirm the Performance Criteria findings from the broacler studies, 'he figure 'I' c implementation of the two types of per- shows that starting from a worse piositii n, the fo rmance criteria, the track record on policy per- Average annual growth riates, 4.5 4A 35- *___ 3 2 5 2 __e_ ___ 1.5 - M / Poor 0.5 O 1980i-85 1986--90 1991-95 1936-2000 Source OEt 1997 and World Oevelopment Indicators 30 IMPLEMENTATION EXPERIENCE formance (to be eligible for the decision point) Completion Point Conditions and the completion point conditions (to reach the The HIPC Initiative incorporates three types of conpletion point), are considered in this section. conditions for reaching the completion point: Track Record * Process conditions, directly linking the HIPC An important difference between the past debt process to development of a PRSP rel ef efforts and the HIPC Initiative is the mi- Performance benchmarks, also termed tiative's application of a uniform set of rules to completion point triggers * The use of HIPC resources for earmarked ensure equity and fairness in the treatment of in- dividual countries. The main requirement for purposes. both the O-HIPC and the E-HIPC has been a The implementation of each is discussed. three-year track record of sustained policy and structural reforms and macroeconomic stabil- Process Conditions ity. From the very beginning, this condition has PRSPs operationalized the E-HIPC Initiative's ob- been applied flexibly. None of the countries qual- jective of linking debt relief resources to the pro- ifying for EIIPC assistance under the O-HIPC had motion of poverty reduction. Support for a more to wait for three years; they were given credit for participatory and holistic approach to develop- strong policy performance in prior years. The ment was emerging in its own right at the time same has been the case in the E-lIIPC. of the HIPC review in 1999. The application of a The application of a track record has been pro- The PRSP embodied such gressively reduced during the E-HIPC. All six an approach and incorpo- track record has been countries that successfully completed the 0- rated lessons of experience progressively reduced HIPC process had a strong policy track record in from past development ef- during the E-HIPC. terms of performance under the IMF ESAF/PRGF, forts, emphasizing the need WorIJ Bank adjustment programs, or both. Sim- for ownership and participation, as well as the ho- ilarly all nine countries that entered the E-HIPC listic view expounded by the Comprehensive process between January andJuly 2000 had a sat- Development Framework (CDF). By putting the isfactory or strong track record. But of the 13 government in the driver's seat and including con- countries that reached decision point between ditionality that called for the participation of a August and December 2000, only 2 had estab- wide cross-section of stakeholders, the PRSP lished a track record.6 aimed to improve ownership, transparency, ac- Nct only did these 13 more recent entrants countability, and the focus on results. (that is, the "millennium rush" group) have Skeptical at first, civil society supported the weaker economic track records, they also-in PRSP as a potential step in the right direction, the aggregate-have a weaker development but many of its members were concerned that program. For example, they have lower ratings the development of a full PRSP might delay for the outcome of World Bank assistance in countries from reaching their decision points. OED's CAEs. Their completed World Bank proj- An interim PRSP (I-PRSP)-essentially a state- ects have significantly lower satisfactory out- ment of intent and a roadmap to carry out a full come ,-atings than the earlier entrants. And their PRSP-was determined to he a compromise cri- Country Policy and Institutional Assessment terion for decision point qualification. A full (CPIA) scores in 2001 were lower than those of PRSP, with satisfactory implementation for one the earlier entrants (about one-half of one point full year, was retained as a requirement for the lower on a six-point scale). 7 completion point. Based on this evidence, the HIPC countries The weak capacity of many countries to carry that reached their decision point during the out complex consultations and strategy formu- "millennium rush" are less likely to achieve good lation prompted concerns among some stake- development results than their predecessors, holders that the link between the HIPC and the other things being equal. PRSP processes would either delay the delivery 31 DEBT RELIEF FOR THE POOREST. AN OED REVI-W CF THE HIIC INITIATIVE of HIPC relief or provide an incentive For coun- stucdes and feedback from debtor representatives tries to rush the PRSP to secur-e the debt relief. at workshops held for this review indicate that To address this concern and to deliver relief the ink between the HIPC and PRSP processes faster, the innovation in the E-HIPC was to in- has been beneficial, as discussed in box 5. 1 . troduce the provision of "interim debt relief " he- An assessment of whether the process has tween the decision point and the completion been rusned as a result of being linked to the point, when debt relief would be proviled in full HIPC prccess requires an in-depth comparative and irrevocably. The annual debt service relief assussment across HIPCs and non-HIPCs. Emerg- during the interim period is projected to be sub- ing findings from case studies for OED's ongo- stantial, in most cases amounting tc) over 80 per- ing evaluation of the CDF indicate that some of cent of the annual debt service reduction the initial PRSPs appear to have been rushed. BLut expected after the completion point. how the link to HIPC relative to the potentially Most debtor officials and stakeholders ac- much larger volume of development aid has af- knowledge the HIPC Initiative as thz main ra- fected the process needs further study (since, at tionale and motivation for the PRSP process in least in -rinciple, PRSPs are to be :he basis for lIlP(.s, but they note future aid flows). Due consideration also needs Stakeholders acknowledge that the provision of to be given to capacity constraints and domes- the HIPC Initiative as the interim debt relief tic political factors. These issues will be taken up main rationale and largcly/ remove-d the in the review of the PRSP process by OED in incentivc to hastily th.z coming year. motivation for the PRSP comrplete the PRSP Local NGOs, donors, and other stakeholders process in HIPCs. QED's country case in the case study countries expressed satisfaction Theparlicipantsatthetwoworkshopsorganizedtogatherfeedback While a number of speakers said that the PRSP had suc- from debtor governmentrepresentativesforthis review considered ceeded in putting countries "in the drivers seat' most per- the PRSPto bean integral partof the HIPC lnhiative andthe primary ceived the requirement that the Joint Staff Assessment be instrument for achieving the HIPC objectives of debt sustainability endorsed by the boards of the World Bank and the IMF as tan- andthepromotionofpovertyreduction Themajorityofspeakersheld tamount to requiring endorsement of the PRSP itself. They thatthe costs of preparing the PRSP, while substantial, were justi- held that this undermined the spirit of true ownership. Some fiable; most maintained thatthe benefits outweighed the costs. also questioned the extent to which donors were willing to ac- Internally, the PRSP process has created a new partnership cept the 1'RSP as the single framewotk for development co- among development partners, helping to identify national pri- operation. Several speakers pointed to the need for closer orities, build broader ownership of the development agenda, and alignment between the macroeconomic framework and the improve governance through greatertransparency. Several of the PRSP and called for greater flexibility by the VWorld Bank and representatives underlined the growing-and in some cases un- IMF to achieve this. precedented-contribution of civil society to the PRSP. In the Representatives credited the HIPC Initiative with brincling words of one official, "HIPC has caused civil society to organ- poverty reduction into sharper focus and held that a major ize itself in order to influence the process." challenge for the PRSP would be to unite the growth and By most accounts, the policy dialogue surrounding the PRSP poverty reduction objectives. Speakers emplhasized the im- is much improved compared with past experience with adjust- portance of a holistic approach to development-improving ment programs. Speakers noted that in the past, the discus- human capital, nurturing the growth of the private sector, sions had been dominated by the international financieil and building and maintaining infrastructure, among otheir ob- institutions (IRFs) and inordinately focused on economic growth. jectives. 32 IMPLEMENTATION EXPERIENCE with the nature of consultations and the partic- Performance Benchmarks ipatory process undertaken by the government. HIPC decision point documents specify the con- In many places, the process has been called ditions that the country has agreed to meet by ' pathbreaking" in the way it establishes a new re- completion point. Most O-HIPC decision point lationship between the government and civil so- documents included a comprehensive list of key ciety. Across countries, however, the degree of structural reforms under ESAF and ongoing IDA PRSP ownership varies. In some cases, there is Structural Adjustment Credits as part of the con- substantial ownership by the political leader- ditions for completion point. In addition, they ship of the country, but less at the lower opera- required successful implementation of reforms tional levels (as in Guyana). In others, political or satisfactory progress under IDA Structural leaders or parliamentarians have not been sub- Adjustment and other credits. stantively involved in the process (as in Malawi).9 The conditions under the E-HIPC have been The overall ownership of the PRSP is also af- considerably reduced from an average of over 41 fected by other factors such as the role of the in- to 13 per country. The reduction has mostly ternational financial institution (IFI) boards in been in economic policy and structural reform endorsing them as the basis for international conditions. A significant development in the F- assistance (see box 5.1). To what degree and HIPC is the inclusion A significant development hovv the process is affecting the ownership of the of governance condi- PRSPs is another area the OED review of PRSPs tions, with two-thirds in the E-HIPC is the will )ursue. of all countries having inclusion of governance While the consultative process has been quite at least one gover- conditions. satisfactory, the quality of the substantive as- nance condition. The pects of the strategy has been a subject of debate. most common types of structural reforms for the The strategies have been critici7ed by donors in E-HISPC decision point countries were in public some countries as being long wish lists in need expenditure management (13 countries). Cov- of further prioritization and costing (World Bank erage of rural development has also decreased and I V4F 2002b; DFID 2002). Most strategies, as in the E-HIPC. While more than half of the 0- presented, are financially untenable. While HIPC countries had one or more conditions re- growth and economic development figure prormi- lating to this sector, only 8 percent of countries nently in the stated objectives of most strategies, under E-IIIPC (two countries) had at least one the identification of priority activities is weak, as rural development condition.10 is the articulation of how the growth is to be achiexed. The Use of HIPC Resources Among the case study countries, only Uganda Since the O-IHIPC was not specifically aimedl at had completed its PRSP at the time the studies poverty reduction, it did not seek to specify were conducted. As noted in box 4.1, Uganda has how the funds released from debt relief were been a leader in the process innovation on par- to be used. Six of the seven 0-HIPC countries ticipatory poverty reduction strategy formula- had no targets or guidelines for the use of tion and implementation. Even in Uganda, these funds. The debt relief was intended to be although the PEAP provides a credible strategy used for public spending in the social sectors to meet its four objectives, the government has and for supporting the cost of structural re- focusec much of its attention on two of the four forms. This approach is consistent with the legs of its PFAP relating to social outcomes and current development research findings that "quality of life" issues. There has been less focus money is fungible, earmarking is inefficient, on its export diversification and private sector dc- and growth and reform are also essential for velopment strategies. Government officials now poverty reduction. recognize the need for a more balanced ap- While the number of conditions was stream- proach to clevelopment. linedc under the E-HIPC, the conditions are more 33 DEBT RELIEF FOR THE POOREST. AN OED REVIEW O- THE HIPC IN TIATIVE specific than in the O-HIPC with regard to sec- penditures. The limited scope of the PERs does toral allocations, targets by sector, anL details not permit an analysis of the absorptive capacity about the intended use of HIPC funds. With the acro. s sectors or the areas of priority for public addition of poverty reduction in the E-HIIPC, the expcnditures. focus in implementation has also shifted the Irn Guyana, for instance, under the E-IHIPC balance between the alternative uses of 3HIPC one trigger called for achieving satisfactory funds. The emphasis on ensuring that resources progress n increasing the numbers of teachers from HIPC "savings" are useC for povert) re- as i1 entifiecd in the interim PRSP matrix. But while duction has increased, and this has been oper- the PER attributes the shortage of teachers mainly ationalized mainly by targeting the savings for to a brain drain from the country, and recom- social expenditures, mostly for ecJucation and mends that teachers be given more voice in health, as mentioned in Chapter 3. sch,)ol management and be rewarded for achiev- All of the countries reaching their E-I-IIPC de- ing ineas Lrable goals, the I-PRSP called for "build- cision points have conditions targeting funds ing two new dorms at the Teacher Training for specific sectors. Of the 20 that rcached de- college, a review of teachers' diploma program cision point afterJuly 2000, all but one had a de- and working with the Teacher's Union to in- tailed description of how the fundis were to be prove the condition of teachers." Of these three, used, with 13 specifying numerical targets for sec- on ly the latter is consistent with the recommen- toral allocation. Based on averages for the:se 1a dations of the PER for reducing the brain drain. countries, 65 percent of the E-HIPC savings were Weak performance in social sectors results focused on the social sectors, 13 percent on from low efficiency of expenditures, poor serv- rural development, 8 percent on infrastructure, ice quality, capacity shortfalls, low utilization, 4 percent on governance, and 2 perccnt on struc- and inequitable allocations. Although many of the tural reforms. Across the E-H-IIPC countr es, 49 completion point triggers do address relevant percent of the resources are to be allocated to scctoral constraints, increased budgetary allo- education and health. cations in most cases have been superimposed Budgetary resources for Country case stud- on weak institutions, which is likely to limit the ies reveal that at the effective use of HIPC resources. Some examples the targeted sectors, central level, HI[PC ex- are given in box 5.2. particularly education penditures are heing al- and health, have locatcd largely as Creditor Participation anticipated in the de- ' 'v deal effectively with the totalitv of a country's Increased. i n most cision point docu- debt, one of the core principles of the IIPC Ini- cases superimposed on ments. The budgetary I iative is comprehensive and concerted action by weak institutions. resources for the tar- all creditors, as discussed in Chapter 3. The par- getcti sectors, particu- ticipation of creditors has proved to be a chal- larly education and health, h,iave increased, lenge. The four major categories of creditors although there is also some evicdence of fungibil- are the multilateral, Paris Club bilateral, non-Paris ity.11 However, the World Bank's own analysis of Club bilateral, and commercial creditors. these sectors in Public Expenditure Revievs^ (PERs) The feedback from debtors and country case highlights that increased financing is necessary but studies indicates that most multilaterals are de- not sufficient to improve the quality of services and livering on their promises. Of these, the World outcomes. The PERs, available for 17 of the 26 de- Bank and the IMF have been the most punctual cision point HIPCs, reveal that the fIIPC conditions and efficient. There have been some delays with only partially address the core constraints to im- the other multilaterals, but the anticipated relief proved performance in thesc sectors. Most PERs is being delivered. With respect to the Paris Club, focus on social sectors, on health and education performance has varied across creditors. The sectors in particu'ar, ancl do niot provide an as- process of reaching formal agreements with each sessment of the overall efficiency of public ex- individual creditor has proved to be taxing and ex- 34 IMPLEMENTATION EXPERIENCE _ W E _ E . | w 1 w ~~~~~~~~~~~~~~~. Lowefficiencyin education and health remains a major constraint Capacity shortfalls in the face of rising enrollments are the to sectoral performance in almost every HIPC, although it was underlying cause of quality issues in several countries. Ethiopia rarely addressed directly in completion point triggers. For exam- has experienced this in the education sector, where the main ple, one-third of HIPC resources in Honduras are allocated to the obstacle to effective implementation is capacity shortfalls in all education sector.The PERforHondurasnotes, "in spite of Honduras' departments and at all levels. The PER states that "children had relatively strong funding effort and high coverage, its outcomes in been encouraged to enroll in school even though there were in- primary education are not notably superiortothose of its neighbors." sufficient resources or funds for operational costs with a con- The PER findsthatthe costs of inefficiency are huge-about 36 per- sequent decline in quality." The triggers require an increase in cent of spending by the Secretariat of Public Education does not enrollment rates for girls and a reduction in repetition rates, but produce a student qualified at the grade level-and also recom- do not address the basic capacity problems, ranging from issues mends that the total spending level in education not be raised. such as buying textbooks, equipment, and transport, to improv- Poor