debt relief for the poorest

Debt Relief forthe PoorestAn OEDReview of the

HIPC Initiative

Madhur Gautam

2003THE WORLD BANK

Washington, D.C.

WORLD BANK OPERATIONS EVALUATION DEPARTMENT

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Contents

vii Acknowlegments

ix Forewordix Forewordix Prefácioxi Préfacexi Prólogo

xiii Executive Summaryxiii Executive Summaryxiii Resumo Executivoxix Résumé analytiquexix Resumen

xxvii Abbreviations and Acronyms

11. Introduction2 Progress and Current Status 3 Evaluation Design

52. Evolution of Debt and the Debt Problem5 Evolution of the HIPC Debt Burden 8 The Consequences of an Excessive External Debt Burden

93. The HIPC Initiative9 Background 10 The Political Economy of HIPC 11 The HIPC Objectives 11 The Process

15 4. Design of the Initiative15 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

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25 Creditor Participation 25 Capacity Building

27 5. Implementation Experience27 Pace of Implementation 27 Debt Sustainability Analysis 30 Performance Criteria 34 Creditor Participation35 Institutional Development: Capacity Building for External

Debt Management

37 6. Likely Outcomes—Preliminary Findings37 Debt Sustainability42 Progress Toward Performance Criteria 46 Incremental Resource Transfer 50 Debt Management Capacity 51 Likely Outcomes

53 7. Findings and Recommendations53 Relevance55 Efficacy and Efficiency56 Sustainability56 Institutional Development57 Recommendations

59 Annexes61 A:HIPCInitiative: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 Perspectives on the Heavily Indebted Poor Country

(HIPC) Initiative 81 I: Synthesis of Main Findings from Case Studies 87 J: Constraints to Growth as Identified by OED Country Assistance

Evaluations 89 K: Management Response95 L: Chairman’s Summary: Committee on Development Effectiveness (CODE)

99 Endnotes

105 References

Figures6 2.1 Evolution of the HIPC Debt Burden7 2.2 Net Resource Transfers to HIPCs Have Outpaced Debt Service20 4.1 HIPC Target for Debt-to-Export Ratio Compared with

Other Poor Countries

21 4.2 What Would Be a Good Debt-to-GDP Target?30 5.1 Structural Adjustment Compliance Fosters GDP Growth40 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 Countries44 6.4 Average Policy Performance Scores of Early Entrants, the

“Millennium Rush” Group, and Late Entrants48 6.5 Declining Aggregate Net Transfers to HIPCs48 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

Tables5 2.1 External Debt as Percentage of GDP (period average)12 3.1 The Original and Enhanced HIPC Frameworks in a Nutshell29 5.1 Comparison of DSA Export Growth Projections and Historical

Performance38 6.1 Debt Sustainability Indicators for O-HIPC Graduates39 6.2 Debt Sustainability Indicators for E-HIPC Graduates43 6.3 Countries with Difficulties Staying on Track with Macroeconomic and

Structural Programs in 2001

Boxes2 1.1 Status of the 42 Eligible HIPCs (as of August 2002)16 4.1 Uganda’s Influence on the Design of the HIPC Initiative32 5.1 Debtor Countries Endorse the Links Between the HIPC Initiative and

the PRSP35 5.2 PERs Highlight Absorptive Capacity Constraints in the Social Sectors

in HIPCs36 5.3 Increasing World Bank Involvement in Debt Management Capacity

Building42 6.1 Topping-Up and the Prospects for Debt Sustainability for Burkina Faso

CONTENTS

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Acknowledgments

This report was prepared by a team led byMadhur Gautam. Members of the coreteam were Georgia Wallen, Shonar Lala,

and Yusuf Ahmad. Victoria Elliott provided over-all guidance to the team as manager of the Cor-porate Evaluation and Methods Group, withsubstantial input into the formulation of thefinal report. Professors Thomas M. Callaghy andJonathan Eaton contributed key background pa-pers and have advised the team at critical stagesof the review. Magdalene Apenteng, William Bat-taile, Sunday Khan, Michael Lav, and Mirafe Mar-cos contributed to the country case studies.Additional inputs were provided by Judith Hahn,Robert Keyfitz, Carlos Reyes, and P. A. Shara-fudheen. Parveen Moses provided administrativesupport, with assistance from Annisa Cline-Thomas and Julia Ooro. William Hurlbut andCaroline McEuen edited the report.

The evaluation has benefited from discus-sions, comments, and assistance from numerouspeople. Special thanks are due to former and cur-rent staff of the World Bank’s HIPC unit, in par-ticular Mark Dorfman, Francis Earwaker, AnthonyGaeta, Charlene Adam Gust, Young Chul Kim,Jacob Kolster, Vikram Nehru, and Axel van Trot-senberg, for their cooperation at all stages ofthe review. Inputs from the following persons areacknowledged with gratitude: Lisandro Abrego,Masood Ahmad, Oliver Buston, John Cady,Punam Chuhan, Stijn Claessens, Shantayanan

Devarajan, Sumana Dhar, Geske Djikstra, WilliamDorotinsky, Ceri Edmonds, Ibrahim Elbadawi,Mahyar Eshragh-Tabary, Gerald Flood, IndermitGill, Romilly Greenhill, Jo Marie Griesgraber,Bernhard Gunter, Sanjeev Gupta, Maria Ionata,Keith Jay, Kadima Kalonji, Nawal Kamel, JeffreyKatz, Heinz Kaufmann, Tony Killick, Jeni Klug-man, Matthew Martin, Calvin McDonald, RobMills, John Mitchell, Ashoka Mody, CatherinePattillo, Ann Pettifor, Malvina Pollock, RobertPowell, Doris Ross, Alison Scott, Kathy Selvaggio,Sudhir Shetty, Veena Siddharth, Miriam Tamane,Melissa Thomas, Rachel Turner, D. C. van derHoek, Nicholas Vaughan, Jian-Ye Wang, HowardWhite, Alexandre Widmer, John Williamson, andHanspeter Wyss.

OED is grateful to the Swiss Agency for De-velopment Cooperation for financial assistanceto support a number of activities, including themultistakeholder workshop and background re-search. OED also thanks the U.K. Departmentfor International Development for sponsoringthe Lilongwe and London workshops, Debt Re-lief International for organizing the workshops,and the finance ministers and their representa-tives from the 24 HIPCs who participated inthese two workshops for their time and invalu-able inputs. The evaluation benefited greatlyfrom the feedback from the World Bank’s ex-ecutive directors and their advisers from 14creditor countries on their perspectives on the

initiative. Thanks are due to the governments ofCameroon, Guyana, Malawi, Uganda, and Zam-bia for agreeing to be case study countries forthis review, and to the numerous governmentofficials and civil society and donor represen-tatives interviewed in these countries. The coun-try case studies also benefited significantly fromthe assistance and inputs of the respective WorldBank and IMF country teams. Finally, the eval-uation team is grateful to the participants of

the multistakeholder technical workshop heldin Washington in September 2002 for their timeand inputs.

The study was published in OED’s Partner-ships and Knowledge Group, under the directionof Osvaldo Feinstein, by the Outreach and Dis-semination staff of the Knowledge ManagementUnit, including Patrick Grasso, lead knowledgemanagement officer, Caroline McEuen, editor;and Juicy Qureishi-Huq, team assistant.


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Director-General, Operations Evaluation: Gregory K. IngramDirector, Operations Evaluation Department (Acting): Nils Fostvedt

Manager, Corporate Evaluation and Methods: Victoria ElliottTask Manager: Madhur Gautam

FOREWORD

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FOREWORD

The creation of the Heavily Indebted Poor Countries(HIPC) Debt Initiative marked a turning point in the evolu-tion of development finance. The HIPC Initiative has beena catalyst for far-reaching changes in the processes sur-rounding development assistance, reflecting the comingof age of a new authorizing environment with the activeparticipation of civil society. It has introduced greatertransparency and accountability in the sovereign debtregime and raised development cooperation to a higherplane, including between the World Bank and the Inter-national Monetary Fund.

This review by the Operations Evaluation Departmentfinds the HIPC Initiative highly relevant in addressinga key obstacle facing many poor countries. If the an-ticipated debt relief is delivered in full, the initiative willsucceed in substantially achieving its fundamental goalof reducing the excessive debt burden of the qualify-ing countries. But the legitimizing process that helpedmake the initiative a reality has also expanded its ob-jectives. The initiative seeks to provide a “permanent”exit from debt rescheduling, promote growth, and re-lease resources for social expenditures targeted atpoverty reduction. Achieving these objectives will re-quire actions by donors and the HIPC governmentsthat are beyond the scope and means of the initiative.

Unmanageable debt is a problem that needs to beeffectively dealt with, but it is also a result of economicand political factors constraining growth and povertyreduction. The HIPC Initiative is thus an importantbut small part of the overall development assistanceframework. Having provided the HIPCs with an op-portunity for a “fresh start,” the international com-munity still faces a challenge in helping these countriesset out on a sustainable path for growth and povertyreduction. This requires actions by the HIPC govern-ments to adopt sound policy frameworks and a bal-anced development strategy. It also requires actions bythe international community to assist the countries toenhance their exports and build needed institutionalcapacities. A further challenge for donors, consistent

PREFÁCIO

A criação da Iniciativa para os Países Pobres MuitoEndividados (PPME) marca uma viragem na evolução do fi-nanciamento do desenvolvimento. A iniciativa para osPPME tem sido catalisadora de mudanças de longo al-cance nos processos que rodeiam a assistência ao desen-volvimento, o que reflecte a maturação de uma novaconjuntura que autoriza a participação activa da socie-dade civil. Ela introduziu uma maior transparência e res-ponsabilidade no regime da dívida estatal e elevou acooperação para o desenvolvimento a um nível mais alto,inclusivamente a cooperação entre o Banco e o FMI.

Esta análise realizada pela OED mostra que a iniciativapara os PPME é muito pertinente para abordar um grandeobstáculo que enfrentam muitos países pobres. Se o alí-vio previsto da dívida for prestado na sua totalidade, a ini-ciativa conseguirá alcançar substancialmente o seuobjectivo fundamental de reduzir o encargo excessivo dadívida dos países qualificados. Mas o processo de legiti-mação que contribuiu para que a iniciativa se tornasse umarealidade também ampliou os seus objectivos. A inicia-tiva procura proporcionar uma saída “permanente” do re-escalonamento da dívida para promover o crescimentoe desbloquear recursos para as despesas sociais dirigidasà redução da pobreza. Para atingir estes objectivos seránecessário que os doadores e os governos dos PPMEtomem medidas que vão para além do alcance e dosmeios da iniciativa.

A dívida descontrolada é um problema que tem queser tratado efectivamente, mas também é o resultadode factores económicos e políticos que constrangem ocrescimento e a redução da pobreza. A Iniciativa para osPPME é, portanto, uma parte importante, porém pe-quena, de toda a estrutura de assistência ao desenvolvi-mento. Tendo proporcionado aos PPME a oportunidadede “começar de novo”, a comunidade internacional en-frenta ainda o desafio de ajudar os países que estão notrilho do crescimento e da redução da pobreza. Isso re-quer que os governos dos PPME tomem medidas paraadoptar um sólido quadro de políticas e sigam uma es-tratégia de desenvolvimento equilibrado. Também re-

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with one of the initiative’s main guiding prin-ciples, is to provide adequate resources to meetthe development priorities of HIPCs as well asother poor countries, and ensure that the HIPCdebt relief is truly additional to other aid flows.

The review makes four recommendationsaddressing the strategic issues facing the ini-tiative. The first is to clarify and communicate

the purpose and objectives of the initiative and ensurethat its design is consistent with these objectives. Thesecond recommendation is to make explicit themethodology and economic models underlying thedebt projections used in the debt sustainability analy-ses and make the economic forecasts more realistic toassess better the prospects and risks facing individualcountries. Third, the initiative should maintain thestandards for HIPCs’ policy performance to ensurethat the risks to achieving and maintaining the initia-tive’s objectives are minimized. And when flexibility isdesirable, there should be a clear and transparent ra-tionale for relaxing the criteria. Finally, the review rec-ommends a greater focus on pro-poor growth toprovide a better balance among development priori-ties relative to the current emphasis on social expen-ditures.

quer que a comunidade internacional empreendauma acção para auxiliar os países a incrementar assuas exportações e a edificar as capacidades ins-titucionais que são necessárias. Um desafio adi-cional para os doadores, que é coerente com umdos grandes princípios orientadores da iniciativa,é o de proporcionar recursos adequados paracumprir as prioridades de desenvolvimento dos

PPME, assim como as de outros países pobres, e o de as-segurar que o alívio da dívida dos PPME se venha verda-deiramente adicionar aos outros fluxos de ajudas.

Esta análise formula quatro recomendações para abor-dar as questões estratégicas que se colocam à iniciativa.A primeira é esclarecer e comunicar quais são a finalidadee os objectivos da iniciativa e assegurar que ela seja con-cebida de maneira coerente com esses objectivos. A se-gunda recomendação é tornar explícita a metodologia eos modelos económicos subjacentes às projecções da dí-vida usados nas análises de sustentabilidade da dívida efazer com que as previsões económicas sejam mais rea-listas para se poder avaliar bem as perspectivas e os ris-cos que os países individuais enfrentam. Em terceirolugar, a iniciativa deveria manter os padrões do desem-penho de política dos PPME para assegurar que os riscosde alcançar e manter os objectivos da iniciativa sejam mi-nimizados. E quando for desejável uma maior flexibilidade,deverá haver razões claras e transparentes para suavizaros critérios. Finalmente, esta análise recomenda que hajauma maior focalização no crescimento em prol dos po-bres para estabelecer um melhor equilíbrio entre as prio-ridades do desenvolvimento e o ênfase actualmente dadoàs despesas sociais.


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FOREWORD

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PRÉFACE

La création de l’Initiative en faveur des payspauvres très endettés (Initiative PPTE) a marqué un tour-nant dans l’évolution du financement du développement.L’Initiative a joué un rôle de catalyseur pour l’introductionde réformes de grande portée dans les processus qui en-tourent l’aide au développement, traduisant la maturationd’un nouvel environnement réglementaire auquel la sociétécivile participe activement. Elle a introduit une plus grandetransparence et une plus grande responsabilisation dansle régime de la dette souveraine et elle a haussé le niveaude la coopération pour le développement, notamment entrela Banque et le FMI.

À l’issue de l’examen qu’il a effectué, l’OED conclutque l’Initiative PPTE a été un moyen très efficace de s’at-taquer à un obstacle crucial auquel sont confrontés denombreux pays pauvres. Si les allègements de dettesprévus sont accordés dans leur totalité, l’Initiative auraatteint son objectif fondamental, qui est de réduire lepoids excessif de la dette des pays qui réunissent lesconditions requises. Mais le processus de légitimationqui a contribué à faire de l’Initiative une réalité en aaussi élargi les objectifs. La finalité de l’Initiative est depermettre une sortie «définitive» des opérations derééchelonnement de la dette, de promouvoir la crois-sance et de libérer des ressources afin de pouvoir ac-croître les dépenses sociales consacrées à la luttecontre la pauvreté. Pour atteindre ces objectifs, lesbailleurs de fonds et les gouvernements des PPTE de-vront prendre des mesures qui dépassent la portée etles moyens de l’Initiative.

Un endettement ingérable est un problème qui re-quiert un traitement efficace, mais c’est aussi la consé-quence d’un ensemble de facteurs économiques etpolitiques qui pèsent sur la croissance et la lutte contrela pauvreté. L’Initiative PPTE est donc un élément im-portant quoique modeste du dispositif global de l’aideau développement. Après avoir donné aux pays pauvrestrès endettés la possibilité de prendre un «nouveau dé-part», la communauté internationale n’en est pasmoins confrontée à une gageure, qui est d’aider ces

PRÓLOGO

La Iniciativa para la Reducción de la Deuda de losPaíses pobres Muy Endeudados (PPME) representa un puntode inflexión en la evolución del financiamiento para el de-sarrollo. Ha actuado como agente catalizador de profundoscambios en los procesos relacionados con la asistenciapara el desarrollo, lo que denota que un nuevo ordena-miento ha alcanzado la mayoría de edad, con la participa-ción activa de la sociedad civil. La iniciativa ha introducidomayor transparencia y ha reafirmado la obligación de ren-dir cuentas en el régimen de la deuda soberana, y ha lle-vado a un plano superior la cooperación para el desarrollo,especialmente entre el Banco Mundial y el Fondo Mone-tario Internacional.

En este examen del DEO se llega a la conclusión deque la Iniciativa para los PPME es de gran importancia paraabordar un obstáculo al que se enfrentan muchos paísespobres. Si se concede la totalidad del alivio previsto dela deuda, la iniciativa logrará alcanzar su objetivo funda-mental de reducir la carga excesiva de la deuda de los pa-íses que reúnan los requisitos pertinentes. Sin embargo,el proceso de legitimación que ayudó a hacer realidad lainiciativa también ha ampliado sus objetivos. La Iniciativaprocura otorgar una salida “permanente” de la repro-gramación de la deuda, promover el crecimiento y libe-rar recursos para que puedan aplicarse al gasto socialdestinado a la reducción de la pobreza. A fin de alcanzarestos objetivos será preciso que los donantes y los go-biernos de los PPME adopten medidas que trasciendenel alcance y los medios de la iniciativa.

Una deuda de proporciones ingobernables es un pro-blema que debe abordarse con eficacia, pero también esproducto de factores económicos y políticos que limitanel crecimiento y obstaculizan la reducción de la pobreza.Por ello, la Iniciativa para los PPME es una parte impor-tante pero menor de la asistencia para el desarrollo ensu conjunto. Después de ofrecer a los PPME la oportu-nidad de “empezar desde cero”, la comunidad interna-cional se ve aún ante la dificultad de ayudar a esos paísesa transitar una senda sostenible de crecimiento y reduc-ción de la pobreza. Para lograrlo, los gobiernos de los

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pays à s’engager dans la voie d’une croissancedurable qui leur permettra de faire reculer lapauvreté. Pour cela, il faut que les dirigeants desPPTE adoptent un cadre de politique écono-mique rationnel et une stratégie de dévelop-pement équilibrée. Il faut aussi que lacommunauté internationale prenne des me-sures pour aider les pays à accroître leurs ex-

portations et à se doter des capacités institutionnellesnécessaires. Les bailleurs de fonds doivent relever uneautre gageure, qui s’inscrit dans la logique des grandsprincipes de l’Initiative, et qui est de fournir des res-sources suffisantes pour faire face aux priorités de dé-veloppement des PPTE et d’autres pays pauvres, et deveiller à ce que les allègements de dette accordés auxPPTE soient vraiment des concours additionnels auxautres apports d’aide.

L’examen débouche sur quatre recommandationspour traiter les problèmes stratégiques liés à l’Initiative.La premièreest de clarifier et de faire connaître la fi-nalité et les objectifs de l’Initiative, en veillant à ceque le plan d’action qu’elle comporte soit cohérent avecles objectifs poursuivis. La deuxième est d’expliciter laméthodologie et les modèles économiques qui sous-tendent les projections de la dette sur lesquelles re-posent les analyses du degré d’endettement tolérable,et de faire des projections économiques plus réalistesafin d’apprécier plus justement les perspectives d’évo-lution des différents pays considérés et les risquesauxquels ils sont confrontés. La troisièmerecomman-dation est de maintenir les critères de performance del’action gouvernementale des PPTE afin de minimiserles éléments de risque qui pourraient compromettreles objectifs de l’Initiative ou rendre ses résultats pré-caires. Et s’il faut assouplir les critères établis, une jus-tification claire et transparente doit être fournie. Enfin,les auteurs de l’examen demandent de mettre davan-tage l’accent sur une croissance qui réponde aux be-soins des pauvres afin d’établir un meilleur équilibreentre les priorités de développement par rapport à lapolitique actuelle, qui privilégie les dépenses sociales.

PPME deben adoptar marcos normativos racio-nales y una estrategia de desarrollo equilibrada. Lacomunidad internacional, por su parte, debe ayu-dar a esos países a aumentar sus exportaciones yfortalecer su capacidad institucional. Los donan-tes enfrentan además otro desafío, congruentecon uno de los principios rectores de la iniciativa:suministrar recursos suficientes para que los PPME

y otros países pobres puedan atender las prioridades enmateria de desarrollo, y cerciorarse de que el alivio de ladeuda de los PPME se sume, sin lugar a dudas, a otras co-rrientes de ayuda.

En el examen se formulan cuatro recomendacionessobre las cuestiones estratégicas que se plantean a la ini-ciativa. La primera es aclarar y comunicar el propósito ylos objetivos de la iniciativa y garantizar que su diseñoguarde coherencia con estos objetivos. La segunda con-siste en explicar la metodología y los modelos económicosen que se basan las proyecciones de la deuda utilizadasen los análisis de sostenibilidad de ésta y realizar pro-nósticos económicos más realistas para evaluar mejor lasperspectivas y los riesgos que cada país tiene ante sí. Entercer lugar, la iniciativa debe mantener las normas parael cumplimiento de las políticas por parte de los PPME,a fin de reducir al mínimo el riesgo de que no se puedanalcanzar y mantener los objetivos de la iniciativa. Y cuandosea conveniente actuar con flexibilidad, debe existir unajustificación clara y transparente para aplicar con menosrigor los criterios pertinentes. Por último, en el examense recomienda dedicar más atención a un crecimiento quebeneficie a los pobres, a fin de hallar un equilibrio mássatisfactorio entre las prioridades en materia de desarrolloen relación con la importancia que se atribuye actual-mente al gasto social.


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Gregory K. IngramDirector-General,

Operations Evaluation

EXECUTIVE SUMMARY

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EXECUTIVE SUMMARY

The Heavily Indebted Poor Countries (HIPC) DebtInitiative marks a major innovation in the development fi-nance regime. Relative to past efforts, it is more concertedacross creditors and more comprehensive in its attempt toreduce the high external debt—including, for the firsttime, multilateral debt—of many of the poorest countries.It has made the processes surrounding the sovereign debtregime more open and accountable. The initiative alsomarks a significant break with the past in how develop-ment aid is approached. Its design embodies lessons of ex-perience linking aid effectiveness with the policyenvironment and aid coordination, conditionality withownership, and social impacts of macroeconomic policyreforms with public expenditure prioritization.

Public concern with excessive debt burdens to-gether with declining aid resources and poor per-formance in poverty reduction provided the impetusfor debt relief. With the vocal support of advocacynongovernmental organizations, these concerns cameto be shared by pragmatic policymakers in donor gov-ernments and international financial institutions. Theoverarching poverty reduction mission of the devel-opment community became the core justification forthe HIPC Initiative, with considerable political reso-nance in the wake of the Jubilee campaign. By 1999,the enhanced HIPC explicitly identified debt sustain-ability and poverty reduction as its twin objectives.

The HIPC Initiative was triggered by a confluenceof factors including the ascendancy of international civilsociety organizations and their growing influence onmajor creditors, and a change in the World Bank’sleadership. Debtors had no explicit role in the designof the original initiative and limited influence on thedesign of the enhanced initiative, even though they arecentral to its implementation.

The specific objectives of the initiative have evolved.1

The original goal in 1996 was to remove the debt over-hang as a constraint to economic growth and povertyreduction. The modifications introduced in 1999brought not only deeper, broader, and faster debt re-

RESUMO EXECUTIVO

A Iniciativa para a Dívida dos Países Pobres MuitoEndividados (PPME) constitui uma inovação importante noregime de financiamento do desenvolvimento. Em relaçãoaos esforços do passado, ela reflecte um maior acordoentre os credores e revela-se mais abrangente na sua ten-tativa de reduzir uma dívida externa elevada—inclusiva-mente, e pela primeira vez, a dívida multilateral—de muitospaíses mais pobres. Ela tornou os processos circundantesdo regime da dívida soberana mais abertos e responsá-veis. A iniciativa marca igualmente uma quebra significa-tiva em relação ao passado na maneira como são abordadasas ajudas ao desenvolvimento. A sua concepção incorporaos ensinamentos da experiência, estabelecendo uma li-gação entre a eficácia das ajudas e a conjuntura políticae a coordenação da assistência, entre as condicionalida-des e os programas executados sob os auspícios dos paí-ses e entre os efeitos sociais das reformas de políticamacro-económica e a definição das prioridades das des-pesas públicas.

A preocupação pública com os encargos excessivos dadívida, com o decréscimo dos recursos das ajudas e como fraco desempenho em matéria de redução da pobreza,deram o ímpeto ao alívio da dívida. Com o apoio sonorodas organizações não governamentais (ONG) defensoras,essas preocupações passaram a ser partilhadas pelos de-cididores pragmáticos de política dos governos doado-res e das instituições financeiras internacionais. Aincumbência primordial de redução da pobreza extra-ordinária da comunidade dedicada ao desenvolvimentotornou-se a justificação básica da Iniciativa para os PPME,que teve uma ressonância política considerável na se-quência da campanha do Jubileu. Em 1999, a Iniciativapara os PPME reforçada identifica explicitamente a sus-tentabilidade da dívida e a redução da pobreza comosendo os seus objectivos gémeos.

A Iniciativa para os PPME foi provocada por uma con-fluência de factores, nos quais estão incluídos a as-cendência das organização internacionais da sociedade civile a sua influência crescente sobre os maiores credores, euma mudança de liderança no Banco. Os devedores não

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lief, but also a more ambitious and expanded setof objectives—to provide a “permanent” exitfrom debt rescheduling, promote growth, andrelease resources for higher social spendingtargeted at poverty reduction. The need to cre-ate fiscal space for social expenditures was a crit-ical prerequisite of broad-based support for theinitiative among donors and has had a major im-

pact on the objectives of the initiative, its design, andits implementation.

If the anticipated debt relief is delivered, the initia-tive will succeed in substantially reducing most HIPCs’external debt stocks and their debt service (on average)to below the levels of other poor countries. Thus, theinitiative is likely to achieve its original goal—to reducethe external debt burden of several of the poorest coun-tries and give them a “fresh start.” But to simultaneouslyachieve all three objectives—specifically to free up re-sources for increased social expenditures—the initiativewould have to transfer additional real resources to thecountries. And to do this without diverting aid resourcesfrom poor but not highly indebted countries, the over-all level of aid resources would have to increase. Al-though the initiative’s objectives are predicated on theassumption that (other things being equal) past aid lev-els would be maintained, so that HIPC resources wouldbe additional, the initiative’s design cannot ensure thatthis will happen. The initiative thus faces the risk ofpromising outcomes (related to its multiple objectives)that it cannot deliver by itself.

In fact, there was a sharp decline in global net re-source transfers starting about the time the initiative wascreated. As a result, although the HIPCs as a group aregetting an increasing share of declining global aid re-sources relative to other poor countries, they are notreceiving additional funds in absolute terms comparedwith what they were receiving before the creation of theinitiative (that is, until 1995). Because net transferswere depressed in the years immediately before mostcountries qualified for debt relief, these years are notthe most appropriate benchmark for establishing ad-ditionality. It is too early to quantitatively determinewhether there is a reversal in the recent decliningtrend. To the extent that the initiative has succeededin protecting the HIPCs’ share of aggregate aid flows,it may be judged to be a limited success. However, itappears that the share of other poor countries has de-

tinham um papel explícito na concepção da ini-ciativa original, e uma influência limitada na con-cepção da iniciativa reforçada, embora eles sejamcruciais para a sua implementação.

Os objectivos específicos da iniciativa evoluí-ram.1 O objectivo original em 1996 era o de remo-ver a dívida acumulada que era um constrangimentoao crescimento económico e a redução da po-

breza. As modificações introduzidas em 1999 trouxeramnão só um alívio da dívida mais profundo, mais amplo emais rápido, mas também um conjunto de objectivos maisambiciosos e extensos– para oferecer uma “saída” per-manente ao reescalonamento da dívida, para promover ocrescimento, e para desbloquear recursos permitindomaiores gastos sociais dirigidos à redução da pobreza. Anecessidade de criar um espaço fiscal para as despesas so-ciais era uma condição sine qua non crítica do apoio debases amplas à Iniciativa entre os doadores, e tem tido umefeito importante sobre os objectivos da iniciativa, sobrea sua concepção e sobre a sua implementação.

Se o alívio da dívida previsto for proporcionado, a ini-ciativa vai conseguir reduzir substancialmente a dívida ex-terna acumulada da maioria dos PPME e o serviço dadívida (em média) para um nível inferior ao de outros pa-íses pobres. Assim, a iniciativa atingirá provavelmente oseu objectivo original—reduzir o encargo da dívida ex-terna de vários países mais pobres, e dar-lhes a possibi-lidade de “começarem de novo”. Mas, para alcançar osseus objectivos actualmente declarados—sustentabili-dade da dívida, crescimento e despesas sociais acresci-das—a iniciativa teria que transferir recursos reaisadicionais para os países. E, para fazer isso sem desviarrecursos das ajudas dos países pobres mas não muito en-dividados, o nível global dos recursos da ajuda teriam queaumentar. Embora os objectivos da iniciativa se fundemna suposição de que (sendo todas as coisas iguais) os ní-veis passados das ajudas seriam mantidos, para que os re-cursos para os PPME fossem adicionais, a formulação dainiciativa não pode assegurar que isso aconteça. A iniciativacorre portanto o risco de prometer resultados (relacio-nados com os seus múltiplos objectivos) que ela nãopode proporcionar por si mesma.

De facto, houve uma diminuição acentuada dos re-cursos das ajudas, em termos globais, aproximadamentea partir do momento em que foi criada a Iniciativa. Emconsequência, embora os PPME como um grupo estarema receber uma parte crescente dos recursos mundiais de-


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clined correspondingly. The resulting redistrib-ution conflicts with the principle of performance-based allocation and could reduce the overallefficiency and effectiveness of aid. This outcomeis a direct consequence of funding limitations,and it cannot be overcome through design im-provements internal to the initiative as currentlyconceived. A clear acknowledgment of the lim-

itations imposed by past and current aid levels wouldfacilitate the realignment of the initiative’s basic ob-jectives with the resources actually available.

A key element in assessing the initiative’s likelihoodof achieving its core objective of debt sustainability isthe projection of debt indicators. The initiative uses adebt inventory methodology for assessing current debtlevels that is a clear improvement over past practice anda sound basis for calculating the amount of debt relieffor individual countries. The initiative also projects fu-ture debt levels to assess each country’s likelihood ofachieving debt sustainability. The methodological basisunderlying these projections in the debt sustainabilityanalyses (DSAs) has not been made transparent, and thegrowth assumptions maintained in the DSAs have beenoveroptimistic in relation to historical growth rates.Debt indicators are influenced by how future debt lev-els, exports, and other macroeconomic aggregatesevolve. The economic model behind these projectionsneeds to be made explicit, and the economic forecaststhat are the basis of projections should become morerealistic. In particular, they need to better capture thepotential effects of volatility in export earnings—a keyrisk factor. Improved risk analysis would provide a bet-ter assessment of each country’s likelihood of meetingthe initiative’s debt sustainability threshold. This wouldnot by itself improve the prospects for debt sustainability,but it might foster a more informed debate about thepolicy changes needed in donor and recipient countriesalike—as well as greater realism in setting objectives andfunding arrangements for the initiative.

Meeting the objective of debt sustainability will bea challenge for the HIPCs on both the debt and revenuesides. These countries may need to continue to bor-row to meet their development needs, especially in theabsence of adequate grants. Their main challenge is toensure that the funds are invested productively and ef-ficiently to promote repayment capacity. To do so re-quires improved public expenditure management

clinantes das ajudas em relação a outros países po-bres, eles não estão a receber fundos adicionaisem termos absolutos, comparado com aquilo queestavam a receber antes da criação da iniciativa(isto é, em 1995). Visto os fluxos das ajudas terembaixado nos anos imediatamente anteriores àmaioria dos países estarem habilitados para re-ceber o alívio da dívida, esses anos não são a re-

ferência mais apropriada para estabelecer umaadicionalidade. É demasiado cedo para determinar quan-titativamente se existe uma inversão da recente tendên-cia decrescente. Na medida na qual a iniciativa foi bemsucedida ao proteger a parte dos fluxos agregados das aju-das dos PPME, isso pode ser considerado como um êxitolimitado. Contudo, parece que a participação de outrospaíses pobres decresceu de maneira correspondente. Aconsequente redistribuição está em conflito com o prin-cípio de distribuição com base no desempenho e pode-ria reduzir a eficiência e a eficácia globais. Este resultadoé uma consequência directa das limitações do financia-mento, e não pode ser superado através de melhora-mentos internos da iniciativa, como ela é actualmenteconcebida. Um reconhecimento claro das limitações im-postas pelos níveis das ajudas, passados e actuais, facili-taria um realinhamento dos objectivos básicos da iniciativacom os recursos actualmente disponíveis.

Um elemento fundamental para avaliar a probabili-dade de a Iniciativa alcançar os seus objectivos básicos desustentabilidade da dívida é a projecção dos indicadoresda dívida. A iniciativa usa uma metodologia de inventárioda dívida para avaliar os níveis actuais da dívida, o que éum melhoramento evidente em relação à prática do pas-sado, e é uma base sólida para calcular o montante do alí-vio da dívida para os países individualmente. A iniciativatambém projecta os níveis futuros da dívida para avaliara probabilidade de cada país alcançar a sustentabilidadeda dívida. A base metodológica subjacente a estas pro-jecções nas análises de sustentabilidade da dívida (ASD)não foi transparente, e as hipóteses de crescimento man-tidas nas ASD foram demasiado optimistas em relação àstaxas históricas de crescimento. Os indicadores da dívidasão influenciados pela maneira na qual os níveis futurosda dívida, as exportações e outros agregados macro-eco-nómicos evoluem. O modelo económico por detrás des-tas projecções tem que ser explicitado, e as previsõeseconómicas que são a base das projecções deveriam sermais realistas. Em especial, elas precisam de captar mel-

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along with intensified and sustained efforts toaccelerate economic growth. On the revenueside, the fiscal base is narrow and the exportbase is typically concentrated in a few com-modities subject to highly volatile market con-ditions. These countries need to address fiscalconstraints and other policy obstacles to morerapid, broad-based growth and diversified ex-

ports. In turn, this may require improved trade facili-tation services and better access to developed countrymarkets.

A necessary condition for accelerated economicgrowth is adoption of a sound policy framework thatwill produce economic stability, effective public ex-penditure management, and efficient and nondistort-ing revenue generation. A main requirement forqualification for HIPC relief has from the start been atrack record of strong policy performance. The appli-cation of this requirement was progressively reducedin the enhanced HIPC, particularly for the “millenniumrush” countries that qualified in the second half of2000. Many of these countries have yet to demonstratean ability to put such frameworks in place, which raisesconcerns about the achievement of the HIPC objectives.

The initiative’s guidelines for increased public ex-penditures emphasize social sectors relative to othersectors where public expenditures can also help en-hance economic growth. There are two disadvantagesto this. First, the performance criteria emphasize ex-penditures rather than outcomes or impacts, yet in-creased expenditures may encounter diminishingreturns in the short and medium run. The capacity ofeducation and health ministries to manage increasedbudget resources efficiently is often weak, a substan-tial share of aid resources is already targeted at socialexpenditures, and the World Bank’s own public ex-penditure reviews indicate that financing is not alwaysthe primary constraint to achieving outcomes. Ab-sorptive capacity constraints in the targeted sectors andthe need for investment to promote growth may war-rant a different balance between social and other sec-tors, especially infrastructure and rural development.Second, the inflexibility in allocation of HIPC resourcesis a major concern voiced by debtor-country repre-sentatives. They note that the external strictures ontheir resource allocation can weaken budget disciplineand domestic ownership. Debtor governments believe

hor os efeitos potenciais de instabilidade nas re-ceitas de exportação—um factor principal de risco.Uma análise de riscos melhorada poderá indicarque níveis-limiar de indicadores da dívida, dife-rentes dos que foram anteriormente estabelecidos,definiriam melhor a sustentabilidade. Isto per senão melhoraria as perspectivas de sustentabili-dade da dívida, mas poderia encorajar um debate

mais informado sobre as alterações de política necessá-rias, tanto nos países doadores como beneficiários—assim como um maior realismo na fixação dos objectivose nos arranjos de financiamento da Iniciativa.

Atingir o objectivo de sustentabilidade da dívida seráum desafio para os PPME, do ponto de vista da dívidacomo dos rendimentos. Esses países talvez necessitemde continuar a contrair empréstimos para satisfazer as suasnecessidades de desenvolvimento, especialmente quandonão há doações adequadas. O desafio principal é o de as-segurar que os fundos são investidos produtivamente eeficientemente para promover a capacidade de reem-bolso. Para isso é necessária uma melhor gestão das des-pesas públicas, juntamente com esforços mais intensose continuados para acelerar o crescimento económico.Do ponto de vista dos rendimentos, a base fiscal é estreitae a base das exportações está normalmente concentradaem alguns produtos sujeitos a condições de mercadomuito instáveis. Esses países necessitam de abordas osconstrangimentos fiscais e os outros obstáculos de polí-tica que se colocam a um crescimento mais rápido debases amplas e a exportações diversificadas. Por seuturno, isso poderá requerer serviços melhorados de fa-cilitação do comércio e um melhor acesso aos mercadosdos países desenvolvidos.

Uma condição necessária para o crescimento econó-mico acelerado é a adopção de um bom quadro de polí-ticas que produza estabilidade económica, uma gestãoefectiva das despesas públicas e uma geração de rendi-mentos eficiente e sem distorções. Um requisito princi-pal para os PPME estarem habilitados ao alívio da dívidatem sido desde o início demonstrar um forte desem-penho de política. A aplicação deste requisito foi reduzidaprogressivamente na Iniciativa reforçada para os PPME, es-pecialmente para os países da “corrida do milénio” queestavam habilitados no segundo trimestre de 2000. Mui-tos desses países ainda não demonstraram a capacidadepara instaurar essas estruturas, o que suscita preocu-pação acerca de eles alcançarem os objectivos dos PPME.


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that these two issues are undermining theachievement of the main HIPC objectives.

To sum up, excessive debt creates problems,and must be dealt with effectively. Yet unman-ageable debt is a symptom of deeper structuralproblems. While providing much-neededrespite, as the initiative appears likely to do, debtrelief is not a panacea for broader economic de-

velopment problems, nor is a one-time debt reductiona guarantee that the problem will not reemerge. Thebiggest challenge facing the initiative is the expectationsof what it can achieve at current funding levels, givenpolicy and institutional constraints. Achieving its mul-tiple objectives requires actions that are well beyondthe scope and means of the initiative. The achievementand sustainability of the individual objectives requireactions by HIPC governments to promote exports andbroad-based growth, together with human capital de-velopment, for sustained poverty reduction.

The review makes four recommendations. The firstis to clarify the purpose and objectives of the initiative,ensure that its design is consistent with these objec-tives, and communicate both the objectives and how theyare to be achieved clearly to the global community. Thesecond recommendation is to improve the transparencyof the methodology and economic models underlyingthe debt projections and the realism of the economicgrowth forecasts in the DSAa, to guide decisionmakingthrough a better assessment of the prospects and risksfacing individual countries. The third recommendationis to maintain the standards for policy performance.And when the established criteria are to be relaxed, pro-vide a clear and transparent rationale to ensure that therisks to achieving and maintaining the initiative’s objec-tives are minimized. Finally, the review recommends thatthere needs to be a greater focus on pro-poor growth toprovide a better balance among development prioritiesrelative to the current emphasis on social expenditures.

As directrizes da iniciativa para maiores despesaspúblicas faz ressaltar os sectores sociais em relaçãoaos outros sectores nos quais as despesas públi-cas também podem reforçar o crescimento eco-nómico. Isto tem duas desvantagens. Primeiro, ocritério de desempenho destaca as despesas emvez dos resultados ou dos efeitos, mas no entantoas despesas podem levar a uma diminuição dos

rendimentos a curto e médio prazo. A capacidade dos mi-nistérios da educação e da saúde para administrar recursosorçamentais acrescidos eficientemente é frequentementedébil, uma parte importante dos recursos das ajudas jáestão dirigidas para as despesas sociais, e as própriasanálises do Banco das despesas públicas indicam que ofinanciamento não é sempre o principal constrangimentopara conseguir os resultados. Os constrangimentos da ca-pacidade de absorção nos sectores alvejados e a neces-sidade de investimentos para promover o crescimentopodem justificar um equilíbrio diferente entre os secto-res sociais e os outros sectores, especialmente em ma-téria de infra-estruturas e de desenvolvimento rural.Segundo, a inflexibilidade da distribuição dos recursos aosPPME é uma grande preocupação que foi expressa pelosrepresentantes dos países devedores. Eles fizeram notarque as restrições externas à sua distribuição de recursospodem debilitar a disciplina orçamental e a adesão aosseus programas. Os governos dos países devedores acre-ditam que essas duas questões dificultam o alcance dosprincipais objectivos dos PPME.

Em suma, a dívida excessiva cria problemas e deve sertratada de maneira efectiva. Porém, a dívida que nãopode ser gerida é um sintoma de problemas estruturaismais profundos. Embora proporcionando uma folgamuito necessária, como a iniciativa parece fazer, o alívioda dívida não é uma panaceia para os problemas mais am-plos de desenvolvimento económico, nem uma reduçãoda dívida é uma garantia de que o problema não ressur-girá. O maior desafio que enfrenta a iniciativa são as ex-pectativas daquilo que ela pode alcançar nos níveis actuaisde financiamento, tendo em conta os constrangimentosde política e institucionais. Para atingir os seus múlti-plos objectivos é preciso tomar medidas que vão muitopara além do alcance e dos meios da iniciativa. O al-cance e a sustentabilidade dos objectivos individuais re-querem que os governos dos PPME tomem medidaspara promover as exportações e o crescimento de basesamplas, juntamente com o desenvolvimento do capital

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humano para que haja uma redução continuadada pobreza.

Esta avaliação formula quatro recomendações.A primeira é a de esclarecer a finalidade e os ob-jectivos da iniciativa, assegurar que ela foi conce-bida de maneira coerente com esses objectivos,e comunicar à comunidade mundial tanto os ob-jectivos como a maneira clara como eles devem

ser atingidos. A segundarecomendação é a de melhorara transparência da metodologia e dos modelos econó-micos subjacentes às projecções da dívida, e o realismonas previsões do crescimento económico nas análises dasustentabilidade da dívida, para orientar a tomada dedecisões, através de uma melhor avaliação das perspec-tivas e dos riscos que enfrentam os países individual-mente. A terceira recomendação é a de manter os padrõesde desempenho de política. E quando os critérios esta-belecidos forem atenuados, proporcionar razões clarase transparentes para assegurar que os riscos em atingire manter os objectivos da iniciativa sejam minimizados.Finalmente, a avaliação recomenda que é necessárioque haja uma maior focalização no crescimento a favordos pobres para estabelecer um melhor equilíbrio entreas prioridades do desenvolvimento em relação ao des-taque dado actualmente às despesas sociais.

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RÉSUMÉ ANALYTIQUE

L’Initiative en Faveur des Pays Pauvres Très En-dettés (Initiative PPTE) marque une innovation majeuredans le régime du financement du développement. Parrapport aux mesures passées, elle implique une concer-tation plus grande entre les créanciers et un programmed’action plus global pour tenter de réduire l’endettementextérieur élevé—et en particulier pour la première foisl’endettement multilatéral—de nombreux pays qui comp-tent parmi les plus pauvres de la planète. Grâce aux dis-positions qu’elle comporte, les processus qui entourent lerégime de la dette souveraine sont plus ouverts et davan-tage basés sur le principe de la responsabilité. L’initiativemarque aussi par rapport au passé une rupture impor-tante dans la façon de concevoir l’aide au développe-ment. Sa philosophie repose sur les leçons de l’expérience,liant l’efficacité de l’aide au contexte global de l’action despouvoirs publics et à la coordination de l’aide, la condi-tionnalité à la nécessité pour le pays concerné d’adhérerpleinement au programme d’action convenu et les effetssociaux des réformes de la politique macroéconomique àl’établissement des priorités dans le domaine des dé-penses publiques.

Les préoccupations que suscitait dans le public lepoids excessif de la dette, conjuguées à la diminutiondes ressources d’aide et aux maigres résultats obtenussur le front de la pauvreté, ont été les éléments mo-teurs du mouvement en faveur d’un allègement de ladette. Avec le soutien d’organisations non gouverne-mentales (ONG) militantes qui ont su se faire en-tendre, ces préoccupations ont trouvé un écho parmiles responsables pragmatiques de l’action gouverne-mentale des pays bailleurs de fonds et des institutionsfinancières internationales. La mission première delutte contre la pauvreté que s’est fixée la communautédu développement est devenue la justification essen-tielle de l’Initiative PPTE, avec la résonance politiqueconsidérable que lui a donnée le Jubilé de l’an 2000.En 1999, un double objectif a été fixé pour l’InitiativePPTE élargie: ramener l’endettement à un niveau to-lérable et faire reculer la pauvreté.

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La Iniciativa para la Reducción de la Deuda de losPaíses Pobres Muy Endeudados (PPME) constituye una im-portante innovación en el régimen de financiamiento del de-sarrollo. En relación con esfuerzos anteriores, ésta permiteuna mayor concertación entre los diferentes acreedores yuna mayor integración en el intento de reducir los eleva-dos niveles de deuda externa de muchos de los países máspobres, con inclusión por primera vez de la deuda multila-teral. Ha representado una mayor apertura y rendición decuentas en los procesos que rodean al régimen de deudasoberana. Otra novedad en relación con el pasado es laforma en que se plantea la ayuda para el desarrollo. Su di-seño plasma las enseñanzas de la experiencia que esta-blecen una relación entre la eficacia de la ayuda y elentorno normativo y la coordinación de la ayuda, entrecondicionalidad y protagonismo y entre los efectos socia-les de la reforma de las políticas de alcance general y elestablecimiento de prioridades en el gasto público.

La preocupación pública por una carga de la deuda ex-cesiva, junto con la disminución de los recursos de laayuda y los escasos progresos en la lucha contra la po-breza han dado impulso al alivio de la deuda. Con el de-cidido apoyo y promoción de algunas organizacionesno gubernamentales (ONG), estas preocupaciones sonahora compartidas por las autoridades pragmáticas de losgobiernos donantes y las instituciones financieras inter-nacionales. La misión global de reducción de la pobrezaque recae sobre la comunidad del desarrollo fue la jus-tificación básica de la Iniciativa para los PPME, con con-siderable resonancia política a raíz de la campaña delJubileo. Para el año 1999, la Iniciativa reforzada para losPPME se fijaba como objetivos paralelos la sostenibilidadde la deuda y la reducción de la pobreza.

La Iniciativa para los PPME fue desencadenada por unaconfluencia de factores: importancia creciente de las or-ganizaciones internacionales de la sociedad civil, su cre-ciente influencia en los grandes acreedores y un cambioen la dirección del Banco Mundial. Los deudores no in-tervinieron expresamente en el diseño de la Iniciativa ori-ginal y tuvieron escasa influencia en el diseño de la

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iniciativa reforzada, aun cuando ocupan un lugarimportante en la ejecución.

Los objetivos específicos de la iniciativa hanevolucionado1. El objetivo original, en 1996, era eli-minar la deuda pendiente en cuanto obstáculo alcrecimiento económico y la reducción de la po-breza. Las modificaciones introducidas en 1999aportaron no sólo un alivio de la deuda más pro-

fundo, más amplio y más rápido sino también un conjuntomás ambicioso y amplio de objetivos: ofrecer una salida“permanente” de la reprogramación de la deuda, pro-mover el crecimiento y liberar recursos para aumentar losgastos sociales orientados a la reducción de la pobreza.La necesidad de crear un espacio fiscal para los gastos so-ciales era un requisito fundamental con el fin de conse-guir entre los donantes un apoyo de amplia base a lainiciativa, con importantes repercusiones en sus objeti-vos, diseño y aplicación.

Si se obtiene el alivio de la deuda previsto, la iniciativaconseguirá reducir sustancialmente la mayor parte de ladeuda externa acumulada de los PPME y de su servicio dela deuda (por término medio) a niveles inferiores a los deotros países pobres. Así pues, es probable que la inicia-tiva consiga su objetivo original: reducir la carga de la deudaexterna de varios de los países más pobres y ofrecerles laposibilidad de “comenzar de nuevo”. Pero para conseguirlos objetivos actualmente propuestos—sostenibilidad dela deuda, crecimiento y aumento de los gastos sociales—la iniciativa tendría que transferir recursos reales adicio-nales a los países. Y, para hacerlo sin desviar los recursosdestinados a ayudar a los países pobres pero no muy en-deudados, habría que aumentar el volumen general de losrecursos de la ayuda. Aunque los objetivos de la iniciativaestán basados en el supuesto de que (en igualdad decondiciones) se mantendrían los niveles de ayuda del pa-sado, de forma que los recursos para la iniciativa fueranadicionales, el diseño de ésta no puede garantizar que vayaa ocurrir así. Por ello, la iniciativa corre riesgo de prome-ter resultados (relacionados con sus múltiples objetivos)que no puede conseguir por sí sola.

De hecho, durante las mismas fechas en que se creóla iniciativa se produjo un fuerte descenso de los recur-sos mundiales disponibles para la ayuda. En consecuen-cia, en comparación con otros países pobres, el conjuntode los PPME está recibiendo una parte mayor de unos re-cursos mundiales en descenso: no están recibiendo fon-dos adicionales en cifras absolutas con respecto a lo que

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LL’Initiative PPTE a été déclenchée par laconjugaison de plusieurs facteurs—la montéeen puissance des organisations de la société ci-vile internationales, leur influence grandissanteauprès des principaux créanciers, et un chan-gement dans la direction de la Banque Mon-diale. Les débiteurs n’avaient joué aucun rôleexplicite dans la conception de l’initiative ini-

tiale et ils n’ont eu que peu d’influence sur la concep-tion de l’initiative élargie alors qu’ils jouent un rôlecentral dans sa mise en œuvre.

Les objectifs spécifiques de l’initiative ont évolué1.En 1996, le but initial de l’entreprise était de réduirele poids excessif de la dette, qui faisait obstacle à lacroissance économique et à la réduction de la pauvreté.Les modifications introduites en 1999 n’ont pas seu-lement aboutit à la mise en place d’un programme d’al-lègement de la dette plus profond, plus large et plusrapide, elle ont aussi conduit à fixer un ensembled’objectifs plus ambitieux et plus vastes—qui étaientde permettre une sortie «définitive» des opérationsde rééchelonnement de la dette, de promouvoir lacroissance et de libérer des ressources afin de pouvoiraccroître les dépenses sociales consacrées à la luttecontre la pauvreté. La nécessité de créer un espace bud-gétaire pour les dépenses sociales était une condi-tion sine qua non pour obtenir des bailleurs de fondsun soutien multiforme à l’initiative, et elle a eu un im-pact majeur sur les objectifs du programme d’action,son contenu et sa mise en œuvre.

Si les allègements de dette prévus se matérialisent,l’initiative permettra de réduire de façon substantiellele stock de la dette extérieure de la plupart des PPTEet le service de leur dette, pour les ramener (enmoyenne) à un niveau inférieur à ceux des autres payspauvres. L’initiative va donc probablement atteindreson objectif initial, qui était de réduire la dette exté-rieure de plusieurs des pays les plus démunis de la pla-nète et de leur permettre de prendre un «nouveaudépart». Mais, pour atteindre les objectifs déclarés ac-tuels, qui sont de ramener l’endettement à un niveautolérable, de dynamiser la croissance et d’accroîtreles dépenses sociales, il faudra que l’initiative per-mette de transférer des ressources réelles supplé-mentaires aux pays concernés. Et, pour pouvoir lefaire sans pénaliser pour autant les pays pauvres maisnon lourdement endettés, il faudrait que le niveau

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percibían antes de la iniciativa (es decir, hasta1995). Como el volumen de la deuda disminuyóinmediatamente antes de que la mayor parte delos países reunieran los requisitos para acogersea las medidas de alivio de la deuda, ese períodoprecedente no es el punto de referencia más in-dicado para establecer la adicionalidad. Es toda-vía demasiado temprano para determinar en forma

cuantitativa si se ha producido una inversión de la recientetendencia descendente. En la medida en que la iniciativaha conseguido proteger la cuota de los PPME en el con-junto agregado de los flujos de ayuda, puede calificarsecomo un éxito limitado. No obstante, la participación deotros países pobres ha disminuido en proporción se-mejante. Esta redistribución está en contradicción con elprincipio de asignación basada en el desempeño y podríareducir la eficiencia y eficacia global del ayuda. Este re-sultado es consecuencia directa de las limitaciones de fi-nanciamiento, y no puede superarse con mejoras internasdel diseño de la iniciativa en su formulación actual. Unreconocimiento claro de las limitaciones impuestas porlos niveles anteriores y actuales de la ayuda facilitaría laarmonización de los objetivos básicos de la iniciativa conlos recursos realmente disponibles.

Un elemento clave para evaluar la probabilidad deque la iniciativa alcance su objetivo básico de sostenibi-lidad de la deuda es la proyección de los indicadores dela misma. La iniciativa utiliza una metodología de inven-tario de la deuda para determinar los niveles de la deudacorriente, lo que representa una clara mejora con respectoa las prácticas anteriores y ofrece una sólida base para cal-cular el total del alivio de la deuda para los distintos pa-íses. La iniciativa presenta también proyecciones de losniveles de deuda futura para determinar la probabilidadde cada país de alcanzar la sostenibilidad de la deuda. Labase metodológica en que se sustentan estas proyec-ciones en los análisis de sostenibilidad de la deuda (ASD)no se ha hecho transparente, y los supuestos de creci-miento mantenidos en los ASD han sido excesivamenteoptimistas en relación con las tasas de crecimiento delpasado. Los indicadores de la deuda dependen de laforma en que evolucionen los niveles de la deuda futura,las exportaciones y otros agregados macroeconómicos.El modelo económico en que se basan estas proyeccio-nes debe formularse explícitamente, y los pronósticos eco-nómicos en que se basan las proyecciones deberían sermás realistas. En particular, deben reflejar mejor los po-

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Lglobal des ressources d’aide augmente. Les ob-jectifs de l’initiative reposent sur l’hypothèseque (toutes choses égales par ailleurs) les ni-veaux d’aide passés seront maintenus pour queles concours apportés aux PPTE soient desconcours additionnels, mais la stratégie quisous-tend l’entreprise ne permet pas de ga-rantir que c’est ce qui arrivera. L’initiative risque

donc de faire espérer des résultats (liés à ses multiplesobjectifs) qu’elle ne pourra concrétiser par elle-même.

En fait, les ressources globales consacrées à l’aideont fortement diminué à peu près à partir du momentoù l’initiative a été lancée. De ce fait, même si, com-parativement aux autres pays pauvres, les PPTE entant que groupe bénéficient d’une part croissante desapports d’aide, qui ne cessent d’ailleurs de diminuer,ils ne reçoivent pas de fonds additionnels en valeur ab-solue par rapport à ce qu’ils obtenaient avant la miseen place de l’initiative (c’est-à-dire, jusqu’en 1995).Comme il y a eu un tassement des flux d’aide dans lesannées qui ont immédiatement précédé l’époque oùla plupart des pays ont réuni les conditions requisespour obtenir un allègement de la dette, ces années neconstituent pas une base de référence appropriée pourdéterminer si les apports d’aide sont réellement desapports additionnels. Il est trop tôt pour déterminersi, quantitativement, il y a une inversion de tendancedans l’évolution baissière récente. Dans la mesure oul’initiative a permis de maintenir la part des PPTE dansle volume global des flux d’aide, on peut estimer quec’est déjà un élément positif. Mais il apparaît que la partdes autres pays pauvres a diminué d’autant. Cette re-distribution est contraire au principe de la répartitionbasée sur la performance et elle risque de réduire l’ef-ficience et l’efficacité de l’aide en général. Ce résultatest une conséquence directe des restrictions qui pè-sent sur les financements, et il n’est pas possible de re-médier au problème par des aménagements internesdu dispositif qui sous-tend l’initiative telle qu’elle estconçue actuellement. La reconnaissance claire des li-mitations qu’imposent les niveaux passés et actuels del’aide faciliterait une remise à plat des objectifs fon-damentaux de l’initiative en fonction des ressources ef-fectivement disponibles.

Pour évaluer les probabilités qu’a l’initiative d’at-teindre son objectif fondamental, qui est de ramenerla dette à un niveau tolérable, les éléments clés sont

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les projections relatives aux indicateurs de ladette. L’initiative se base sur une méthodologiefondée sur le stock de la dette pour évaluer lesniveaux de la dette au moment étudié , ce quireprésente une amélioration évidente par rap-port aux méthodes passées; c’est aussi unebonne base pour calculer le montant de l’allè-gement de la dette pour chaque pays consi-

déré. L’initiative établit aussi des projections relativesau niveau futur de la dette afin de déterminer leschances qu’a un pays de ramener sa dette à un niveautolérable. La base méthodologique utilisée pour les pro-jections sur lesquelles repose l’analyse du degré d’en-dettement tolérable reste opaque et les hypothèses decroissance retenues pour ces analyses pèchent parexcès d’optimisme si l’on en juge par les taux de crois-sance passés. Les indicateurs de la dette varient en fonc-tion de la façon dont évoluent les niveaux del’endettement futur, les exportations et d’autres agré-gats macroéconomiques. Le modèle économique quisous-tend ces projections doit être précisé et les pré-visions économiques sur lesquelles se fondent les pro-jections doivent être plus réalistes. En particulier, cesprévisions doivent mieux tenir compte des effets po-tentiels de la volatilité des recettes d’exportation—vo-latilité qui est un facteur de risque crucial. Une analyseplus fine des risques indiquera peut-être qu’il serait pos-sible de mieux définir le degré d’endettement tolérablesi on retenait des seuils différents pour les indicateursde la dette. Certes, cela n’améliorerait pas en soi leschances qu’ont les pays de ramener leur endettementà un niveau tolérable, mais cela pourrait permettreaux pays bailleurs de fonds comme aux pays bénéfi-ciaires d’examiner en meilleure connaissance de causeles réformes à engager—et de fixer les objectifs et lesmodalités de financement de l’initiative avec plus deréalisme.

Les PPTE auront bien du mal à atteindre l’objectifde l’endettement tolérable, que l’on considère le côtéde la dette ou le côté des recettes. Ces pays devrontéventuellement continuer à s’endetter pour faire faceà leurs besoins de développement, en particulier s’ilsne peuvent obtenir des financements suffisants sousforme de dons. Le grand problème qui se posera à euxsera de veiller à ce que les fonds soient investis de façonproductive et efficace pour maintenir leur capacité deremboursement. Encore faut-il améliorer la gestion

sibles efectos de la inestabilidad de los ingresos de-rivados de la exportación, factor de riesgo funda-mental. Un análisis de riesgo más adecuado puedeindicar que la sostenibilidad se definiría mejorutilizando umbrales de los indicadores de la deudadiferentes de los establecidos previamente. Ello nosólo mejoraría las perspectivas de sostenibilidadde la deuda, sino que podría fomentar un debate

con mayor conocimiento de causa sobre los cambiosnormativos necesarios tanto en los países donantes comoen los receptores, así como mayor realismo en la for-mulación de objetivos y mecanismos de financiamientopara la Iniciativa.