quality in many cases has become a cause of high ing management skills, training teachers, and building new dropout rates and repetitions in education, and is a factor that classrooms. increased funding cannot necessarily address. In Madagascar, Low utilization or excess capacity has emerged as a con- the poor quality of the education system (along with the inabil- straint in Bolivia and Uganda. The Bolivia PER recommends that ity of families to afford education) has been the main cause of further incentives be designed for certain groups-for exam- the fall in enrollment rates and worsening indicators in primary ple, a negative price may be required to encourage the con- education since the 1980s. While the triggers attempt to ad- sumption of certain health services. In Uganda, quality and dress the shortage of teachers in rural areas, they do not address staffing in primary health care and education are major is- their poor performance, which is the main driving force behind sues. Neither have any triggers to address these issues under the low quality of education. the E-HIPC. pensive. While the relief will eventually be retroac- ou t s t a n di n g Many non-Paris Club creditors tive to the date of the Paris Club agreement, the debt 13 In some have either not responded to delays have in some instances caused budgetary instances, the problems for HIPC governments, who had al- debt has been ac- q f ready anticipated such relief in their budgets. quired by vulture simply refused. ThL participation of non-Paris Club bilateral funds at discount creditors has been very limited.12This was the his- from sovcreign creditors. For some countries, tory prior to the If IPC Initiative, and was also ex- these cases are proving to be quite burdensome, perienced in the O-HIPC. The current framework and most have been settled in favor of the com- continues to leave the government with the re- mercial creditors. The legal case in favor of the sponsibility of reaching agreement with all cred- HIPCs is weak: as noted in the previous chapter, itors. Underthe rules of equal burden-sharing, the the HIPC Initiative is an informal agreement, HIPCs cannot service the debt of any creditor fully, like the Paris Club, ancl does not have the legal and many non-Paris Club creditors have either authority to challenge a formal loan contract.'4 not responded to requests of the i IIPCs or have simply refused. Institutionral Development: Capacity Even more troublesome is the behavior of Building for External Debt Management commercial creditors. Most have refused to par- A crucial element for future debt sustainability ticipate in the process, and many have even suc- is prudent debt management. Poor or nonex- cessfullv sued HIPC governments to recover istent dlebt management has been an important 35 DEBT RELIEF FOR THE POOREST: AN OED REVIEW OF THE HIPC INITIATIVE factor in the creation of the IIP's' clebt prob- cies Etats de l'Afrique Centrale in 2000. The Cen- lem, but in the past govertnments hiave not pivcn ter lor Latin American Monetary Studies (CEMIA) it the attention it needs. alsi established a National Debt Strategy in 1999, Outside of tbe 3IIPC framework, capacity oudining a technical assistance program relatcd building efforts in debt management nave baeen to financial data systems. Among other activities increasing since the mid-'.990s, ancl a iumber of fociised on debt management, the Common- international and regional organizati:)ns, along we tlth Secretariat and the United Nations Con- with several clonor agencics, are playing closc at- fcr2nce on Tradce and Development (UNCTAD) tention to this area."5 Thcse efforts cover a wide arc leading providers of debt management comn- spectrum of activities, fromn tl-.e provision of ref- puler software used by the HIPCs. More recently, erence materials and ccmpuier software to thc World Bank has stepped up its efforts to hands-on training ancl assistancc in prepari hg for provide technical assistance for debt manage- debt renegotiations. Aftcr the initiation of thc ml nt, as discussed in box 5.3. HIPC in 1996, five clonor agencics collaborated In workshops and interviews conducted for to establish Debt Relief International (DRI) to this review, several HIPC government officials af- build the debt man- firmed .hat the initiative had significantly raised HIPC government officials agCement ancl nego- the profile of clebt issues in their respective affirmed that the initiative tiationi capacity oif countries, and had in most cases helped to ac- IIIPC govcrnments. celerate their government's efforts to improve helped to accelerate their Thrce regional agen- debht management. While most officials in charge government's efforts to ics clevoted to Ce- of debt management acknowledged technical improve debt management. l:auK' build ng in we aknesses in managing the debt stock and vet- Africa have been es- ti ng new loans, many also pointed to emerging tabhlished since the inception of the 3IIPC Iri- er ongoing efforts to strengthen debt manage- tiative: the West African Institute of Fiiancial rient. Amongthe HIPC reviewcasn studies, both and Economic Management (9UAIFNM) in 1996, Cruyana and Uganda have developed compre- the Macroeconomic and Financial Management hcnsive debt management strategies and Malawi Institute of Eastern and Southcrn Africa (M0EFIN1I) has recently instituted a process te streamline the in 1997, and the P)1le-Dctte Initiative of 3anque i eview of new loans (World Bank andL IMF 2002c). There are growing efforts within the World Bank to strengthen group recently organized a seminar based on case studies con- debt management capacity in the HIPCs. The World Bank and ducted for Tanzania and Malawi. The Development Economics IMF (2001b) published Guidelines forPublic Debt Management data grojp of the World Bank is also involved in providing tech- in 2001, and a companion volume will include case studies cif nical assistance training to complement existing debt rnan- proven debt management strategies among 18 industrialized, agement software with simulations and linkages to emerging, and developing countries. The Public Debt Manage- macroeconomic models. ment Group in the Treasury unit has broadened its mandate l:o One of the main conclusions from a recent inquiry into the include debt management capacity building and technical as- debt management capacity of the HIPCs was that the VWorld sistance for all World Bank member countries, including the Bank and the IMF should be more proactive in identifying lprob- HIPCs. This will include providing advice in the context of plan- lems in debt management in the context of the HIPC Initiative (that ning for Country Assistance Strategy (CAS) and pro ject desig n. is, decision and completion points) and in helping countries to In addition, in a partnership with the Harare-based MEFMI, tlhe access the resources needed to resolve thenri. 3 6 Likely Outcomes- Preliminary Findings G iven the short time since the HIPC Initiative was launched, its economic and social outcomes will not be known with any certainty for some iyears. Based on availahle evidence and the progress made so far, this chapter assesses the likelihood of the initiative achieving its objectives along the three major dimensions critical to its success: debt sustainability, im- proved economic performance, and the incremental resource transfer of the HIPC Initiative. The final section summarizes the tentative conclusions emerg- ing From this analysis on the prospects for achieving the HIPC objectives. Debt Sustainability the requirement of an additional three years of This section discusses the current status of the track record in policy performance, none of the countries that have reached their completion six had to wait the full three years before reach- point or are in the process of doing so and as- ing the completion point. sesses their prospects for achieving debt sus- Uganda, Mali, and Bolivia successfully reached tainability. The initial outcomes of the countries their targets for the O-lIlPC completion point. that have reached their completion point are Addlitional bilateral support from Japan ulti- considered first, followed by the status of "in- mately brought Bolivia's debt-to-export ratio terim" countries-that is, those between their de- down to 198 percent. Uganda beat its target, cision and completion points. It concludes by through a combination of better than expected drawing the lessons emerging from the early ex- export performance, appreciation of the U.S. perience of these countries on the prospects dollar, higher discount rates, and a reallocation for debt sustainability. of arrears from the public sector through priva- tization. Mozambique and Burkina Faso qualified Completion Point Countries for additional relief because they had a higher debt-to-cxport ratio than targeted at the decision 0-HIPC point. Both experienced slower export growth Six countries reached completion point under than procjected, lower commodity prices, and the O-HIPC, receiving total debt relief of US$3.1 an increase in NPV of debt as result of a decline billion in NPV terms. Table 6.1 shows that despite in discount rates and U.S. diollar depreciation. 37 DEBT RELIEF FOR THE POOREST: AN OED REVIEW OF THE HIPC INITIATIVE Debt sustainalhility ilndicatbr: debtlexports or t v i . . ^ ^debtVrevenues (percent) Country te9 > Target (SP Action taken Uganda 12 202 Target reached Mali 200 Target reached Bolivia 12 225 Target reached Mozambique 15 200 X, Additional relief of US$274 million Burkina Faso d 3 205 Additional relief of US$114 million Guyana 17 107 D/X 7 Not applicable 280 D/R No additional relief Note CP, completion point, DP. decision point, O/X, debt/exports OR, debt/revenjes Source HIPC DP and CP documents, data from t'ne World Bank HIPC Lfit Burkina Faso's debt stock also increased be- new borrowing. However, Tanzania's narrow ax- cause of previously unrecorded loans. port base is a source of risk. Guyana, which qualificd undecr the "fiscal win- The external debt outlook for Bolivia is mixed: dow," missed its target debt-to-rcvenue ratio by the debt-to-export ratio has improved since the a wide margin. Lower export earnings, a decline completion point (with additional debt relief in central government revenues, and the dce- rrore than offsetting a fall in exports), but the preciation of the Guyanese dlollar contributed to d 2bt service ratio has worsened as a result of new this outcome.' The O-HiIPC framework clicd not eŹternal debt on nonconcessional :erms to cover provide additional relief For missing the fiscal cri- the bLdget deficit. For Mauritania, while the terion. Guyana thus completed thie O-l IIPC as the debt-to-revenue ratio is likely to be maintained only unsucccssful case. jlust under the target 250 percent, the debt-to- cxports ratio has worsened, as has the debt serv- E-HIPC ice ratio-a result of higher than anticipated Table 6.2 shows the cu-rent debt-to-cxport ratio new horrowing and lower exports.2 for the six countries that had reached their corn- Downturns in export earnings and higher pletion point under the E-IIIPC as of August han anticipated new borrowings have signifi- 2002. Figures 6.1 and 6.2 show the l)SA projec- cantly undermined the debt sustainaoility tions of the NPV of tlhe ueht-to-expol-ts ratio prospects for Uganda and Burkina Faso. Uganda's and the debt service ratio ror thle .iext tO years. debt-to-exports ratio (based on end-June 1999 Mozambique is data) was brought down to 150 percent at the Early experience f,rml ' positi.)ned to time of the completion point, but deteriorated bighligbts the main risk mainLain its cdebt ratios soon thereafter. By end-June 2001, the ratio had frdebt helow thc E-HIPC deteriorated by 43 percent (relative to .he E- factos for b threshold, and the HIPC decision point projection of 128 percent), sustainability: expotrt prospects for Thanzania a little over half of which is accounted for by performance and the co clo so also appear lower exports, and the rest by an increase in the levels and terms of new good. Both have hen- NPv of clebt through new borrowing. For Burk- efitcd from strong cx- ina ]aso, the increase in the NPV of debt (49 per- borrowing. port performancc and cent) more than accounts for the decline in its loxer than anticipated deb-t-to-exports indicator (46 percent)-an out- 38 LIKELY OUTCOMES-PRELIMINARY FINDINGS Debt sustainability indicator:. debt/exports or M mtb debt/revenues (percent) Country -^ CP Target Actual at CP Current A^,;,. I, Bolivia 16 150 4 t- 131 . treac,. Mozambique 17 ^ ^ 150 27 108 Tanzania i9 150 1i7 143 Mauritania 28 137 D/X 7174 14 -^ 0 y biNateral debt 250 D/R ^^ 247 '4 ^forg2i4ness: tOMs to 149 percent Burkina Faso 21 ^^ 150 15i. 216 Comnpeton tatioof19pernet ^b^ ..h^dow^to ^15 percent with additionol rehf xf $1 .29 million. Uganda 3 150 1 171 lIncreoaseinebtsok fromprevious y not ^denti~ '' ^at complteton point. No/te. CP, completion point, DE decision point, D/X, debt/exports, DR, debt/revenues. Scurce HIPC decision point and completion pDint documents, data from the World Bank HIPC unit come of a large public investment program. In a 68 percent decline in coffee prices over the past both cases, however, the debt service ratios re- two years, an increase in other exports has main well within the target range. helped cushion the impact of this decline. This early experience with countries success- The NPV of debt is affected by discount rates fully completing the requirements for both the and currency fluctuations, but the biggest influ- 0-HI PC and E-HIPC highlights the main risk fac- ence is new borrowing. Lower borrowing has im- tors for debt sustainability: export performance proved the prospects for Tanzania and and the levels and terms of new borrowing. Fig- Mozambique, while higher borrowing by the oth- ure 6.3 summarizes the influence of these factors ers has made matters worse. And although the on the debt sustainability of the countries that sample is small, the findings suggest an associa- have reached their completion point under the tion between deteriorating export performance E-HIPC. Quadrant 2 represents a good outcome and higher borrowing-doubly affecting debt for debt sustainability, and quadrant 3 a bad out- sustainability come. Quadrants 1 and 4 represent mixed out- Whether and how the HIPC Initiative has af- comes, with the net effect depending on the fected the level of new borrowing is not known. relative contributions of the opposing effects on There is no obvious correlation between new debt sL stainability. As discussed above, Bolivia is borrowing and the level of HIPC relief (in terms a mixed case. of percentage of pre-HIPC debt stock reduced). Export performance has been a decisive fac- The possible relationship between export per- tor in almost all cases. Tanzania has managed to formance and new borrowing, as also between overcome the reduced earnings brought about new borrowing and the objectives of poverty by a decline in coffee prices through increased reduction and growth (for instance, Burkina exports of gold-highlighting the critical need Faso's new borrowing was for infrastructure and for export diversification. Uganda provides a poverty alleviation projects), has implications similar example: although it has been hit hard by for the macroeconomic framework used to un- 39 DEBT RELIEF FOR THE POOREST: AN OED REVIEWN OF THE HIPC INITIATIVE NPV debt as percent of exports 300 - - Bolivia 250 - r ~^ X; v < Burkina Faso 200 -_ -a-- \ +Mauritania 1 50 - - \ ____________ _________________________________________________ < Mozambique 1 00 - 3'a.,,_ 50 - >- - -*-,-# Tanzania + - Uganda 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source HIPC unit, spring 2002 database Debt service as percent of exports 30 - Bolivia 25 - > Burkina Faso 20 - _ \ , 7/ s _ -a- Mauritania 15- . Mozambique -*--' Tanzania 0 Uganda 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 40 LIKELY OUTCOVES-PRELIMINARY FINDINGS Exports Low High 2 Tanzania Low Bolivia Mo2ambique .' 2 03 4 t: [Uganda Mauritania Burkina Faso High derpin the DSA. As rioted in Chapter 5, since the than anticipated new borrowing, ancl in some the assL mptions underlying the models are not debt stock data have been revised to fully account knovn, it is not possible to draw the implications for outstanding debt. of t- ese findings. T'he overall pattern emerging for the interim HIPCs is similar to that of the countries that The Interim Countries have reached the completion point. Borrowing Of the countries past their decision points, 11 (65 ancl exports are negatively correlatecd. The con- percent) show a worsening of their debt ratios.3 clusions and lessons are also similar. Of the full set of 20 countries, based on available data, the HIPC unit currently expects half to ex- Prospects for Debt Sustainability ceed :he target for their debt sustainability ratios To assess the prospects for future dlebt sustain- at their completion point.'4 ability, the appropriate test is the projected trend As with the completion point countries, the for the key indicator. The projected paths shown dominant influence on the economic outcomes in figures 6.1 and 6.2 are baseC on export pro- of the interim HIPCs in 2000-01 has been export jections and other underlying assumptions in performance, which has led to a worsening of the country DSA.s. As discussed in Chapter 5, their debt profiles.5 Average (unweighted) export the projections appear to be optimistic for many growth for IIPCs during 2000-01 was 4.9 per- countries. For the completion point countries, cent, compared with projections averaging 9.0 the realized export growth for 2000- 01 has been percent. Still, despite the short-term increase in line with or better than the assumed growth in the NPV of debt-to-exports ratios, the current rate in the DSAs for three of the six countries, projections show that most countries should or a 50 percent success rate. 'hese outcomes re- fall below the sustainability target over the iterate the need to better incorporate export mediurm to long term, volatility in the DSAs. These countrics, in the aggregate, have bor- Taking the prt)jections at face value, the long- rowed less (in nominal terms) than anticipated for run debt sustainability prospects are tenuous both 2C00 and 2001.6 This is partly a result of for Bolivia, Mauritania, and Tanzania, with debt- lower disbursements from multilaterals because of to-exports ratios close tt) the 150 percent thresh- interruptions in the PRGF-supported macroeco- old, and poor for Burkina Faso anti IJgancla, nomic programs in several countries. Some coun- which remain at around 200 percent. 