El logro del objetivo de sostenibilidad de la deuda re-presenta un desafío para los PPME tanto en lo que res-pecta a la deuda como a los ingresos. Estos países quizánecesiten continuar solicitando préstamos para atendersus necesidades de desarrollo, sobre todo en ausencia dedonaciones en volumen suficiente. Su principal pro-blema es garantizar que los fondos se invierten en formaproductiva y eficiente para promover la capacidad de re-embolso. Para ello se necesita una mejor gestión delgasto público, así como esfuerzos intensos y sostenidospara acelerar el crecimiento económico. En lo que se re-fiere a los ingresos, la base fiscal es estrecha y la base deexportaciones suele estar concentrada en un reducido nú-mero de productos básicos sujetos a la fuerte inestabili-dad del mercado. Estos países deben superar losobstáculos fiscales y otros problemas normativos parapoder conseguir un crecimiento rápido y de amplia basey diversificar las exportaciones. A su vez, ello quizá re-quiera mejoras en los servicios de promoción del co-mercio y mayor acceso a los mercados de los paísesdesarrollados.

Una condición necesaria para acelerar el crecimientoeconómico es la adopción de un marco normativo sólidoque consiga la estabilidad económica y la gestión eficazdel gasto público y permita generar ingresos en forma efi-ciente y sin distorsiones. Un requisito importante parapoder acogerse a la iniciativa ha sido, desde el principio,contar con un historial normativo satisfactorio. La apli-cación de este requisito se redujo progresivamente en lainiciativa reforzada para los PPME, sobre todo para los pa-íses que pudieron acogerse a las medidas aceleradas enel contexto del milenio, en la segunda mitad de 2000. Mu-chos de esos países tienen que demostrar todavía su ca-pacidad de poner en marcha dichos marcos, lo que


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des dépenses publiques et intensifier durable-ment les efforts pour accélérer la croissanceéconomique. En ce qui concerne les recettes,la matière imposable est étroite et, en règle gé-nérale, les exportations reposent pour l’essen-tiel sur un petit nombre de produits de basepour lesquels la situation du marché est extrê-mement volatile. Ces pays doivent lever les

contraintes budgétaires et d’autres obstacles liés auxinterventions de l’État, qui les empêchent de s’enga-ger dans la voie d’une croissance plus rapide et large-ment répartie, et sur la diversification des exportations.Pour cela, il faudra éventuellement prendre des me-sures pour améliorer des services de facilitation deséchanges et élargir l’accès aux marchés des pays dé-veloppés.

Pour accélérer le rythme de la croissance écono-mique, il est indispensable que les pays concernésadoptent un cadre de politique économique rationnel,qui leur permette de jeter les bases de la stabilité éco-nomique, de gérer efficacement les dépenses pu-bliques et de générer des recettes dans de bonnesconditions d’efficience, sans introduire de distorsions.Depuis le début, la présentation d’un bilan solide enmatière de politique économique est la principalecondition exigée pour obtenir un allègement de ladette au titre de l’Initiative PPTE. L’application de cecritère a été progressivement assouplie dans l’initiativerenforcée, en particulier s’agissant des pays éligiblesau second semestre2000 pour lesquels les dossiers ontété instruits plus rapidement. Beaucoup de ces paysdoivent encore administrer la preuve qu’ils sont ca-pables de mettre en place ces cadres de politique éco-nomique, ce qui suscite des doutes quant à la réalisationdes objectifs de l’Initiative PPTE.

Les directives énoncées dans le cadre de l’initiativepour accroître les dépenses publiques privilégient lessecteurs sociaux par rapport aux autres secteurs, où lesdépenses peuvent aussi contribuer à stimuler la crois-sance économique. Cela présente deux inconvénients.Premièrement, les critères de performance mettentl’accent sur les dépenses plutôt que sur les résultatsou sur l’impact, alors que l’augmentation des dépensespeut se heurter à la loi des rendements décroissantsà court ou moyen terme. Les ministères de l’éducationet de la santé sont dans bien des cas mal armés pourgérer efficacement un budget important, une partie

suscita inquietud acerca del logro de los objetivosde la iniciativa.

Las orientaciones de la iniciativa acerca del au-mento del gasto público hacen hincapié en lossectores sociales, en relación con otros sectoresdonde el gasto público puede ayudar también a au-mentar el crecimiento económico. Ello representados desventajas. En primer lugar, los criterios de

desempeño hacen hincapié en los gastos más que en losresultados o efectos, pero el aumento de los gastos puedeprovocar la disminución de los rendimientos a corto y me-diano plazo. La capacidad de los ministerios de educacióny salud para administrar con eficiencia unos recursos pre-supuestarios crecientes es con frecuencia débil, una parteconsiderable de los recursos de la ayuda están ya orien-tados a gastos sociales y los exámenes del gasto públicodel mismo Banco Mundial indican que el financiamientono es siempre el obstáculo principal para el logro de losresultados. Los problemas de capacidad de absorción enlos sectores seleccionados y la necesidad de inversión parapromover el crecimiento pueden justificar una distribu-ción diferente entre los sectores sociales y los demás sec-tores, en particular la infraestructura y el desarrollo rural.En segundo lugar, la falta de flexibilidad en la asignaciónde los recursos de la iniciativa es un grave motivo de pre-ocupación manifestado por los representantes de los pa-íses deudores. Éstos señalan que las imposiciones externaspara la asignación de sus recursos pueden debilitar ladisciplina presupuestaria y la identificación nacional conlas medidas. Los gobiernos deudores creen que estas doscuestiones están dificultando el logro de los objetivosprincipales de la Iniciativa.

En resumen, una deuda excesiva crea problemas, loque significa que debe gestionarse con procedimientoseficaces. No obstante, una deuda inmanejable es sín-toma de problemas estructurales más profundos. La ini-ciativa ofrece al parecer un alivio necesario, pero ni éstees la panacea para resolver problemas de desarrollo eco-nómico de carácter más amplio ni una reducción ocasionalde la deuda puede garantizar que el problema no vuelvaplantearse. El principal desafío que se presenta a la ini-ciativa es la expectativa de lo que puede conseguir conlos actuales niveles de financiamiento, dados los obstá-culos normativos e institucionales. El logro de sus múl-tiples objetivos requiere intervenciones que superan losmedios que tienen a su disposición. El logro y la soste-nibilidad de los distintos objetivos requieren interven-

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substantielle des ressources d’aide est déjà af-fectée à des dépenses sociales et les examensdes dépenses publiques effectués par la Banquemontrent que le financement n’est pas tou-jours la principale contrainte qui empêche d’ob-tenir les résultats voulus. Les problèmes decapacité d’absorption dans les secteurs ciblés etla nécessité d’investir pour promouvoir la crois-

sance justifient parfois un recentrage entre les sec-teurs sociaux et les autres secteurs, en particulier ceuxde l’infrastructure et du développement rural. Deuxiè-mement, la rigidité de l’allocation des ressources estun sujet de préoccupation majeur que soulignent lesreprésentants des pays débiteurs. Ils font observerque les restrictions externes qui pèsent sur l’allocationde leurs ressources peuvent éroder la discipline bud-gétaire et inciter les dirigeants nationaux à passer lamain. Les pays débiteurs estiment que ces deux pro-blèmes compromettent la réalisation des principaux ob-jectif de l’Initiative PPTE.

En somme, le poids excessif de la dette engendredes problèmes et c’est une question qui doit être trai-tée de manière efficace. Mais un endettement ingérableest le symptôme de problèmes structurels plus pro-fonds. Si L’Initiative PPTE apporte un répit plus que né-cessaire, comme cela paraît être le cas, l’allègement dela dette n’est pas une panacée pour les problèmes dedéveloppement économique plus larges, et une ré-duction unique de la dette ne saurait garantir non plusque le problème ne resurgira pas. Le grand dangerpour l’initiative tient aux attentes qu’elle suscite quantaux résultats qu’elle peut obtenir avec les niveaux definancement actuels, compte tenu des contraintes liéesà l’action gouvernementale et aux structures institu-tionnelles. Pour atteindre les multiples objectifs dé-clarés, il faut un plan d’action qui dépasse largementla portée et les moyens de l’initiative. S’ils veulent réa-liser les objectifs individuels et inscrire les résultats ob-tenus dans la durée, les gouvernements des PPTEdoivent prendre des dispositions pour promouvoirles exportations et une croissance diversifiée, et favo-riser la mise en valeur du capital humain afin de fairereculer durablement la pauvreté.

L’examen débouche sur quatre recommandations.La première est de clarifier la finalité et les objectifs del’initiative, en veillant à ce que le programme d’actionsoit cohérent avec les objectifs poursuivis, et d’indiquer

ciones de los gobiernos de los PPME para pro-mover las exportaciones y un crecimiento de am-plia base, junto con el desarrollo del capitalhumano, para conseguir una reducción sostenidade la pobreza.

En la evaluación se formulan cuatro recomen-daciones. La primera es la de aclarar el propósitoy los objetivos de la iniciativa, asegurar que su di-

seño sea compatible con dichos objetivos y comunicara la comunidad mundial tanto los objetivos como laforma en que se pueden conseguir. La segunda reco-mendación consiste en mejorar, por un lado, la transpa-rencia de la metodología y los modelos económicos enque se basan las proyecciones de la deuda así como porel otro, el realismo de las previsiones sobre el creci-miento económico empleadas en los ASD, con el fin deorientar la toma de decisiones mediante una evaluaciónmás adecuada de las perspectivas y riesgos de cada unode los países. La tercera recomendación es mantener losniveles de desempeño normativo y, cuando haya queflexibilizar los criterios establecidos, ofrecer una justifi-cación clara y transparente que contribuya al logro y elmantenimiento de los objetivos de la Iniciativa. Final-mente, se recomienda una mayor concentración en el cre-cimiento en favor de los pobres, para conseguir un mayorequilibrio entre las prioridades de desarrollo, frente a lainsistencia actual en el gasto social.


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clairement à la communauté internationale lesobjectifs retenus et les moyens mis en œuvrepour les atteindre. La deuxième recommanda-tion est d’améliorer la transparence de la mé-thodologie et des modèles économiques surlesquelles reposent les projections de la detteet les prévisions de croissance économique quisous-tendent les analyses du degré d’endette-

ment tolérable, afin de guider les prises de décisionsgrâce à une évaluation plus réaliste des perspectivesd’évolution des différents pays considérés et des risquesauxquels ils sont confrontés. La troisième recomman-dation est de maintenir les critères de performance del’action gouvernementale. Et s’il faut assouplir les cri-tères établis, une justification claire et transparentedoit être fournie afin de minimiser les éléments derisque qui pourraient compromettre les objectifs del’initiative ou rendre ses résultats précaires. Enfin , lesauteurs de l’examen soulignent qu’il est nécessaire demettre davantage l’accent sur une croissance qui ré-ponde aux besoins des pauvres afin d’établir unmeilleur équilibre entre les priorités de développe-ment par rapport à la situation actuelle, qui fait unelarge place aux dépenses sociales.

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CAE Country Assistance EvaluationCAS Country Assistance StrategyCDF Comprehensive Development FrameworkCEMLA Center for Latin American Monetary StudiesCODE Committee on Development Effectiveness CP completion pointCPIA Country Policy and Institutional AssessmentDAC Development Assistance CommitteeDFID Department for International Development (U.K.)DP decision pointDRI Debt Relief InternationalDRS Debtor Reporting SystemDSA debt sustainability analysisE-HIPC enhanced HIPC InitiativeESAF Enhanced Structural Adjustment FacilityEURODAD European Network on Debt and DevelopmentGAO General Accounting OfficeGDF Global Development FinanceGDP gross domestic productGNI gross national incomeGNP gross national productHIAL Higher Impact Adjustment LendingHIPC heavily indebted poor countryIBRD International Bank for Reconstruction and DevelopmentIDA International Development AssociationIEO Independent Evaluation OfficeIFI international financial institutionIMF International Monetary FundI-PRSP Interim Poverty Reduction Strategy PaperLIBOR London interbank offered rateLIC low-income countryLMI lower-middle-incomeMDBs multilateral development banksMEFMI Macroeconomic and Financial Management Institute of Eastern and Southern AfricaMIC middle-income countryNGO nongovernmental organizationNIEO New International Economic OrderNPV net present valueODA official development assistanceOECD Organisation for Economic Co-operation and DevelopmentOED Operations Evaluation DepartmentO-HIPC original HIPC InitiativePAFP overty Action FundPEAP Poverty Eradication and Action PlanPER Public Expenditure ReviewPPG public and publicly guaranteed external debtPPP purchasing power parityPREM Poverty Reduction and Economic Management Network

ABBREVIATIONS AND ACRONYMS

PRGF Poverty Reduction and Growth FacilityPRSP Poverty Reduction Strategy PaperSILICs severely indebted low-income countriesSPA Strategic Partnership with AfricaWAIFEM West African Institute of Financial and Economic ManagementSSA Sub-Saharan AfricaUNCTAD United Nations Conference on Trade and Development


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1

Introduction

After almost two decades of repeated attempts to relieve many low-income countries of their external debt burdens, in 1996 the World Bankand the International Monetary Fund (IMF) proposed the Heavily

Indebted Poor Country (HIPC) Debt Initiative to provide comprehensive debtrelief to some of the world’s poorest and most heavily indebted countries. Theinitiative was formally agreed to by governments around the world in September1996 and “enhanced” in 1999. The objectives of the initiative have subtlyevolved since its conception.

In response to intense pressure to make debt re-lief broader, faster, and deeper, the goals of theinitiative were markedly modified in 1999. Butfundamentally the initiative still aims to reduce,within a reasonable time, the external debt bur-den of qualifying countries to “sustainable” lev-els. The underlying and plausible premise is thatexcessive debt is an impediment to the broaderdevelopment goals of sustainable economicgrowth and poverty reduction.

The HIPC Debt Initiative marks an importantinnovation in the development finance regime,with significant changes in the relationships ofthe World Bank and IMF with member coun-tries and development partners. It represents asignificant shift in the strategy to deal with thepersisting debt crises and associated repaymentproblems facing low-income countries, ac-knowledging the HIPCs’ problem as one of in-

solvency rather than illiquidity and recognizingthe need for different actions from those takenin the past. It is designed as a concerted and com-prehensive approach to deal with the externaldebt of poor countries in its entirety, and withan explicit objective of resolving it in a sustain-able way. For the first time, it includes multilat-eral creditors and broadens the scope ofperformance requirements to include social cri-teria along with the macroeconomic and struc-tural policy reform conditionality of traditionaldebt relief mechanisms.

The emergence of the original HIPC (O-HIPC)Initiative in 1996, and—even more—the en-hanced HIPC (E-HIPC) Initiative of 1999, hasbeen enormously influenced by nongovern-mental organizations (NGOs) and civil societygroups around the world. The Jubilee 2000 move-ment was particularly effective in making the

11

enhanced initiative a political reality in creditorcapitals at a time of declining aid resources. Theprocess of legitimizing and promoting the ini-tiative forged a direct link between debt relief andpoverty, but it also gave rise to unrealistic ex-pectations of what the initiative could achieve.While every stakeholder group accepts that debtrelief is only part of the solution in a broader at-tack on the obstacles to sustained poverty re-

duction, it is striking howcritical many commentatorsare with respect to the ac-tual or anticipated achieve-ments of the initiative. Ineffect, the HIPC Initiative

has become a lightning rod for broader policydisagreements regarding equitable and sustain-able development and the role of aid.

Progress and Current StatusUnder the original framework, from a group of41 countries a total of 29 were expected to qual-ify for relief. Of these, seven reached their deci-sion points and six reached their completionpoints. The number of countries expected toqualify under the E-HIPC Initiative expanded to36 in 1999, at the time it was launched (from agroup of 41 countries, although eligibility wasopen to all countries meeting the E-HIPC eligi-bility criteria).

By August 2002, the number of countries el-igible for debt relief increased to 42; of these, 6

have reached their completion points and are re-ceiving (or should be receiving) the full benefitfrom HIPC relief (see box 1.1). Another 20 coun-tries have reached the decision point and arebenefiting from interim relief under the E-HIPC.Of the remaining 16, 4 are considered potentiallysustainable after receiving relief from traditionalmechanisms and 8 are conflict-affected coun-tries facing particularly difficult challenges incoming to their decision points under the cur-rent framework.

The total amount of debt relief committed(that is, to countries past their completionpoint and the potential estimated relief to coun-tries that are past their decision points, in-cluding those that qualified under the O-HIPCInitiative) is US$41.52 billion in nominal debtservice relief over time, equivalent to US$25.1billion in net present value (NPV) terms (AnnexA). Of this amount, the cost of debt relief to thesix countries that reached their completionpoints under the O-HIPC is US$6.97 billion innominal terms, or US$3.46 billion in NPV terms.1

According to current estimates, the total costof the initiative is expected to be about US$37.2billion in 2001 NPV terms, with the World Bankaccounting for some US$8.2 billion. This esti-mate excludes the potentially sustainable cases(Angola, Kenya, Vietnam, and Yemen) andLiberia, Somalia, Sudan, and Lao People’s De-mocratic Republic (PDR).2 It also excludes po-tential topping-up costs.


2

Reached completion point:6 (Bolivia, Burkina Faso, Mauritania,

Mozambique, Tanzania, Uganda).

Reached decision point and receiving interim relief:20 (Benin,

Cameroon, Chad, Ethiopia, The Gambia, Ghana, Guinea, Guinea-

Bissau,* Guyana, Honduras, Madagascar, Malawi, Mali,

Nicaragua, Niger, Rwanda,* Saõ Tomé and Principe, Senegal,

Sierra Leone,* Zambia).

* Conflict-affected countries.

Not yet at decision point:12 (Burundi,* Central African Repub-

lic,* Comoros, Democratic Republic of Congo,* Republic of

Congo,* Côte d’Ivoire, Lao People’s Democratic Republic,

Liberia,* Myanmar,* Somalia,* Sudan,* and Togo).

Potentially sustainable without HIPC assistance: 4 (Angola,*

Kenya, Vietnam, Yemen).

Status of the 42 Eligible HIPCs (as of August 2002)

Box 1.1

The HIPC Initiative hasbecome a lightning rod

for broader policydisagreements.

INTRODUCTION

3

For the 34 countries (that is, excluding the 4sustainable cases, and Liberia, Somalia, Sudan,and Lao PDR), the share of the costs is roughlyevenly divided between bilateral and multilateralcreditors. The World Bank Group’s share is 22.3percent (the share of the International Devel-opment Association [IDA] is 20.3 percent of thetotal). The share of the Paris Club creditors ishighest at 38.6 percent. Non–Paris Club creditorsaccount for 8.8 percent of the costs, and com-mercial creditors for 4.2 percent.

Evaluation DesignIn light of the increased interest in financing fordevelopment, as well as the impact of the recentglobal economic slowdown on the prospects forthe sustainability of external debt of poor coun-tries, this is an appropriate juncture to reviewthe progress and prospects of the HIPC Initiativewith a view to informing and, if necessary, strength-ening its ongoing implementation. With 6 coun-tries past their completion point, and another 20past their decision point, increasing concerns arebeing voiced about, on the one hand, the pace atwhich the initiative is progressing, and, on theother, the likely outcomes of the initiative.

The guiding principles and the building blocksof the original and the enhanced HIPC frame-works provide the basis for assessing whether theprocess being followed and the implementationof the initiative are consistent with its objectivesand design. The stated objectives and guidingprinciples endorsed by the Interim and Develop-ment Committees are given in Annex B and theflow diagram describing the HIPC process is givenin Annex C. The details of the evaluation approachadopted for this review are given in Annex D.

Main Evaluative QuestionsThis review focuses on the design and imple-mentation of the HIPC Initiative. The purpose

is to assess the prospect of the initiative achiev-ing its intended immediate objectives—reduc-ing debt to sustainable levels and creating thefiscal space for increased spending for povertyreduction—and the potential for contributing to-ward its underlying development goals—sus-tainable economic growth and povertyreduction. Using the objectives-based evalua-tion framework of the Operations EvaluationDepartment (OED), this review seeks to an-swer the following overarching questions cor-responding to the framework’s principalassessment criteria:

• Relevance:Is the HIPC Initiative’s design ad-equate and appropriate to achieve its stated ob-jectives and intended outcomes?

• Efficacy and efficiency: Based on the experi-ence so far, is the HIPC Initiative achieving orlikely to achieve its objectives, and to achievethem efficiently?

• Sustainability:How resilient to risks are the ex-pected outcomes of the HIPC Initiative?

• Institutional development: To what extentdoes the design of the initiative help buildcountry capacity to ensure that the HIPC ob-jectives are achieved and can be sustained?

Coordination with the IMFIn preparing this review, OED has interactednot only with World Bank staff and manage-ment but also with the IMF’s Independent Eval-uation Office (IEO) and the staffs of the IMF’sPolicy Development and Review Departmentand Fiscal Affairs Department. The key back-ground papers were shared with IMF staff forcritical comment, and they participated in sem-inars to discuss the findings of the backgroundpapers, along with the staff of the World Bank’sHIPC unit. IMF staff also participated in thetechnical workshop held in Washington, D.C., inSeptember 2002.

5

Evolution of Debt and the Debt Problem

This chapter briefly discusses the evolution and magnitude of the debtproblem and past responses to it. It then presents the main findings froma review of the literature on the likely consequences of a large debt stock.

Evolution of the HIPC Debt BurdenThe 42 HIPCs accounted for about 14 percent ofthe developing world’s population in 2000 butonly about 5 percent of the total gross nationalincome (GNI).1 Their share of total external debtof all developing countries, approximately 8 per-cent, is small relative to their share of population,but large in relation to the size of their economies(table 2.1).

The large stock of debt in the HIPCs has a longhistory, but it did not start out as large. Follow-ing a decade of good growth in the 1960s (afterindependence for a large number of the Africanstates), the economic shocks of the early 1970s,

combined with serious economic, social, andstructural constraints to rapid and broad-basedgrowth, resulted in a long and persistent eco-nomic decline—lasting until the early 1990s. Oilshocks, declining terms of trade, and highlyvolatile commodity markets led to a spiral of fis-cal imbalance brought about by declining rev-enues, resistance to painful fiscal adjustments,and heavy reliance on borrowing to meet thedeficit. Large inflows and mounting arrears ledto the rapid accumulation of debt (Dasekingand Powell 1999). Figure 2.1 shows how thenominal stock of debt of the 42 HIPCs has ex-ploded relative to exports since about 1980. The

2

Category 1980–84 1985–89 1990–94 1995–00

HIPC 38 70 120 103

Other IDA countries 21 33 38 33

Other lower-middle-income countries 22 30 27 26Source: Global Development Financeand World Development Indicators.

External Debt as Percentage of GDP (period average)

Table 2.1

debt burden, measured in terms of the NPV ofexternal debt-to-exports, also increased sharplyuntil the mid-1980s.2

The debt of low-income countries (LICs) es-calated even as major initiatives were under wayto solve the middle-income country (MIC) debtcrisis of the 1980s. But the two groups have im-

portant differences (Cline1997). For LICs, and es-pecially for the HIPCs, bi-lateral and multilateralcreditors have been theprimary sources for the

past two decades. The MIC debt of the 1980sarose largely from private commercial sources.And while the MICs experienced large negativenet transfers during the crisis period, the LICshave consistently had positive and substantial netresource transfers (figure 2.2).3 The official cred-itors have had a long-standing commitment toensuring positive net transfers to the HIPCs, de-spite the latter’s generally low productivitygrowth, high debt-service levels, and, in somecases, virtual insolvency (World Bank 1994).

The prolonged economic decline, with an-nual per capita growth rates averaging –2.2 forSub-Saharan Africa (SSA) during 1980–89, and de-

teriorating terms of trade led to increasing debtservice problems and mounting arrears. ManyLICs were unable to fully service their debts; in1993, those then classified as severely indebtedlow-income countries (SILICs) paid only 40 per-cent of the scheduled debt service (World Bank1994).4 Under the circumstances, additionalflows of credit would not have been justifiableunder commercial financing practices—as evi-denced by the early exit of commercial creditors(other than state-sponsored export credits). Theofficial creditors, however, were not operatingunder commercial principles. Often driven by po-litical concerns and domestic commercial con-siderations, they eventually committed tomaintaining positive net transfers. As figure 2.2shows, official net transfers have been twice thelevel of total debt service, and gross inflows havebeen three times (or more) the total outflows.

The positive net transfers have been main-tained using various mechanisms: initiallythrough rescheduled debt payments, then bysubstituting concessional loans and grants fornonconcessional loans. The figure in Annex Eshows how the sources of net transfers to HIPCshave changed since 1980. Nonconcessional lend-ing from the International Bank for Recon-


6

Evolution of the HIPC Debt BurdenFigure 2.1

0

200

400

600

800

1,000

1,200

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

Percentage (of exports)

Total stocks (nominal)

PPG stocks (nominal)

Present valuePPG stocks

PPG = Public and publicly guaranteed external debt

Source: Global Development Finance, World Development Indicators, and NPV calculations for Easterly 2001a.

The official creditorswere not operatingunder commercial

principles.

struction and Development (IBRD) and othermultilateral sources was replaced by conces-sional lending from the International Develop-ment Association (IDA) and other multilateralinstitutions. Thus, although net transfers from theIBRD turned negative in the late 1980s, overalltransfers from the World Bank have remainedpositive. Similarly, starting in the mid-1980s,most bilateral donors reduced nonconcessionallending, progressively curtailed concessionallending, and sharply increased grants.

With a persistent debt crisis and the increas-ing acceptance that it reflected the insolvency ofmost HIPCs, actions to relieve the debt burdensof poor countries have progressively intensified.5

Major bilateral lenders switched from noncon-cessional rescheduling to concessional resched-uling, and finally to debt stock reduction actionsthrough the Paris Club.6 Multilaterals were morelimited in their options, reflecting a combina-tion of the relatively small proportion of the over-all debt burden (in present value) owed to them,concern about maintaining their financial in-tegrity, and their continued treatment of theHIPC debt problem as one of liquidity. 7 Never-theless, the increasing recognition of the strainsimposed by debt service and the emerging mul-tilateral debt service problem led to the intro-

duction of the Special Program of Assistance forAfrica in 1987, debt buybacks through the IDAdebt reduction facility, fifth-dimension grants tohelp former IBRD borrowers to meet their in-terest payments, and the establishment of the En-hanced Structural Adjustment Facility (ESAF), aconcessional arm for IMF assistance to LICs.

These actions, especially those to relieve debt(starting in 1988), did have an impact in check-ing the rise of the debt burden, as shown by theflattening of the NPV of debt-to-exports ratio in figure 2.1.Additional Paris Club actionswith successively increasingrelief elements and, eventu-ally, the pick-up in growth ac-count for the decline in theratios of both the nominal andNPV of debt stock-to-exports in the mid to late1990s. An important consequence of the multi-lateral actions, particularly the expansion of con-cessional finance, was the shift in thecomposition of debt outstanding and the cor-responding debt service obligations. The shareof official sources, particularly multilateral con-cessional debt, increased significantly.

The rising share of multilateral debt serviceposed potentially severe problems, because these

EVOLUTION OF DEBT AND THE DEBT PROBLEM

7

0

2

4

6

8

10

12

14

16

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

US$ billions

Official net transfers

Aggregate net transfers

Official debt service

Net Resource Transfers to HIPCs Have Outpaced Debt Service

Figure 2.2

Source:Global Development Finance.

The rising share ofmultilateral debtservice posedpotentially severeproblems.

institutions did not offer an option of resched-uling or debt relief, and dire consequences wereassociated with falling into arrears on multilateraldebt. At the same time, the increased frequencyof debt restructurings with the Paris Club madeit apparent that the existing mechanisms were inadequate to deal with the problem. Eventually,a comprehensive solution was sought to addressthe insolvency of HIPCs, which actions merely de-signed to provide temporary relief or to check arise in debt burdens could not resolve.

The Consequences of an ExcessiveExternal Debt BurdenIt is generally accepted that a large debt stock canimpair development, but there is less agreementon how this impact might occur, particularly in thecase of HIPCs. Annex F summarizes the main find-ings from a review of the research and academic

literature on this topic. Thedominant theory underlyingthe adverse consequences ofan excessive debt stock is the“debt overhang” hypothesis.8

This was the straightforwardstrategic rationale for theHIPC Initiative as originallyconceived and operational-ized (World Bank and IMF1998, 1999). But as discussed

in Annex F, this has not been demonstrated con-vincingly for the HIPCs. Low domestic investment,capital flight, and limited flows of foreign direct in-vestment reflect a combination of factors affecting

the investment climate, including the policy en-vironment and structural and social constraints. Inthe continued presence of these factors, a reduc-tion in debt stock by itself is unlikely to lead to sig-nificant increases in private investment.

A more plausible argument is that high debtservice payments crowd out high-priority pub-lic expenditures. Despite the large positive nettransfers, the fiscal space may be too small to simultaneously accommodate large debt serviceobligations and to fund the necessary infra-structure and social investments for broad-basedand equitable growth. This partly reflects theinefficiency of existing aid processes (such asproject finance and tied procurement), but italso reflects insufficient efforts to increase budg-etary revenues, inefficient management of pub-lic expenditures, or both. To effectively reducethe fiscal strain would require not only debt re-duction (to lower the debt service obligations),but also concurrent actions on the policy frontby donors and recipients alike.

Furthermore, the positive net transfers havebeen maintained through a complex and inef-ficient restructuring and negotiation process(see Annex F). The uncertainty surroundingthe process and the general inefficiency asso-ciated with high debt stocks can have a nega-tive influence on both the level of investmentand the effective use of existing capacity. Thereis some evidence suggesting this might be amore important channel through which ex-cessive debt stocks can affect economic per-formance in the HIPCs.


8

It is generally acceptedthat a large debt stock

can impairdevelopment, but

there is less agreementon how this impact

might occur.

9

The HIPC Initiative

This chapter provides a brief review of the rise of the HIPC Initiative. Aftera short background summary, it describes how the political pressuresunderlying the changing international financial governance and emerg-

ing alliances of civil society groups brought the initiative into being. Thechapter then presents the key objectives and characteristics of the HIPCprocess.

BackgroundIn the mid-1990s, increasing poverty and a gen-eral perception of development failure in manyof the least developed countries, primarily inSub-Saharan Africa, coincided to intensify thepressure for a strategy to deal with the LIC debtcrisis. The complex relations between heretoforerelatively distinct groups of actors started tocome together and influence official thinkingon the issue (Callaghy 2002).1 The growing in-fluence of civil society, with NGO networks at itsforceful core, transformed the international debtregime through political reach into the higherechelons of international governance, especiallywith the G-7 governments and the Developmentand Interim Committees of the Bretton Woodsinstitutions. The alliance’s efforts led to a call bythe governing body of the World Bank at its an-nual meetings in 1994 and 1995 to study multi-lateral debt and develop an effective strategy todeal with the issue.

Within the World Bank, concern was alreadygrowing about the rising debt problem for a

large number of its poorest borrowers, particu-larly in the Africa Region. At first the voices weredisjointed; they were also discounted under thepresumption that the poor countries had a short-term cash-flow constraint that was readilyamenable to policy reform. The major tool in thisstrategy was structural adjustment programs,which provided the resources to get throughthe short-run problems and targeted much-needed policy reforms. By the early 1990s, how-ever, it had become clear that structuraladjustment programs were not working as ex-pected. Lack of ownership of reform programscombined with governance dysfunctions; weakpublic expenditures management; and inade-quate emphasis on infrastructure, private sectordevelopment, and agricultural productivity hadhindered supply responses to macroeconomicpolicy adjustment—and they still do.

To address increasing concerns about LICdebt, especially the rapidly increasing multilat-eral debt, the World Bank established a workinggroup to assess the magnitude of the multilateral

3

debt problem and develop possible mechanismsto deal with it. The group sought to comple-ment the World Bank’s existing instruments(noted in Chapter 2) and existing (“traditional”)mechanisms for providing relief for bilateral andcommercial debt. The mechanism proposed bythe group, a “multilateral debt fund,” was de-liberately designed to be a concerted and com-prehensive effort to effectively deal with theHIPC debt problem.

When a draft working paper prepared by thegroup was leaked to the press in 1995, it had anunexpected catalytic effect. The developmentcommunity quickly embraced the idea, whichsoon translated into the proposal for the HIPC Ini-tiative put forth by the World Bank and the IMFin 1996. Through more uniform rules, the HIPC

Initiative marked a significant ad-vance from traditional debt re-lief mechanisms for eligible LICs.It transformed the debt regimetoward more open and account-able norms, and introducedsome key innovations, including,for the first time, a systematictreatment of multilateral debt,the notion of debt sustainability,and the focus on poverty reduc-

tion. The evolution of the “multilateral debt fund”to the final form of the HIPC Initiative, and thevarious pressures that have influenced its emer-gence and design, are discussed in detail in abackground paper to this review (Callaghy 2002).

The Political Economy of HIPCHIPC is a response to the central structuraldilemma of recent times—the emergence of agroup of weak states and economies that have notbeen able to benefit easily or quickly from eco-nomic reform and globalization. This dilemmaposes important difficulties for the functioningand evolution of the international political econ-omy, and ultimately for international peace. Thecauses of this structural dilemma are many, com-plex, and very deeply rooted—developed coun-try policies, external trade patterns and otherexternal shocks, heavy reliance on primary com-modities, weak formal economies, flagging eco-nomic reform efforts, poor investment climates,

corrupt and oppressive governments, weak do-mestic capacities, civil conflict and war, environ-mental degradation, and disintegrating physicaland social infrastructure. All of this is reinforcedby limited access to private international capitalflows, despite the implicit bargain with the in-ternational community that such access wouldsustain economic reform efforts.

The major evolution of the treatment of sov-ereign debt was the move from debt collection,to debt rescheduling, to aid and structural ad-justment, to debt “sustainability,” to forgivenessand poverty reduction—what one G-7 officialcalled the “slippery slope of debt.” The slipperyslope was expertly greased by the strategyadopted, and very effectively implemented, bymajor advocacy NGOs in ratcheting up the de-bate and ultimately winning ground on debt re-lief.2 The resulting momentum brought about theoriginal HIPC Initiative and the E-HIPC.

Stakeholders agree that debt relief is essen-tially a political issue. It has significant economicconsequences, but to deal with the debt prob-lem requires political commitment and resolve.This is evident in the evolution of the debtregime. Not surprisingly, these changes werebrought about by a confluence of factors:

•Slow and uneven learning by bilateral and mul-tilateral creditors about the existence of agroup of states that were not benefiting muchfrom structural adjustment, while greatly in-creasing their debt loads in the process

•The growing pressure, influence, and effec-tiveness of a new set of actors in internationaleconomic governance—networks of NGOsthat believed the existing situation for thesestates was unjust and untenable, and that hadnew ideas and proposals of their own, with asocial movement to back them up

•The influence of a group of economists, bothinside and outside creditor institutions, in-cluding in the World Bank, who providedknowledge, advice, and technical under-standing on this issue

•The leadership of a group of small creditorstates, and eventually several G-7 members

•New leadership at the World Bank •The successful efforts by negotiators of key

creditor countries and donor institutions, both


10

The HIPC Initiativetransformed the

debt regime towardmore open and

accountable norms,and introduced

some keyinnovations.

bilateral and multilateral, to work through thecomplex and often politically contentious details.

Many of the ideas inherent in HIPC were pro-posed by southern states during the New Inter-national Economic Order (NIEO) events of the late1970s and early 1980s, but nothing came of this in-tense and polarized state-to-state bargaining. Oneof the striking things about the rise of HIPC isprecisely that the debtor states were not a majordriving force behind the innovation. Rather, it wasmade possible by NGOs that shifted the battlefrom the corridors of power into the domestic po-litical arenas of the Organisation for EconomicCo-operation and Development (OECD) industrialdemocracies. The weak power position of thedebtor states and the concomitant strong influenceof the NGOs help to explain how the HIPC Initia-tive eventually became focused almost exclusivelyon a particular approach to poverty reduction.3

One of the main complaints by almost all debtorsand many of the creditors is that this is very oftenat the expense of broader developmental con-cerns (see Annexes G and H for summaries ofconsultations with the two groups).

The HIPC ObjectivesThe main features of the HIPC Initiative, forboth the original and the enhanced frameworks,are given in table 3.1. A full statement of the ob-jectives and the guiding principles of the initia-tive are given in Annex B.

The original framework had a straightforwardfocus on the key issue that the initiative was cre-ated to address—to reduce the debt stock.4 Thestrategic rationale for this was that it would removethe disincentive effects on private investment ofa “debt overhang” and allow progress toward theunderlying development goal of economic growthand poverty reduction. The initiative was viewedas one element of an overall strategy to achievedebt sustainability for the HIPCs. At the sametime, the “savings” from reduced debt service, tothe extent that they were actually realized, wouldgenerate the much-needed fiscal space in theHIPC governments’ budgets to pursue economicgrowth and poverty reduction.

Over time, the objectives evolved, in subtleways at first and then significantly with the launchof the E-HIPC in 1999. While the original goal of

promoting growth by removing the debt over-hang has been retained, the transformation, ev-ident in the stated objectives and the guidingprinciples (see Annex B), took place in two di-mensions: (a) a shift in focus of the original ob-jective related to debt sustainability and (b) theaddition of an explicit twin objective.

The objective related to debt sustainabilitybecame more ambitious: from reducing debt aspart of a broader strategy to achieve long-runsustainability in 1995; to reducing debt to sus-tainable levels and thus providing a durable exitstrategy from the rescheduling process in theoriginal formulation of the initiative in 1996; toproviding a “robust” exit from debt reschedul-ings and the achievement of debt sustainabilityin 1998 (World Bank and IMF 1998); to a “per-manent” exit from therescheduling processand a “clear” exit fromunsustainable debt in1999 (World Bank andIMF 1999).

The objectives were expanded to specificallytarget the freed resources to social spending,ostensibly suggesting that debt relief would gen-erate additional resource flows. The addition ofthis objective had a significant impact on the im-plementation of the initiative. To strengthen thelink between HIPC relief and poverty reduction,the performance criteria were broadened to in-clude the requirement of a Poverty ReductionStrategy Paper (PRSP).5 And, while the perform-ance criteria to reach the completion point in theO-HIPC framework included both structural andsocial measures, it was decided in the E-HIPC to“give more weight than under the [original]framework to social and poverty-related reforms”in the assessment of performance to reach com-pletion point (World Bank and IMF 1999).

The ProcessThe current HIPC process is described in detailin the flow diagram in Annex C. The primaryqualification criteria and the core building blocksof the process, along with the modifications tothe specific elements of the design from the O-HIPC to the E-HIPC framework, are given intable 3.1. Among the qualification criteria, the

THE HIPC INITIATIVE

11

The objectives wereexpanded to specificallytarget the freed resourcesto social spending.


12

Element Original Enhanced

Stated objectives To bring the country’s debt down to sustainable Maintains the original focus to remove the debt overhang levels, subject to satisfactory policy performanceand provide a permanent exit from rescheduling, plus

free up resources for higher social spending aimed at poverty reduction to the extent that cash debt-service payments are reduced.

Qualification criteria IDA-only countries (poverty) Same. Applied retroactively to include countries already Unsustainable level of debt after full use of past decision or completion points under the original traditional mechanisms framework.Strong record of policy performance 41 eligible in 1999, currently 42, of which 38 are expected41countries eligible, 29 expected to qualify to qualify.

Debt sustainability Guiding principle: Target overall debt sustainability Principle for change: Provide a clear exit from to provide a durable exit strategy from the unsustainable debt burden to remove the debt overhang 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: 200–250% NPV debt-to-exports: 150%NPV debt-to-revenue: 280% with export/GDP: 40%; NPV debt-to-revenue: 250% with export/GDP: 30%; revenue/GDP: 20% revenue/GDP: 15%

Calculation of relief Fixed at completion point, based on projections of Fixed at decision point, using actual data on NPV debt for debt indicator for completion point year prior to decision point and 3-year average for exports

Time of relief delivery Completion point (CP), irrevocable commitmentDecision point: on an annual basis, interim relief is bulk of anticipated post-CP relief, it is irrevocable

Forward-looking Debt sustainability analysis to project profile of Sameassessments key debt indicators

Performance criteria Guiding principle: Action only after the debtor has Principle for change: To strengthen the incentives for shown, through a track record, the ability to put to debtor countries to adopt strong programs of adjustment good use whatever relief is provided and reform

For decision point 3-year track record of macroeconomic stability and Same plus policy reform interim or full PRSP

For completion point Further 3-year track record of macroeconomic stability Maintenance of macroeconomic stabilityand policy reform Completion of PRSP, plus one-year PRSP implementation

for E-HIPCPerformance benchmarks for structural and social reforms

Interim period 3 years Flexible, with the introduction of floating CP

Creditor participation Guiding principle:Comprehensive debt relief action: Principle for change:Samecoordinated among all creditors involved with broad plus debt relief should be additional to reinforce the and equitable participation wider tools of the international community to promote New external finance to be on appropriately sustainable development and poverty reductionconcessional terms

The Original and Enhanced HIPC Frameworks in a Nutshell

Table 3.1

focus on poverty is straightforward: only coun-tries that are eligible for concessional loans fromIDA qualify for HIPC relief, excluding the IDA-IBRD blend countries. The second and thirdcriteria are linked to two main building blocksthat define debt sustainability and policy per-formance. The focus of this review is the threebuilding blocks of the process: debt sustain-ability, performance criteria, and creditor par-ticipation.

The total amount of assistance provided by theHIPC Initiative, in the form of debt service reliefover the next 30 years or so, is divided roughlyevenly between the multilateral and bilateralcreditors. The processes involved in accessingdebt relief at the country level are more pro-tracted for bilateral than for multilateral creditors.Although the amount of debt relief from theParis Club is determined in the context of theHIPC Initiative and is not subject to subsequentnegotiation, the HIPCs are obliged to meet withthe Paris Club after the decision point to agreeon the broad terms of the debt relief to be de-livered by the participating creditors. After thisagreement, the HIPCs must reach a formal agree-ment with individual Paris Club creditors on themodalities of debt relief. They also have to securecomparable treatment from non–Paris Club bi-lateral creditors and commercial creditors. Theprocess of accessing debt relief from the major

multilateral creditors is simpler, with debt reliefgenerally taking the form of reduced debt serv-ice payments, cancellation of credits, or the pro-vision of grants. The World Bank’s HIPC unitestimates the amount of relief due from eachmultilateral creditor, although the delivery modal-ities still vary across creditors.

The financing of the debt relief is straight-forward for the bilateral creditors. It is compli-cated for the multilateral creditors, given theirstatus as preferred cred-itors. To finance themultilateral share of therelief, the World Bankestablished the HIPCtrust fund in 1996. Thetrust fund is structuredto allow multilateralcreditors to participatein the initiative in ways that are consistent withtheir financial policies, and it also helps addressresource constraints for certain multilateral cred-itors. The two main sources of financing for thetrust fund have been bilateral contributions andtransfers from IBRD net income and surplus;contributions from other multilaterals are alsopermitted. The trust fund either prepays, or pur-chases a portion of the debt owed to a multilat-eral creditor and cancels the debt, or pays thedebt service as it comes due.

THE HIPC INITIATIVE

13

Processes involved inaccessing debt relief atthe country level are moreprotracted for bilateralthan for multilateralcreditors.

15

Design of the Initiative

This chapter assesses whether the design of the initiative is appropriateto 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 capacitybuilding in the initiative’s design. The discussion draws on a background paperto this review (Eaton 2002), a review of HIPC documents, and data analysis.

BackgroundThe design embodies the emerging empiricalevidence and lessons of experience on the linkbetween aid effectiveness and policy environ-ment, conditionality and ownership, social im-pacts of macroeconomic policy and publicexpenditure reforms, and aid coordination.While the original design was essentially de-veloped by the staffs of the World Bank andthe IMF, the broad participatory processadopted to review and then enhance the HIPCframework in 1999 was critical to the evolutionof the initiative, given the key role played by theinternational NGO community. The debtorshad no explicit role in the O-HIPC design, andlimited influence on the E-HIPC. This is note-worthy, since the HIPC process envisages thedebtor government and the civil society in poorcountries firmly taking the driver’s seat andowning the process. Their limited input into the

design of the process may affect the initiative’soutcomes.

Nevertheless, adaptive “learning” among par-ticipants has been a strong feature of the evolu-tion of the HIPC Initiative’s design and theprocesses for implementation. As the first coun-try to qualify under both the O-HIPC and E-HIPCframeworks, Uganda has been a valuable learn-ing ground (see box 4.1). The interactive processwith stakeholders, in particular the NGOs, andtheir suggestions and inputs have helped to for-mulate new ideas—from process issues, to the in-troduction of the participatory poverty reductionstrategy concept, to technical issues such as retro-fitting the sustainability thresholds.

Consistency of the Design with OverallObjectivesThe HIPC Initiative has acquired three distinctobjectives:

4

1. Debt sustainability by “[providing] a perma-nent exit from rescheduling”1

2. Raising long-term growth rates by “removingthe debt overhang”

3. Poverty reduction by “[freeing] up resourcesfor higher social spending . . . . to the extentthat cash debt-service payments are reduced.”2

Although each ofthese objectives isclear, the design ofthe initiative does notensure that all threegoals can be met si-multaneously. In spe-

cific contexts and given limited grant resources, the goals may instead conflict with one another.

The central issue is whether the debt relief pro-vided by the initiative results in an increase in net

resource transfers to the HIPCs—“additionality.”The impact of debt forgiveness on net resourcetransfers to countries must be viewed in the con-text of overall aid flows. For net resource trans-fers to these countries to increase as a result ofdebt relief, donors need to maintain the levels ofother aid flows. 3 Equally important, the impactof debt relief on the availability of other aidshould be assessed both at the level of the indi-vidual HIPC and at the global level for aid recip-ient countries in the aggregate.

For the individual countries eligible for HIPCrelief, an increase in net resource transfers isnecessary to achieve the third objective—to freeup resources for higher social spending forpoverty reduction. The design of the initiativecannot ensure that this increase will in fact takeplace. Evidence suggests that past debt relief ef-forts were not additional (Birdsall and Williamson


16

As the first country to qualify for HIPC debt relief, Uganda has

served as a valuable learning ground to refine the parameters for

determining debt sustainability. The main debt sustainability in-

dicators used in the initiative are the NPV of debt-to-exports

ratio and the debt service-to-exports ratio. Initial HIPC propos-

als used a single year’s export earnings to calculate the key ra-

tios and, consequently, to determine debt relief and debt

sustainability. Ugandan authorities opposed the use of a single

year’s exports, arguing that it would not adequately capture the

extreme volatility of Uganda’s export earnings. The authorities

were concerned that a decision point that coincided with un-

usually high international prices for coffee or other commodities,

and therefore higher export receipts, could potentially lower

the amount of debt relief they would receive. Underlying their con-

cern was the rapid tapering off of the 1994–95 and 1995–96 boom

in the international price of coffee. They favored a six-year ex-

port average, but that was not acceptable to the World Bank and

the IMF. According to the Ugandan authorities, a six-year back-

ward-looking average (in 1995–96) would have almost doubled

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

Uganda was quick to commit itself to linking debt relief to

poverty reduction under the O-HIPC, and it was first among

LICs to successfully formulate a national poverty reduction

strategy, long before the advent of the PRSP. These successes

have strongly influenced the design of the E-HIPC by the World

Bank and IMF. Uganda’s poverty reduction strategy—known as

the Poverty Eradication Action Plan (PEAP)—was formulated

in 1997 following an 18-month-long consultation involving stake-

holders that included central and local governments, NGOs, civil

society, donors, and academia. The consultative process was

subsequently broadened to include a diagnostic of poverty

through direct consultations with the poor, carried out jointly

by the government and civil society through a Participatory

Poverty Assessment Project. In 1998–99, the government es-

tablished the Poverty Action Fund (PAF)—a virtual fund within

the budget to finance expenditures identified as priority poverty-

reducing areas in the PEAP—to “ring-fence” debt relief funds,

including donor budget support, in support of PEAP objectives.

Uganda’s PEAP has become the model for the PRSPs.

Uganda’s Influence on the Design of the HIPC Initiative

Box 4.1

a. Based on information obtained from interviews with Ugandan authorities and the Austrian Development Cooperation (1999).

An increase in net resourcetransfers is necessary to free

up resources for highersocial spending for poverty

reduction.

2002). As will be seen in Chapter 6, while it is tooearly to assess the additionality of HIPC debt re-lief, the evidence so far on the net resourcetransfers to the HIPCs shows a declining trend.

To achieve the initiative’s first objective—a“permanent exit from rescheduling”—the in-creased net transfers would also need to be sus-tainable. That is, their terms need to besufficiently concessional to obviate the need forfuture rescheduling. If additionality can beachieved only by transfers in the form of loans,the objective of a “permanent exit from resched-uling” will be more difficult to achieve. With lim-ited grant resources, there is thus a tensionbetween the first and third objectives: the morethe initiative achieves toward the first objective,the less it may do to accomplish the third.

The means of achieving the second objec-tive, growth, may also create a tension with thefirst objective. If the intent is to eliminate thecrowding-out effects of debt service, additionalresources will be needed to allow growth-pro-moting fiscal expenditures or public investment.The “debt overhang” argument, that debt scaresaway private investment, remains speculativegiven other factors affecting the investment cli-mate. To the extent it does induce private in-vestment, however, debt reduction may lead tohigher growth even if there is no additionality.4

But for this argument to hold, private investorswould have to be attracted by creating enclavesto protect their investments, while foreign pri-vate lenders must have the confidence that, atsome time in the future, they will be able totake their returns out of the country—that is, thecountry will start making net resource transfersto creditors. This has not happened historically.

If the primary goal of the initiative is to facili-tate an exit from debt rescheduling while not af-fecting overall aid or redirecting aid resourcesaway from other poor countries and toward theHIPCs, then the lack of additionality is not a prob-lem. If there is no increase in transfers as a resultof the HIPC Initiative, then what are the gainsfrom reducing the debt stock? The gains are whatBirdsall and Williamson call “efficiency” gains. Oneis the elimination of complex debt negotiations,which require the extensive involvement of sen-ior government officials, and a reduction in the un-

certainty about the outcome of the negotiations,which generates economic instability. A secondgain would be to allow creditors to be more se-lective in their lending. The initiative involvesmore coordination among creditors, and this couldlead to a rationalization in the use of funds for el-igible countries. The third would be to fostergreater ownership of the country’s developmentprogram by allowing governments to pursue theirown priorities by putting resources more directlyin their hands. This would result, for example, byreplacing project lending with general budgetsupport and reducing economic costs associatedwith tied aid.5 Finally, a transfer-neutral reductionin aid would lessen the transactions cost associatedwith external financing. Allof these effects have the po-tential to enhance growthand tax revenues.6

It should also be men-tioned that if the initiativedoes not entail any addi-tionality, then the total“cost” of the programwould be less than the direct costs estimated byHIPC documents. The initiative would not incuradditional costs if the overall level of financial as-sistance were maintained by giving up debt serv-ice payments, but also simultaneously reducingthe provision of transfers, including those for fi-nancing the debtors’ debt service obligations. Tothe extent this occurs (as argued by Birdsall,Claessens, and Diwan 2001 and Sachs and oth-ers 1999), there are efficiency gains from endingthis “shell game” or “forced lending,” but it iscost-neutral to the international donor com-munity. Nevertheless, debt forgiveness mightend up reshuffling obligations among individualdonor/ creditors, making the discussion of ap-propriate “burden sharing” important.

At the global level, whether or not HIPC debtrelief is additional to overall aid flows has im-portant implications for the distributional impactof the initiative between the highly indebtedand non–highly indebted poor countries. Asthe Report of the High-Level Panel on Financ-ing for Development notes, the issue of addi-tionality is a key factor in appraising thedesirability of debt relief in overall development

DESIGN OF THE INITIATIVE

17

Whether or not HIPCdebt relief is additionalto overall aid flows hasimportant implicationsfor the distributionalimpact of the initiative.

finance, as it determines who actually pays forit (United Nations 2000). If the purpose of theinitiative were solely to “end the cycle of peri-odic reschedulings,” without requiring addi-tional resources, as was the main objective in theO-HIPC, then such distributional issues wouldnot arise. Aid allocation would remain inde-pendent of the initiative. But to the extent thatthe program results in additional transfers to theHIPCs, it expands the commitment of aid re-sources to these countries. Unless overall aid re-sources increase, less will be available for thenon-HIPC countries. Whether and how thismight be affecting the two groups of countriesis discussed in Chapter 6.

To sum up, each of the three stated objectivesof the initiative is highlydesirable. But to meetthem simultaneously re-quires actions beyond thescope of the initiative. Inparticular, to free up re-sources for higher social

spending, it is necessary (though not sufficient)to transfer additional resources. The initiative,however, has no means of ensuring this, espe-cially with fixed or declining aid resource en-velopes. Nor is it clear how the initiative couldhave been designed to provide such surety. Theinitiative is a limited instrument. A clear publicacknowledgment of this reality and a prioritiza-tion of its principal goals and how they are to beachieved in specific contexts would help createthe correct expectations of what the initiative canrealistically achieve.

Debt SustainabilityDebt sustainability was the core objective in theO-HIPC and remains a central objective in the E-HIPC. It is assessed through the debt sustain-ability analysis (DSA) conducted jointly by theWorld Bank, the IMF, and the country authori-ties. There are two key components of the DSA.First, the debt sustainability criteria are criticalin determining which countries become eligiblefor HIPC relief and the level of relief to be pro-vided in each case. Second, the forward-lookingdebt projections are the main instrument to as-sess the likely success of the initiative for each

country in maintaining the future debt burdenat a sustainable level.

The Debt Sustainability CriteriaThe eligibility of countries to qualify for HIPC as-sistance and the amount of relief are based on ac-tual and historical data.7 The main criterion tojudge eligibility and calculate the amount of debtrelief is the ratio of NPV of debt-to-exports. TheNPV of debt is estimated using a detailed debt-inventory methodology, which aggregates thedebt service payments, scheduled for each out-standing loan, discounted by the prevailing cur-rency-denominated market interest rate. Althoughcumbersome, this accounting procedure is nec-essary to arrive at a robust estimate of a country’sexternal debt burden, and its introduction is a verypositive feature of the initiative. For very openeconomies, a fiscal criterion is used—defined asthe ratio of NPV of debt to government revenues(using the same debt-inventory methodology).The indicators have remained the same from theO-HIPC to the E-HIPC, but the threshold levelswere modified to deliver deeper relief and tocover more countries, as detailed in table 3.1. Crit-icisms have been leveled against three elementsof the debt sustainability criteria: the choice of theprimary indicator, threshold levels at which debtis judged to be unsustainable, and the exclusionof domestic debt from the analysis.

The Choice of Primary Indicator

The main indicator is the ratio of NPV of publicand publicly guaranteed long-term external debtto the average of the past three years of exportsof goods and nonfactor services. Several NGOsdo not think that this stock-based approach ad-equately captures the burden of debt service onthe government.8 Nor do they consider exportsas relevant to the governments’ overall repay-ment capacity. They suggest using the debt-serv-ice-to-revenue ratio (Oxfam 2001). Thealternative “sustainable development” approachis also linked to government revenues (pro-posed by EURODAD 2002).9 But to use revenuesas the basis for judging eligibility, sustainability,and the amount of debt relief presents severalchallenges. The data on government revenuesare notoriously poor. The HIPCs’ low level of rev-


18

To meet all threeobjectives

simultaneously requiresactions beyond the

scope of the initiative.

enues relative to gross domestic product (GDP)partly reflects their poor economic condition, butalso inadequate revenue collection efforts, asmany OED evaluations have found. In manycountries, a large part of the revenues is kept offbudget (Thomas 2001). But most important, in-cluding revenue as a qualifying indicator wouldreward governments with poor revenue collec-tion efforts, as argued by Birdsall and Williamson(2002), and provide adverse incentives to re-form the revenue systems.

An alternative indicator is the debt-service-to-GDP ratio, which overcomes the problems as-sociated with a revenue-based indicator(suggested by Birdsall and Williamson 2002).This indicator also raises some concerns aboutincentives for policy formulation and imple-mentation. It is easier to measure and is less di-rectly manipulable than government revenue, butdepending on how it is measured in individualcountries, it may be more difficult to compareacross countries. And depending on the struc-ture of the economy, it may not accurately reflectthe country’s external debt burden or repay-ment capacity. Nevertheless, the relative meritsof using GDP versus exports need to be studiedin more detail.10 Different indicators have theiradvantages and disadvantages. From a designperspective, the less manipulable the indicatorthe better; thus, for practical and operationalreasons, the NPV of debt-to-exports is preferableto other indicators. That said, alternative indi-cators convey useful information and need to beregularly monitored and reported. This is donein the HIPC progress reports.

Finally, although the E-HIPC has poverty re-duction as an objective, its primary indicators re-late to debt, not to poverty criteria such as healthor nutrition (Sachs and others 1999). The eligi-bility criterion that relates to poverty is thatcountries must be IDA-only borrowers—that is,have a per capita income of US$875 or less.11 IDA-only borrowers constitute the poorest 76 of theworld’s 117 developing nations. 12 Dagdevirenand Weeks (2001) show that that HIPCs houseonly 9–12 percent (5–6 percent in purchasingpower parity [PPP] terms) of the world’s poor,and argue that the aggregate impact on povertywould be limited. It is likely that different crite-

ria could have better targeted the initiative tomaximize its impact on global poverty. But thiswould be the case only if the initiative providesadditional flows. To the extent that there is re-distribution toward the HIPCs, the initiative willbe disadvantageous to the non–HIPCs that haveregularly serviced their debt and/or have prac-ticed more prudent debt and macroeconomicmanagement, thus raising moral hazard issues.

In fact, the manner in which poverty reductionis targeted in the HIPC design is to earmark debtrelief “savings” for poverty reduction. This hasbeen translated to conditions that require sub-stantial allocations of debt relief resources forsocial expenditures or include targets for socialspending in government budgets. These condi-tions are a result of the demand by the advocacyNGOs, who have equated poverty reduction withsocial expenditures (Jubilee 2000 Coalition 1999).

The Threshold Levels

The O-HIPC thresholds were criticized as being toohigh. The lower E-HIPC thresholds, while wel-comed by NGOs and other critics, are still judgedby many to be too high. Moreover, critics con-sider them arbitrary and lacking a scientific basis.

While there is no theoret-ical basis for the ratios, theywere based on empirical in-vestigations of historical data(Underwood 1990; Cohen1996). The analysis deter-mined that the range of200–250 percent for the NPVof debt-to-exports ratio was“about right” and the corre-sponding ratio for NPV of debt-to-GDP was 50percent.13 These findings provided the rationalefor adopting the 200–250 percent range as thethreshold for eligibility to the O-HIPC. In the re-view of the HIPC Initiative, which resulted inthe E-HIPC in 1999, to a large extent under pres-sure from civil society groups and advocates fordeeper debt relief, the ratio was lowered to 150percent—in order to provide countries a cush-ion to absorb exogenous shocks.

Using the same argument as before, but moreformally estimating the level of debt stocks atwhich countries are more likely to run into debt-


19

These conditions area result of thedemand by theadvocacy NGOs, whohave equated povertyreduction with socialexpenditures.

servicing problems, Cohen (2001) estimatesthresholds of 200 percent of NPV of debt-to-exportsand 50 percent of NPV of debt-to-GDP as the turn-ing points. Other analyses are less definitive butgenerally supportive. Using an alternative method-ology, Elbadawi, Ndulu, and Ndung’u (1997) findthe turning point for the debt-induced growthLaffer curve for a sample of African countries to bequite high (97 percent of debt-to-GDP ratio). Pat-tillo, Poirson, and Ricci (2002) estimate the turn-ing point to be 160–170 percent from one statisticaltechnique, but find a wide range of turning pointsusing alternative techniques.

These findings support the shift down from the200–250 percent range but do not challenge 150percent as the appropriate threshold. They

demonstrate the diffi-culty in establishing atruly scientific basis forsuch a number. Tosome extent, it is in-

evitable that such a threshold will be arbitrary.There is no particular level that can guarantee debtsustainability—which is a function not only ofdebt reduction, but also of the volume, pace, andterms of new borrowings, as well as economic and

export performance. These variables are influ-enced by exogenous and behavioral parameters.