'I'he alter- tries increased their debt stocks through higher native indicator of debt burden, the debt serv- 41 DEBT RELIEF FOR THE POOREST: AN OED REVIEW OF THE HIPC INITIATIVE ice ratio, indicates that the prosreects for the Burkina Faso (see box 6.1), in addition to mon- debt service burden arc better for all hut Bolivia.' itorir g the levels and terms of the new borrow- The flat profile for most countries h ghlights ing, it is important also to ensure that new the importance of stabilizing and nrrproving ex- borrow ing is put to productive use to enhance port performance and closely monito ing new the country's repayment capacity through growth borrowing to ensure long-run debt suitainh.hil- and For poverty reduction. ity. The profile, however, is not influenced by the level at which the thresholdl foir sustainability is Pro(jress Toward Performance Criteria set: the level of the dcbt-to-exports thre.shold This section reviews countries' progress toward provides a bench.mark, bLt the prcfile endures, perCormance criteria that are critical to the irrespective of where the benchmnark is set. ach evement of HIPC objectives. Among these is A critical elementfor A critical clement for- im- the clevelopment and implementation of a par- proving the p-ospects for ticilpatorv PRSP2 It is too early to comment on improving the debt .sustainability an(i foir the outcomes from PRSPs, as many are still under prospects for debt povertyf reductior, is a cred- prtparation or have only recently been com- ible strateg)y for growth. As plcted, but the issues of ownership and balance the initiative is currently on development priorities (both identified in poverty reduction, is a being implemented, there is thu prevous chapter) are sources of risk to achiev- credible strategy for little emphasis on growth ing HIPC objectives. Assessing the implications growth other than the maintenancc of these and other issues related to the PRSPs re- of macroeconomic stability qL ires a separate in-depth review, which is cur- and the development of human capital. Other ren tly being conducted by OED. This sectLon factors affecting growth, such as the investment reviews the progress on policy performance and climate, infrastructure development, and ece- the performance benchmarks included as com- nomic productivity-for example, in agricui- piction point conditions and assesses their effi- ture-have received little attention in most cacy in contributing to the initiative's objectives. countries. Additional borrowing mav he essencial for Policy Performance most, if not all, HIPCs to) improve the prospects From the start, the HIPC Initiative has required for growth and poverty red,ction (see Elbadawi beneficiary countries to have and maintain strong and Gelb 2001 for an assessment of the financ- policies to promote economic growth and ing needs for Africa). The need for a(lditional fi- poverty reduction. As noted in the previous nancing posits a potential conflict with the goal chapter, the ex ante performance criteria were of debt sustainability Replacing loans with granits -elaxed to allow more countries to ente^ the would help avoid this conflict, hut the prospects program by the end of 2000. While many stake- for this happening at the scale necesiarv are holders view this flexibility as a good thing, it also limited for the near future.9 But as in the case of implies that to reach the completion point, these At the completion point, Burkina Faso had the highest debt-tto- NPV $129 million reduces the debt hump in the short run, but does exports ratios of all the completion point countries and had the not appear to make a great difference in long-term debt sus- longest elapsed timeto completethe O-HIPC (34months) and the tainability figures. In order to achieve and maintain debt sus- E-HIPC (21 months). A large public investment program results tainability. Burkina Faso needs to preserve macroeconomic in a hump in the debt stock and keepsthe debt sustainability raiio stability and continue with structural reformis to diversify its persistently high throughout the next decade. Topping up of the econoray, stabilize economic growth, and en'nance expofrts. 42 LIKELY OUTCOMES-PRELIMINARY FINDINGS countries would face a tougher challenge than enced policy slippages and is operating under a countries that were already implementing the shadow program. necessary policy and structural reforms. Several of the 20 current interim countries The group of countries that completed the O- have weaker policy performance than the com- HPC program had a strong track record of pol- pletion point countries. By mid-2002, half of icy performance going into the program, and all them had experienced policy slippages and sub- but one maintained good performance to qual- sequent interruptions in their IMF program. As ify for the E-EIIPC. Guyana was the exception; it shown in table 6.3, qualifiecd for the E-HIPC but had a mixed record of these 10 coun- e p t just prior to the decision point. The countries tries, 9 had reached to decision point is a tha.t reached the E-HIPC completion point sim- decision point in reasonable predictor of ilarly had a strong record prior to entering the the second half of subsequent performance. program ancd maintained their performance to 2000, and 8 had the completion point." Since the E-HlIPC com- reached it in November or December. Most had pletion point, policy performance has been a previous track record of variable performance. broadly satisfactory for four of the six countries. Thus, it appears that the policy track record Burkina Faso is also largely on track, but revenue prior to decision point is a reasonable predictor collection remains poor, and Bolivia has experi- of subsequent performance. NPV of debt-to-exports at CP Country DP Mixed pre-HIPC track record noted likelyto exceed 5Opercent?" Guinea December 2000 Difficulties 10/99-3/00, but back on track by end-September 2000 No Gu nea-Bissau December2000 Satisfactory until 1998 civil war, which lasted over a year No Guyana November 2000 Mixed track record post-i 997, including delays in IMF review No Horduras July 2000 Broadly satisfactory perforrnance No Malawi December 2000 Mixed performance, especially on expenditure control Yes (anticipated at DP) Nicaragua December 2000 Slippages in PRGF occurred in early 2000 No Niger December 2000 Satisfactory until the 1999 coup New government in 2000 Yes (anticipated at DP) Rwa ida December 2000 Broadly satisfactory but delays in implementing agreed policies and shortfalls in meeting targets noted Yes (anticipated at DP) Sad 1Tome and December 2000 Track record under PRGF and IDA Principe programs equal one year as of 12/00 No Senegal June 2000 Favorable track record post-1 994 devaluation Yes Note DP, decision point, CP, compietion point a After additional biiateral support Source HIPC decision point documents, World Bank and IMF 2002d 43 DEBT RELIEF FOR THE POOREST. AN OED REVIEW 0: THE HIPC IN TIATIVE Another measure of countries' po icy per- phas s on macroeconomic policy and manage- formance is the CPIA index. Some of tht coan- menm, through the PRGF, and the increasing tries had worse policies in 2001, a.s me asured focu. on social sectorpolicyand performance ir by the CPIA, than they did prior to the launch recc it years. They also indicate a need for ad- of the HIPC Initiative. Figure 6 4 sha)ws that ditional focus on structural policies. the average CPIA score for thc early cntrants was A indicated in the previous chapter, the "mil- high in 1998 (before entering the HIPC pro- lennium rush" group faces a tougher challenge gram) relative to the other HIPCs and has s nce in ar hieving desired development results. Cur- continued to improve. The score for the 13 reni evidence suggests that these countries are countries that qualified during "the millenrium inde ed at greater risk in their efforts to achieve rush" imp-roved slightly until 2000, but slipped the HIPC objectives. On average, despite weaker hack to the 1998 level in 2001 (after thle (deci- polticy frameworks and lower economic per- sion point). The four late entrants s 1iW a dce- forinance in terms of real GDP growth (2.6 per- teriorating trend. cert through the 1990s) relative to the early Analysis of the four main components c f the cntrants (4.4 percent), the assumed real GDP CPIA index shows that for HIPC, countries, the growth rates in their DSAs were significantly quality of economic management and socia poli- more optimistic.'1 The actual per.5ormance in For HIPC countries the Cites has mproved, 20010-01 has not lived up to these expectations: FrHP conr t hut structural poli- the early entrants have performed better (4.8 per- quality of economic cies have slightly de- ce nt) than the millennium rush group (3.8 per- management and social teriorated. The cent), with both groups growing a': a lower rate policies has improved, but performance in pub- than assumed. The millennium rush group is lic sector manage- al .o more likely to have deterioration in the key structuralpolicies have nient is rcughly delbt sustainability indicator, the debt-to-exports slightly deteriorated. unchanged. I'hes_ ratio, as they are more likely to experience ex- scores re'lect t'he em- p )rt underperformance. The new borrow ng- Overall CPIA score 4.00 3.50 3.00 250 _ 1958 1999 2000 2001 Up to Jul 200J - Aug-Jec 2000 A ter Dec 2000 Source World Banik Poverty Recuction and Economic Managemert ((PREMI Netvjork' data 44 LIKELY OUTCOMES-PRELIMINARY FINDINGS to-GDP ratio is also higher for these countries, other donor assistance, the net effect on specific and the fiscal deficit worse than for the early sectoral expenditures may be less. entrants. On the second issue of expenditure tracking, in principle the countries track overall public Progress on Other Performance Benchmarks expenditures for poverty reduction. In most In addition to the requirement for strong poli- countries, these are essentially social expendi- cies, the initiative includes other performance tures, and mostly in the form of financing for benchmarks that countries must meet to reach health and education. The IFIs also regularly their completion points. As discussed in Chap- track estimates of social expenditures in HIPC ter 5, the most common of these are targets for progress reports. Reporting on pro-poor spend- expenditures-often including specific condi- ing in reviews of PRGF programs also places em- tions on the use of HIPC relief-on public sec- phasis on social expenditures (see, for instance, tor education and health programs. HIPC Gupta and others 2002). progress reports regularly provide updates on the The country case studies show that processes progress in social expenditures. Given the poor are in place for tracking debt relief inflows and state of monitoring and budget systems in many for monitoring the use of HIPC expenditures at of the HIPCs, significant effort is being made to the central level (Annex I). Some countries also improve them, particularly for public expenditure have transparent dissemination of this informa- management. Even if the expenditure or other tion, as in Zambia, but for most the tracking of input-oriented targets are met, they may not expenditures at the lower levels is still lacking."2 necessarily ensure demonstrable outcomes to- Furthermore, although monitoring the proper warcl the initiative's objectives. Three issues are use of resources is important, it is not a good in- important here: (a) the totality of expenditures dicator of outcomes. So far, there is little evidence in individual sectors; (b) the tracking of expen- on outcomes or results to determine what the ditures beyond the central level and, more im- increased expenditures are achieving. There are portant, the tracking of outcomes; and (c) the some exceptions to this, with Uganda as an ex- balance among development priorities. ample. Surveys are Most recipients consider On the first issue-the totality of public ex- being undertaken there penditures-the evidence from HIPC docu- to track access to and the focus of the initiative ments and the country case studies shows a quality of public serv- to be excessive on social significant increase in social sector expendi- ices. The outcomes from sectors and too little on tures, but the extent to which this represents a Uganda show a marked change in totality of resources is not known. As improvement in service growth and "wealth mentioned in Chapter 5, a substantial share of delivery, but also high- creation." donor assistance and government revenues is light the need for im- not captured in the budget. Development As- proving the efficiency of social expenditures. A sistance Committee (DAC) data show that social similar survey for Ghana reveals substantial leak- sectors have received a major share of the sec- age of funds allocated to primary health and ed- tor-allocabledonorassistance (rising from about ucation facilities.'3 Surveys in some other a quarter in 1990 to over one-half in 2000, with countries have recently been conducted or are an almost corresponding decline in aid alloca- planned, but their results are not yet available. tion for "production services"). To the extent that Efforts are also being made to rely on civil soci- some of the donor assistance is being shifted ety groups for monitoring at the local level, as from project to budget support (as in Uganda), in Malawi. Early evidence from Malawi shows the incr-eases in recorded budget expenditures some impact-but less than expected. may not represent an actual increase in total ex- Finally, perhaps reflecting the recent increased penditures. Also, to the extent that the increase emphasis on social spending by donors and the in gove,-nment budgets as a result of HIPC as- IFIs, HIPC progress reports note that over half of sistance is offset by a corresponding decline in government revenues will be earmarked for so- 45 DEBT RELIEF FOR THE POOREST: AN DED REVIEW OF THE HIPCC INITIATIVE cial expenditures in the coming years. Flaradoxi- ceivirg "interim" assistance (as in World Bank and cally, most recipients consider the focus of the ini- IMF 2002d). They regularly report on ;he key in- tiative to be excessive on social sectors, and, :oo dicat )rs related to debt, including the level of the little on growth and "wealth creation" (Anncx G). debt stock, and the debt service burden as re- Considering that many PRSPs are veL to be corn- flectecd in the ratio of debt service to exports, pleted, these anticipated allocations ar. alsci in- GDP and government revenues. Only the broadl consistent with the intended role of the PRSPs. aggregates are discussed here. Both these issues question the degree of owrer- Relief provided by the HIPC Initiative alone ship of the HIPC-related programs and activities. will cut the debt of the 26 decision point cour,- The inflexibility in the use oF HIPC resources tries in present value by half, from US$52 billion for building essential infrastructure and for eco- after trac.itional relief to US$27 billion before nomic services, even when there are known ab- additional bilateral assistance. When additional sorptive capacity constraints in the social sectors, relief from major bilateral donors is added, the is viewed by debtor representatives as an ineffi- total debt is expected to be reduced by two- cient use of scare resources. The conditions at- thirds, from US$62 billion to US$22 billion (in tached to the HlIPC Initiative are viewed as prc-sent value terms). A similar pattern of bene- inadequately attuned to the holistic develop- fit emerges from the other debt indicators. To:al ment goals of the HIPC governmnents or to en- debt service as a percentage of exports is ex- hancing the "post-lIIPC prospects" to en1sure pec,ted to be halved, from 16.5 percent pre-HI PC debt sustainability and to 8 percent in 2001-05, compared with 20 pzr- Reliefprovided by the poverty reduction. cet for other developing countries.14 Debt serv- HIPC Initiative alone will Creditor COL.ntry Irepre- ic('-to-GDP is expected to be cut from 4 percent cut the debt of the 26 ,sentatives were also crit- to 2 percent, and debt service-to-government rev- cut t*e debt of the 26 ical of the lack of focus er.ues is expected to decline from about 24 per- decision point countries on growth opportuni- ccnt to an average of around 10 percent by in present value by half ties (Annex H1). While 2(005.11 At the same time, social sector expendi- welcoming the focus on tL res as a percent of GDP are expected to rise poverty reduction, a strong consensus am,ong the to 10 percent (about five times the debt service, debtor representatives consultec for this review compared with two times before HIPC), or over was that the potential gains from their partici- half of the average government's revenues (up pation in the HIPC Initiative-long-terrn debt firom a third before HIPC). Total savings to HIPC sustainability and "breathing space" for i -)creas- governments are expected to be about US$41.5 ing social expenditures-could not be sustained billion over the next 30 years. Annually, HIPC debt without increased economic growth relief amounts to about US$1.3 hillion. The direct financial impact of IIIPC assistance Incremental Resource Transfer is already being felt, not only in the countries that This section discusses the implications of thie have reached their completion point, but also in initiative on the overall resource transfers to the ihose that have reached their (decision point. HIPCs. It first discusses the financial impact of The impact, however, varies across countries, HIPC assistance on the beneficiary countries and depending on their particular circumstances. then looks at the overall resource nows to these The interim relief to the countries past their de- and other countries, inlcludling Lhe likely distiib- cision points is broadly comparable to the full utional implications for other poor countries. debt relief expected after the completion point for all but three countries (Chad, The Gambia, HIPC Assistance Niger). Some have experienced a curtailment The HIPC progress reports provide a detaileci ac- of interim relief from the IMF (or have yet to re- count on the deliverv of HIPC assistance to the ceive interim relief) because of policy slip pages. beneficiary countries, including those that have IDA has provided interim relief to all of the reached their completiorn points and thosse re- HIPCs that have passed their decision point, 46 LIKELY OUTCOMES-PRELIMINARY FINDINGS even in the context of an interruption in the The donors/lenders provide the same gross IhlF program. future amounts irrespective of the initiative. In These estimates of the financial impact are this case, the reduction in debt service obli- based on the assumption of full participation of gations brought about by the initiative is fully all creditors. Although the majority of creditors additional. are participating or have given assurances of Donors/lenders do not anticipate the initia- participation, even for the completion point tive and decide to cut back future gross trans- countries the delivery of assistance is not 100 per- fers to maintain net resource transfers. In this cent of the amount promised by the HIPC Ini- case, there would be no additionality, but a tiative; assurances range from 80 percent to 96 comparison of the flows immediately before percent. For countries in the interim period, the and after the agreement to deliver HIPC relief range of assurances given is for similar magni- would reveal a change in gross flows with no tudes of the expected relief. Finally, the share of change in net transfers. the noncooperating commercial and non-Paris * Donors/lenders already anticipated the impact Club bilateral creditors in the total debt is small, of the initiative early on Witbout additionaUty it but an important concern of debtors is that the by cutting back on their potential reward from litigation by these credi- gross transfers by their is not apparent that the tors to recover past loans could result in much anticipated obligations fiscal space needed for larger and immediate payouts.'6 under the initiative. In th dated ial this case, the before-th mad edscl Overall Resource Transfers after comparisons of and other expenditures As noted in Chapter 4, the initiative will increase net transfers may indi- would be created. net resource transfers to the HIIPC countries cate additionality, but only if other aid flows (including grants and con- net transfers would already have fallen previ- cessional loans) do not fall dollar-for-dollar with ously. The net result would he little or no ad- the r-duction in debt service obligations result- ditionality, and could even be a decline in ing from current debt relief. This additionality of overall net transfers. resources made available by debt relief is criti- The analytical difficulty in assessing addition- cal to simultaneously achieve all of the initia- ality is exacerbated by the complexity and poor tive's multiple objectives. Without additionality, quality of the data on international aid flows it is not apparent that the fiscal space needed for (Birdsall and Williamson 2002; Renard and Cas- the mandated social and other expenditures simon 2001). Recognizing that the full impact of would be created. And, as also noted in Chapter the HIPC Initiative in terms of additionality will 4, adcitionality is assumed by the initiative, but only become clear in the coming years, an attempt there is no mechanism by which it can ensure is made below to identify any discernible trends that this indeed takes place. in the recent aggregate aid flows."7 The two It is generally difficult to determine whether sources of these data are the DAC reporting sys- the lIIPC Initiative has generated incremental re- tem, which gives the donors' perspective on aid source transfers, because there is no rigorous way flows, ancd the Debtor Reporting System (DRS) to know what would have happened in the ab- of the World Bank, which reflects the debtors per- sence of debt relief. One option is to use the pro- spective. Both sources show similar trends in jected flows used for the HIPC DSAs. These net resource transfers to the HIPCs. 