To assess whether the 150 percent target forthe NPV-to-debt ratio provides the HIPCs a rea-sonable chance of attaining debt sustainability,figure 4.1 compares the ratio for HIPCs withthat of other poor but non–highly indebtedcountries. The comparison is made with non-HIPC IDA countries and non-HIPC lower-middle-income countries. The figure shows that, onaverage, other IDA countries have sustaineddebt-to-export ratios of over 150 percent. Thenon-HIPC lower-middle-income countries havesustained up to 250 percent debt ratios. 14

Through the 1990s, both groups maintained lev-els under 150 percent, with IDA countries aver-aging 148 percent for 1998 and LMI countriesaveraging 135 percent. Thus there is some his-torical justification for the 150 percent target.

An alternative measure of the debt burden isthe NPV of debt-to-GDP ratio. As shown in fig-ure 4.2, the average for this indicator for thenon-HIPC IDA countries remained between 30and 40 percent in the 1990s, although earlier itwas lower. The ratio for the LMI countries has his-torically been above 50 percent and stayed


20

HIPC Target for Debt-to-Export Ratio Compared with Other Poor Countries

Figure 4.1

0

50

100

150

200

250

300

350

400

450

500

550

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

NPV debt-to-exports (%)

All HIPCs

LMI

Other IDA

Source: Global Development Financeand World Development Indicators.

There is no particularlevel that can guarantee

debt sustainability.

around 40 percent in the 1990s. It would seem,then, that 30 to 40 percent would be a good tar-get to bring the HIPCs to a position comparableto that of other poor countries. Based on the NPVof debt reductions offered by the E-HIPC, the av-erage NPV of debt-to-GDP is expected to be re-duced to 30 percent. Thus, although the NPV ofdebt-to-GDP ratio is not explicitly used as an in-dicator in the initiative, the actions envisaged areexpected to bring the debt burden of the HIPCs,as measured in this way, down to a level com-parable to other poor countries. Similarly, the in-dicators for the ratio of debt service-to-exports,GDP, and revenues also show that if the initiativesucceeds in delivering the envisaged amount ofrelief, the HIPCs will be at par or below the cur-rent ratios for other poor countries.

While any specific number may be arbitrary, inthe interest of transparency and equity of treatmentit is politically necessary (although not always theoptimum in specific circumstances) to use a sim-ple, uniform rule. This is a lesson learned from thedissatisfaction with the “case-by-case” approachthat governed the earlier debt regime, which wasperceived as being too “political.” More important,it should be clear that there is no current debt level

that “ensures” debt sustainability with any cer-tainty. The ratios are composites of variables sub-ject to the future decisions and behavior of thecountry and its creditors, in the case of the debtstock, and unpredictable exogenous factors, inthe case of exports. The completion of the initia-tive cannot guarantee that a country will avoidfurther debt-servicing prob-lems down the road.

Maintaining debt at sus-tainable levels requires pru-dent debt management, a keyelement missing in mostHIPCs in the past, and a needfor close and continuousmonitoring of the debt in-ventory, including domesticdebt, to ensure that the coun-try continues to remain on a sustainable debtpath. The country and its creditors should ensurethat the extent and nature of future loans are con-sistent with HIPC targets.

The Exclusion of Domestic Debt

Domestic debt is excluded from the analysis butsome, including many debtors, have criticized


21

What Would Be a Good Debt-to-GDP Target?Figure 4.2

0

10

20

30

40

50

60

70

80

90

100

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

NPV debt-to-GDP (%)

All HIPCs

LMI

Other IDA

Source: Global Development Financeand World Development Indicators.

If the initiativesucceeds in deliveringthe envisaged amountof relief, the HIPCswill be at par orbelow the currentratios for other poorcountries.

this, arguing that servicing domestic debt addsas much to a government’s fiscal burden as serv-icing external debt. But integrating domesticcreditors into the process would be unwieldy (forinstance, when applying the principle of equalburden-sharing) because they are likely to be avery diverse group. Moreover, the level of do-mestic debt is more open to manipulations. De-vising mechanisms to avoid moral hazard issueswould be challenging. For example, a govern-ment can easily increase its domestic debt (suchas by taking over a failed bank). Finally, reduc-ing domestic debts might wreak havoc on frag-ile domestic financial markets.

In view of these characteristics of domesticdebt, the decision to include only external debtfor the HIPC Initiative is appropriate. Yet the ef-fective management of domestic debt can be animportant prerequisite for the success of theHIPC Initiative. Therefore, the levels and char-acteristics of domestic debt need to be monitoredand reported at the decision and completionpoints, and more routinely through World Bank

and IMF monitoring—for instance, in the con-text of the PovertyReduction and GrowthFacility (PRGF) review.Further, to the extentthat the external initia-tives add to fiscal bur-dens, care must betaken that these do not

lead to excessive domestic debt.One issue raised in the debtor feedback work-

shops was to allow increased flexibility in the cur-rent framework so that HIPC debt relief could beused to deal with domestic debt servicing (al-though not to include domestic debt in the cal-culation of HIPC relief). To the extent thatcontrolling or reducing domestic debt or debtservice is critical for macroeconomic stability,such actions fall under the purview of PRGFarrangements within the context of overall fiscalmanagement. The HIPC Initiative has recentlyshown such flexibility. For example, in the caseof Ghana, a part of the HIPC debt relief is ear-marked for domestic debt retirement. However,here again, care needs to be exercised to assess

who holds domestic debt and what the likely dis-tributional implications are.

Do DSA Projections Provide a Robust Forecast?The forward-looking component of the DSAprojects the key indicators for debt sustainabil-ity using forecasts for key macroeconomic vari-ables. These projections do not have any impacton the eligibility criteria or the amount of reliefthat will go to individual countries. The projec-tions are used to assess whether, after receivingHIPC relief, the profile of a country’s debt bur-den is likely to remain within the prescribedrange over the next 10 to 20 years, and thereforeto demonstrate whether the initiative is likely toachieve its main objective. Debt projections canbe evaluated both in terms of the methodologythey employ to connect endogenous variables toexogenous variables, and the assumptions theymake about the exogenous variables themselves.The former is assessed here; the assumptions willbe discussed in the next chapter, “Implementa-tion Experience.”

This review sought to assess the models un-derlying the forward-looking DSA projections,notably the consistency with which they are ap-plied and their sensitivity to selected assump-tions. Key components of the debt projectionsfor each country are the balance of payments pro-jections, derived from the IMF’s macroeconomicframework. Because the methodological basis ofthese projections was not made available, it is notpossible to attest to the consistency betweenthe balance of payments projections and theanalysis of debt sustainability. In particular, it isunclear how the initiative itself is incorporatedinto projections of imports and net resourcetransfers, or how the debt projections are inte-grated with the macroeconomic framework. Itwould be useful for the World Bank and IMF toprovide an explicit statement of how the debtprojections, including their balance of paymentsand fiscal components, are arrived at.15 A reviewof some of the analysis in the HIPC documentsand consultations with World Bank and IMF staffraise concern that accounting identities are ei-ther not observed or are forced by using certainlines as arbitrary “buffers.” While it is necessaryto make assumptions in exercises such as the


22

It would be useful toprovide an explicit

statement of how the debtprojections, including

their balance of paymentsand fiscal components,

are arrived at.

DSA, the basis for the key assumptions needs tobe documented and made explicit.

Other external reviewers have experiencedsimilar difficulties in seeking to comprehendthe basis on which DSAs are conducted. Ac-cording to the U.S. General Accounting Office(GAO 2000, appendix VI) “inconsistencies andgaps in the types of information provided in thedebt sustainability analyses presented challengesin our analyses of the documents.” 16 An inde-pendent research and advisory group, Devel-opment Finance International (2001), makessimilar points: “It is important that there is con-sistency between the new borrowing assump-tions of the DSA and the HIPCs’ PRGF limitsand that there is an objective basis for the spec-ified new borrowing limits of HIPCs. The debtsustainability analysis needs to be directly linkedup to the Poverty Reduction Strategy Papers soone can see if debt relief (both amounts andtiming) coupled with new inflows is sufficient toachieve HIPCs’ poverty reduction plans.” Thereporting by the World Bank and IMF on theimplementation of the HIPC Initiative has beenmore comprehensive and standardized in thecontext of the E-HIPC. Nonetheless, a moretransparent, explicit, and consistent methodol-ogy for the debt projections that connects all therelevant components of the fiscal budget, na-tional accounts, financial flows, and balance ofpayments remains necessary.

Performance CriteriaThere are two sets of performance criteria acountry has to meet to be eligible for debt reliefunder the initiative. One is an ex ante require-ment of the establishment of a strong trackrecord of policy performance to reach the deci-sion point. The second is a set of conditions,called the completion point triggers, that mustbe met to reach the completion point, whenthe full amount of HIPC assistance promised isdelivered and made irrevocable.

Track Record RequirementThere is little disagreement among researchersand policymakers that growth is essential forboth debt sustainability and poverty reduction.There is also little dispute about the need for sup-

portive economic policies, macroeconomic sta-bility, and sound economic management to pro-mote growth and poverty reduction, as reiteratedin the Monterrey Consensus statement. The lackof sustained macroeconomic adjustment poli-cies and structural reforms has contributed todebt buildup in the HIPCs (Brooks and others1998). The country case studies for this reviewconfirm that poor fiscal management and fail-ure to adjust to evolving economic circumstanceswere significant con-tributing factors in all ofthe country cases re-viewed (Annex I).

OED’s Country Assis-tance Evaluations (CAEs)conducted since 1997,available for 13 HIPCs,identify significant short-comings in macroeco-nomic and fiscal management and the policyframework. Annex J summarizes the constraintsto growth and long-term sustainability identifiedby the CAEs. A common cause of rising externaldebt has been the combination of adverse termsof trade, weather shocks, and poor fiscal man-agement (lax and inefficient tax administrationand uncontrolled expansion of unproductivepublic expenditures, with consequent heavy re-liance on external finance). Poor economic per-formance has been a result of political instability,poor macroeconomic policies, and institutionalconstraints, including poor governance. Infra-structure, agriculture, and private sector de-velopment have typically been neglected in thedesign of poverty reduction strategies, as high-lighted by OED’s independent review of IDA10–12 (Gwin 2002).

OED studies of World Bank structural ad-justment programs have also identified the pol-icy environment and fiscal management as theprincipal causes of poor economic performancein the early years of adjustment. Where suc-cessful, adjustment operations and structuraland sectoral reforms have promoted growth andhave been a significant factor in reducing poverty.But the studies also found shortcomings in theprograms, such as fragmented treatment of dif-ferent fiscal issues and vague or imprecise con-


23

Poor fiscal managementand failure to adjust toevolving economiccircumstances weresignificant contributingfactors in all of thecountry cases reviewed.

ditionality. A significant shortcoming was thelack of attention to the social impact of adjust-ment. The challenge has been poor compliancewith conditions and the lack of borrower own-ership of the reform program. The Higher Im-pact Adjustment Lending (HIAL) operationssought to improve the design and enhance theeffectiveness of adjustment lending through im-proved country selection, and conditions that arefewer and better designed, but more effective.These operations have had better outcomesthan their predecessors and have been differentin their attention to social concerns and poverty(OED 1999). The issues of ownership and the di-verse social impacts of adjustment lending arealso highlighted in reviews of ESAF (Botchweyand others 1998).

Given the importance of an appropriate pol-icy framework and sound macroeconomic man-agement to ensure that the relief resources arewell utilized, the O-HIPC Initiative required atotal of six years of track record—three yearsprior to the decision point, and three years toreach the completion point. In the E-HIPC thiswas reduced to a three-year track record beforethe decision point (to be applied flexibly to give

credit for past per-formance), and afloating completionpoint that wouldallow the country toundertake reforms atits own pace. The de-

sign incorporated lessons of experience on theneed to streamline conditions, with fewer con-ditions attached to the new PRGF programs. Tofoster ownership, the initiative also envisagesthe PRGF conditionality to emerge from the newPRSP process, with broad participation from civilsociety in defining and supporting the adjust-ment program for attaining macroeconomic sta-bility and a sound policy framework.

Thus, the design of the current framework isconsistent with the need to focus on the policyframework. The modifications to the track recordrequirements in the E-HIPC are also consistentwith a key lesson from the MIC debt crisis of the1980s: the need to focus on countries with con-vincing policy track records, but once that is ac-

complished, the process should not delay the de-livery of debt relief (Cline 1997).

Completion Point TriggersTo reach the completion point, each countryhas to comply with a set of conditions. Twogeneric requirements are (a) staying on track withthe IMF’s PRGF macroeconomic stabilizationand reform program and (b) the developmentand implementation (for at least one year) of aparticipatory PRSP. In addition, the staff of theWorld Bank and IMF, with the government, iden-tify key structural and social development actionsor reforms that would promote progress towardsustainable development. Beyond the twogeneric requirements, the design allows for thetriggers to be tailored to suit the particular cir-cumstances of a country and expects them to bedesigned in full consultation with its govern-ment. Should this materialize, the foundation forsustainable growth and poverty reduction re-quired by HIPC should be secured.

The added focus on poverty reduction led tothe inclusion of social sector policy reform andperformance criteria as explicit completionpoint triggers, and very often in the allocationof HIPC “savings” for social expenditures. Asnoted in Chapter 3, the modifications to theHIPC framework introduced in 1999 specifi-cally shifted the focus of the performance as-sessment by giving more weight to social andpoverty-related reforms.

The World Bank and the IMF are required tomonitor progress toward the triggers, but the ini-tial design did not incorporate any safeguardsagainst poor public expenditure managementor other governance issues. The process man-dated specific uses for the relief “savings,” but theneed to “track” expenditures and outcomes onlyemerged later as the realization set in that debtrelief essentially amounted to budget support.These issues have been recognized and actionsare being taken to monitor the use of HIPC “sav-ings” as part of tracking overall poverty reduc-ing expenditures by governments under regularIMF and World Bank program reviews. A majorconstraint in doing this is weak budget formu-lation, execution, and reporting systems. Multi-donor efforts are under way to improve public


24

The initial design lackedsafeguards against poor

governance . . . but actionsare now being taken to

monitor HIPC “savings.”

expenditure management systems in HIPCs(World Bank and IMF 2002a).

Creditor ParticipationThe initiative was designed to provide a com-prehensive treatment of the HIPCs’ debt prob-lem through a concerted and uniform approachwith the participation of all creditors: the mul-tilateral, Paris Club and non–Paris Club bilateral,and commercial creditors. Although agreed to bygovernments, there is no formal or legal accordthat obliges creditors to participate. The legalsanctity of the loan contracts signed between acreditor and a debtor is not supplanted by theHIPC process. In essence, the decision to par-ticipate in the HIPC Initiative is a voluntary one,and the initiative is essentially an informal agree-ment among nations. Moral suasion is the mainenforcement mechanism.

Although the design assumes the full partic-ipation of all creditors and emphasizes equalburden sharing, the process requires individualdebtors to follow up with the creditors, as wasthe case with the previous Paris Club treatments.The current design does not adequately takeinto account the capacity constraints faced byHIPC governments, or the inefficiency of theprocess in terms of the time and resource re-quirements to follow through with individual

bilateral creditors.17 More important, it does notaddress previously known problems with thenon-participation of a number of creditors, par-ticularly the commercial and non–Paris Club bi-lateral creditors who have refused to participatein the past. Given that this is a persistent prob-lem, the assumption of full participation main-tained in the DSAs is also invalid.

Capacity BuildingDebt management is an important element in debtsustainability. It has long been recognized by theWorld Bank and theIMF that poor debtmanagement, becauseof weak institutionalcapacity, has been animportant factor exac-erbating debt problems in many countries. But ca-pacity building for debt management has not beenan objective of the initiative, and the design doesnot address any aspect of capacity development ortechnical assistance for debt management. Decisionand completion point documents discuss debtmanagement issues as part of their forward-look-ing assessments for individual countries, but the ini-tiative does not address any aspect of capacitydevelopment for debt management.18This remainsa design shortcoming.


25

Capacity building for debtmanagement has not beenan objective of theinitiative.

27

Implementation Experience

This chapter reviews how the initiative is being implemented. It assessesthe extent to which the initiative is being implemented efficaciously, eq-uitably, and in accordance with its key objectives. Following brief back-

ground information on the pace of implementation, the discussion below isstructured 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 ImplementationThe O-HIPC got off to a slow start. From 1996 to1999, only seven countries became eligible fordebt relief. The modifications in the process in-troduced by the E-HIPC, particularly the lower-ing of the debt sustainability thresholds, madeadditional countries eligible. With continuedpressure by civil society and the impatience ofthe Development Committee at the seeminglyslow pace of progress, implementation was ac-celerated in the latter half of 2000 to meet a self-imposed challenge by the World Bank and theIMF to bring at least 20 countries to decisionpoint by December 2000. With extraordinary ef-forts on the part of the staffs of the World Bankand IMF, helped by the enhancements intro-duced in 1999, the HIPC Initiative exceeded itsmuch-publicized target, with 22 countries reach-ing their decision points by December 27, 2000.The pace has since slowed down, with only an-other four countries qualifying for debt relief

by August 2002. The challenge of bringing the re-maining countries to their decision points, par-ticularly those affected by conflict, remains.

The late-2000 “millennium rush” reflectedthe flexibility in the implementation of the ini-tiative, and is generally perceived to have beenbeneficial in bringing several countries into theprocess (see Annex H for creditor perspectives).At the same time, it is also perceived by many,including several creditors and NGOs, as havingdiluted adherence to the standards and processrequirements incorporated in the design, and hasraised the issue of equity of treatment.

Debt Sustainability AnalysisThe DSAs done at decision point, and updated atcompletion point, do not have any impact on theamount of relief that a country receives under thecurrent framework. They do have profound im-plications for assessing the likely outcomes, andhence the overall success of the initiative. Two as-

5

sumptions in the DSA influence the outcomes: thelevel and terms of new financing and an assessmentof future economic and export performance.

The level and terms of new financing as-sumed in the DSAs have been criticized as beingtoo optimistic (GAO 2000). While the interestrates for loans assumed in the DSAs are lowerthan they have been in the past, they are notmuch lower than current levels. Further, they arebased on a survey of creditors and donors abouttheir future commitments. The level and termsof new borrowings are also monitored underthe IMF PRGF reviews, which place restrictionson the amount of nonconcessional borrowingand set limits on the minimum grant element fora loan to be considered concessional.

The economic assumptions in the DSA pro-jections have been the main subject of criticism.The assumptions about the future growth ratesof exports and GDP have been criticized as beingtoo optimistic (GAO 2000; Martin and Alami2001). These concerns have also been consis-tently raised by the debtors and creditor officials

(Annexes G and H).To assess this criticism, table

5.1 compares the exportgrowth assumptions (for thefive years after the decisionpoint) maintained in the DSAswith historical performancefor the 24 countries thatreached their decision pointsby end-2001.1 The projectionswere updated in 2002, taking

into account the experience of 2000 and 2001.To assess how the updated projections comparewith the original decision point DSA assump-tions, table 5.1 also gives the assumptions forthe next five years (2003–08) maintained in theoriginal and the updated projections. Exportearnings, and trade flows in general, are veryvolatile. To assess the degree of confidence inthe forecast assumptions, table 5.1 also includesthe upper and lower bounds of what might beconsidered reasonable forecasts based on his-torical experience. 2

The overall simple average of the growth rateassumed in DSAs across all 24 countries is morethan twice the historical average for 1990–2000

and almost six times the average for 1980–2000.Individually, the forecast is below the historicalestimate for 1990–2000 for only four countries,but is within statistically reasonable bounds foreight (shown by the boxed cells in the table). 3

For the other 12 countries, the assumptionsoften far exceed historical rates (Chad is an ex-ception, pending the expected increase in oil rev-enues). Also, the lower bound is in most casesmuch lower than the assumed rate, and in manycases is negative. The high probability of suchpoor outcomes requires appropriate sensitivityanalyses to reflect the real possibilities. TheDSAs, however, do not typically simulate the ef-fects of such low growth rates.

The findings show that there was optimism inthe assumptions maintained by the DSAs doneat decision point. A similar analysis of the as-sumptions in updated DSAs (for 2003–08) showsthat although slightly better, the assumptionscontinue to be optimistic. In only nine cases arethe assumptions in the updated DSAs withinthe reasonable (upper) bounds of confidence (inaddition to Chad, Saõ Tomé and Principe is alsoan exception for this time period, as oil exportsare expected to rise significantly by about 2006).Comparing the old and new forecasts for thesame period (2003–08) also shows that the newassumptions are slightly more optimistic.

The forecasts for GDP growth rates assumedin the DSA are also criticized as being overly op-timistic. 4 As noted in Chapter 4, assumptionsabout economic growth and low interest rates areimportant for the achievement of debt sustain-ability in the DSAs. The projections assume thatif countries follow appropriate policies, the pro-jected growth rates could be realized. Lookingat the evidence, there is some merit in the ar-gument. Recent analyses of countries classifiedas good, weak, and poor compliers with struc-tural adjustment conditions show that commit-ted structural adjustment can produce tangibleresults (OED 1997; World Bank 2002). Using thefindings from the OED review of structural ad-justment programs, formal statistical evidenceshows policy compliance does matter and doesresult in a higher rate of growth.5 Other studiesalso show that the new structural adjustmentprograms are better designed, incorporating


28

The overall simpleaverage of the

growth rate assumedin DSAs is more than

twice the historicalaverage for1990–2000.

IMPLEMENTATION EXPERIENCE

29

DSA assumptions a Historical performance b

2000–05c 2003–08 1990–2000 1980–2001 EnhancedHIPC

Lower Upper Lower Upper decision Country Original Original New Estimatebound bound Estimatebound bound point date

Bolivia 10.52 8.24 8.18 5.18 2.88 7.48 4.68 4.22 5.13 Feb-00

Mauritania 4.14 4.80 7.11 1.20 –2.61 5.01 1.88 1.06 2.69 Feb-00

Uganda 8.99 10.07 11.73 15.14 8.39 21.90 0.31 –2.05 2.67 Feb-00

Mozambique 18.98 6.95 21.27 10.37 8.96 11.78 –0.61 –2.57 1.35 Apr-00

Tanzania 11.51 10.50 7.70 3.35 1.72 4.98 0.97 –0.64 2.59 Apr-00

Senegal 9.02 6.44 6.25 –0.16 –1.85 1.54 3.14 1.53 4.75 Jun-00

Benin 7.32 8.19 8.74 4.18 1.51 6.85 4.20 3.07 5.32 Jul-00

Burkina Faso 10.89 11.20 9.81 –1.20 –3.75 1.35 2.47 1.16 3.77 Jul-00

Honduras 13.72 10.89 9.66 11.28 9.40 13.16 2.98 1.79 4.17 Jul-00

Mali 7.35 5.22 2.94 4.93 3.01 6.84 3.31 2.12 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

Guyana 4.16 4.49 4.76 9.55 5.99 13.12 –0.17 –2.43 2.08 Nov-00

Gambia, The 7.58 6.31 4.34 0.05 –2.25 2.35 3.73 2.77 4.68 Dec-00

Guinea 8.54 7.15 7.26 –1.79 –2.73 –0.84 4.33 3.31 5.34 Dec-00

Guinea–Bissau 14.81 10.28 9.63 11.75 3.97 19.54 1.61 0.63 2.59 Dec-00

Madagascar 7.95 8.18 9.15 8.40 6.34 10.46 0.85 –0.30 2.00 Dec-00

Malawi 3.72 4.88 5.59 2.13 –1.60 5.86 2.74 1.42 4.07 Dec-00

Nicaragua 9.56 8.59 10.72 15.25 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 –1.28 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

São Tomé and Principe 10.59 9.84 67.96 5.32 2.67 7.96 –0.51 –1.30 0.29 Dec-00

Zambia 12.73 6.56 5.36 –2.39 –5.12 0.33 0.13 –1.28 1.53 Dec-00

Chad 65.07 64.17 94.51 2.53 –1.97 7.03 4.14 2.93 5.35 May-01

Ethiopia 8.10 8.75 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 1.40 8.06 1.72 0.34 3.09

Without Chad, São Tomé 9.37 8.04 8.25 4.80 1.49 8.11 1.71 0.30 3.12

Note: Ghana 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. From 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

bounds correspond to the 95 percent confidence interval of the estimated growth rate.

c. Estimates for Ethiopia and Chad are from 2002–07.

Comparison of DSA Export Growth Projections and Historical Performance

Table 5.1

past lessons on ownership and streamlined con-ditionality, and are performing relatively betterthan the programs of the 1980s (OED 1999; SPA2002). Evidence from country cases studies (suchas Guyana, Malawi, and Uganda) shows that sig-

nificant economic reforms, undertaken in the1990s, were associated with much improvedeconomic performance.

The HIPC requirements of a prior policy trackrecord and continued performance in main-

taining and furthering macroeconomic andstructural reforms thus take on added impor-tance in future debt sustainability. Assumingthat these policy reforms are fully implemented,as agreed to by the countries, it is reasonable toadd a “policy premium” to historical growthrates for future projections. Available statisticalevidence suggests the magnitude of this growthpremium to be between 1 and 2 percent percapita real growth (Easterly 2001a; Noorbakshand Paloni 2001).

The potential magnitude of the “policy pre-mium” is confirmed by some simple data analy-ses. The 1997 OED study of Structural AdjustmentLoans completed between 1988 and 1994 by coun-tries in Sub-Saharan Africa rated each country bythe level of compliance with the conditionality in-

cluded. Figure 5.1shows the correlationbetween the degree ofcompliance, rated asgood, weak, and poor,and growth rates forthe 33 HIPCs includedin the study. The

trends in the growth rates for HIPCs confirm thefindings from the broader studies. The figureshows that starting from a worse position, the

good compliers have achieved higher growthrates than the poor compliers, both in the shortand the long run. The difference in the real GDPgrowth rates between good compliers and poorcompliers is less than 2 percent per annum. Thus,while policy-based projections are justified in as-suming higher growth rates, evidence also sug-gests that these projections need to be reasonable.

Further, recent research findings also sug-gest a need for conservatism in projections.While volatility entails both downside and upsiderisks, negative shocks tend to do more harmthan the good delivered by an equivalent upsideshock. That is, negative shocks in export pricestend to have a much greater impact on growththan do positive shocks (Collier, Gunning and As-sociates 2000; Dehn 2000; Deaton and Miller1995). At the same time, positive shocks do notappear to have any lasting effects, which impliesthat windfall gains are not being properly savedand invested (Dehn 2000). These findings sug-gest a need to better incorporate volatility inexports in the DSA projections, perhaps throughmore robust sensitivity analysis.

Performance CriteriaThe implementation of the two types of per-formance criteria, the track record on policy per-


30

Structural Adjustment Compliance Fosters GDP Growth

Figure 5.1

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

1980–85 1986–90 1991–95 1996–2000

Average annual growth rates

Good

Weak Poor

Source:OED 1997 andWorld Development Indicators.

While policy-basedprojections are justified in

assuming higher growthrates, these projections need

to be reasonable.

formance (to be eligible for the decision point)and the completion point conditions (to reach thecompletion point), are considered in this section.

Track RecordAn important difference between the past debtrelief efforts and the HIPC Initiative is the ini-tiative’s application of a uniform set of rules toensure equity and fairness in the treatment of in-dividual countries. The main requirement forboth the O-HIPC and the E-HIPC has been athree-year track record of sustained policy andstructural reforms and macroeconomic stabil-ity. From the very beginning, this condition hasbeen applied flexibly. None of the countries qual-ifying for HIPC assistance under the O-HIPC hadto wait for three years; they were given credit forstrong policy performance in prior years. Thesame has been the case in the E-HIPC.

The application of a track record has been pro-gressively reduced during the E-HIPC. All sixcountries that successfully completed the O-HIPC process had a strong policy track record interms of performance under the IMF ESAF/PRGF,World Bank adjustment programs, or both. Sim-ilarly, all nine countries that entered the E-HIPCprocess between January and July 2000 had a sat-isfactory or strong track record. But of the 13countries that reached decision point betweenAugust and December 2000, only 2 had estab-lished a track record.6

Not only did these 13 more recent entrants(that is, the “millennium rush” group) haveweaker economic track records, they also—inthe aggregate—have a weaker developmentprogram. For example, they have lower ratingsfor the outcome of World Bank assistance inOED’s CAEs. Their completed World Bank proj-ects have significantly lower satisfactory out-come ratings than the earlier entrants. And theirCountry Policy and Institutional Assessment(CPIA) scores in 2001 were lower than those ofthe earlier entrants (about one-half of one pointlower on a six-point scale). 7

Based on this evidence, the HIPC countriesthat reached their decision point during the“millennium rush” are less likely to achieve gooddevelopment results than their predecessors,other things being equal.

Completion Point ConditionsThe HIPC Initiative incorporates three types ofconditions for reaching the completion point:

•Process conditions,directly linking the HIPCprocess to development of a PRSP

•Performance benchmarks, also termedcompletion point triggers

•The use of HIPC resourcesfor earmarkedpurposes.

The implementation of each is discussed.

Process Conditions

PRSPs operationalized the E-HIPC Initiative’s ob-jective of linking debt relief resources to the pro-motion of poverty reduction. Support for a moreparticipatory and holistic approach to develop-ment was emerging in its own right at the timeof the HIPC review in 1999.The PRSP embodied suchan approach and incorpo-rated lessons of experiencefrom past development ef-forts, emphasizing the needfor ownership and participation, as well as the ho-listic view expounded by the ComprehensiveDevelopment Framework (CDF). By putting thegovernment in the driver’s seat and including con-ditionality that called for the participation of awide cross-section of stakeholders, the PRSPaimed to improve ownership, transparency, ac-countability, and the focus on results.

Skeptical at first, civil society supported thePRSP as a potential step in the right direction,but many of its members were concerned thatthe development of a full PRSP might delaycountries from reaching their decision points.An interim PRSP (I-PRSP)—essentially a state-ment of intent and a roadmap to carry out a fullPRSP—was determined to be a compromise cri-terion for decision point qualification. A fullPRSP, with satisfactory implementation for onefull year, was retained as a requirement for thecompletion point.

The weak capacity of many countries to carryout complex consultations and strategy formu-lation prompted concerns among some stake-holders that the link between the HIPC and thePRSP processes would either delay the delivery


31

The application of atrack record has beenprogressively reducedduring the E-HIPC.

of HIPC relief or provide an incentive for coun-tries to rush the PRSP to secure the debt relief.To address this concern and to deliver relieffaster, the innovation in the E-HIPC was to in-troduce the provision of “interim debt relief” be-tween the decision point and the completionpoint, when debt relief would be provided in fulland irrevocably. The annual debt service reliefduring the interim period is projected to be sub-stantial, in most cases amounting to over 80 per-cent of the annual debt service reductionexpected after the completion point.

Most debtor officials and stakeholders ac-knowledge the HIPC Initiative as the main ra-tionale and motivation for the PRSP process in

HIPCs, but they notethat the provision ofinterim debt relieflargely removed theincentive to hastilycomplete the PRSP.OED’s country case

studies and feedback from debtor representativesat workshops held for this review indicate thatthe link between the HIPC and PRSP processeshas been beneficial, as discussed in box 5.1.8

An assessment of whether the process hasbeen rushed as a result of being linked to theHIPC process requires an in-depth comparativeassessment across HIPCs and non-HIPCs. Emerg-ing findings from case studies for OED’s ongo-ing evaluation of the CDF indicate that some ofthe initial PRSPs appear to have been rushed. Buthow the link to HIPC relative to the potentiallymuch larger volume of development aid has af-fected the process needs further study (since, atleast in principle, PRSPs are to be the basis forfuture aid flows). Due consideration also needsto be given to capacity constraints and domes-tic political factors. These issues will be taken upin the review of the PRSP process by OED inthe coming year.

Local NGOs, donors, and other stakeholdersin the case study countries expressed satisfaction


32

The participants at the two workshops organized to gather feedback

from debtor government representatives for this review considered

the PRSP to be an integral part of the HIPC Initiative and the primary

instrument for achieving the HIPC objectives of debt sustainability

and the promotion of poverty reduction. The majority of speakers held

that the costs of preparing the PRSP, while substantial, were justi-

fiable; most maintained that the benefits outweighed the costs.

Internally, the PRSP process has created a new partnership

among development partners, helping to identify national pri-

orities, build broader ownership of the development agenda, and

improve governance through greater transparency. Several of the

representatives underlined the growing—and in some cases un-

precedented—contribution of civil society to the PRSP. In the

words of one official, “HIPC has caused civil society to organ-

ize itself in order to influence the process.”

By most accounts, the policy dialogue surrounding the PRSP

is much improved compared with past experience with adjust-

ment programs. Speakers noted that in the past, the discus-

sions had been dominated by the international financial

institutions (IFIs) and inordinately focused on economic growth.

While a number of speakers said that the PRSP had suc-

ceeded in putting countries “in the driver’s seat,” most per-

ceived the requirement that the Joint Staff Assessment be

endorsed by the boards of the World Bank and the IMF as tan-

tamount to requiring endorsement of the PRSP itself. They

held that this undermined the spirit of true ownership. Some

also questioned the extent to which donors were willing to ac-

cept the PRSP as the single framework for development co-

operation. Several speakers pointed to the need for closer

alignment between the macroeconomic framework and the

PRSP and called for greater flexibility by the World Bank and

IMF to achieve this.

Representatives credited the HIPC Initiative with bringing

poverty reduction into sharper focus and held that a major

challenge for the PRSP would be to unite the growth and

poverty reduction objectives. Speakers emphasized the im-

portance of a holistic approach to development—improving

human capital, nurturing the growth of the private sector,

and building and maintaining infrastructure, among other ob-

jectives.

Debtor Countries Endorse the Links Between the HIPC Initiative and the PRSP

Box 5.1

Stakeholders acknowledgethe HIPC Initiative as the

main rationale andmotivation for the PRSP

process in HIPCs.

with the nature of consultations and the partic-ipatory process undertaken by the government.In many places, the process has been called“pathbreaking” in the way it establishes a new re-lationship between the government and civil so-ciety. Across countries, however, the degree ofPRSP ownership varies. In some cases, there issubstantial ownership by the political leader-ship of the country, but less at the lower opera-tional levels (as in Guyana). In others, politicalleaders or parliamentarians have not been sub-stantively involved in the process (as in Malawi).9

The overall ownership of the PRSP is also af-fected by other factors such as the role of the in-ternational financial institution (IFI) boards inendorsing them as the basis for internationalassistance (see box 5.1). To what degree andhow the process is affecting the ownership of thePRSPs is another area the OED review of PRSPswill pursue.

While the consultative process has been quitesatisfactory, the quality of the substantive as-pects of the strategy has been a subject of debate.The strategies have been criticized by donors insome countries as being long wish lists in needof further prioritization and costing (World Bankand IMF 2002b; DFID 2002). Most strategies, aspresented, are financially untenable. Whilegrowth and economic development figure promi-nently in the stated objectives of most strategies,the identification of priority activities is weak, asis the articulation of how the growth is to beachieved.

Among the case study countries, only Ugandahad completed its PRSP at the time the studieswere conducted. As noted in box 4.1, Uganda hasbeen a leader in the process innovation on par-ticipatory poverty reduction strategy formula-tion and implementation. Even in Uganda,although the PEAP provides a credible strategyto meet its four objectives, the government hasfocused much of its attention on two of the fourlegs of its PEAP relating to social outcomes and“quality of life” issues. There has been less focuson its export diversification and private sector de-velopment strategies. Government officials nowrecognize the need for a more balanced ap-proach to development.

Performance Benchmarks

HIPC decision point documents specify the con-ditions that the country has agreed to meet bycompletion point. Most O-HIPC decision pointdocuments included a comprehensive list of keystructural reforms under ESAF and ongoing IDAStructural Adjustment Credits as part of the con-ditions for completion point. In addition, theyrequired successful implementation of reformsor satisfactory progress under IDA StructuralAdjustment and other credits.

The conditions under the E-HIPC have beenconsiderably reduced from an average of over 41to 13 per country. The reduction has mostlybeen in economic policy and structural reformconditions. A significant development in the E-HIPC is the inclusionof governance condi-tions, with two-thirdsof all countries havingat least one gover-nance condition. Themost common types of structural reforms for theE-HIPC decision point countries were in publicexpenditure management (13 countries). Cov-erage of rural development has also decreasedin the E-HIPC. While more than half of the O-HIPC countries had one or more conditions re-lating to this sector, only 8 percent of countriesunder E-HIPC (two countries) had at least onerural development condition. 10

The Use of HIPC Resources

Since the O-HIPC was not specifically aimed atpoverty reduction, it did not seek to specifyhow the funds released from debt relief wereto be used. Six of the seven O-HIPC countrieshad no targets or guidelines for the use ofthese funds. The debt relief was intended to beused for public spending in the social sectorsand for supporting the cost of structural re-forms. This approach is consistent with thecurrent development research findings thatmoney is fungible, earmarking is inefficient,and growth and reform are also essential forpoverty reduction.

While the number of conditions was stream-lined under the E-HIPC, the conditions are more


33

A significant developmentin the E-HIPC is theinclusion of governanceconditions.

specific than in the O-HIPC with regard to sec-toral allocations, targets by sector, and detailsabout the intended use of HIPC funds. With theaddition of poverty reduction in the E-HIPC, thefocus in implementation has also shifted thebalance between the alternative uses of HIPCfunds. The emphasis on ensuring that resourcesfrom HIPC “savings” are used for poverty re-duction has increased, and this has been oper-ationalized mainly by targeting the savings forsocial expenditures, mostly for education andhealth, as mentioned in Chapter 3.

All of the countries reaching their E-HIPC de-cision points have conditions targeting fundsfor specific sectors. Of the 20 that reached de-cision point after July 2000, all but one had a de-tailed description of how the funds were to beused, with 13 specifying numerical targets for sec-toral allocation. Based on averages for these 13countries, 65 percent of the E-HIPC savings werefocused on the social sectors, 13 percent onrural development, 8 percent on infrastructure,4 percent on governance, and 2 percent on struc-tural reforms. Across the E-HIPC countries, 49percent of the resources are to be allocated toeducation and health.

Country case stud-ies reveal that at thecentral level, HIPC ex-penditures are being al-located largely asanticipated in the de-cision point docu-ments. The budgetaryresources for the tar-geted sectors, particu-

larly education and health, have increased,although there is also some evidence of fungibil-ity.11 However, the World Bank’s own analysis ofthese sectors in Public Expenditure Reviews (PERs)highlights that increased financing is necessary butnot sufficient to improve the quality of services andoutcomes. The PERs, available for 17 of the 26 de-cision point HIPCs, reveal that the HIPC conditionsonly partially address the core constraints to im-proved performance in these sectors. Most PERsfocus on social sectors, on health and educationsectors in particular, and do not provide an as-sessment of the overall efficiency of public ex-

penditures. The limited scope of the PERs doesnot permit an analysis of the absorptive capacityacross sectors or the areas of priority for publicexpenditures.

In Guyana, for instance, under the E-HIPCone trigger called for achieving satisfactoryprogress in increasing the numbers of teachersas identified in the interim PRSP matrix. But whilethe PER attributes the shortage of teachers mainlyto a brain drain from the country, and recom-mends that teachers be given more voice inschool management and be rewarded for achiev-ing measurable goals, the I-PRSP called for “build-ing two new dorms at the Teacher Trainingcollege, a review of teachers’ diploma programand working with the Teacher’s Union to im-prove the condition of teachers.” Of these three,only the latter is consistent with the recommen-dations of the PER for reducing the brain drain.

Weak performance in social sectors resultsfrom low efficiency of expenditures, poor serv-ice quality, capacity shortfalls, low utilization,and inequitable allocations. Although many of thecompletion point triggers do address relevantsectoral constraints, increased budgetary allo-cations in most cases have been superimposedon weak institutions, which is likely to limit theeffective use of HIPC resources. Some examplesare given in box 5.2.

Creditor ParticipationTo deal effectively with the totality of a country’sdebt, one of the core principles of the HIPC Ini-tiative is comprehensive and concerted action byall creditors, as discussed in Chapter 3. The par-ticipation of creditors has proved to be a chal-lenge. The four major categories of creditorsare the multilateral, Paris Club bilateral, non–ParisClub bilateral, and commercial creditors.

The feedback from debtors and country casestudies indicates that most multilaterals are de-livering on their promises. Of these, the WorldBank and the IMF have been the most punctualand efficient. There have been some delays withthe other multilaterals, but the anticipated reliefis being delivered. With respect to the Paris Club,performance has varied across creditors. Theprocess of reaching formal agreements with eachindividual creditor has proved to be taxing and ex-


34

Budgetary resources forthe targeted sectors,

particularly educationand health, have

increased . . . in mostcases superimposed on

weak institutions.

pensive. While the relief will eventually be retroac-tive to the date of the Paris Club agreement, thedelays have in some instances caused budgetaryproblems for HIPC governments, who had al-ready anticipated such relief in their budgets.

The participation of non–Paris Club bilateralcreditors has been very limited.12This was the his-tory prior to the HIPC Initiative, and was also ex-perienced in the O-HIPC. The current frameworkcontinues to leave the government with the re-sponsibility of reaching agreement with all cred-itors. Under the rules of equal burden-sharing, theHIPCs cannot service the debt of any creditor fully,and many non–Paris Club creditors have eithernot responded to requests of the HIPCs or havesimply refused.

Even more troublesome is the behavior ofcommercial creditors. Most have refused to par-ticipate in the process, and many have even suc-cessfully sued HIPC governments to recover

outstandingdebt. 13 In someinstances, thedebt has been ac-quired by vulturefunds at discountfrom sovereign creditors. For some countries,these cases are proving to be quite burdensome,and most have been settled in favor of the com-mercial creditors. The legal case in favor of theHIPCs is weak: as noted in the previous chapter,the HIPC Initiative is an informal agreement,like the Paris Club, and does not have the legalauthority to challenge a formal loan contract.14

Institutional Development: CapacityBuilding for External Debt ManagementA crucial element for future debt sustainabilityis prudent debt management. Poor or nonex-istent debt management has been an important


35

Low efficiencyin education and health remains a major constraint

to sectoral performance in almost every HIPC, although it was

rarely addressed directly in completion point triggers. For exam-

ple, one-third of HIPC resources in Honduras are allocated to the

education sector. The PER for Honduras notes, “in spite of Honduras’

relatively strong funding effort and high coverage, its outcomes in

primary education are not notably superior to those of its neighbors.”

The PER finds that the costs of inefficiency are huge—about 36 per-

cent of spending by the Secretariat of Public Education does not

produce a student qualified at the grade level—and also recom-

mends that the total spending level in education not be raised.

Poor qualityin many cases has become a cause of high

dropout rates and repetitions in education, and is a factor that

increased funding cannot necessarily address. In Madagascar,

the poor quality of the education system (along with the inabil-

ity of families to afford education) has been the main cause of

the fall in enrollment rates and worsening indicators in primary

education since the 1980s. While the triggers attempt to ad-

dress the shortage of teachers in rural areas, they do not address

their poor performance, which is the main driving force behind

the low quality of education.

Capacity shortfalls in the face of rising enrollments are the

underlying cause of quality issues in several countries. Ethiopia

has experienced this in the education sector, where the main

obstacle to effective implementation is capacity shortfalls in all

departments and at all levels. The PER states that “children had

been encouraged to enroll in school even though there were in-

sufficient resources or funds for operational costs with a con-

sequent decline in quality.” The triggers require an increase in

enrollment rates for girls and a reduction in repetition rates, but

do not address the basic capacity problems, ranging from issues

such as buying textbooks, equipment, and transport, to improv-

ing management skills, training teachers, and building new

classrooms.

Low utilization or excess capacityhas emerged as a con-

straint in Bolivia and Uganda. The Bolivia PER recommends that

further incentives be designed for certain groups—for exam-

ple, a negative price may be required to encourage the con-

sumption of certain health services. In Uganda, quality and

staffing in primary health care and education are major is-

sues. Neither have any triggers to address these issues under

the E-HIPC.

PERs Highlight Absorptive Capacity Constraintsin the Social Sectors in HIPCs

Box 5.2

Many non–Paris Club creditorshave either not responded torequests of the HIPCs or havesimply refused.

factor in the creation of the HIPCs’ debt prob-lem, but in the past governments have not givenit the attention it needs.

Outside of the HIPC framework, capacitybuilding efforts in debt management have beenincreasing since the mid-1990s, and a number ofinternational and regional organizations, alongwith several donor agencies, are playing close at-tention to this area.15 These efforts cover a widespectrum of activities, from the provision of ref-erence materials and computer software tohands-on training and assistance in preparing fordebt renegotiations. After the initiation of theHIPC in 1996, five donor agencies collaboratedto establish Debt Relief International (DRI) to

build the debt man-agement and nego-tiation capacity ofHIPC governments.Three regional agen-cies devoted to ca-pacity building inAfrica have been es-

tablished since the inception of the HIPC Ini-tiative: the West African Institute of Financialand Economic Management (WAIFEM) in 1996,the Macroeconomic and Financial ManagementInstitute of Eastern and Southern Africa (MEFMI)in 1997, and the Pôle-Dette Initiative of Banque

des Etats de l’Afrique Centrale in 2000. The Cen-ter for Latin American Monetary Studies (CEMLA)also established a National Debt Strategy in 1999,outlining a technical assistance program relatedto financial data systems. Among other activitiesfocused on debt management, the Common-wealth Secretariat and the United Nations Con-ference on Trade and Development (UNCTAD)are leading providers of debt management com-puter software used by the HIPCs. More recently,the World Bank has stepped up its efforts toprovide technical assistance for debt manage-ment, as discussed in box 5.3.

In workshops and interviews conducted forthis review, several HIPC government officials af-firmed that the initiative had significantly raisedthe profile of debt issues in their respectivecountries, and had in most cases helped to ac-celerate their government’s efforts to improvedebt management. While most officials in chargeof debt management acknowledged technicalweaknesses in managing the debt stock and vet-ting new loans, many also pointed to emergingor ongoing efforts to strengthen debt manage-ment. Among the HIPC review case studies, bothGuyana and Uganda have developed compre-hensive debt management strategies and Malawihas recently instituted a process to streamline thereview of new loans (World Bank and IMF 2002c).


36

There are growing efforts within the World Bank to strengthen

debt management capacity in the HIPCs. The World Bank and

IMF (2001b) published Guidelines for Public Debt Management

in 2001, and a companion volume will include case studies of

proven debt management strategies among 18 industrialized,

emerging, and developing countries. The Public Debt Manage-

ment Group in the Treasury unit has broadened its mandate to

include debt management capacity building and technical as-

sistance for all World Bank member countries, including the

HIPCs. This will include providing advice in the context of plan-

ning for Country Assistance Strategy (CAS) and project design.

In addition, in a partnership with the Harare-based MEFMI, the

group recently organized a seminar based on case studies con-

ducted for Tanzania and Malawi. The Development Economics

data group of the World Bank is also involved in providing tech-

nical assistance training to complement existing debt man-

agement software with simulations and linkages to

macroeconomic models.

One of the main conclusions from a recent inquiry into the

debt management capacity of the HIPCs was that the World

Bank and the IMF should be more proactive in identifying prob-

lems in debt management in the context of the HIPC Initiative (that

is, decision and completion points) and in helping countries to

access the resources needed to resolve them.

Increasing World Bank Involvement in Debt Management Capacity Building

Box 5.3

HIPC government officialsaffirmed that the initiative

helped to accelerate theirgovernment’s efforts to

improve debt management.

37

Likely Outcomes—Preliminary Findings

Given the short time since the HIPC Initiative was launched, its economicand social outcomes will not be known with any certainty for someyears. Based on available evidence and the progress made so far, this

chapter assesses the likelihood of the initiative achieving its objectives alongthe three major dimensions critical to its success: debt sustainability, im-proved economic performance, and the incremental resource transfer of theHIPC Initiative. The final section summarizes the tentative conclusions emerg-ing from this analysis on the prospects for achieving the HIPC objectives.

Debt SustainabilityThis section discusses the current status of thecountries that have reached their completionpoint or are in the process of doing so and as-sesses their prospects for achieving debt sus-tainability. The initial outcomes of the countriesthat have reached their completion point areconsidered first, followed by the status of “in-terim” countries—that is, those between their de-cision and completion points. It concludes bydrawing the lessons emerging from the early ex-perience of these countries on the prospectsfor debt sustainability.

Completion Point Countries

O-HIPC

Six countries reached completion point underthe O-HIPC, receiving total debt relief of US$3.1billion in NPV terms. Table 6.1 shows that despite

the requirement of an additional three years oftrack record in policy performance, none of thesix had to wait the full three years before reach-ing the completion point.

Uganda, Mali, and Bolivia successfully reachedtheir targets for the O-HIPC completion point.Additional bilateral support from Japan ulti-mately brought Bolivia’s debt-to-export ratiodown to 198 percent. Uganda beat its target,through a combination of better than expectedexport performance, appreciation of the U.S.dollar, higher discount rates, and a reallocationof arrears from the public sector through priva-tization. Mozambique and Burkina Faso qualifiedfor additional relief because they had a higherdebt-to-export ratio than targeted at the decisionpoint. Both experienced slower export growththan projected, lower commodity prices, andan increase in NPV of debt as result of a declinein discount rates and U.S. dollar depreciation.

6

Burkina Faso’s debt stock also increased be-cause of previously unrecorded loans.

Guyana, which qualified under the “fiscal win-dow,” missed its target debt-to-revenue ratio bya wide margin. Lower export earnings, a declinein central government revenues, and the de-preciation of the Guyanese dollar contributed tothis outcome.1 The O-HIPC framework did notprovide additional relief for missing the fiscal cri-terion. Guyana thus completed the O-HIPC as theonly unsuccessful case.

E-HIPC

Table 6.2 shows the current debt-to-export ratiofor the six countries that had reached their com-pletion point under the E-HIPC as of August2002. Figures 6.1 and 6.2 show the DSA projec-tions of the NPV of the debt-to-exports ratioand the debt service ratio for the next 10 years.

Mozambique isfirmly positioned tomaintain its debt ratiosbelow the E-HIPCthreshold, and theprospects for Tanzaniato do so also appeargood. Both have ben-efited from strong ex-port performance andlower than anticipated

new borrowing. However, Tanzania’s narrow ex-port base is a source of risk.

The external debt outlook for Bolivia is mixed:the debt-to-export ratio has improved since thecompletion point (with additional debt reliefmore than offsetting a fall in exports), but thedebt service ratio has worsened as a result of newexternal debt on nonconcessional terms to coverthe budget deficit. For Mauritania, while thedebt-to-revenue ratio is likely to be maintainedjust under the target 250 percent, the debt-to-exports ratio has worsened, as has the debt serv-ice ratio—a result of higher than anticipatednew borrowing and lower exports.2

Downturns in export earnings and higherthan anticipated new borrowings have signifi-cantly undermined the debt sustainabilityprospects for Uganda and Burkina Faso. Uganda’sdebt-to-exports ratio (based on end-June 1999data) was brought down to 150 percent at thetime of the completion point, but deterioratedsoon thereafter. By end-June 2001, the ratio haddeteriorated by 43 percent (relative to the E-HIPC decision point projection of 128 percent),a little over half of which is accounted for bylower exports, and the rest by an increase in theNPV of debt through new borrowing. For Burk-ina Faso, the increase in the NPV of debt (49 per-cent) more than accounts for the decline in itsdebt-to-exports indicator (46 percent)—an out-


38

Debt sustainability indicator: debt/exports or

Months debt/revenues (percent)from DP

Country to CP Target Actual at CP Action taken

Uganda 12 202 196 Target reached

Mali 24 200 197 Target reached

Bolivia 12 225 218 Target reached

Mozambique 15 200 254 Additional relief of US$274 million

Burkina Faso 33 205 279 Additional relief of US$114 million

Guyana 17 107 D/X 117 Not applicable

280 D/R 410 No additional relief

Note:CP, completion point; DP, decision point; D/X, debt/exports; DR, debt/revenues.Source: HIPC DP and CP documents;data from the World Bank HIPC unit.

Debt Sustainability Indicators for O-HIPC Graduates

Table 6.1

Early experiencehighlights the main risk

factors for debtsustainability: exportperformance and the

levels and terms of newborrowing.

LIKELY OUTCOMES—PRELIMINARY FINDINGS

39

Debt sustainability indicator: debt/exports or

Months debt/revenues (percent)from DP

Country to CP Target Actual at CP Current Action taken

Bolivia 16 150 143 131 Target reached

Mozambique 17 150 127 108 Target reached

Tanzania 19 150 137 143 Target reached

Mauritania 28 137 D/X 174 174 Including voluntary bilateral debt

250 D/R 247 247 forgiveness, D/X fell to 149 percent

and D/R to 206 percent.

Burkina Faso 21 150 150 216 Completion point ratio of 199 percent

brought down to 150 percent with

additional relief of $129 million.

Uganda 3 150 150 171 Increase in debt stock from previous

year not identified at completion point.

Note:CP, completion point; DP, decision point; D/X, debt/exports; DR, debt/revenues.Source: HIPC decision point and completion point documents;data from the World Bank HIPC unit.

Debt Sustainability Indicators for E-HIPC Graduates

Table 6.2

come of a large public investment program. Inboth cases, however, the debt service ratios re-main well within the target range.

This early experience with countries success-fully completing the requirements for both theO-HIPC and E-HIPC highlights the main risk fac-tors for debt sustainability: export performanceand the levels and terms of new borrowing. Fig-ure 6.3 summarizes the influence of these factorson the debt sustainability of the countries thathave reached their completion point under theE-HIPC. Quadrant 2 represents a good outcomefor debt sustainability, and quadrant 3 a bad out-come. Quadrants 1 and 4 represent mixed out-comes, with the net effect depending on therelative contributions of the opposing effects ondebt sustainability. As discussed above, Bolivia isa mixed case.

Export performance has been a decisive fac-tor in almost all cases. Tanzania has managed toovercome the reduced earnings brought aboutby a decline in coffee prices through increasedexports of gold—highlighting the critical needfor export diversification. Uganda provides asimilar example: although it has been hit hard by

a 68 percent decline in coffee prices over the pasttwo years, an increase in other exports hashelped cushion the impact of this decline.

The NPV of debt is affected by discount ratesand currency fluctuations, but the biggest influ-ence is new borrowing. Lower borrowing has im-proved the prospects for Tanzania andMozambique, while higher borrowing by the oth-ers has made matters worse. And although thesample is small, the findings suggest an associa-tion between deteriorating export performanceand higher borrowing—doubly affecting debtsustainability.

Whether and how the HIPC Initiative has af-fected the level of new borrowing is not known.There is no obvious correlation between newborrowing and the level of HIPC relief (in termsof percentage of pre-HIPC debt stock reduced).The possible relationship between export per-formance and new borrowing, as also betweennew borrowing and the objectives of povertyreduction and growth (for instance, BurkinaFaso’s new borrowing was for infrastructure andpoverty alleviation projects), has implicationsfor the macroeconomic framework used to un-


40

Projected Debt Service Ratios (2000–10)Figure 6.2

0

5

10

15

20

25

30

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Debt service as percent of exports

Bolivia

Burkina Faso

Mauritania

Mozambique

Tanzania

Uganda

Projected Debt-to-Export Ratios (2000–10)Figure 6.1

0

50

100

150

200

250

300

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

NPV debt as percent of exports

Bolivia

Burkina Faso

Mauritania

Mozambique

Tanzania

Uganda

Source:HIPC unit, spring 2002 database.

derpin the DSA. As noted in Chapter 5, since theassumptions underlying the models are notknown, it is not possible to draw the implicationsof these findings.

The Interim CountriesOf the countries past their decision points, 11 (65percent) show a worsening of their debt ratios.3

Of the full set of 20 countries, based on availabledata, the HIPC unit currently expects half to ex-ceed the target for their debt sustainability ratiosat their completion point. 4

As with the completion point countries, thedominant influence on the economic outcomesof the interim HIPCs in 2000–01 has been exportperformance, which has led to a worsening oftheir debt profiles.5 Average (unweighted) exportgrowth for HIPCs during 2000–01 was 4.9 per-cent, compared with projections averaging 9.0percent. Still, despite the short-term increasein the NPV of debt-to-exports ratios, the currentprojections show that most countries shouldfall below the sustainability target over themedium to long term.

These countries, in the aggregate, have bor-rowed less (in nominal terms) than anticipated forboth 2000 and 2001.6 This is partly a result oflower disbursements from multilaterals because ofinterruptions in the PRGF-supported macroeco-nomic programs in several countries. Some coun-tries increased their debt stocks through higher

than anticipated new borrowing, and in some thedebt stock data have been revised to fully accountfor outstanding debt.

The overall pattern emerging for the interimHIPCs is similar to that of the countries thathave reached the completion point. Borrowingand exports are negatively correlated.7 The con-clusions and lessons are also similar.

Prospects for Debt SustainabilityTo assess the prospects for future debt sustain-ability, the appropriate test is the projected trendfor the key indicator. The projected paths shownin figures 6.1 and 6.2 are based on export pro-jections and other underlying assumptions inthe country DSAs. As discussed in Chapter 5,the projections appear to be optimistic for manycountries. For the completion point countries,the realized export growth for 2000–01 has beenin line with or better than the assumed growthrate in the DSAs for three of the six countries,or a 50 percent success rate. These outcomes re-iterate the need to better incorporate exportvolatility in the DSAs.

Taking the projections at face value, the long-run debt sustainability prospects are tenuousfor Bolivia, Mauritania, and Tanzania, with debt-to-exports ratios close to the 150 percent thresh-old, and poor for Burkina Faso and Uganda,which remain at around 200 percent. The alter-native indicator of debt burden, the debt serv-


41

Key Factors Affecting Debt Sustainability: Status of E-HIPC Completion Point Countries

Figure 6.3

Exports

Low High

Low

1

Bolivia

2 Tanzania

Mozambique

Bor

row

ing

High

3 Uganda Mauritania

Burkina Faso

4

ice ratio, indicates that the prospects for thedebt service burden are better for all but Bolivia.8

The flat profile for most countries highlightsthe importance of stabilizing and improving ex-port performance and closely monitoring newborrowing to ensure long-run debt sustainabil-ity. The profile, however, is not influenced by thelevel at which the threshold for sustainability isset: the level of the debt-to-exports thresholdprovides a benchmark, but the profile endures,irrespective of where the benchmark is set.

A critical element for im-proving the prospects fordebt sustainability, and forpoverty reduction, is a cred-ible strategy for growth. Asthe initiative is currentlybeing implemented, there islittle emphasis on growthother than the maintenanceof macroeconomic stability

and the development of human capital. Otherfactors affecting growth, such as the investmentclimate, infrastructure development, and eco-nomic productivity—for example, in agricul-ture—have received little attention in mostcountries.

Additional borrowing may be essential formost, if not all, HIPCs to improve the prospectsfor growth and poverty reduction (see Elbadawiand Gelb 2001 for an assessment of the financ-ing needs for Africa). The need for additional fi-nancing posits a potential conflict with the goalof debt sustainability. Replacing loans with grantswould help avoid this conflict, but the prospectsfor this happening at the scale necessary arelimited for the near future.9 But as in the case of

Burkina Faso (see box 6.1), in addition to mon-itoring the levels and terms of the new borrow-ing, it is important also to ensure that newborrowing is put to productive use to enhancethe country’s repayment capacity through growthand for poverty reduction.