18 As dis- projections are based on a survey of the donor cussed in Chapter 4, it is important to consider and lender community to assess their antici- the changes in net resource transfers both at the pated transfers. This provides one basis for es- global level-because of distributional implica- tablish:ng a counterfactual and is discusscd tions-and at the level of the individual HIPCs. below. But it is unclear how these projections by At the global level, net resource transfers to the donors/lenders have taken the initiative into the HIPCs rose during the first half of the 1990s, account. Three analytical possibilities arise: but then turned sharply downward, as shown in 47 DEBT RELIEF FOR THE POOREST: AN OED REVIEW OF THE HIFC INITIATIVE US$ billions 17 - 1 99C-95 trend 154 14 - _ \ / =_____A____ ___-__ 13 12 11 10 1995-2000 trend 9 8 - - C - - - - - - 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Source OECD, DAC database US$ billions 50 45 40 1990-95 trend 35 30 25 20 tr-nd 15 10 5- 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2030 Source OECD, DAC database figure 6.5. The net transfers averagecl ahout Some further analysis shows that between US$14.2 billion from 1990 to 1995 and ahout 1990 and 1995, net transfers to all developing US$ 11.9 billion from 1996 to 2000. A similar but cour tries grew at a rate of 2.3 percent pe -year, sharper decline is observed in figure 0.6 for all but declined at a rate of-13 percent from 1995 developing countries.19 The figurcs also show onward. For HIPCs, the corresoonding growth some stabilization after 1997, hut a dcicine again rates are 0.5 percent before 1995 and -3.7 per- in 2000. cent after 1995. 48 LIKELY OUTCOMES-PRELIMINARY FINDINGS 100% 1 iC 90% 80% 70%L 600/% 50% 40% 30% w 20% 10% 0% . r T 1 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 r7 Other developing countries [r Remaining HIPCs * Decision point HIPCs Source OECD, DAC database It should be noted that the impact of interim T'hese findings suggest that although the debt relief has yet to be fully captured in the DRS HIPCs as a group are getting an increasing share or the DAC data. H owever, even if the entire of declining global aid resources, they are not re- US$1.3 billion to be delivered in annual debt ceiving additional funds in absolute terms rela- service relief (noted above) to the 26 LlIPCs tive to what they were receiving before the were to be included, it would not offset the ag- initiative was created (that is, before 1996). While gregate decline in net transfers of US$14 billion, the reasons behind thle sharp decline since 1995 including the over US$2 billion decline to all are not known, because the resource transfers HIPCs combined. were depressed in the years immediately pre- Out of these shrinking transfers, the share of ceding most countries' qualification for debt re- the 26 countries that have reached their decision lief, these years are not the appropriate points sharply increased after 1998, as shown in benchmark for establishing additionality. figure 6.7.20 The share of the remaining HIPCs At the country level has also increased since 1998, but not as sharply. the data from the There appears to have been Thus, there appears to have been redistribution spring 2002 ElIPC data- redistribution from non- from non-HIPCs to HIPCs since 1998. This shift base corroborate the HIPCs to HIPCs since 1998. has important implications for the principle of decline of net transfers selectivity and effectiveness of aid. Considering in 2000 shown above. This shift has important that the HIPCs have weaker policy frameworks, Although the full im- implications for the as judged by the group-average CPIA index, than pact of the HIPC Initia- principle of selectivity and other poor countries (non-HIPC IDA countries tive may not be best as well as non-HIPC LMI countries), this redis- measured by looking at efectiveness of aid tribution conflicts with the principle of per- the data for theyear immediately before and after formance-based allocation and is likely to reduce the delivery of relief, because the bulk of the the overall efficiency of development aid.21 countries reached their E-HIPC decision point 49 DEBT RELIEF FOR THE POOREST. AN EOD REVIEW CF THE HIP" INITIATIVE within about a year of each other, it may be po s- paym_nts support declined considerably after the sible to corroborate the decline ohserved in the decisicon point, reflecting donors' concerns about aggregate data from those at the couLrntry level. As govei nance. Beyond these specific country cases, noted above, the projected transfers from :he additionaliry varies across HIPCs. The latest HIPC decision point documents, hased on a survev of impli mentation report (July 2002) notes that donors, provide a benchmark for assessing the inflows tc the decision point HIPCs have in- subsequent actual transfers in 2000. A ceclinz in crea:!ed in 2001 over the average of 1998-2000, actual net transfers in 2000 is consistent for de- but that the situation varies by country. The full cision point countnes as well as countries that have impact of HIPC in terms of additionality will only reached completion point: net transfers were become clear in the coming years. about 19 percent lower than anticipated for the decision point countries taken together, and 18 Debt Management Capacity percent lower for the completion pcint coun- As rioted in Chapter 5, a number of donors and tries. The DAC data also show a decline of about org-anizauions are devoted to improving debt 14 percent for all 26 HIPCs. mai nagement in the HIPCs through technical as- The change in transfers, howcver, varie:s by sistance and training. While most agencies note country. In Uganda and Cameroon, IJIPC relief re- that their programs are having a positive im- sources have been additional, as donors have pact, the extent to which most groups monitor continued to provide assistance in the light of or are able to measure outcomes varies consid- their sustained policy and reform efforts Two ercbly, hut is generally limited. Beyond qualita- cases, by contrast, show the opposite trencd. In tive accounts, evidence of measurable Malawi, even prior to deterioration in the .oun- improvements in the debt management capac- try's policy performance in 2001, non-official de- ity of the HIPCs is scarce. velopment assistance (ODA) and, to some extent, A recent self-assessment survey on debt man- ODA loans had cleclined as some donors adopted apemert in 33 HIPC countries sponsored by the a no-loans policy toward l-IIPCs. While this is good Ww)rld Bank and IMF found that the countries for debt sustainability, it also reduces the overaUl that have already passed completion point ap- transfers of aid, as the decline in loans has not pear to have made more progress in debt man- been fully replaced by grants. The recent with- agement capacity than the other HIPCs (World drawal of budget support by most creditors be- Bank and IMF 2002c).22 The need to strengthen cause of concerns with governance and institutional capacity (both the legal framework accountability has and the organization and staffing of the debt man- exacerbated the de- agement function) remains the core challenge, training and capacity cIne. in develop- wvhich is also dependent on political support for building activities to the ment financing to rnaking necessary changes. The World Bank-IMF HIPCs, but the lack of Malawi. Given that survey of debt management officials also found donors have funded X hat transparency and accountability related to coordination among a substantial part of new borrowing were weak across countries. The agencies is reducing the the iMalawian budget :apacity constraints were identified in three main overall efficiency of the in recent years, this areas: (a) institutional and political constraints, (b) maY reflect increas- human resource constraints; and (c) coordination efforts. ing selectivit) as the between debt and macroeconomic policies. Even donors feel less pressure to continue providing in cases where staffing levels are adequate (60 per- funding (for example, to meet debt service obli- cent), a vast majority of the respondents (75 per- gations, among other things). While, again, this cent) judged staff skills to be only rudimentary may be viewed as a positive cutcome by some The survey found that there is an ample sup- from a development effectiveness perspective, it ply of training and capacity building activities also implies reduced additionality. to the HIPCs, but the lack of coordination among The second case is Zambia, where halance of agencies providing the services is reducing the 50 LIKELY OUTCOMES-PRELIMINARY FINDINGS overall efficiency of the efforts. 23 OED consul- so requires actions to im- Most countries are likely tations with regional providers of debt manage- prove public expenditure to continue to need new ment training indicate that the rationality of and debt management, capacity building for debt management (that is, improve the investment borrowing. . . Their en-suring that needed services are being offered climate, and make the main challenge is to by the organizations best able to supply them) necessary investments ensure that the funds are has suffered from the lack of information shar- aimed at accelerating and ing across external training providers. Going for- sustaining overall eco- invested productively ward, there is a need for more attention to nomic growth. These cen- and efficiently to building debt-management capacity asPart ofthe tral issues need to be promote repayment HIPCprocess, as well as more coordinated and given more attention. targeted technical assistance across providers. A necessary condition capacity for economic growth is Likely Outcomes the adoption of a sound policy framework. Many Achieving debt sustainability remains a challenge of the HIPCs have not demonstrated this track for the HIPCs-both because they are likely to con- record, which raises concerns about the achieve- tinue to need to borrow to meet their develop- ment of the HIPC objectives-not only of growth mental challenges and because their export base and poverty reduction, but also of debt sustain- is concentrated and their earnings too volatile. In ability, which requires revenue generation. this context, replacing grants with loans would The performance criteria are heavily weighted further the debt sustainability objective and avoid in favor of the social sectors, and more specifi- potential conflicts with the other objectives that cally on social expenditures, with little focus on require additional resources. But at present, the outcomes or impacts. The current balance be- prospects for this happening on the scale neces- tween growth-enhancing public expenditures sary in the near future are limited. The debate on and social expenditures is viewed by the debtor the indicators and levels does not change the un- governments as undermining the achievement derlying prospects for debt sustainability: it merely of the main HIPC objectives. changes the benchmark against which debt may A necessary (though not sufficient) require- be considered sustainable. For example, even if the ment to simultaneously achieve the initiative's target debt-to-exports ratio were reduced to 100 multiple objectives-specifically to free up re- percent, export volatility or the need for new bor- sources for increased social sector spending- rowing would remain, and the sustainability pro- is an increase in net resource transfers by at file would look the same. Relative to the new least the amount of the promised HIPC relief The definition of "sustainability," most of these coun- recent trends in net transfers, however, show a tries would still not have achieved debt sustain- marked decline in flows to the HIPCs, as well as ability. Lowering the threshold will deliver more to all poor countries in the aggregate. More- debt relief (although not necessarily more re- over, the data show a marked shift in the distri- sources) and may be a goal in itself, but that is in- bution of shrinking aid resources away from dependent of the achievement of sustainability. other poor countries and in favor of the HIPCs. While the export projections need to be made In light of the limited instruments at the ini- more realistic, the pressing issue remains in- tiative's disposal, and recognizing that it is an im- creasing and stabilizing export earnings through portant but only a small part of the overall diversifed exports. This in turn may require im- development framework, it is important to clar- proved access to developed country markets. Most ify: (a) what are the principal objectives of the ini- countries are likely to continue to need new bor- tiative, (b) what are the specific means to achieving rowing to meet their development needs, and those objectives, and (c) how can those means be hence incur new debt. Their main challenge is to ensured. This would help in better assessing the ensure that the funds are invested productively and initiative's performance relative to its goals and the efficiently to promote repayment capacity. To do expectations they help to create. 51 Findings and Recommendations T his chapter summarizes the main findings from this review in relation to the main evaluative questions laid out in Chapter 1: * Relevance: Is the HIPC Initiative's design adequate and appropriate to achieve its stated objectives and intended outcomes? * Efficacy and efficiency: Based on the experience so far, is the HIPC Initiative achieving or likely to achieve its objectives and achieve them efficiently? * Sustainability: How resilient to risks are the expected outcomes of the HIPC Initiative? * Institutional development: To what extent does the design of the ini- tiative help build country capacity to ensure that the HIPC objectives are achieved and can be sustained? Relevance the expectations of what it can deliver on debt The core purpose of the initiative, to reduce the sustainability have increased, and creating fiscal high clebt levels of HIPCs, is highly relevant from space for increased social expenditures has been political economy perspectives as well as from added as an explicit objective. The latter two economic and aid effectiveness perspectives. expansions in objectives are discussed in turn. This is evidenced by the wide support for HIPC in all major international forums, from G-7 meet- Debt Sustainability ings to the Monterrey Consensus. But the HIPC The objective related to debt sustainability be- Initiative has acquired multiple objectives, while came more ambitious-a result of political pres- the instruments at its disposal have remained the sures-fueling expectations of what the initiative same. The objective of promoting growth by re- can realistically achieve. The main objective of moving the debt overhang has been maintained, the original HIPC Initiative was to reduce debt 53 DEBT RELIEF FOR THE POOREST. AN OED REVIEW OF THE HIPC INITIATIVE to a sustainable level as part of a stracegy to initial ive. It would have been more realistic for achieve debt sustainability. Over time, this ob- the initiative to set the more modest objective jective was transformed to the stated E-IIIPC ob- of rerlucing debt to a level that provides coun- jective of assuring a 'permanent" ecit from tries with a reasonable chance of sustaining debt rescheduling. their external debts. Even this more modest The notion of "debt sustainability" has been objective would require full creditor participa- contentious, with controversy about how to tion to de iver the promised level of relief, and measure it and how to "ensure" It. The review pruc ent clebt management. The initiative as- concludes that while not perfect, the main in- sumzs that all creditors will participate, but dicator used in the initiative, the NPV of debt-to- cannot assure this. And the design of the ini- exports ratio, is operationally preferable to tiative dozs not address the critical issue of ca- alternative indicators for practical reasons. The pacity building for debt management, assuming current thresholdl level also appears to he rea- instcad that efforts outside the initiative will fill sonable in comparison with the debt leve s of the necessary gaps. non-HIPCs. The level of the threshold deter- Finally a critical element of strategy to achieve Th3e lack of mines the amount of debt debt sustainability, and for poverty reduction, is relief a country