Progress Toward Performance CriteriaThis section reviews countries’ progress towardperformance criteria that are critical to theachievement of HIPC objectives. Among these isthe development and implementation of a par-ticipatory PRSP. It is too early to comment onthe outcomes from PRSPs, as many are still underpreparation or have only recently been com-pleted, but the issues of ownership and balanceon development priorities (both identified inthe previous chapter) are sources of risk to achiev-ing HIPC objectives. Assessing the implicationsof these and other issues related to the PRSPs re-quires a separate in-depth review, which is cur-rently being conducted by OED. This sectionreviews the progress on policy performance andthe performance benchmarks included as com-pletion point conditions and assesses their effi-cacy in contributing to the initiative’s objectives.

Policy Performance From the start, the HIPC Initiative has requiredbeneficiary countries to have and maintain strongpolicies to promote economic growth andpoverty reduction. As noted in the previouschapter, the ex ante performance criteria wererelaxed to allow more countries to enter theprogram by the end of 2000. While many stake-holders view this flexibility as a good thing, it alsoimplies that to reach the completion point, these


42

At the completion point, Burkina Faso had the highest debt-to-

exports ratios of all the completion point countries and had the

longest elapsed time to complete the O-HIPC (34 months) and the

E-HIPC (21 months). A large public investment program results

in a hump in the debt stock and keeps the debt sustainability ratio

persistently high throughout the next decade. Topping up of the

NPV $129 million reduces the debt hump in the short run, but does

not appear to make a great difference in long-term debt sus-

tainability figures. In order to achieve and maintain debt sus-

tainability, Burkina Faso needs to preserve macroeconomic

stability and continue with structural reforms to diversify its

economy, stabilize economic growth, and enhance exports.

Topping Up and the Prospects for DebtSustainability for Burkina Faso

Box 6.1

A critical element forimproving the

prospects for debtsustainability, and forpoverty reduction, is a

credible strategy forgrowth.

countries would face a tougher challenge thancountries that were already implementing thenecessary policy and structural reforms.

The group of countries that completed the O-HIPC program had a strong track record of pol-icy performance going into the program, and allbut one maintained good performance to qual-ify for the E-HIPC. Guyana was the exception; itqualified for the E-HIPC but had a mixed recordjust prior to the decision point. The countriesthat reached the E-HIPC completion point sim-ilarly had a strong record prior to entering theprogram and maintained their performance tothe completion point. 10 Since the E-HIPC com-pletion point, policy performance has beenbroadly satisfactory for four of the six countries.Burkina Faso is also largely on track, but revenuecollection remains poor, and Bolivia has experi-

enced policy slippages and is operating under ashadow program.

Several of the 20 current interim countrieshave weaker policy performance than the com-pletion point countries. By mid-2002, half ofthem had experienced policy slippages and sub-sequent interruptions in their IMF program. Asshown in table 6.3,of these 10 coun-tries, 9 had reacheddecision point inthe second half of2000, and 8 hadreached it in November or December. Most hada previous track record of variable performance.Thus, it appears that the policy track recordprior to decision point is a reasonable predictorof subsequent performance.


43

NPV of debt-to-exports at CP Country DP Mixed pre-HIPC track record noted likely to exceed 150 percent?a

Guinea December 2000 Difficulties 10/99–3/00, but back on

track by end-September 2000. No

Guinea-Bissau December 2000 Satisfactory until 1998 civil war, which lasted

over a year. No

Guyana November 2000 Mixed track record post-1997, including

delays in IMF review. No

Honduras July 2000 Broadly satisfactory performance. 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)

Rwanda December 2000 Broadly satisfactory but delays in

implementing agreed policies and

shortfalls in meeting targets noted. Yes (anticipated at DP)

Saõ Tomé 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-1994

devaluation Yes

Note:DP, decision point; CP, completion point. a.After additional bilateral support.Source: HIPC decision point documents, World Bank and IMF 2002d.

Countries with Difficulties Staying onTrack with Macroeconomic and StructuralPrograms in 2001

Table 6.3

The policy track record priorto decision point is areasonable predictor ofsubsequent performance.

Another measure of countries’ policy per-formance is the CPIA index. Some of the coun-tries had worse policies in 2001, as measuredby the CPIA, than they did prior to the launchof the HIPC Initiative. Figure 6.4 shows thatthe average CPIA score for the early entrants washigh in 1998 (before entering the HIPC pro-gram) relative to the other HIPCs and has sincecontinued to improve. The score for the 13countries that qualified during “the millenniumrush” improved slightly until 2000, but slippedback to the 1998 level in 2001 (after the deci-sion point). The four late entrants show a de-teriorating trend.

Analysis of the four main components of theCPIA index shows that for HIPC countries, thequality of economic management and social poli-

cies has improved,but structural poli-cies have slightly de-teriorated. Theperformance in pub-lic sector manage-ment is roughlyunchanged. Thesescores reflect the em-

phasis on macroeconomic policy and manage-ment, through the PRGF, and the increasingfocus on social sector policy and performance inrecent years. They also indicate a need for ad-ditional focus on structural policies.

As indicated in the previous chapter, the “mil-lennium rush” group faces a tougher challengein achieving desired development results. Cur-rent evidence suggests that these countries areindeed at greater risk in their efforts to achievethe HIPC objectives. On average, despite weakerpolicy frameworks and lower economic per-formance in terms of real GDP growth (2.6 per-cent through the 1990s) relative to the earlyentrants (4.4 percent), the assumed real GDPgrowth rates in their DSAs were significantlymore optimistic. 11 The actual performance in2000–01 has not lived up to these expectations:the early entrants have performed better (4.8 per-cent) than the millennium rush group (3.8 per-cent), with both groups growing at a lower ratethan assumed. The millennium rush group isalso more likely to have deterioration in the keydebt sustainability indicator, the debt-to-exportsratio, as they are more likely to experience ex-port underperformance. The new borrowing-


44

Average Policy Performance Scores ofEarly Entrants, the “Millennium Rush”Group, and Late Entrants

Figure 6.4

2.50

3.00

3.50

4.00

1998 1999 2000 2001

Overall CPIA score

Up to Jul 2000 Aug–Dec 2000 After Dec 2000

Source: World Bank Poverty Reduction and Economic Management ([PREM] Network) data.

For HIPC countries, thequality of economic

management and socialpolicies has improved, but

structural policies haveslightly deteriorated.

to-GDP ratio is also higher for these countries,and the fiscal deficit worse than for the earlyentrants.

Progress on Other Performance Benchmarks In addition to the requirement for strong poli-cies, the initiative includes other performancebenchmarks that countries must meet to reachtheir completion points. As discussed in Chap-ter 5, the most common of these are targets forexpenditures—often including specific condi-tions on the use of HIPC relief—on public sec-tor education and health programs. HIPCprogress reports regularly provide updates on theprogress in social expenditures. Given the poorstate of monitoring and budget systems in manyof the HIPCs, significant effort is being made toimprove them, particularly for public expendituremanagement. Even if the expenditure or otherinput-oriented targets are met, they may notnecessarily ensure demonstrable outcomes to-ward the initiative’s objectives. Three issues areimportant here: (a) the totality of expendituresin individual sectors; (b) the tracking of expen-ditures beyond the central level and, more im-portant, the tracking of outcomes; and (c) thebalance among development priorities.

On the first issue—the totality of public ex-penditures—the evidence from HIPC docu-ments and the country case studies shows asignificant increase in social sector expendi-tures, but the extent to which this represents achange in totality of resources is not known. Asmentioned in Chapter 5, a substantial share ofdonor assistance and government revenues isnot captured in the budget. Development As-sistance Committee (DAC) data show that socialsectors have received a major share of the sec-tor-allocable donor assistance (rising from abouta quarter in 1990 to over one-half in 2000, withan almost corresponding decline in aid alloca-tion for “production services”). To the extent thatsome of the donor assistance is being shiftedfrom project to budget support (as in Uganda),the increases in recorded budget expendituresmay not represent an actual increase in total ex-penditures. Also, to the extent that the increasein government budgets as a result of HIPC as-sistance is offset by a corresponding decline in

other donor assistance, the net effect on specificsectoral expenditures may be less.

On the second issue of expenditure tracking,in principle the countries track overall publicexpenditures for poverty reduction. In mostcountries, these are essentially social expendi-tures, and mostly in the form of financing forhealth and education. The IFIs also regularlytrack estimates of social expenditures in HIPCprogress reports. Reporting on pro-poor spend-ing in reviews of PRGF programs also places em-phasis on social expenditures (see, for instance,Gupta and others 2002).

The country case studies show that processesare in place for tracking debt relief inflows andfor monitoring the use of HIPC expenditures atthe central level (Annex I). Some countries alsohave transparent dissemination of this informa-tion, as in Zambia, but for most the tracking ofexpenditures at the lower levels is still lacking.12

Furthermore, although monitoring the properuse of resources is important, it is not a good in-dicator of outcomes. So far, there is little evidenceon outcomes or results to determine what theincreased expenditures are achieving. There aresome exceptions to this, with Uganda as an ex-ample. Surveys arebeing undertaken thereto track access to andquality of public serv-ices. The outcomes fromUganda show a markedimprovement in servicedelivery, but also high-light the need for im-proving the efficiency of social expenditures. Asimilar survey for Ghana reveals substantial leak-age of funds allocated to primary health and ed-ucation facilities. 13 Surveys in some othercountries have recently been conducted or areplanned, but their results are not yet available.Efforts are also being made to rely on civil soci-ety groups for monitoring at the local level, asin Malawi. Early evidence from Malawi showssome impact—but less than expected.

Finally, perhaps reflecting the recent increasedemphasis on social spending by donors and theIFIs, HIPC progress reports note that over half ofgovernment revenues will be earmarked for so-


45

Most recipients considerthe focus of the initiativeto be excessive on socialsectors, and too little ongrowth and “wealthcreation.”

cial expenditures in the coming years. Paradoxi-cally, most recipients consider the focus of the ini-tiative to be excessive on social sectors, and toolittle on growth and “wealth creation” (Annex G).Considering that many PRSPs are yet to be com-pleted, these anticipated allocations are also in-consistent with the intended role of the PRSPs.Both these issues question the degree of owner-ship of the HIPC-related programs and activities.

The inflexibility in the use of HIPC resourcesfor building essential infrastructure and for eco-nomic services, even when there are known ab-sorptive capacity constraints in the social sectors,is viewed by debtor representatives as an ineffi-cient use of scare resources. The conditions at-tached to the HIPC Initiative are viewed asinadequately attuned to the holistic develop-ment goals of the HIPC governments or to en-hancing the “post-HIPC prospects” to ensure

debt sustainability andpoverty reduction.Creditor country repre-sentatives were also crit-ical of the lack of focuson growth opportuni-ties (Annex H). Whilewelcoming the focus on

poverty reduction, a strong consensus among thedebtor representatives consulted for this reviewwas that the potential gains from their partici-pation in the HIPC Initiative—long-term debtsustainability and “breathing space” for increas-ing social expenditures—could not be sustainedwithout increased economic growth.

Incremental Resource TransferThis section discusses the implications of theinitiative on the overall resource transfers to theHIPCs. It first discusses the financial impact ofHIPC assistance on the beneficiary countries andthen looks at the overall resource flows to theseand other countries, including the likely distrib-utional implications for other poor countries.

HIPC AssistanceThe HIPC progress reports provide a detailed ac-count on the delivery of HIPC assistance to thebeneficiary countries, including those that havereached their completion points and those re-

ceiving “interim” assistance (as in World Bank andIMF 2002d). They regularly report on the key in-dicators related to debt, including the level of thedebt stock, and the debt service burden as re-flected in the ratio of debt service to exports,GDP, and government revenues. Only the broadaggregates are discussed here.

Relief provided by the HIPC Initiative alonewill cut the debt of the 26 decision point coun-tries in present value by half, from US$52 billionafter traditional relief to US$27 billion beforeadditional bilateral assistance. When additionalrelief from major bilateral donors is added, thetotal debt is expected to be reduced by two-thirds, from US$62 billion to US$22 billion (inpresent value terms). A similar pattern of bene-fit emerges from the other debt indicators. Totaldebt service as a percentage of exports is ex-pected to be halved, from 16.5 percent pre-HIPCto 8 percent in 2001–05, compared with 20 per-cent for other developing countries.14 Debt serv-ice-to-GDP is expected to be cut from 4 percentto 2 percent, and debt service-to-government rev-enues is expected to decline from about 24 per-cent to an average of around 10 percent by2005.15 At the same time, social sector expendi-tures as a percent of GDP are expected to riseto 10 percent (about five times the debt service,compared with two times before HIPC), or overhalf of the average government’s revenues (upfrom a third before HIPC). Total savings to HIPCgovernments are expected to be about US$41.5billion over the next 30 years. Annually, HIPC debtrelief amounts to about US$1.3 billion.

The direct financial impact of HIPC assistanceis already being felt, not only in the countries thathave reached their completion point, but also inthose that have reached their decision point.The impact, however, varies across countries,depending on their particular circumstances.The interim relief to the countries past their de-cision points is broadly comparable to the fulldebt relief expected after the completion pointfor all but three countries (Chad, The Gambia,Niger). Some have experienced a curtailmentof interim relief from the IMF (or have yet to re-ceive interim relief) because of policy slippages.IDA has provided interim relief to all of theHIPCs that have passed their decision point,


46

Relief provided by theHIPC Initiative alone will

cut the debt of the 26decision point countriesin present value by half.

even in the context of an interruption in theIMF program.

These estimates of the financial impact arebased on the assumption of full participation ofall creditors. Although the majority of creditorsare participating or have given assurances ofparticipation, even for the completion pointcountries the delivery of assistance is not 100 per-cent of the amount promised by the HIPC Ini-tiative; assurances range from 80 percent to 96percent. For countries in the interim period, therange of assurances given is for similar magni-tudes of the expected relief. Finally, the share ofthe noncooperating commercial and non–ParisClub bilateral creditors in the total debt is small,but an important concern of debtors is that thepotential reward from litigation by these credi-tors to recover past loans could result in muchlarger and immediate payouts.16

Overall Resource TransfersAs noted in Chapter 4, the initiative will increasenet resource transfers to the HIPC countriesonly if other aid flows (including grants and con-cessional loans) do not fall dollar-for-dollar withthe reduction in debt service obligations result-ing from current debt relief. This additionality ofresources made available by debt relief is criti-cal to simultaneously achieve all of the initia-tive’s multiple objectives. Without additionality,it is not apparent that the fiscal space needed forthe mandated social and other expenditureswould be created. And, as also noted in Chapter4, additionality is assumed by the initiative, butthere is no mechanism by which it can ensurethat this indeed takes place.

It is generally difficult to determine whetherthe HIPC Initiative has generated incremental re-source transfers, because there is no rigorous wayto know what would have happened in the ab-sence of debt relief. One option is to use the pro-jected flows used for the HIPC DSAs. Theseprojections are based on a survey of the donorand lender community to assess their antici-pated transfers. This provides one basis for es-tablishing a counterfactual and is discussedbelow. But it is unclear how these projections bythe donors/lenders have taken the initiative intoaccount. Three analytical possibilities arise:

•The donors/lenders provide the same grossfuture amounts irrespective of the initiative. Inthis case, the reduction in debt service obli-gations brought about by the initiative is fullyadditional.

•Donors/lenders do not anticipate the initia-tive and decide to cut back future gross trans-fers to maintain net resource transfers. In thiscase, there would be no additionality, but acomparison of the flows immediately beforeand after the agreement to deliver HIPC reliefwould reveal a change in gross flows with nochange in net transfers.

•D onors/lenders already anticipated the impactof the initiative early onby cutting back on theirgross transfers by theiranticipated obligationsunder the initiative. Inthis case, the before-after comparisons ofnet transfers may indi-cate additionality, butnet transfers would already have fallen previ-ously. The net result would be little or no ad-ditionality, and could even be a decline inoverall net transfers.

The analytical difficulty in assessing addition-ality is exacerbated by the complexity and poorquality of the data on international aid flows(Birdsall and Williamson 2002; Renard and Cas-simon 2001). Recognizing that the full impact ofthe HIPC Initiative in terms of additionality willonly become clear in the coming years, an attemptis made below to identify any discernible trendsin the recent aggregate aid flows. 17 The twosources of these data are the DAC reporting sys-tem, which gives the donors’ perspective on aidflows, and the Debtor Reporting System (DRS)of the World Bank, which reflects the debtors’ per-spective. Both sources show similar trends innet resource transfers to the HIPCs. 18 As dis-cussed in Chapter 4, it is important to considerthe changes in net resource transfers both at theglobal level—because of distributional implica-tions—and at the level of the individual HIPCs.

At the global level, net resource transfers tothe HIPCs rose during the first half of the 1990s,but then turned sharply downward, as shown in


47

Without additionality, itis not apparent that thefiscal space needed forthe mandated socialand other expenditureswould be created.

figure 6.5. The net transfers averaged aboutUS$14.2 billion from 1990 to 1995 and aboutUS$11.9 billion from 1996 to 2000. A similar butsharper decline is observed in figure 6.6 for alldeveloping countries. 19 The figures also showsome stabilization after 1997, but a decline againin 2000.

Some further analysis shows that between1990 and 1995, net transfers to all developingcountries grew at a rate of 2.3 percent per year,but declined at a rate of –13 percent from 1995onward. For HIPCs, the corresponding growthrates are 0.5 percent before 1995 and –3.7 per-cent after 1995.


48

Sharply Declining Aggregate Net Transfersto All Developing Countries (excludingAsian crisis countries)

Figure 6.6

5

10

15

20

25

30

35

40

45

50

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

US$ billions

1990–95 trend

1995–2000 trend

Source: OECD, DAC database.

8

9

10

11

12

13

14

15

16

17

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

US$ billions

1990–95 trend

1995–2000 trend

Declining Aggregate Net Transfers to HIPCs

Figure 6.5


It should be noted that the impact of interimdebt relief has yet to be fully captured in the DRSor the DAC data. However, even if the entireUS$1.3 billion to be delivered in annual debtservice relief (noted above) to the 26 HIPCswere to be included, it would not offset the ag-gregate decline in net transfers of US$14 billion,including the over US$2 billion decline to allHIPCs combined.

Out of these shrinking transfers, the share ofthe 26 countries that have reached their decisionpoints sharply increased after 1998, as shown infigure 6.7.20 The share of the remaining HIPCshas also increased since 1998, but not as sharply.Thus, there appears to have been redistributionfrom non-HIPCs to HIPCs since 1998. This shifthas important implications for the principle ofselectivity and effectiveness of aid. Consideringthat the HIPCs have weaker policy frameworks,as judged by the group-average CPIA index, thanother poor countries (non-HIPC IDA countriesas well as non-HIPC LMI countries), this redis-tribution conflicts with the principle of per-formance-based allocation and is likely to reducethe overall efficiency of development aid.21

These findings suggest that although theHIPCs as a group are getting an increasing shareof declining global aid resources, they are not re-ceiving additional funds in absolute terms rela-tive to what they were receiving before theinitiative was created (that is, before 1996). Whilethe reasons behind the sharp decline since 1995are not known, because the resource transferswere depressed in the years immediately pre-ceding most countries’ qualification for debt re-lief, these years are not the appropriatebenchmark for establishing additionality.

At the country levelthe data from thespring 2002 HIPC data-base corroborate thedecline of net transfersin 2000 shown above.Although the full im-pact of the HIPC Initia-tive may not be bestmeasured by looking atthe data for the year immediately before and afterthe delivery of relief, because the bulk of thecountries reached their E-HIPC decision point


49

HIPCs’ Growing Share of Aggregate NetResource Transfers

Figure 6.7

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Other developing countries Remaining HIPCs Decision point HIPCs


There appears to have beenredistribution from non-HIPCs to HIPCs since 1998.This shift has importantimplications for theprinciple of selectivity andeffectiveness of aid.

within about a year of each other, it may be pos-sible to corroborate the decline observed in theaggregate data from those at the country level. Asnoted above, the projected transfers from thedecision point documents, based on a survey ofdonors, provide a benchmark for assessing thesubsequent actual transfers in 2000. A decline inactual net transfers in 2000 is consistent for de-cision point countries as well as countries that havereached completion point: net transfers wereabout 19 percent lower than anticipated for thedecision point countries taken together, and 18percent lower for the completion point coun-tries. The DAC data also show a decline of about14 percent for all 26 HIPCs.

The change in transfers, however, varies bycountry. In Uganda and Cameroon, HIPC relief re-sources have been additional, as donors havecontinued to provide assistance in the light oftheir sustained policy and reform efforts. Twocases, by contrast, show the opposite trend. InMalawi, even prior to deterioration in the coun-try’s policy performance in 2001, non–official de-velopment assistance (ODA) and, to some extent,ODA loans had declined as some donors adopteda no-loans policy toward HIPCs. While this is goodfor debt sustainability, it also reduces the overalltransfers of aid, as the decline in loans has notbeen fully replaced by grants. The recent with-drawal of budget support by most creditors be-cause of concerns with governance and

accountability hasexacerbated the de-cline in develop-ment financing toMalawi. Given thatdonors have fundeda substantial part ofthe Malawian budgetin recent years, thismay reflect increas-ing selectivity as the

donors feel less pressure to continue providingfunding (for example, to meet debt service obli-gations, among other things). While, again, thismay be viewed as a positive outcome by somefrom a development effectiveness perspective, italso implies reduced additionality.

The second case is Zambia, where balance of

payments support declined considerably after thedecision point, reflecting donors’ concerns aboutgovernance. Beyond these specific country cases,additionality varies across HIPCs. The latest HIPCimplementation report (July 2002) notes thatinflows to the decision point HIPCs have in-creased in 2001 over the average of 1998–2000,but that the situation varies by country. The fullimpact of HIPC in terms of additionality will onlybecome clear in the coming years.

Debt Management CapacityAs noted in Chapter 5, a number of donors andorganizations are devoted to improving debtmanagement in the HIPCs through technical as-sistance and training. While most agencies notethat their programs are having a positive im-pact, the extent to which most groups monitoror are able to measure outcomes varies consid-erably, but is generally limited. Beyond qualita-tive accounts, evidence of measurableimprovements in the debt management capac-ity of the HIPCs is scarce.

A recent self-assessment survey on debt man-agement in 33 HIPC countries sponsored by theWorld Bank and IMF found that the countriesthat have already passed completion point ap-pear to have made more progress in debt man-agement capacity than the other HIPCs (WorldBank and IMF 2002c).22 The need to strengtheninstitutional capacity (both the legal frameworkand the organization and staffing of the debt man-agement function) remains the core challenge,which is also dependent on political support formaking necessary changes. The World Bank–IMFsurvey of debt management officials also foundthat transparency and accountability related tonew borrowing were weak across countries. Thecapacity constraints were identified in three mainareas: (a) institutional and political constraints, (b)human resource constraints; and (c) coordinationbetween debt and macroeconomic policies. Evenin cases where staffing levels are adequate (60 per-cent), a vast majority of the respondents (75 per-cent) judged staff skills to be only rudimentary.

The survey found that there is an ample sup-ply of training and capacity building activitiesto the HIPCs, but the lack of coordination amongagencies providing the services is reducing the


50

There is an ample supply oftraining and capacity

building activities to theHIPCs, but the lack ofcoordination among

agencies is reducing theoverall efficiency of the

efforts.

overall efficiency of the efforts. 23 OED consul-tations with regional providers of debt manage-ment training indicate that the rationality ofcapacity building for debt management (that is,ensuring that needed services are being offeredby the organizations best able to supply them)has suffered from the lack of informationshar-ing across external training providers. Going for-ward, there is a need for more attention tobuilding debt-managementcapacity as part of theHIPC process,as well as more coordinated andtargeted technical assistance across providers.

Likely OutcomesAchieving debt sustainability remains a challengefor the HIPCs—both because they are likely to con-tinue to need to borrow to meet their develop-mental challenges and because their export baseis concentrated and their earnings too volatile. Inthis context, replacing grants with loans wouldfurther the debt sustainability objective and avoidpotential conflicts with the other objectives thatrequire additional resources. But at present, theprospects for this happening on the scale neces-sary in the near future are limited. The debate onthe indicators and levels does not change the un-derlying prospects for debt sustainability: it merelychanges the benchmark against which debt maybe considered sustainable. For example, even if thetarget debt-to-exports ratio were reduced to 100percent, export volatility or the need for new bor-rowing would remain, and the sustainability pro-file would look the same. Relative to the newdefinition of “sustainability,” most of these coun-tries would still not have achieved debt sustain-ability. Lowering the threshold will deliver moredebt relief (although not necessarily more re-sources) and may be a goal in itself, but that is in-dependent of the achievement of sustainability.

While the export projections need to be mademore realistic, the pressing issue remains in-creasing and stabilizing export earnings throughdiversified exports. This in turn may require im-proved access to developed country markets. Mostcountries are likely to continue to need new bor-rowing to meet their development needs, andhence incur new debt. Their main challenge is toensure that the funds are invested productively andefficiently to promote repayment capacity. To do

so requires actions to im-prove public expenditureand debt management,improve the investmentclimate, and make thenecessary investmentsaimed at accelerating andsustaining overall eco-nomic growth. These cen-tral issues need to begiven more attention.

A necessary conditionfor economic growth isthe adoption of a sound policy framework. Manyof the HIPCs have not demonstrated this trackrecord, which raises concerns about the achieve-ment of the HIPC objectives—not only of growthand poverty reduction, but also of debt sustain-ability, which requires revenue generation.

The performance criteria are heavily weightedin favor of the social sectors, and more specifi-cally on social expenditures, with little focus onoutcomes or impacts. The current balance be-tween growth-enhancing public expendituresand social expenditures is viewed by the debtorgovernments as undermining the achievementof the main HIPC objectives.

A necessary (though not sufficient) require-ment to simultaneously achieve the initiative’smultiple objectives—specifically to free up re-sources for increased social sector spending—is an increase in net resource transfers by atleast the amount of the promised HIPC relief. Therecent trends in net transfers, however, show amarked decline in flows to the HIPCs, as well asto all poor countries in the aggregate. More-over, the data show a marked shift in the distri-bution of shrinking aid resources away fromother poor countries and in favor of the HIPCs.

In light of the limited instruments at the ini-tiative’s disposal, and recognizing that it is an im-portant but only a small part of the overalldevelopment framework, it is important to clar-ify: (a) what are the principal objectives of the ini-tiative, (b) what are the specific means to achievingthose objectives, and (c) how can those means beensured. This would help in better assessing theinitiative’s performance relative to its goals and theexpectations they help to create.


51

Most countries are likelyto continue to need newborrowing . . . Theirmain challenge is toensure that the funds areinvested productivelyand efficiently topromote repaymentcapacity.

53

Findings and Recommendations

This chapter summarizes the main findings from this review in relationto 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?

RelevanceThe core purpose of the initiative, to reduce thehigh debt levels of HIPCs, is highly relevant frompolitical economy perspectives as well as fromeconomic and aid effectiveness perspectives.This is evidenced by the wide support for HIPCin all major international forums, from G-7 meet-ings to the Monterrey Consensus. But the HIPCInitiative has acquired multiple objectives, whilethe instruments at its disposal have remained thesame. The objective of promoting growth by re-moving the debt overhang has been maintained,

the expectations of what it can deliver on debtsustainability have increased, and creating fiscalspace for increased social expenditures has beenadded as an explicit objective. The latter twoexpansions in objectives are discussed in turn.

Debt Sustainability The objective related to debt sustainability be-came more ambitious—a result of political pres-sures—fueling expectations of what the initiativecan realistically achieve. The main objective ofthe original HIPC Initiative was to reduce debt

7

to a sustainable level as part of a strategy toachieve debt sustainability. Over time, this ob-jective was transformed to the stated E-HIPC ob-jective of assuring a “permanent” exit fromdebt rescheduling.

The notion of “debt sustainability” has beencontentious, with controversy about how tomeasure it and how to “ensure” it. The reviewconcludes that while not perfect, the main in-dicator used in the initiative, the NPV of debt-to-exports ratio, is operationally preferable toalternative indicators for practical reasons. Thecurrent threshold level also appears to be rea-sonable in comparison with the debt levels ofnon-HIPCs. The level of the threshold deter-

mines the amount of debtrelief a country may be eli-gible for, but achieving thethreshold does not by itselfensure long-term debt sus-tainability. The latter is as-sessed through debtsustainability analysis, therobustness of which has notyet been convincinglydemonstrated. While theuse of the debt inventorymethodology for assessingthe current level of debt is

a positive feature of the initiative, the method-ological basis underlying the projections of fu-ture levels of debt remain unclear. The lack oftransparency of the economic models behindthese projections and the overoptimistic growthassumptions have made debt sustainability analy-ses ambiguous, giving rise to the impressionthat the process is politically manipulable. Thethreshold levels are also partly a function of thelevel of resources available to the initiative.

A one-time debt reduction is not sufficientto guarantee that countries will be able to avoidfuture debt problems. The prospects for debtsustainability depend on a number of factors af-fecting the country’s repayment capacity, es-pecially the levels and terms of new borrowings,the productive use of additional resources togenerate revenues and promote growth, and ex-port stabilization and diversification. These fac-tors cannot be directly addressed by the

initiative. It would have been more realistic forthe initiative to set the more modest objectiveof reducing debt to a level that provides coun-tries with a reasonable chance of sustainingtheir external debts. Even this more modestobjective would require full creditor participa-tion to deliver the promised level of relief, andprudent debt management. The initiative as-sumes that all creditors will participate, butcannot assure this. And the design of the ini-tiative does not address the critical issue of ca-pacity building for debt management, assuminginstead that efforts outside the initiative will fillthe necessary gaps.

Finally, a critical element of strategy to achievedebt sustainability, and for poverty reduction, isa credible strategy for broad-based growth. Herethe initiative’s design, specifically the link to thePRSP process, is consistent with lessons of ex-perience on the need for a sound policy frame-work and the development of a comprehensivepoverty reduction strategy that is locally owned.If fully implemented, the PRSP process might fos-ter the rise of stronger civil societies and a havea positive impact on inclusion, transparency, andaccountability processes. Whether this will fa-cilitate economic reform efforts that are suffi-ciently strong to make a major dent in thestructural dilemma and promote growth remainsto be seen. As the initiative is being implementednow, there is little emphasis on growth-relatedactivities beyond the establishment of a soundmacroeconomic framework and investment inhuman capital. Factors such as trade access, in-vestment climate, and infrastructure develop-ment are critical to promote growth in HIPCs, buthave received little attention so far.