may be eli- a credible strategy for broad-based growth. Here transparency of the gible for, but achieving the the initiative's design, specifically the link to the economic models threshold does not by itself PRSP process, is consistent with lessons of ex- behind these ense,re long-term debi: sus- per ience on the need for a sound policy frame- tainability. The latter is as- work and the development of a comprehensive projections and the sessed through debt poverty reduction strategy that is locally owned. overoptimistic growth sustainability analysis, the If filly implemented, the PRSP process might fos- assumptions have robustness of which haLs not ter the rise of stronger civil societies and a have yet been convincingly a positive impact on inclusion, transparency, and madte debt demonstrated. While the accountability processes. Whether this will fa- sustainability analyses use of the debt inventorn cilitate zconomic reform efforts that are suffi- ambiguous. methodology for assessing cierntly strong to make a major dent in the the current level of lebt is structural dilemma and promote growth remains a positive feature of the initiative, the method- to be seen. As the initiative is being implemented ological basis underlying the projections offu- now, there is little emphasis on growth-related ture levels of debt remain unclear. The lack of activities beyond the establishment of a sound transparency of the economic models behind rracroeconomic framework and investment in these projections and the overoptimistic growth h uman capital. Factors such as trade access, in- assumptions have made debt sustainability analy- ve stment climate, and infrastructure deve(op- ses ambiguous, giving rise to the impression nient are critical to promote growth in HIPCs, but that the process is politically manipulable. The have received little attention so far. threshold levels are also partly a function of the level of resources available to the initiat've. Freeing up Resources for Poverty Reductionl A one-time debt reduction is not sufficient The objectives were expanded in the E-HIFC to to guarantee that countries will be able to avoid explicitly target the resources released by debt future debt problems The prospects fo)r debt relief toward higher social expenditures aimed sustainability depend on a num'ner of factors af- at poverty reduction. The achievement of this ob- fecting the country's repaymcnt capacity, es- jective rests on the key assumption that the debt pecially the levels and terms of new borrowings, -elief provided will be additional to other aid the productive use of additional rcsourccs to transfers. This is necessary to free up resources generate revenues ancl promote growth, and ex- for increased poverty-reducing social spending. port stabilization and diversification. These fac- The design of the initiative, however, has no tors cannot be directly addressed by the means to ensure that this will in fact happen- 54 FINDINGS AND RECOMMENDATIONS debt forgiveness by itself does not guarantee as well as on the budget, will become clear only additionality. Without additional resources, it is with time and more detailed data on budgets and unclear how the fiscal space is to be created overall resource transfers. As noted above, the and, in the absence of additionality, what the data for recent years show a substantial decline implied tradeoffs are among priority actions for in net resource transfers to the HIPCs in ab- poverty reduction. solute terms. Further, the distribution of re- Past debt relief efforts have not been addi- sources in favor of HIPCs conflicts with the tional. The available data show a substantial de- principle of performance-based allocation and cline in net resource transfers after 1995, could reduce the overall efficiency and effec- coinciding with the build-up of the momentum tiveness of aid. for HIPC debt relief. There also appears to be a Debt reduction by itself The initiative is likely marked increase in the share of HIPCs in the will not necessarily ensure overall aid flows. There is not enough evidence debt sustainability, which de- to achieve its original yet to definitively determine the full impact of pends crucially on growth goal of reducing the HI]C debt relief or whether the recent declining and export volatility More external debt of the trend in net resource transfers has been reversed. realistic growth forecasts and HIPC .urther, with limited aid resources, the betterriskanalysisofthepro- poverty reduction and debt sustainability ob- jected debt burdens in the debt sustainability jectives may conflict with each other. The decline analyses would provide a better assessment of in loans is good for debt sustainability, but it each country's likelihood of meeting the initia- may reduce the availability of overall resources tive's debt sustainability threshold and would for poverty reduction and growth. Replacing help promote a more informed debate on the loans with grants would help avoid this conflict policy changes needed in donor and recipient between the need for increased real resources countries. It would also help bring more clarity and debt sustainability, but the prospects for and realism in the setting of the initiative's ob- this happening in the near future are limited. jectives and the needed funding arrangements. Thus, while the initiative is relevant to the cir- The initiative requires countries to have a cumstances of the HIPCs, its design is not con- track record of sustained policy and structural re- sistent with the stated objectives. The objectives forms. This requirement has been applied flexi- are cverambitious, and it is not clear how the lim- bly to bring more countries into the program. But itations can be overcome by design improvements. the progressive relaxation of the requirement The dlesign would have been more appropriate for for the "millennium rush" countries that qualified a more modest objective-of delivering debt re- in late 2000 raises the risk of not achieving the lief to some of the poorest countries. HIPC objectives, as these countries face a tougher challenge in meeting the necessary conditions to Efficacy and Efficiency reach their completion points. And the majority If the anticipated debt relief is delivered, the of the millennium rush countries have indeed ex- initiative will succeed in substantially reducing perienced policy slippages after reaching their de- the HIPCs' external debt stocks, and the level of cision points. While it is too early to assess the debt service that the HIPCs are currently paying impact of this flexibility on outcomes, other will fall to levels comparable to, or lower than, things being equal, these countries are less likely what other poor countries are paying. Thus, the to achieve good development results. initiative is likely to achieve its original goal of re- The findings on the PRSP process-a key per- ducing the external debt of the HIPCs and pro- formance criterion-are that the participatory viding them with a fresh start. process has been satisfactory, but the degree of Notionally reduced debt service provides ownership varies across countries. The growth HIPC governments with the fiscal space to pur- elements of the strategy are weak. This finding sue their development priorities, but the actual is consistent with the reviews of PRSPs by the impact on overall development expenditures, World Bank and external partners, which indicate 5 5 DEBT RELIEF FOR THE POOREST AN CED REVIEW OF: THE HIPC INITIATIVE that although growth is univers.,dli accorded arisin, fromi the potential lack of additionality and high priority in the PRSPs, a comn-on 01 caknuess over,, ambitious interpretations of debt sus- is the lack of focu.s on hoA the anticipated ln- tainahility. Other important sources of risk are the els of growth are to he realizecd andi on the pri- lack If full creditor participation, which could re- oritization of actiors neccssar) to achbev the ecduce thc cuelivery of anticipated relief; weak ca- objectives of the strategy. pacit v for debt management in virtuallv all HIPCs: The initiative also set performance bench- ancl the pcrceived lack of claritysurrounding the marks for public expcnditu:es wit1- ar crmpha- forw arcd-looking aspects of the DSAs. sis on social sectors, particularl, health and l.ong-term debt sustainability requires the de- education This is evident both in the cocdi- \elopnertandinstitutionalization oFa credible tions attached to the usc of IIIPC resources and growth strategy to generate the levels of income, on input- andl expncnditu -c-re ,ated t rgets for job) ( reation, and revenues necessary to attain fis- public expenditures as complettoin point trig- cal ,ustai-ahility and repayment capacity. A key gers. In principle, the beneficiary coun.rics track elemient of this strategy is stabilizing export earn- overall government spending fo- povertoJ re- ings by dcversifying the export base and gaining duction. In practice, rmost countries focu. on mat ket access, with worsening terms of trade and social expenditures, primarily in the form of an ineclcitable international trade regime re- health and education expcnditLires. I'hle IIlPC ma ning a significant source of risk. To mczt progress reports regularly track social expendi- their development challenges, these countries tures and the PRGF reviewvs also iplace empha- mna continue to need to borrow, and the key sis on pro-poor spendiing. chaillenge is to ensure that all resources are used Reflecting this emphasis, IlIPC progress re- prociuctively and efficiently. The recent progrcss ports indicate that ovcr half of government rev- on increased availability of grants will help in fi- enues wi'1 be earmarkeci for social expencl tures na icing development in a sustainable manner, in the coming years. Most recipiient countrie. con- but the amounts of grant aid are still limitecl and sider this imbalanced ancd inconsistent with theii- far short of the financing needs of the HIPCs. Be- focus on broader dievelopment goals an(i Withl the yond official finance, the lItIPCs need to create intendec, role of PRSPs in setting priorities a hospitable environment for private investment This emphasis on social expenc.itures also through continuccl and substantial policy and has other disadvantages. T'he perfo rman:e cr- st -uctu .al reforms, including providing the nec- teria largely focus on inputs anc expenc itures essary infrastructure and other services. rather than intcrmedliatc or final outcomes an(d The biggest risk impacts. The impact of these in- Ifrstitutional Development puts is likely to he limited by ab- 'Ihe creation of the HIPC Initiative was a major facing the initiative sorptivc capacitb cornstraints, the irnnovation in development finance. It has made is that of unrealistic fact that substan tial -t-d reources thc processes in the sovereign debt regime more are alreacIv targeted at social sec- open and accountable and spurred develop- expectations. tors, anti the uniform applica- ment cooperation. It has particularly encour- tion of conditions across coL.ntriCs--cvern where aged much better collaboration and coordination funding may not be the c ore constraint to achicv- hetween the World Bank and the IMF, both at the ing social sector outcomes. The ipefficient use opera1tional level and in providing technical ad- of resources in the targete(d sectors and 1 he lack A ice to governments. While not incorporated of focus on other growth-er0ianc inp ancl poverty- into the original design, the most significant in- reducing expenditures are also likely to lirmit stitutional development impact of the HIPC Ini- the achievement of the IHIPC objcctives. .iative may well be improvements in the HlPCs' public expenditure management systems. Sustainability The HIPC Initiative has been a catalyst for The biggest risk facing the initiative is that of un- the PRSP process, which holds considerable realistic expectations about what it can achieve, prorrise in helping countries improve gover- 56 FiNDINGS AND RECOMMENDATIONS nance, transparency, and accountahility while The debt projections component of the DSAs promoting ownership of country poverty re- should be based on a simple, transparent duction strategies. The initiative falls short in methodological framework. The current lack of capacity building for debt management, which clarity surrounding the projections addls to the was not addressed in its design. A number of ef- controversy on the achievement of l-IIPC objec- forts are ongoing, but they remain uncoordi- tives and is a significant but unnecessary source nr ted and inefficient in providing the needed of reputational risk for the World Bank. A better assistance to HIIPC governments. analysis of the prospects and risks would also allow more informed decisions on how to mod- Recommendations ify the current framework to maximize the ini- Recommendation 1: Clarify the objectives and tiative's development effectiveness. ensure the consistency of the design of the ini- Recommendation 3: Maintain standardsfor tiative with the main objectives. policy performance. The purpose of the initiative needs to be clar- The critical importance of policy perform- ified. Debt relief is a limited instrument; a clear ance for debt sustainability, growth, and poverty public acknowledgment of this reality and a pri- reduction is widely recognizecd. For effective im- oritization of its principal goals and how they are plementation, flexibility is often necessary, but to be achieved in specific contexts would help there needs to be a clear and transparent ra- create correct expectations of what the initiative tionale for relaxing the criteria or standards can realistically achieve. Specifically, the goal of for policy performance. Without such a justi- debt sustainability needs to be clearly distin- fication, it is critical that standards established guished from the goal of poverty alleviation. for the initiative be maintained-not only in the Bot - goals are worthy, but require different re- interest of fairness and equity, but also to im- sponses. Increased spending for poverty reduc- prove the likelihood of achieving the initia- tion requires increasing the resources delivered tive's objectives and for the durability of results to poor countries (in conjunction with improved obtained. policies and the efficiency of resource use). Debt Recommendation 4: Performance criteria sustainability requires redesigning the way the need to increase thefocus on pro-poorgrowth. resources are delivered and, more important, ad- Growth is critical for both debt sustainabil- dressing the underlying structural dilemma fac- ity and poverty reduction, but at present the ini- ing these countries. Management should take tiative places a heavy emphasis on social steps to focus the initiative and identify its ap- expenditures as the primary means of poverty prop iate role in the overall development frame- reduction. The initiative's performance crite- work. Its objectives should be clearly stated, ria should he better balanced between growth- along with a clear articulation of how they are to enhancing and social expenditure priorities, be ac -ieved and what the roles of different play- and tailored to the individual country circum- ers are in achieving those objectives. Given the stances. The World Bank should make better publicity surrounding the initiative, any adjust- use of the knowledge already available and fill ment of the objectives and design needs to be the knowledge gaps through additional diag- explained clearly to the global community. nostic work, particularly on the overall effi- Recommendation 2: Improve the trans- ciency of public expenditures, identifying paren-y of the methodology and economic mod- sources of growth, and developing appropriate els underlying the debt projections and the sectoral strategies as the basis of appropriate realism of economicgrowthforecasts in the DSAs. benchmarks, 57 ANNEXES CL ..02 ~' ~'~2 C ~ CD N C C O ( CD D (N (N CD (N (N- CD ( CD, . 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L -0 ANNEX B: THE OBJECTIVES AND GUIDING PRINCIPLES FOR THE HIPC INITIATIVE O-HIPC E-EHIPC Ob ectives "The original focus of the HIPC Initiative was on "The objective of the initiative is to bring the removing the debt overhang and providing a country's debt burden to sustainable levels, permanent exit from rescheduling. Relief can subject to satisfactory policy performance" also be used to free up resources for higher so- (World Bank and IMF 1996). cial spending aimed at poverty reduction to the extent that cash debt-service payments are reduced. These are now twin objectives" (World Bank and IMF 1999). Guiding principles Principles of change 1. Debt sustainability: The objective should he 1. A clear exitfrom an unsustainable debt bur- to target overall debt sustainability on a case- den: Debt relief should remove the debt over- by-case basis, thus providing a durablc exit hang and provide an appropriate cushion strategy from the rescheduling process. against exogenous shocks. 2. Policy performance: Action will be envisaged 2. An incentive to reform: Debt relief should only when the debtor has shown, through a strengthen the incentives for debtor coun- track record, ability to put to good use what- tries to adopt strong programs of adjustment ever exceptional support is provided. and reform. 3. Debt relief. New measures will build, as much 3. Additional: Debt relief should reinforce the as possible, on existing mechanisms. wider tools of the international community to 4. Comprebensive: Additional action will be promrote sustainable development and poverty ct)ordinated among all creditors involved, reduction. with broad and equitable participation. 4. Financing plan: Accompanied by proposals 5. Preferred creditorstatus: Actions by the mul- for financing the cost to multilateral institu- tilateral creditors will preserve their financial tions. integrity and preferred creditor status. 5. Focus on poorer members: Debt relief should 6. New flows: New external finance for the coun- target the poorest member countries for which trics concerned will be on appropriately con- excessive debt can be a particularly severe cessional terms. obstacle to development. 6. Applied retroactively: Enhanced debt relief should be provided to all members, including those that have already reached decision and completion points under the initiative, pro- vided they qualify under the revised thresholds. 7. Provided in a simplified frainework. 63 AN i 4 4 a Reugee infiux from Mczamuique b Poor env:ron nert for busmess 88 ANNEX K: MANAGEMENT RESPONSE Introduction The OED Review The Heavily Indebted Poor Countries Debt Ini- Management welcomes this timely and com- tiative (HIPC Initiative) launched in 1996 and prehensive review of the HIPC Initiative under- enhanced in 1999 represented an advance by taken by the Operations Evaluation Department, the international community in addressing the as it helps take stock of what has been learned chronic external debt burden of the world's in the implementation of the IIIPC Initiative to poorest countries. It brought together donors, help resolve its shortcomings and better achieve crec itors, NGOs, and academics around a core its goals. This Management Response discusses development issue, and led to improvements the OED report's main findings and presents in the way debt relief is provided. The Initiative views on key issues that are fundamental to the spurred the international community to mobi- success of the HIPC Initiative. Nevertheless, it is lize and commit a large amount of money and important to remember that all of the 26 coun- atterttion to reducing the debt overhang in the tries receiving debt relief under the Initiative so poorest countries-and thereby began to elim- far reached their decision point only in 2000 or inate a huge obstacle to growth and develop- thereafter, so any conclusions regarding the pro- ment. For the Bank, it represented one of the gram's accomplishments or shortfalls can only initial efforts to engage in serious dialogue with be tentative at this early stage in the program's civil society and encourage active participation implementation. of beneficiaries beyond the project level. This di- alogue resulted in progressively better design of Joint Program the Initiative and improved transparency in its The IIIPC Initiative is a joint Bank-Fund pro- implementation. gram in which the staffs of the two institutions work closely together. Nonetheless, these corn- Progress in Implementing the HIPC Initiative ments reflect solely the views of World Bank Since its inception six years ago, the HIPC Ini- Managerrent and do not in any way purport to tiativc has succeeded in bringing substantial represent nor implicate the Fund. debt relief to 26 of 42 potentially eligible coun- tries. In parallel, efforts are under way to put in Main Findings and Recommendations place longer-term poverty reduction strategies- This Management Response focuses on the OED craftecd and implemented by the lHIPCs using a Review's main findings and recommendations. broad participatory process-helping to steer Also attached are detailed responses in the Man- savings from reduced debt service payments to agement Action Record matrix. povertv reducing programs. Partly as a result of its early successes, expectations on what the DED Recommendations HIPC Initiative can achieve are high, and there The OED Review's four recommendations are to: are frec uent calls for further accelerating, broad- "(i) clarify the purpose and objectives of the Ini- ening and deepening the debt relief provided tiative, ensure that its design is consistent with through the Initiative. these objectives, and both the objectives and 89 DEBT RELIEF FOR THE POOREST AN QEC 9EVIE-W OF THE HIF'C INITIATIVE how they are to be achievecr he clearly commnu- sistirg these countries to accelerate growth ancd nicated to the global community; (i) improve the reduce poverty. Since the inception of the HIPC transparency of the methodology and economic Initiative, and particularly after the 1999 en- models underlying the debt projections and the han ement, the Bank consciously emphasized realism of economic grovwth forccasts in the the -omprehensive development framework in debt sustainability analyses; (iii maintain the its country assistance strategies, lining up nu- standards for policy performance, and when the merous programs, including the HIPC Initiative, established criteria are to he relaLxcd Ihat there in a consistent and comprehensive attack on be a clear and transparent rationale to ensure that poverty. Naturally, the HIPC program-just one the risks ,o achieving and maintainirg thc Ini- building block in a more comprehensive devel- tiative's objectives are mini mizecd; and (iv) focus opment architecture-aligned itself with the o.n- more on pro-poor growth and provicle a better jeclives and goals of this larger program, bat balance among development priorities rclative wa. never meant to supplant it. to the current emphasis on social expenditures." Additionality of Resources Objectives of the HlPC Initiative We fully support OED's emphasis that addition- The OED Review paper rightly points out th at the alii y is ani important underlying principle of the objectives of the HIPC Initiative have grown in H11'C In,tiative, but contend that it should be as- ambition over the years. The original MIPC frame- sct,scd on a country-by-country basis. For ex- work aimed to bring about a comprehensive ample, lower grants and/or cre iits may be debt reduction "to achieve a sustainable dcbt sit- appropriate in cases where serious policy slip- uation" in the eligible countr-ies The cor,sulta- pages o-even reversals lead to slowergrowth and tive HIPC Review launched in early 1999 with the a ileteriorating macroeconomic situation. Nev- debtor countries and the wicder donor, NGO and ertheless, staff's preliminary review of the data academic communitics, ecommended that debt indicates that, much as one wouldl expect, loan relief operations be better linkcd to the overail commitments and grants to HIPCs in aggregate development and poverty reduction agenda. climbed in 1999 and 2000, just about the time the Participants in that review also felt that cleci- lIIPC Initiative was taking off. And the World sions regarding the use of debt service savings Bank clearly held up its end of the bargain, be- should involve civil society andi lhe poor them- ciuse there is clear evidence that the combina- selves. Poverty Reduction Strategies, formulated tiun of net flows and debt relief from IDA and implemented through a wilde partic,patory increased sharply at about the same time. process concurrent with the IIIPC debt relief process, were identified as a viable means to Positive Net Transfers and Debt Sustainability channel debt savings toward uses considered We agree with OED that net transfers of eKter- to be high priority. iial resources to HIPCs must be adequate to support development programs needed to reach Debt Relief and Development ihe Millennium Development Goals. But this When the HIPC Initiative was enhanc-d with should not come at the expense of debt sus- lower thresholds and faster provision of debt .ainability. It is imperative, therefore, that the relief, it was made clear that therc is at best an now of grants increase significantly to these indirect relationship between debt relief and countries, and in this context we welcome the poverty reduction. Debt relief was never pre- grant component incorporated in IDA-13. At sented as a panacea that would overcome the the same time, however, it needs to he ac- towering challenge of long-term deve ,opment knowledged that grants from bilateral and other and poverty reduction-i in HIPCs. On the con- sources will need to rise further still to eliminate trary, it was always seen as a program that, by re- the tension between these two potentially com- ducing the external debt stock in HIPCs, would peting objectives (namely, attaining MIDGs and ultimately contribute to the hi-oader goal of as- debt sustainability). 90 ANNEX K: MANAGEMENT RESPONSE Transparency in Projections ditional debt relief and reduce its NPV debt-to- The OED Review recommends greater trans- exports ratio to 150 percent. While over-opti- parency in the methodology and economic mod- mistic projections may not penalize HIPCs els underlying the debt projections and greater directly, the OED Review correctly points out realism in the economic growth forecasts in the that they may have the indirect effect of en- debt sustainability analyses. It finds that: (i) the couraging HIPCs (after decision or completion mecroeconomic projections embodied in the point) to borrow at above sustainable levels. debt sustainability analyses (DSAs) tend to be Management is alert to this issue and requires overly optimistic; (ii) models underpinning these country assistance strategies to carefully assess optimistic projections are not easily understood the macroeconomic prospects of all low-income or substantiated; and (iii) the sustainable debt countries, including HIPCs, and emphasizes sen- outlook based on optimistic macroeconomic sitivity analyses and preparation of low case lend- prcjections undermines "a better assessment of ing scenarios. the prospects and risks" facing HIPCs. The World Bark, in collaboration with country governments Standards of Policy Performance and the IMF, is already taking steps to make sure The OED Review paper notes that sustained pol- that greater realism is introduced into long-term icy reforms are crucial for countries to maintain economic projections that underpin debt sus- debt sustainability and achieve economic growth tainability calculations. At the same time, it needs and poverty reduction. Therefore, it emphasizes to be recognized that macroeconomic projec- the importance of maintaining clear standards of tions for HIPCs are inherently difficult due to un- policy performance for the HIPC Initiative, es- reliable data, internal conflict, the effect of pecially in the instance of so-called "Millennium- unpredictable weather patterns on agrarian rush countries," for which OED perceived a economies dependent on one or two key com- tendency to lower standards. The original HIPC modity exports, and volatility in commodity framework required that HIPCs demonstrate a prices. To deal with these issues, staff are al- track record of reform for three years to qualify ready required to develop stress tests to assess for debt relief at decision point, followed by a fur- risks to their baseline scenarios and prepare al- ther period of reforms, to actually benefit from ternative scenarios that reflect the vulnerabilities irrevocable debt relief at completion point. A and uncertainties these countries face.' As far as counterpoint was posed by many critics partic- greater transparency in methodology and eco- ipating in the 1999 HIPC Review who argued nomic models underlying the debt projections that a strict track record requirement was a hur- are concerned, the Fund and the Bank apply to dle intentionally raised by the Bank/Fund and the HIPCs the same disclosure and reporting stan- creditor countries to delay debt relief. Without dards they apply to all other countries. attempting to judge the merit of this contention, efforts were made under the enhanced frame- Impact of Projections work to assist eligible HIPCs in reaching decision The OED Review recognizes that HIPCs are not point more quickly, as a result of which the re- penalized if projections by Fund and Bank staffs quirement of the three-year track record was turn out to be optimistic. First, the calculation relaxed, This was appropriate, because the of debt reduction for any HIPC is not based on quicker an eligible HIPC can reach decision projections but on actual external public debt and point, the earlier the international community the average export value over the previous three can engage with the country to assist with reform years. And second, if the actual NPV debt-to-ex- and development and the greater the likelihood port ratio at completion point is over the pro- of success in reaching completion point and jected ratio on account of factors clearly beyond benefiting from irrevocable debt reduction. At the the control of the country (such as an unex- same time, strong policy performance standards pected decline in commodity prices), then the continued to be maintained in the design of HIPC framework allows the country to receive ad- completion point triggers. Indeed, in line with 91 DEBT RELIEF FOR THE POOREST: AN OEC 9EVIE'W OF THE HiE'C INITIATIVE changing practice in selecting condlitions for ad- tentially powerful strategy for pro-poor growth. justment loans, the Managcrncnt is also tryin to In all cases, completion point triggers include a reduce the number of completion po)int trig- reqluiremcnt that a PRGF program is on track, re- gers, and ensure that those that arc inc,uded are flecting the importance of macroeconomic sta- of strategic importance to the success of the hilitv, an essential ingredient for growth. program. Completion point triggers also include struc- turaL reforms designed to adjust incentives to- Emphasis on Social Expenditure ward g-cater efficiency, private sector The operational nature oF I IPIC documents re- devclopment, and improvedl governance, fur- quires that they explain how savings fronm Jebt the - strengthening the focus on growth even relief will be channeled into poverty reduction though they may not call for additional public ex- expenditures. A, large part of the 3dditiontl ex- periditures. And in the future, PRSPs and public penditures are concentrated in soc ial sectors al- expenditure reviews will provide a better em- though, in some HfIPC documents, thev also pirical assessment of where incremental re- include physical infrastructu-e and cc onomic sources ihould be allocated. services such as water supply, rural electrification, housing, and agricultural servtces. These ex- Att chnment penditures, when taken together with thc pro- Attached to this Management Response are cle- grams of policy and structural reforrm that are also tailed responses in the Management Actio)n articulated in HlIPC docurnents, constitute a po- Record matrix. 92 ANNEX K MANAGEMENT RESPONSE Attachment: Management Action Record Major OED Recommendation Management Response 1. Clarifythe purpose and objectives of the Initiative, 1. Management will strengthen the communication of the ensure that its design is consistent with these ob- objective of the HIPC Initiative and clarify that it is to re- jectives, and both the objectives and how they are duce debt stocks, and so contribute to broader efforts to be achieved be clearly communicated to the global aimed at accelerating growth and reducing poverty. community When the HIPC Initiative was enhanced, debt relief in it- self was envisioned only as a necessary, but never as a suf- ficient, condition to overcome the challenges of long-term development and poverty reduction in HIPCs. The Initiative deliberately aligned itself in each HIPC with the goals of the country program that often contained many elements of a broader development architecture By reducing the debt stock, the Initiative was expected to contribute to a more comprehensive development effort, but not supplant it. In its communications strategy, Bank Management will work with relevant stakeholders to ensure that the objectives of the HltPC Initiative are clarified and communicated con- sistently. 2. Improve the transparency of the methodology and 2 All debt sustainability analyses of HIPCs are based on economic models underlying the debt projections and accompanying PRGF macroeconomic projections where the realism of economic growth forecasts in debt sus- the key assumptions for debt sustainability are presented tai nability analyses. The methodology and economic models underlying these projections are subject to the same disclosure and report- ing standards as for all other countries. Management agrees with OED's recommendation to im- prove the realism of growth projections and elaborated these points in the HIPC progress report of September 2002. To deal with the inherent volatility, nsks and weak underlying data, staffs of the Fund and the Bank are being asked to improve the realism of long-term projections and apply stress tests that assess nsks to the baseline scenarios. 93 DEBT RELIEF FOR THE POOREST AN OED R--VIEVV CF THE HIPC INITIATIVE Major lED Recommendation Management Response 3. Maintain the standards for policy performance, ani 3. Management believes that the earlier HlPCs reach de- when the established criteria are to be relaxed thera cisios point, the greater the engagement of the international should be a clear and transparent rationale to ensure community in assisting with reform and development efforts that the risks to achieving and maintaining the In i- and the greater the likelihood of reaching completion point. tiative's objectives are minimized. At the same time, Management will seek to irclude few- ermand the most strategicmtriggers in completion docu- ments to ensure thatwhile standards of policy performance are maintained, they are not unnecessarily onerous. It nrould be noted that floating completion aont condi- tioniality has allowed HIPCs to tailor the pace of change in accordance with their capacity and the constraints they face. 4. Focus more on pro-poor growth and provide a bet- 4 Management will continue to assist HIPCs in assuring that ter balance among development priorities relative to savings from debt relief are allocated to expenditures for the current emphasis on social expenditures pro-poor growth (including social development priorities where appropriate) consistent with the PRSP framework. An essential element of the HIPC initiative is that comple- tion point triggers include measures allocating savings from HIFC relief to finance expenditures supporting poverty reduction and growth in line with priorities expressed ii F'RSPs. This will be kept under careful review so that allo- cations to individual sectors or programs do not exceed ab- sorptive capacity constraints. Through the Poverty Reducticn Department, the HIPC Unit, and the regional country teams, Management will continue to ask that future Decision Point cases follow this approach. Accordingly, it will work to determine Completion Point triggers forpro-poorgrowth on a case-by-case basis in accordance with the PRSP o -l- PRSP 94 ANNEX L: CHAIRMAN'S SUMMARY: THE COMMITTEE ON DEVELOPMENT EFFECTIVENESS (CODE) Main Findings Conclusions and Next Steps The Heavily Indebted Poor Country Debt Ini- CODE commended OED for an excellent re- tiative was formally agreed to by governments port. Members supported the thrust of recom- around the world in September 1996 and "en- mendations of the report and were overall hanced" in 1999. Its original objective was to satisfied with the management response. Key reduce, within a reasonable time horizon, the messages arising out of the committee's dis- external debt burden of qualifying countries to cussion were that (a) debt relief was not a sub- "sustainable" levels. While the link to growth stitute for a broader, growth oriented, has been maintained, the enhanced framework development program and that HIPC needs to added increased social expenditures for poverty be seen as one of several instruments to support reduction as an explicit objective. The report poverty reduction; (b) additionality was an im- concludes that the HIPC Initiative has been a portant part of the HIPC framework but should catalyst for far-reaching changes in the not override performance-based allocation of processes surrounding development assistance resources; and (c) realism of debt sustainability and that the initiative has been highly relevant analysis (DSA) and a clear external communica- in adldressing a key obstacle facing many poor tion supporting wider public understanding of countries. The initiative is likely to achieve its the report's findings were also important. CODE original fundamental goal of reducing the ex- recommended that the OED report be disclosed. ternal debt of the HIPCs. While its design has The report findings will inform, among other beer adequate and appropriate to achieve its things, management's annual upcdate on HIPC original stated objective of reducing the "debt planned for the Development Committee in overhang," the report concludes that this de- September 2003. sign is no longer consistent with the expanded set of objectives of the enhanced HIPC, no- Issues tably to simultaneously provide a "permanent Some of the main issues raised by the commit- exit" from rescheduling, promote growth, and tee were the following: free Up resources for increased social expen- Design and objectives of the IIIPC Initiatives: ditures. Management is in broad agreement The committee's discussion of the design and ob- with Operations Evaluation Department's rec- jectives of the initiative largely centered around ommendations but does not concur with parts the disconnect between what the initiative could of OED's analysis, notably the conclusion that realistically achieve and the overly ambitious ex- the design, as such, is inconsistent with the ob- pectations held by some stakeholders. The com- jectives of the enhanced HIPC Initiative. The mittee agreed that it would be important to management response underlines that by re- clarify the HIPC Initiative's objectives but ad- ducing debt stocks, the HIPC Initiative was al- vised that it was the role of governors and gov- ways meant to contribute toward a broader, ernments, not management or a panel of experts, more comprehensive development architec- as the objectives were established through a po- ture but not supplant it. litical process and agreed to by governors. CODE 95 DEBT RELIEF FOR THE POOREST: AN OED REVIEW OF THE HIFC INITIATIVE supported the nccd for management to ens -re on ci onorlic growth was symptomatic of PRSPs that World 'Bank communications wcre clear and not idequately addressing growth. They found consistent, andl did not fur-ther rake cxpct,ta- that [his was an area that required further at- tions. Management agreed it woulW addLress :his tention and supported management's -proposal issue in its annual update n f IIPC. to giv'e greater consideration to economic growth The comrmittee agreed witlh the OEF) report's whc designing completion point triggers. Man- finding that thc HJPC Initiativc had objectives that agcrnient agreed that the support for poverty could not be met through clesign mrprovements rceduLction under the HIPC Initiative will be con- alone. Members discussecl varying irterpreta- sistt nt with the broad policy framework es- tions of what a "permancnt eNit' fromn debt prel sed in PRSPs and noted that high-priority rescheduling was intend(cect to rmlan and sug- pubhic ex nenditures, togethe- with programs of gestecl caution in automatically 'inking debt re- policy and structural reform, constitute a po- lief to debt sustainability anrd poverty recluc ion. ten liallv powerful strategy for pro-poor growtlh. The committee supported1 management's view kesou-ces: The committee discussed the im- that HIPC is one of several instrumerts to sup- plications of reallocation of funds from non- port poverty rdcluction ancd underlined the nCeed C 111'Cs te HIPCs. Some chairs stressed that the to link HIPC to a broader developnent program intention of the additionality principle did not cx- that addresscd the underlying s tructural prob- cmpt countries from the performance-based al- lems. t'ec committee believecl the evaluation location framework. The management response couldl have taker. greater account of Povecty Re- no, etl that strong policy performance standarcls duction Strategy Papers (PRSPs) as the franmework were integral to the development of lendinig to address long-term dcielopmcnt problems in triggers. Some chairs pointed to a potential con- these countries. OED noted that it was in the flict between the Country Policy and Insti:u- planning stages of a separate arid in-depth revicvw tinnal Assessment (CPIA) allocations and debt of the PRSP process. relief. Tic committee notecl the apparent over- Managenment noted that wlhile the HI PC is all decline in resource transfers to HIPC coun- now clearly linked to the PRSP proccss anc, by tries through 2000, and whi'e recognizing it was extension, to supporting countrocs ii acheving ealy in the HIPC process, underlined that if re- their growth and poxvcrt reduclion goals, scurces were to be freed up for poverty reduc- throughout its evolution the initiative Has re- ti(on it would be important to (a) assess the tained its central ohjective of reducing the ex- public .xpenditure priorities expressed in the ternal cebt burden of beneficiary countries. P1`SP to gain a better understanding of how to Management also noted tlhat the groxwth agenda best use HIPC resources, (b) ensure that aid is central to the PRSP approach in many coun- flows and savings from HIPC debt relief support tries where the PRSP is advanced Scveral speak- those priorities and reach the poor, and (c) en- ers corfirmed that the i1PC -eview vas an sure that longer-term measures are in placz to important learning process andi underlired the a.ldress potential country absorptive capacity. importance of continuedl frank and opLn con- Some nmembers underlined the need to identify sultations with all stakeholders. nlew sources of concessional financing. includ- Social sector spending,: T'lih committee was i iggrants. The committeealso noted that since in agreement with the review s finding that the trends in aid flows are influenced strongly by pol- early focus on the use of ilIPC tleb.-service sav- isy and economic performance, they should he ings had focused too narrowly on social expen- assessed on a country-by-country basis rather ditures. The committee felt that a broader growth than in aggregate. and development framework to accom-nmodate Debt sustainabilitv analysis: The committee other factors that also affcct groxth-such as the supp0rted OED's recommendation on the need investment climate, infrastructure development, or more transparency in the methodology for and economic prodLctivity-was preferable. FDSA and for more realistic growth forecasts. Some members noted that the lack of cmphasis Some members, however, noted that OED could 96 ANNEX L. REPORT FROM THE COMMITTEE ON DEVELOPMENT EFFECTIVENESS (CODE) have gone deeper into some of the factors that the same disclosure standards they apply to ccntributed to the debt difficulties so that ap- other countries and programs. propriate lessons could be drawn. The commit- Mlfanagement of expectations: The committee tee also supported the idea of monitoring agreed that some stakeholders had overly high post-HIPC performance and stressed that debt expectations of the enhanced i IIPC and were sustainability would require giving more atten- concerned that the Bank, as one of the principal tion to the investment climate, volatility of trade caretakers of this initiative, could be vulnerable exports, access to markets, and domestic debt. to criticism on the final outcormes, even though The need to address possible conflicts between key decisions and actions needed to realize the debt sustainability and increased Bank lending broader outcomes were beyond the initiative's were also cited. It would also be important to en- purview. The committee underlined the need sure that resources are productively used so for management to put into place an effective in- tha- sufficient capacity to service the debt is cre- ternal and external communication strategy re- ated. Improvement of debt management ca- garding the initiative and what it could and could pacity of HIPCs would also be key. Management not do, to minimize the risk of misinterpreta- informed the committee that the Bank, in col- tion of the review's findings. Emphasis should be laboration with country governments and the In- on what is required to achieve the objectives ternational Monetary Fund, was already taking rather than the realism of the expectations. OED steps to ensure that greater realism was intro- is planning dissemination activities for its report. duced into long-term economic projections and Management confirmed that it would undertake also noted that the Fund and Bank apply to HIPC a proactive communication strategy. Finn Jonck Chairman 97 ENDNOTES Executive Summary derado como mais um elemento na construcao de Management comment: The context of this evo- uma arquitectura de desenvolvimento abrangente, lution is worth noting. The enormousness and com- com o desenvolvimento sustentavel e a reduc,o da po- plexity of the development challenges facing the breza como os seus objectivos finais. heavily indebted poor countries were well recog- 1. Observation de la direction : le contexte de nized. Overcoming these challenges needed the joint cette evolution vaut d'etre note. L'ampleur extraor- efforts of the countries themselves together with the dinaire et la complexite des problemes de dwvelop- concerted financial and technical support of the in- pement auxquels etaient confrontes les pays pauvres ternational community. More recently, the Monter- tres endettes n'etaient plus a demontrer. Pour sur- rey a-idjohannesburg Summits acknowledged this and monter ces problemes, il fallait que les pays eux- helped enormously in shaping and advancing this di- mcrmes joignent leurs efforts au soutien financier et mension of the global agenda. Using a broad range of technique concerte de la communaute internatio- instruments, the Bank was already heavily engaged in nale. Plus r6cemment, les Sommets de Monterrey et supporting development in low-income countries, in de Johannesburg l'ont reconnu et ont largement partnership with other multilateral agencies, bilateral contribu6 a modeler et a faire avancer cette dimension agencies, HIPC governments, and civil society. The du programme d'action international. S'appuyant sur HIPC Initiative became one element-albeit an im- un large 6ventail d'instruments, la Banque s'etait deja portant one-in this broad effort. It was seen as just resolument engagee a promouvoir le developpement one building block in more comprehensive develop- des pays a faible revenu, en partenariat avec d'autres ment architecture, with sustainable development and organismes multilateraux, des organismes bilateraux, pover :y reduction as its ultimate goals. les gouvernements des PPTE et la societe civile. L'tni- 1. Comentario da administracao: 0 contexto desta tiative PPTE est devenu un element-important evolugao e digno de nota. A enormidade e complexi- certes-de cette vaste entreprise. EBle n'etait consi- dade c os desafios ao desenvolvimento que enfrenta- deree que comme l'une des pieces d'une architecture vam oi paises pobres muito endividados era bem plus vaste du developpement, dont les objectifs ul- reconhecido, Para superar esses desafios eram ne- times etaient le d6veloppement durable ct le recul de cessarios os esforcos conjuntos dos proprios paises la pauvrete. com o apoio financeiro e tecnico concertado da co- 1. Observaci6n de la administraci6n: Conviene se- munidade internacional. Mais recentemente, as Ci- fnalar el contexto de esta evoluci6n. La enormidad y meiras de Monterrey e dejoanesburgo reconheceram complejidad de los desaffos que plantea el desarrollo isso e ajudaram imenso a configurar e a impulsionar para los paises pobres muy endeudados era un hecho esta diinensao da agenda mundial. Utilizando urna ampliamente reconocido. Para superar esos desaffos se ampla gama de instrumentos, o Banco ja estava fir- necesitaban esfuerzos comunes de los mismos paises mement e envolvido em apoiar o desenvolvimentos dos junto con apoyo financiero y tecnico concertado de la paises de baixos rendimentos, em parceria com outros comunidad internacional. Mas recientemente, las Cum- organisrnos multilaterais, organismos bilaterais, go- bres de Monterrey y de Johannesburgo reconocieron vernos dos PPME, e a sociedade civil. A Iniciativa para esa realidad y ayudaron enormemente a configurar y os PPME tornou-se um elemento-se bem que urn ele- promover esta dimensi6n del programa de acci6n mun- mento importante-neste amplo esforco. Era consi- dial. Utilizando una gran variedad de instrumentos, el 99 DEBT RELIEF FOR THE POOREST AN OEC REVIEW OF THE HIPC INITIATIVE Banco dio muestras de fuerte compromiso con el cde- perfornmanze, these reschedulings exacerbated the sarrollc) de los paises de ingreso bajo, et asociacion con dlebt stock buildup. otros organismos multilaterales y bilatcralcs los go- 7. At end-1993, the share of multilateral creclitors biernos de los PPME y la sociedad cndil L.a Iniciativa para in total no -ninal debt stock was 27 percent, with thz los PPME era solo un elemento-importante, sin Banl accounting for half of this (both IDAand IBRD). duda-de este amplio esfuerxo. Era una de las piedras In t, rms of present value, the multilateral share wa s angulares de la arqluitectora general del desartollo, 19 percen - (with the Bank accounting for 37 percent cuyos objetivos ultimos eran el clesarrollo sostecnbie y of the multilateral share). Bilateral creditors' shares la reduccion de la pobreza. wer- 59 percent in nominal stock and 64 percent tn pre.ent value terms. Chapter 1 E . The theory postulates that beyond an optirral 1. Of the sever that reached the decision point poi t, the debt stock has a negative impact on growth under 0-H IPC, Clte d'Ivoire has yet to reach its com- by rLiscouraging investment. pletion point. 2. Including Liberia, Somalia, 2ncl Sudt n, the costs Chapter 3 in 2001 NPV terms are estimatld tr be LTS$zI6.0 billion 1. Thcre has been a "triple helix" of relationshi Ds, as -allagny (2002) calls them, between three sets of Chapter 2 actors that were central to the debt relief movement 1. The developing worldl is defined as aL low-, from the late 1980s: the official agencies and processes lower-midclle-, and upper-middle-incone countries of ihe in ernational debt regime, the NGO networks, as defined by the World Baok, a tol21 of 156 countries anti an epistemic community of econornists and other (see World Bank 2002). sc iolars who have played key advisory roles on both 2. The nominal stock of eebt is not a good indica- sides of the debate on how to deal with the debt tor of the actual burden of debt on a country'ahen a problem. proportion of the debt is contracted on concessional 2. The Jubilee 2000 campaign was highly success- (or below-market) rates. Data on present value are ful in creating a mass movement in support of clebt from William EasterLy's daiaset (discussed in Easterly fc rgivCTess by mobilizing the support of prominent 2001a), which uses GDF dbht inventories to calculate piblic figures, religious leaders, academics, anc en- future obligations on publicly puarantced debt, dis- turtalners. The broad political resonance of the sim- counted using the London interhank offered raze ple ancn forceful "debt relief for poverty reduction" (LIBOR) as the market rate, These data are supple- message helped to mobilize a coalition that com- mented with the- present value estima.es from Gt)F hlined the forces of mainstream development 2dvo- publications after 1998. rates with those of radical critics of the aid process, 3. There are some exceptions to this at the indi- thus overcoming opposition to debt forgiveness at a vidual country level, but the occurr.nccs are fez and time of decline in overall development aid. not sustained. 3. At the time it was created, the principal objec- 4. Thirty-six countries were classified as SLICs, all i ive of the HIPC Initiative was to reduce the external of whom, with the exception of Nigeria, are currently lebt of eligible countries to a level that would be sus- classified as HIMCs. ainable, thereby removing a major constraint on in- 5. The rapid increase in arrears and repeated vestment and growth and spurring further adjustment, rounds of Paris Club reschedulings ar2 a strong iridi- io part by galvanizing private external investment. cator that the previous strategy was nct effectively ad- The victory by the NGOs-in establishing a direct dressing the IIIPCs' problems, link between debt relief and poverty reduction, by ex- 6. Early efforts to address the prnhlcrr through plicitly targeting debt service "savings" to social spend- nonconcessional rescheduling, and even tae subse- ing-was the outcome of a very successful campaign quent rescheduling on concessional terms, simply by th_ Jubilee 2000 movement. postponed reckoning with the problem of excessive 4. HIPC addresses only the long-term public and debt stocks. Instead, with continued weak economic publicly guaranteed disbursed and outstanding debt. 1 00 ENDNOTES 5. The PRSP represents a long-term program for 7. In the O-HIPC, the amount of relief was deter- poverty reduction, prepared by the country authorities mined at the decision point based on the projected in consultation with all stakeholders. PRSPs mark a difference between the indicators and the HIPC tar- new kind of interaction of the Bank and the interna- get ratios at the completion point. In the E-HIPC, the tional development community with borrowers. They DSA projections have no bearing on the calculation put into practice the principles of the new Compre- of the amount of relief to be delivered. hensive Development Framework adopted by the Bank, 8. Debt service will not be an accurate indicator of promoting country ownership and broader stakeholder the debt burden facing a country if the debt is not participation, improving coordination among devel- being fully serviced. NPV of debt is more accurate: by oprment partners, and increasing the focus on results. removing the grant element embedded in conces- sional terms, it makes the debt stock comparable Chapter 4 across countries and should better reflect the burden 1. That is, the initiative is intended to reduce debt of debt service due. The available data show a constant service obligations so that the country can more eas- relationship between debt service paid as a ratio of NPV ily meet with its export revenues and future transfers, of debt to the level of NPV of debt for non-HIPCs. For eliminating the need for future reschedulings, de- the HIPCs, the ratio of debt service paid to NPV of debt fensive lending, and debt forgiveness. falls sharply with the level of debt, indicating that at 2. A press release was more emphatic, stating, "The high levels, debt is not being fully serviced. debt reduction operation . .. will create room for ad- 9. The "sustainable development" approach pro- ditional public expenditures on poverty reduction." poses a bottom-up costing of the Millennium Devel- 3 Net resource transfer is defined as disburse- opment Goals that makes social and other "essential" men s (including loans and grants) less debt service expenditures top priority in the government budgets payments (principal repayments and interest pay- (F.LRODAD). Being budget based, this approach raises ments). Debt relief reduces the debt service obliga- the same concerns as the revenue-based indicators dis- tions of a debtor, but for this to lead to an increase in cussed above (Birdsall and Williamson 2002). net resource transfers, disbursements need to be 10. The empirical evidence on the choice between main-ained at the previous levels (for full additional- the debt-to-exports and debt-to-GDP as a better pre- ity) o- decline less than the reduction in debt service dictor of a debt crisis is ambiguous: debt-to-exports (for partial additionality). If both the inflows (dis- is a better predictor if no other factors are included; bursernents) and outflows (debt service payments) de- debt-to-GDP is a better predictor if some economic cline by equal amounts, the net transfer into the variables (liquidity of the economy and openness) debtor country would remain unchanged. are included (Cohen 2001). An alternative way of as- 4. nvestment incentives may improve, for exam- sessing the choice of indicator is to determine which ple, through indirect positive economic effects from indicator, exports or GDP, better explains arrears. a more stable economic climate or eliminating the ex- Using 1980-2000 annual data from Global Develop- pectation of future crises. nient Finance for the 26 HIPCs that have reached 5. An assessment of the net efficiency gains of their decision points, results from a fixed effects re- moving from project to budget support, however, gression of total arrears on a timc trend (year), GDP needs to weigh the relative inefficiency of project fi- and exports show that exports have a statistically sig- nance versus the inefficiency of budget systems. Re- nificant negative impact on arrears, while the impact cent analyses by the Bank and IMF have identified the of GDP is not significant. need for substantial improvements in the budget 11. This is the current operational cutoff for IDA, management systems in most of the HIPCs (see World measured in GNI per capita in 2001 U.S. dollars. Bo- Bank aid IMF 2001a, 2002a). livia and Honduras currently exceed this cutoff. 6. Thus, debt reduction may lead to efficiency ben- 12. Developing nations are defined as 63 LICs and efits that could also be secured through reform in aid 54 lower-middle-income countries. delivery mechanisms. However, attempts at such re- 13. Underwood's analysis was heuristic, assessing forms have so far not been successful. the likelihood of countries running into dcebt service 1 01 DEBT RELIEF FOR THE POOREST: AN OED REVIEW CF THE HIPC INITIATIVE problems as determinecl by Paris Cluh rcschedulings. port markc ts for primary products, such as coffee, in Cohen (1997) confirmed these findings us ng formal the r fid-1990s. Thus, although a longer historical pe- statistical methods. Cohen (1996) used alternative riod (say from 1980 to 2000, as used by GAO 2000) methods to arrive at similar conclusions. may be bet ter for increased precision, this would ig- 14. The sample of 1MICs used here does not include norc possible structural breaks marking a departure any of the ;980s MIC debt crisis count ies. front the past. 15. In addition, counterfactual scznarios with dif- 4 On sverage, for the 24 countries that reached ferent projections about exports an(t the t_rms oF fu- thei - decision points by end-2000, the assumed real ture lending should compare the situation with and GDF grovxth rates are more than double the average without the HIPC Initiative. growth ra.es achieved in 1990-2000. 16. The appendix concludcs, 'Critical information ',. This finding is consistent with the external re- that we derived from the deht sustainmtbil ty are lyses viev. of ESAF, which notes that the impact of structural is not presented explicitly within lill'C do(uumerrts In adjustmenit has been varied across countries. In coun- some of the decision point docunme ts, the actual triec where the program has been implemented, eco- amount of debt relief a cou atry woult: receive is not notrnic pcrformance has improved (Botchwey and explicitly presented and had te be deduced from olthers 1998). other data provided. In addition, the amount c f bor- S. Of .hese 13 millennium rush countries, all 11 rowing that each country would neect after dtht re- reaching their decision point in November and De- lief is not reported and required a complex ceiinber 2000 had a mixed track record. methodology for us to derive. Finally, although the doc- 7. The CPIA Index is a summary measure of the pol- uments discuss Lhe resources that ciebt relief cvould icV and institutional performance of a country as as- contribut. to poverty rcduction activit cs, tl- es do se ssed by the World Bank's country team. It coverls a not mention that these are financial resources that hroad range of areas, including macroeconomic and each courtry would hawe to borrovC' (page 1 10). structural policies, public sector management and 17. The processes for the multilateral develop- st vice cdelivery, and policies for equity and social in- ment banks (MVDBs) have been strearmnlined, with clusion. The CPIA ratings are used, among other technical problems and methodological issues aci- things, to allocate IDA resources. dressed throughi semiannuial MDB mee ings chaired 8 Annex G gives a summary of proceedings fiom by the World Bank. This has helped secure smoother dthtor feedback workshops, and Annex I gives a syn- and more timely debt relief from most of the MDBs. thlesis of the country case studies. This finding sup- 18. Technical assistance has been proxideti by other ports the conclusions of the PRSP review by the World agencies, primarily UNCTAD, through some bilateral B ink arid IMF (2002b). donor-financed agencies such as DRI ancd regional 9. These findings are in line with the PRSP review initiatives. conducted by the Bank and the IMF In early 2002. 10. 13y rural development, this report refers sprecif- Chapter 5 i( ally to activities that enhance agriculture and agri- 1. The historical growth rates are obtained using cultural productivity, rather than social services or econometric regressions, which have the advantage potlert,v alleviation that may have a rural dimension. over the average year-on-year prowth ratei in not 11. Total allocations, including HIPC allocations, being as influenced hy the starting andt cndcing dates lavte gone up, but governments' budgetary contri- and by outlier,-. hutions have either declined somewvhat or have re- 2. The bounds represent the c(nomrnonly used 95 inained flat, while the overall (non-HIPC) buadget has percent statistical confidrlnce ioitcrv I for the esti- increased. mated growth rates. 12. For the 26 countries that have reached th eir E- 3. T'ne dctailed comparisons are rtstrictecd to the I iIPC decision points, in 2000 about 10.4 percent and performance in the perindo 199(0-2COo. F.:onornic 2 5 percent of the nominal value of total external debt performance in many counti-nes ax as miuch hetter- in .V-as oMvedi to non-Paris Club and commercial creditors, thc 1990s than in the 1980s hecause of more effec- -espectively. Of the total debt relief to be delivered (in tive policy reforms and, in some eases, hia.)Nant ex- 2001 NPV terms), 11.2 percent and 2.3 percent are the 1 0 2 ENDNOTES respective shares of the non-Paris Club and com- 6. Benin and Honduras had higher than expected mercial creditors. borrowing, and projections were broadly in line with 13. Of the total obligations to commercial credi- actual borrowing in four countries. tors of US$2.2 billion, about US$350 million or 16 per- 7. The one exception is Nicaragua, where new bor- cent is currently subject to litigation. Ten countries rowing was overestimated at the decision point. ha-e been sued, some by multiple creditors, in a 8. The fiscal indicator, debt service-to-revenue, total of 23 different cases. These include two lawsuits also shows that, with the exception of Bolivia and by ion-Paris Club official bilateral creditors, Iraq and possibly Mauritania, all countries would reach 10 per- Burundi, although Burundi has recently suspended cent or lower in the next two to three years. its court claim. The face value of total claims is 9. The expansion in the use of grants to assist US$.345.8 million. Of the total original claims of debt-vulnerable countries in the IDA13 replenish- US$ 167.4 million on which the judgments have been ment will to some extent help in addressing the con- made in favor of the creditors, the total reward is flict between the need for new resources and USS416 million. maintaining debt sustainability. The share of IDA13 fi- 14. It should be noted that the creditors with court nancing to be delivered in the form of grants over the judgments in their favor have not as yet been suc- next three years is expected to be between 18 and 21 cessful in converting them into payments by HIPCs. percent. Of this, a maximum of 44 percent (amount- This may possibly discourage other creditors-espe- ing to 8 percent of total IDA13 funds) can be allocated ciallv those with speculative motives-from pursu- as grants to assist debt-vulnerable countries with per ing further litigation. capita GNP of less than US$360 (and NPV of debt-to- 15. These organizations also include public agen- exports above 150 percent). Individually, these coun- cies such as the International Development Research tries can get up to 40 percent of their IDA allocation Center in Canada, theAgence Intergouvernementale in the form of grants. On average, with annual IDA dis- de la Francophonie, and the United Nations Institute bursements of about US$7.7 billion for the next three for T-aining and Research. years, this amounts to about US$600 million annually. 10. All countries met the macroeconomic per- Chapter 6 formance criteria under the IMF program. 1. Between 1996 and 1998, exports fell by USS28 11. The ratio of the assumed real GDP growth million, central government fell as a percentage of GDP rates for 2000-05 to the historical 1990-2000 actual from 4.3 percentage points, and the Guyanese dollar growth rates was 1.4 for the early entrants, but 2.4 for deprcciated from $141 to $165 per U.S. dollar. the millennium rush group. 2. Bilateral debt forgiveness above and beyond the 12. This problem, however, is not specific to HIPC HIPC nitiative is taken into account in this calculation. and is part of the broader set of problems with pub- Fxcluding bilateral debt forgiveness, the debt-to-rev- lic expenditure management in most countries. enue at the completion point would have been 174 13. The Ghana Public Fxpenditure Tracking Survey percent. found that only two-thirds of the funds for recurrent 3. Updated information on the NPV of debt is not expenditures reach their intended destinations (pri- available for 8 of the 17 countries. As new data become mary schools and primary health care clinics). available, the prospects for these countries might change. 14. The envisaged decline in debt service in 2005 4. Bank management notes that this conclusion was (that is, with the full impact of HIPC relief) as a ratio based on a rough exercise to estimate the costs of top- of current (2000) exports would decline to under 15 ping up. Many of the parameters used in the calcula- percent for all countries but Bolivia and Zambia, with tion of the NPV of debt were unchanged from the an average of about 10 percent. For most countries, decision point. it would be at orbelow 10 percent. The ratio forZam- 5. With some exceptions, export growth was lower bia is expected to fall after 2005, and for Bolivia, some than projected for most interim HIPCs. At the same years later. time, countries that had the same or improved debt 15. The debt service envisaged by 2005 (that is, with sustainability indicators also had significantly im- the full impact of HIPC) would be equivalent to 14.5 proved export performance. percent of the current (2000) revenues. 1 03 DEBT RELIEF FOR THE POOREST: AN OED REVIEW OF TIE HIIC INITIATIVE 16. As noted in enclnote 14 te Ch. ptcr 5, r'ow- vestmient a, a percent ofGDP increased to about 4 per- ever, sofartlhelitiga tngcreditor-iwiIhc ourt udgments cent Tor all three groups. in their favor have not heen successful in c onx citing 4 DAC data show that of the total aid recorded for the judgments into paymcnti by the IliPCs 200C, aboL t 25 percent is in the form of program aid 17. A majority of the countries Lha. hava qualified anti actions relating to debt." for HIPC debt relic' reached th-eir decision poirts in 2000, whereas the data on financicl flows are cur- Anniex G rently available only up to 2000). 1 T'he discussion questions were as follows: (a) 18. Some of the similarity i i trends in the DAC( and From your country's perspective, what was the ra- the DRS data is a result of both systems, Lsing thle same tion ale of the HIPC Initiative and what was the ex- source of data for multilateral flows (di-ectlv from pec eci outcome of your country's participation in the the multila-eral institutions' initi ative? (b) Is the HIPC Initiative's design adequate 19. The group of developi lg couni ries irncludce low- anci appropriate to achieve its stated objectives and in- and lower-middle-tncomr Part I countrie . as clcfined ten.led outcomes? (c) Is the HIPC Initiative likely to by DAC (that is, excluding rountries in tralsitior), hut achiexve is objectives and achieve them efficiently? excludes the three East Asian fina acial crisis countries (dl) To what extent does the design of the initiative help in thle group to remove lar.r e moox emer ts in huildl capacity and foster institutional change to ensure 1997-200C. HII'C objectives are achieved and sustained? 20. The shares were roughll cons.an=, sitl-i a flat trend, between 1990 andc 1998. Aiinex H 21. The average 1998 CPlA store x.as 3.11) foi ] I 'less otherwise indicated, HIPC will be used HIPCs, 3.30 for IDA non-F ll'Cs, anti 3.2 for lowNer- he:e to refer to the overall process, including the middle-income: non-HIPCs 'TIhe c irresponcling av- ev )lution from the original HIPC (O-HIPC) in 199(6 to erages for 201)0 arc 3.0)7, 3,25, timl ; 54, respe:tivelv tlh. cnhanced HIPC (E-HIPC) in 1999. One of the 14 22. The rcport underst ores tha thcsc tojbntries cr-ditor countries interviewed is not a Paris Club were amo)ng the better periforingm HI .Cs and thiat crcditor. findings are based on a se f-assessmernt 23. Se z Chanter 5 and hox 5.3 on ti-c various ca- Annex I pacity building efforts curr_ntlv unczr.vay. 1. Bank management noted that the original I lIPC k .ng-term deht sustainability paper explains that these Annex F ounmhe-s do not reflect the full extent of H[PC debt 1. The theory postulatcs that hevor:d an )ptimnal n hief th-iat would become available after the comple- point, tl dchts[ockhaso augatie imnpactin gro w:h li)n pcint. Figures cited in table 1.2 are higher than by discouraging investment. il ie 15C percent H-iIPC threshold because fou-of these 2. G-oss fixed capital forniiatioli ( is per1Ien1t Of L wuntr es have not yet reached the completion point. GDP) rose fastcr for hc IilPCs --oLt0.1gh tile 1990s tb-an for IDA non-111PCs aind loxcur-noitlcllc-incorne lAnnex K non-HIPCs, the comparator groups i -prCsunting oti er 1. "ifeavil;j Incdelbted Poor Coun, ries (I JIPC) Ini- poor but not heavily indc )ted crtri s. ;aCtile - Stattus ofhnmplementation," DC2002-3020, 3. 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Achieving Development Outcomes: TheM illennium Challenge Agricultural Fxtension The Kenya Fxperience Agricultural Fxtension and Research: Achiievements and Prohlems in National Systems Bangladesh: Progress Through Partnership Bridging Troubled Waters. Assessing the World Bank Water Resources Strategy Developing Towns and Cities. Lessons from Brazil and the Philippines The Drive to Partnership: Aid Coordmination and the Woirld Bank Financial Sectir Reform: A Review of World Bank Assistance Financing the Global Benefits of Forests The Bank's GEF Portfolio and the 1991 Forest Strategy and Its Implementation Fiscal Management in Adjustment Lending IDAs Partnership for Poverty Reduction India. The Challenges of Devclopment India: The Dairy Revolution Information Infrastructure The World Bank Group's Expcrience Investing in Hlealth: Development Effectiveness in the Hcalth, Nutrition, and Population Sector Lesotho Development in a Challenging Environmcnt Mainstreaming Gender in World Bank Lending: An Update The Ncxt Ascent An Evaluation of the Aga Khan Rural Support Program, Pakistan Nongovernmental Organizations in World Bank-Supported Projects A Review Paddy Irrigation and Water Management in Southeast Asia Poland Country Assistance Review. Partnership in a Transition Economy Poverty Reduction in the 1990s: An Evaluation of Strategy and Performance Promoting Environmental Sustainahility in Development Reforming Agriculture: The WX'orld Bank Goes to Market Social Funds Assessing Effectiveness Uganda Policy Participation, People The World Bank's Expcnencc with Post-Conflict Reconstruction The World Bank's Forest Strategy: Stnking the Right Balance Zambia Country Assistance Review: Tlhrning an Economy Around Evaluation Country Case Series Bosnia and Herzegovina: Post-Conflict Reconstruction Brazil Forests in the Balance Challenges of Conservation with Development Cameroon. Ftrest Sector Developmcnt in a Difficult Political Econoimy China: From Afforestation to Poverty Alleviation and Natural Porest Management Costa Rica Forest Strategy and the Evolution tof Land Use El Salvador. Post-Conflict Reconstruction India: Allcviating Poverty through Forest Development Indionesia. The Challenges of World Bank Involvement in Forests Uganda. Post-Conflict Reconstruction Proceedings Global Public Policies and Programs. Implications for Financing and Evaluation Lessons of Fiscal Adjustment Lesson from Urban Transport Evaluating the Gender Impact ofWiorld Bank Assistance Evaluation and Development The Institutional Dimension (Transaition Publishers) Evaluation and Poverty Reduction Monitoring & Evaluation Capacity Development in Afnca Public Sector Performance-The Critical Role of Evaluation Multilingual Editions Assessing Develotpment Effectivencss: Evaluation in the World Bank and the: International Financc Corptoratiion Apprticiation de l'efficacite du diiveloppeinent. l'evaliuation a la Banque niondiale et cz la Soci&tefmnancichre internationale Deterrzinar la eficacia de las actividades de desarrollo. l.a evaluaci6n en el Banco Mlundialy lia Corporacion Financiera Internacional C6te d'ltoire Revue de I'aide de la Banque mondiale au pays Philippines From Cnsis to Opportunity Filipinas Crisisy oportunidades Rebuilding the M ozambique Economy Ass-essment of a Developmnent Partnership Reconstruir a E'conomia de ,ifoqambique http.//wwwouvrldhank.org/ocd THE WORLD BANK 1818 H Street, N.W. WVashington, D.C. 20433, U.S.A. Telephone: 202-473-1000 Facsimile: 202-477-6391 Telex: MCI 64145 WORLDBANK MCI 248423 WORLDBANK Internet: w"iv.worldbank.org Operations Evaluation Department Partnerships & Knowledge Programs (OEDPK) E-mail: eline@worldbanLorg Telephone: 202-458-4497 Facsimilie: 202-522-3125 World Bank InfoShop E-mail: pic@worldbankorg Telephone: 202-458-5454 Facsimilie: 202-522-1500 t4A - . .Zl 780 21'355213 52 W :r ,r, , ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~4.~78811 , 5213'