Freeing up Resources for Poverty Reduction The objectives were expanded in the E-HIPC toexplicitly target the resources released by debtrelief toward higher social expenditures aimedat poverty reduction. The achievement of this ob-jective rests on the key assumption that the debtrelief provided will be additional to other aidtransfers. This is necessary to free up resourcesfor increased poverty-reducing social spending.The design of the initiative, however, has nomeans to ensure that this will in fact happen—


54

The lack oftransparency of the

economic modelsbehind these

projections and theoveroptimistic growth

assumptions havemade debt

sustainability analysesambiguous.

debt forgiveness by itself does not guaranteeadditionality. Without additional resources, it isunclear how the fiscal space is to be createdand, in the absence of additionality, what theimplied tradeoffs are among priority actions forpoverty reduction.

Past debt relief efforts have not been addi-tional. The available data show a substantial de-cline in net resource transfers after 1995,coinciding with the build-up of the momentumfor HIPC debt relief. There also appears to be amarked increase in the share of HIPCs in theoverall aid flows. There is not enough evidenceyet to definitively determine the full impact ofHIPC debt relief or whether the recent decliningtrend in net resource transfers has been reversed.

Further, with limited aid resources, thepoverty reduction and debt sustainability ob-jectives may conflict with each other. The declinein loans is good for debt sustainability, but itmay reduce the availability of overall resourcesfor poverty reduction and growth. Replacingloans with grants would help avoid this conflictbetween the need for increased real resourcesand debt sustainability, but the prospects forthis happening in the near future are limited.

Thus, while the initiative is relevant to the cir-cumstances of the HIPCs, its design is not con-sistent with the stated objectives. The objectivesare overambitious, and it is not clear how the lim-itations can be overcome by design improvements.The design would have been more appropriate fora more modest objective—of delivering debt re-lief to some of the poorest countries.

Efficacy and Efficiency If the anticipated debt relief is delivered, theinitiative will succeed in substantially reducingthe HIPCs’ external debt stocks, and the level ofdebt service that the HIPCs are currently payingwill fall to levels comparable to, or lower than,what other poor countries are paying. Thus, theinitiative is likely to achieve its original goal of re-ducing the external debt of the HIPCs and pro-viding them with a fresh start.

Notionally reduced debt service providesHIPC governments with the fiscal space to pur-sue their development priorities, but the actualimpact on overall development expenditures,

as well as on the budget, will become clear onlywith time and more detailed data on budgets andoverall resource transfers. As noted above, thedata for recent years show a substantial declinein net resource transfers to the HIPCs in ab-solute terms. Further, the distribution of re-sources in favor of HIPCs conflicts with theprinciple of performance-based allocation andcould reduce the overall efficiency and effec-tiveness of aid.

Debt reduction by itselfwill not necessarily ensuredebt sustainability, which de-pends crucially on growthand export volatility. Morerealistic growth forecasts andbetter risk analysis of the pro-jected debt burdens in the debt sustainabilityanalyses would provide a better assessment ofeach country’s likelihood of meeting the initia-tive’s debt sustainability threshold and wouldhelp promote a more informed debate on thepolicy changes needed in donor and recipientcountries. It would also help bring more clarityand realism in the setting of the initiative’s ob-jectives and the needed funding arrangements.

The initiative requires countries to have atrack record of sustained policy and structural re-forms. This requirement has been applied flexi-bly to bring more countries into the program. Butthe progressive relaxation of the requirementfor the “millennium rush” countries that qualifiedin late 2000 raises the risk of not achieving theHIPC objectives, as these countries face a tougherchallenge in meeting the necessary conditions toreach their completion points. And the majorityof the millennium rush countries have indeed ex-perienced policy slippages after reaching their de-cision points. While it is too early to assess theimpact of this flexibility on outcomes, otherthings being equal, these countries are less likelyto achieve good development results.

The findings on the PRSP process—a key per-formance criterion—are that the participatoryprocess has been satisfactory, but the degree ofownership varies across countries. The growthelements of the strategy are weak. This findingis consistent with the reviews of PRSPs by theWorld Bank and external partners, which indicate

FINDINGS AND RECOMMENDATIONS

55

The initiative is likelyto achieve its originalgoal of reducing theexternal debt of theHIPCs.

that although growth is universally accordedhigh priority in the PRSPs, a common weaknessis the lack of focus on how the anticipated lev-els of growth are to be realized and on the pri-oritization of actions necessary to achieve the keyobjectives of the strategy.

The initiative also set performance bench-marks for public expenditures with an empha-sis on social sectors, particularly health andeducation. This is evident both in the condi-tions attached to the use of HIPC resources andon input- and expenditure-related targets forpublic expenditures as completion point trig-gers. In principle, the beneficiary countries trackoverall government spending for poverty re-duction. In practice, most countries focus onsocial expenditures, primarily in the form ofhealth and education expenditures. The HIPCprogress reports regularly track social expendi-tures and the PRGF reviews also place empha-sis on pro-poor spending.

Reflecting this emphasis, HIPC progress re-ports indicate that over half of government rev-enues will be earmarked for social expendituresin the coming years. Most recipient countries con-sider this imbalanced and inconsistent with theirfocus on broader development goals and with theintended role of PRSPs in setting priorities.

This emphasis on social expenditures alsohas other disadvantages. The performance cri-teria largely focus on inputs and expendituresrather than intermediate or final outcomes and

impacts. The impact of these in-puts is likely to be limited by ab-sorptive capacity constraints, thefact that substantial aid resourcesare already targeted at social sec-tors, and the uniform applica-

tion of conditions across countries—even wherefunding may not be the core constraint to achiev-ing social sector outcomes. The inefficient useof resources in the targeted sectors and the lackof focus on other growth-enhancing and poverty-reducing expenditures are also likely to limitthe achievement of the HIPC objectives.

SustainabilityThe biggest risk facing the initiative is that of un-realistic expectations about what it can achieve,

arising from the potential lack of additionality andoverly ambitious interpretations of debt sus-tainability. Other important sources of risk are thelack of full creditor participation, which could re-duce the delivery of anticipated relief; weak ca-pacity for debt management in virtually all HIPCs;and the perceived lack of clarity surrounding theforward-looking aspects of the DSAs.

Long-term debt sustainability requires the de-velopment and institutionalization of a crediblegrowth strategy to generate the levels of income,job creation, and revenues necessary to attain fis-cal sustainability and repayment capacity. A keyelement of this strategy is stabilizing export earn-ings by diversifying the export base and gainingmarket access, with worsening terms of trade andan inequitable international trade regime re-maining a significant source of risk. To meettheir development challenges, these countriesmay continue to need to borrow, and the keychallenge is to ensure that all resources are usedproductively and efficiently. The recent progresson increased availability of grants will help in fi-nancing development in a sustainable manner,but the amounts of grant aid are still limited andfar short of the financing needs of the HIPCs. Be-yond official finance, the HIPCs need to createa hospitable environment for private investmentthrough continued and substantial policy andstructural reforms, including providing the nec-essary infrastructure and other services.

Institutional DevelopmentThe creation of the HIPC Initiative was a majorinnovation in development finance. It has madethe processes in the sovereign debt regime moreopen and accountable and spurred develop-ment cooperation. It has particularly encour-aged much better collaboration and coordinationbetween the World Bank and the IMF, both at theoperational level and in providing technical ad-vice to governments. While not incorporatedinto the original design, the most significant in-stitutional development impact of the HIPC Ini-tiative may well be improvements in the HIPCs’public expenditure management systems.

The HIPC Initiative has been a catalyst forthe PRSP process, which holds considerablepromise in helping countries improve gover-


56

The biggest riskfacing the initiativeis that of unrealistic

expectations.

nance, transparency, and accountability whilepromoting ownership of country poverty re-duction strategies. The initiative falls short incapacity building for debt management, whichwas not addressed in its design. A number of ef-forts are ongoing, but they remain uncoordi-nated and inefficient in providing the neededassistance to HIPC governments.

RecommendationsRecommendation 1: Clarify the objectives andensure the consistency of the design of the ini-tiative with the main objectives.

The purpose of the initiative needs to be clar-ified. Debt relief is a limited instrument; a clearpublic acknowledgment of this reality and a pri-oritization of its principal goals and how they areto be achieved in specific contexts would helpcreate correct expectations of what the initiativecan realistically achieve. Specifically, the goal ofdebt sustainability needs to be clearly distin-guished from the goal of poverty alleviation.Both goals are worthy, but require different re-sponses. Increased spending for poverty reduc-tion requires increasing the resources deliveredto poor countries (in conjunction with improvedpolicies and the efficiency of resource use). Debtsustainability requires redesigning the way theresources are delivered and, more important, ad-dressing the underlying structural dilemma fac-ing these countries. Management should takesteps to focus the initiative and identify its ap-propriate role in the overall development frame-work. Its objectives should be clearly stated,along with a clear articulation of how they are tobe achieved and what the roles of different play-ers are in achieving those objectives. Given thepublicity surrounding the initiative, any adjust-ment of the objectives and design needs to beexplained clearly to the global community.

Recommendation 2: Improve the trans-parency of the methodology and economic mod-els underlying the debt projections and therealism of economic growth forecasts in the DSAs.

The debt projections component of the DSAsshould be based on a simple, transparentmethodological framework. The current lack ofclarity surrounding the projections adds to thecontroversy on the achievement of HIPC objec-tives and is a significant but unnecessary sourceof reputational risk for the World Bank. A betteranalysis of the prospects and risks would alsoallow more informed decisions on how to mod-ify the current framework to maximize the ini-tiative’s development effectiveness.

Recommendation 3: Maintain standards forpolicy performance.

The critical importance of policy perform-ance for debt sustainability, growth, and povertyreduction is widely recognized. For effective im-plementation, flexibility is often necessary, butthere needs to be a clear and transparent ra-tionale for relaxing the criteria or standardsfor policy performance. Without such a justi-fication, it is critical that standards establishedfor the initiative be maintained—not only in theinterest of fairness and equity, but also to im-prove the likelihood of achieving the initia-tive’s objectives and for the durability of resultsobtained.

Recommendation 4: Performance criterianeed to increase the focus on pro-poor growth.

Growth is critical for both debt sustainabil-ity and poverty reduction, but at present the ini-tiative places a heavy emphasis on socialexpenditures as the primary means of povertyreduction. The initiative’s performance crite-ria should be better balanced between growth-enhancing and social expenditure priorities,and tailored to the individual country circum-stances. The World Bank should make betteruse of the knowledge already available and fillthe knowledge gaps through additional diag-nostic work, particularly on the overall effi-ciency of public expenditures, identifyingsources of growth, and developing appropriatesectoral strategies as the basis of appropriatebenchmarks.

FINDINGS AND RECOMMENDATIONS

57

ANNEXES

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62

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63

O-HIPC

Objectives“The objective of the initiative is to bring thecountry’s debt burden to sustainable levels,subject to satisfactory policy performance”(World Bank and IMF 1996).

Guiding principles

1. Debt sustainability: The objective should beto target overall debt sustainability on a case-by-case basis, thus providing a durable exitstrategy from the rescheduling process.

2. Policy performance: Action will be envisagedonly when the debtor has shown, through atrack record, ability to put to good use what-ever exceptional support is provided.

3. Debt relief: New measures will build, as muchas possible, on existing mechanisms.

4. Comprehensive: Additional action will be coordinated among all creditors involved,with broad and equitable participation.

5. Preferred creditor status: Actions by the mul-tilateral creditors will preserve their financialintegrity and preferred creditor status.

6. New flows: New external finance for the coun-tries concerned will be on appropriately con-cessional terms.

ANNEX B: THE OBJECTIVES AND GUIDING PRINCIPLES FOR THE HIPC INITIATIVE

E-EHIPC

“The original focus of the HIPC Initiative was onremoving the debt overhang and providing apermanent exit from rescheduling. Relief canalso be used to free up resources for higher so-cial spending aimed at poverty reduction tothe extent that cash debt-service payments arereduced. These are now twin objectives”(WorldBank and IMF 1999).

Principles of change

1. A clear exit from an unsustainable debt bur-den: Debt relief should remove the debt over-hang and provide an appropriate cushionagainst exogenous shocks.

2. An incentive to reform: Debt relief shouldstrengthen the incentives for debtor coun-tries to adopt strong programs of adjustmentand reform.

3. Additional: Debt relief should reinforce thewider tools of the international community topromote sustainable development and povertyreduction.

4. Financing plan: Accompanied by proposalsfor financing the cost to multilateral institu-tions.

5. Focus on poorer members:Debt relief shouldtarget the poorest member countries for whichexcessive debt can be a particularly severeobstacle to development.

6. Applied retroactively: Enhanced debt reliefshould be provided to all members, includingthose that have already reached decision andcompletion points under the initiative, pro-vided they qualify under the revised thresholds.

7. Provided in a simplified framework .

65

First Stage

Country established three-year track record of good performance and develops together with civil society a Poverty Reduction Strategy Paper (PRSP); in early cases, an interim PRSP may be sufficient

to reach the decision point.

• Paris Clubprovides flow rescheduling as per current Naples terms, i.e., rescheduling of debt service on eligible debt falling dueduring the three-year consolidation period (up to 67 percent reduction on eligible maturities on a net present value [NPV] basis).

• Otherbilateral and commercial creditors provide at least comparable treatment. • Multilateral institutionscontinue to provide support within the framework of a comprehensive poverty reduction strategy de-

signed by governments, with broad participation of civil society and donor community.

Either Or

Second Stage

Country establishes a second track record by implementing the policies determined at the decision point (which are triggers for reaching the floating completion point) and linked to (interim) PRSP.

•W orld Bank and IMF provide interim assistance.• Other multilateral and bilateral creditors and donors provide interim debt relief at their discretion.• All creditors continue to provide support within the framework of a comprehensive poverty reduction strategy designed by

governments, with broad participation of civil society and donor community.

“Floating”Completion Point•T iming of completion point is tied to the implementation of policies determined at the decision point.• All creditors provide the assistance determined at the decision point; interim debt relief provided between decision and com-

pletion points counts toward this assistance.– Paris Club goes beyond Naples terms to provide more concessional debt reduction of up to 90 percent in NPV terms

(and, if needed, even higher) on eligible debt so as to achieve an exit from unsustainable debt.– Other bilateral and commercial creditors provide at least comparable treatment on stock of debt.– Multilateral institutions take additional measures, as may be needed, for the country’s debt to be reduced to a sustain-

able level, each choosing from a menu of options, and ensuring broad and equitable participation by all creditors involved.

ANNEX C: HIPC DEBT INITIATIVE:FLOW CHART

Paris Club stock-of-debt operation under Naples termsand comparable treatment by other bilateral and com-mercial creditors

is adequatefor country to reach sustainability by the decision point.

EXIT(Country is not eligible for HIPC)

Paris Club stock-of-debt operation under Naples termsand comparable treatment by other bilateral and com-mercial creditors

is not sufficientfor country to reach sustainability by the decision point.

DECISION POINT(World Bank and IMF boards determine eligibility)

All creditors (multilateral, bilateral, commercial) commitdebt relief to be delivered at the floating completion point.The amount of assistance depends on the need to bringthe debt to a sustainable level at the decision point. Thisis calculated based on the latest available data at the de-cision point.

67

The evaluation used a mix of approaches to ad-dress the main evaluative questions listed inChapter 1. These included documentation and lit-erature reviews, stakeholder analysis and key in-formant interviews, and quantitative anddescriptive analysis of data, case studies, andportfolio reviews. In addition to an analysis of theexperience of the heavily indebted poor countries(HIPCs), where feasible, the review conductedcomparative analyses with other low-incomecountries (LICs), as well as with the experienceof highly indebted middle-income countries andtheir experiences with debt relief in the 1980s.

Desk reviewswere a key source of informa-tion and evidence. These reviews made use of thelarge volume of official documentation and ex-ternal research on the HIPC Initiative. A reviewof the substantial amount of academic researchon debt relief, the external debt problems facingLICs, and development challenges of the HIPCswas conducted. Background work covered awide range of topics, including the origins ofthe debt burden of the HIPCs and past responsesto this problem; creditor policy statements onHIPC debt relief (1995–2000); innovations insovereign debt relief mechanisms (1980–2000);a review of the treatment of additionality, debtsustainability, and growth in HIPC debt sustain-ability analyses; nongovernmental organization(NGO) literature related to the HIPC Initiative;equity issues and the consistency of treatmentacross HIPCs; Public Expenditure Reviews forthe HIPCs; and findings from Operations Evalu-ation Department (OED) Country AssistanceEvaluations for HIPC countries and other OEDstudies on topics of relevance to this review.

Case studies for five countries provided valu-able insight into the relevance of the initiative andhow it is currently being implemented. The case

studies combined desk-based reviews and con-sultations with key World Bank and InternationalMonetary Fund (IMF) staff—for an initial as-sessment of relevance of the initiative and its de-sign—with field visits and local consultations toassess the process followed and initial outcomes.A key objective of the field visits was to obtaindirect feedback from different stakeholders onthe process and implementation progress of theinitiative. The five countries visited wereCameroon, Guyana, Malawi, Uganda, and Zam-bia. The main considerations in the selection ofthese countries were regional balance, at leastone country that received original HIPC Initia-tive (O-HIPC) debt relief, at least one country thathad qualified under the fiscal criterion, and vari-ation across countries in the composition of thedebt stock among multilateral, bilateral, and pri-vate creditors. In addition, this review sought tocoordinate with other ongoing evaluations inselecting the countries for in-depth case studies.The country selection was vetted with WorldBank and IMF staffs, and NGO and creditor rep-resentatives.

Consultations were held inside and outsidethe World Bank and the IMF with a wide rangeof stakeholders. In addition to the World Bankand IMF staff, the review targeted key informants:debtor country officials, creditor representa-tives, and civil society representatives. Inter-views were conducted with major internationalNGOs as well as local NGOs and other civil so-ciety representatives in the context of the casestudies. In addition to the interviews with keygovernment officials in the case study countries,two workshops sponsored by the U.K. Depart-ment for International Development were heldto obtain direct feedback from HIPC financeministers or their representatives. One work-

ANNEX D: EVALUATION APPROACH

shop was held in Lilongwe, Malawi, and includedrepresentatives from 8 Commonwealth HIPCs,and the second was held in London, UnitedKingdom, with representatives from 16 of the re-maining HIPCs attending. Finally, a multistake-holder workshop was held in Washington, D.C.,on September 19–20, 2002, with representativesfrom debtor and creditor countries, northernand southern NGOs, researchers, other partneragencies and institutions, the World Bank (thePoverty Reduction and Economic Management[PREM] network anchor, the HIPC unit, and theAfrica Region), and the IMF (Independent Eval-uation Office, the Policy Development and Re-

view Department, and the Fiscal Affairs Depart-ment). The objective of the workshop was to ob-tain feedback and comments on the analysis andthe main findings emerging from this review.

Quantitative assessment was undertaken,where permitted by data availability, using sec-ondary sources, including the HIPC database,World Development Indicators , and the GlobalDevelopment Finance database from the WorldBank; the World Economic Outlook databasefrom the IMF; and the Organisation for Eco-nomic Co-operation and Development–Devel-opment Assistance Committee debt and creditorreporting service databases.


68

69

–1

1

3

5

7

9

IBRD IDA IMF Other Other

non-concessional

concessionalmultilateral multilateral

Bilateralconcessional

Bilateralnon-

concessional

Private Grants

US$ billions

1980–84 1985–89 1990–94 1995–99

Change in Net Transfers to HIPCs

(annual averages)

Source: Global Development Finance.

ANNEX E: CHANGE IN NET TRANSFERS TO HIPCS BY SOURCE

71

Does Debt Stock Matter for HeavilyIndebyrf Poor Country Growth?It is generally accepted that a large debt stock canimpair development, but there is less agreementon how this impact might occur, particularly inthe case of HIPCs. The dominant theory under-lying the adverse consequences of an excessivedebt stock is the “debt overhang” hypothesis(Krugman 1988; Sachs 1989).1 It posits that ex-ternal financial flows are a positive factor in pro-moting growth and development, but there arelimits to the benefits of borrowings and the ac-cumulation of debt. The middle-income (MIC)debt crisis demonstrates that an excessive debtstock can create disincentives for investment, forundertaking or sustaining politically costly re-forms, and for achieving growth and poverty re-duction. This was the straightforward strategicrationale for the HIPC Initiative as originally con-ceived and operationalized.

Although conceptually appealing, the benefitsto HIPCs of removing the debt overhang have notbeen demonstrated convincingly. There are im-portant differences between the MIC debt prob-lems and those of the HIPCs (Cline 1997). Thecurrent HIPCs are characterized not only by highdebt but also by poor economic performance,poor policies, weak governments and institu-tions, slow reforms, deficient infrastructures,and limited administrative and managerial ca-pacity (Mistry 1991; Killick 1995). The econo-metric evidence on the negative impact of a highdebt stock, particularly of the debt overhang ef-fect, on investment and growth in HIPCs is sug-gestive but inconclusive. The evidence shows anegative correlation between high debt stocksand growth, but it is not clear whether slowgrowth, a result of low savings and investmentand a weak policy environment, is causing an ac-

cumulation of debt, or debt is discouraging in-vestment and good policy, and hence deterringgrowth (see Claessens and others 1997; Pattillo,Poirson, and Ricci 2002; Easterly 2001b; Elbadawi,Nduhu, and Ndung’u 1997; and Hansen 2001, foralternative perspectives and empirical evidence).

There are significant structural and social con-straints to growth in the HIPCs. Private foreigninvestment has historically played a very minorrole in the HIPCs; the early private sector in-vestment retreated before the external debt wasof much consequence for many of the HIPCs (inthe early 1970s). The more recent evidence ongross fixed capital formation does not supporta strong link to debt stocks for HIPCs (it has in-creased in the 1990s irrespective of debt stocks).Nor does a comparison with other poor coun-tries give reason to believe there is any stronglink. 2 Similarly, the flows in foreign direct in-vestment do not show any systematic trend withthe level of debt stocks. The pattern of flowsshows a monotonic upward trend through the1990s for the HIPCs at proportionately the samelevel as for non-HIPCs.3

Does Debt Service Matter?The rationale underlying the evolving consensuson the nature of the debt problem in low-income countries is that high debt service pay-ments crowd out high-priority public expendi-tures. This is the readily understood argumentused by NGOs and other proponents of debtrelief. But the HIPCs have generally had large pos-itive net transfers (as shown in figure 2.2). Thedata for figure 2.2 come from the debtor re-porting system (used for the Global Develop-ment Finance database). From the creditors’perspective (through the Development Assis-tance Committee reporting system), the net

ANNEX F: HOW DOES A LARGE DEBT STOCK AFFECT ECONOMIC PERFORMANCE?

transfers to HIPCs have also been positive andsubstantial. For example, the Organisation forEconomic Co-operation and Development(OECD) data show that during 1990–98, not in-cluding the debt forgiveness grants (variousforms of debt relief), aggregate net transfers av-eraged over US$13 billion a year to the HIPCs.Of this, almost 60 percent was in the form ofgrants (almost US$8 billion). While not all ofthis is program aid (budget or balance of pay-ments support was about US$3 billion), the fun-gibility of aid is well demonstrated (Devarajan,Rajkumar, and Swaroop 1999).

The empirical evidence, therefore does not ap-pear to support the argument that the crowding-out effect or the import-compression effect couldbe constraining HIPC investment or expendi-tures. Yet despite large transfers, countries haverepeatedly run into debt servicing problems andhave not been able to exit from the cycles ofrescheduling. There are several plausible rea-sons for this outcome (Birdsall and Williamson2002). Aid is perhaps not as fungible as com-monly believed, given the strictures of tied pro-curement and project aid. The former reducesthe effective amount of resources at the recipi-ent’s disposal (OECD data suggest as much as 30percent of aid to the HIPCs in 2000 may be fullyor partially tied). The latter determines howmuch makes it to the budget, which is often asmall percentage of the total (Sachs and others1999).4 Further, externally financed projects may

place additional demands on the budget forcounterpart recurrent expenditures. More gen-erally, the fiscal space may be too small to si-multaneously accommodate large debt serviceobligations and to fund the needed infrastructureand social investments for broad-based and eq-uitable growth. This may reflect an insufficientrevenue effort or inefficient management of pub-lic expenditures. Most likely, a combination ofthese factors is at work, so that debt reductionmay help reduce the fiscal strain, but may not de-liver its promise without concurrent actions onthe policy front by donors and recipients alike.

Further, even though net transfers may be pos-itive, they are maintained through a complex re-structuring and negotiation process that entailsdeficiencies and inefficiencies that have beenhighlighted over the years (Sachs and others1999; Birdsall and Williamson 2002). Some of theeconometric evidence suggesting the negativeinfluence of uncertainty associated with volatileand unpredictable debt service and general inef-ficiency associated with high debt stocks (thatimpacts independently of the investment channel)is also consistent with this hypothesis (Pattillo,Poirson, and Ricci 2002; Dijkstra and Hermes2001). Considering the changing nature of thedebt stock of HIPCs, this problem would likelyhave only been exacerbated in the future with theincreasing share of multilateral debt, with theconsequent need for ever more negotiations withdonors to provide grant funds to service the debt.


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Summary of Proceedings fromWorkshops Held in Lilongwe and LondonAs part of the review of the HIPC Initiative bythe Operations Evaluation Department of theWorld Bank, two workshops were held in spring2002 to obtain feedback on the design and im-plementation of the HIPC Initiative from rep-resentatives of beneficiary countries. Theworkshops were sponsored by the U.K. De-partment for International Development andorganized in cooperation with Debt Relief In-ternational. The first workshop was held in Li-longwe, Malawi, on February 20, 2002, with theparticipation of HIPC finance ministers at-tending the Commonwealth HIPC Forum. Thesecond workshop was held in London, UnitedKingdom, on March 4, 2002, to consult withthe other HIPCs. Eight countries participated inthe Lilongwe workshop and 16 in the Londonworkshop.

The workshop discussions were structuredaround four questions related to the relevance,design, efficacy, and sustainability of the HIPC Ini-tiative.1 The officials expressed appreciation forthe financial benefits of debt relief and generalsatisfaction with their countries’ involvement inthe HIPC Initiative. Among the main benefits, anumber of countries noted that debt relief hashelped increase expenditures in the social sec-tors and improve debt management. Many speak-ers held that the initiative was broadly meetingtheir expectations and had high public visibilityin their countries. The experience to date on theadditionality of debt relief and the adequacy ofcreditor participation has been mixed. Speakershighlighted several risks to achieving HIPC ob-jectives, including the need for higher economicgrowth to undergird debt sustainability andpoverty reduction. Several participants also raised

concerns about adverse political consequencesif the HIPC–Poverty Reduction Strategy Paper(PRSP) processes fail to meet heightened pub-lic expectations. The following summary com-bines the key themes identified and discussed inthe workshops.

HIPC is highly relevant, with financial andinstitutional development benefits

• The initiative is highly relevant for in-creasing resource transfers to the HIPCs,though the extent of increased transfersvaries considerably across countries.

Most representatives affirmed that the HIPC Ini-tiative had increased the resources available fortargeted expenditures, particularly in the socialsectors. Many cautioned that the current un-evenness of creditor participation in the frame-work could undermine the impact of the HIPCInitiative; debt relief delivered thus far is below thatexpected in most cases. In some instances, onlyminimal cash-flow savings have been realized asa result of country-specific circumstances.

• The HIPC framework has increased theprofile of debt management and is help-ing to streamline and simplify debtor-creditor relationships.

There was a consensus among participants thatthe HIPC Initiative was an important departurefrom past debt management processes, with in-stitutional development as one of its importantbenefits. Several speakers mentioned that theirgovernment’s relationships with creditors wereimproving, partly through the benefit of cleareraccounting of debt and debt service levels. In a

ANNEX G: DEBTOR COUNTRY PERSPECTIVES ON THE HEAVILY INDEBTED POOR COUNTRY (HIPC) INITIATIVE

number of countries, the initiative’s compre-hensive appraisal of the overall external publicdebt stock has vastly improved national aware-ness about the extent of the country’s debt prob-lem and has helped promote a “debtmanagement culture.” The contributions of theHIPC Initiative in bringing attention to improvedgovernance, policy formation, and the efficiencyand poverty focus of public expenditures wereconsidered by some to be among the most im-portant benefits of HIPC debt relief.

Mixed views on HIPC development and policyframework, and the need to complementcurrent poverty focus with an emphasis ongrowth

• The focus on poverty reduction is ap-propriate and welcome, but growth andwealth creation warrant more attention.

The participants strongly endorsed the focuson poverty reduction in the enhanced HIPC Ini-tiative (E-HIPC) of 1999, noting that it repre-sents an important shift from past approaches,which focused almost exclusively on growth.Most speakers judged the shift to be too ex-treme, however. They considered the currentfocus on poverty to be too narrow, and in-complete without a complementary emphasison building the economic and physical infra-structure for economic growth. They voicedconcern about the inadequate focus on “post-HIPC prospects” for long-run debt sustain-ability and poverty reduction, and called for amore holistic approach to development, withan appropriate mix of viable short- and long-term strategies. A number of speakers consid-ered the initiative too inflexible in its emphasison social expenditures. Most representativesnoted that inflexibility in the allocation of re-sources, currently skewed in favor of socialsectors, was diverting resources and effortsfrom growth-enhancing activities in other keysectors (notably agriculture and core infra-structure). Within the social sectors, one areaof concern voiced was the lack of focus ongender issues.

• There were mixed views about the roleand effectiveness of the policy conditionsthat make up the HIPC framework.

Several participants raised concerns about theconditions and inflexible targets attached to theHIPC debt relief, particularly the macroeconomictargets. These were seen as constraints to rapidprogress. While many of the conditions werejudged to be reasonable and needed, otherswere seen as attempts to “micro-manage” theprocess and were found to have constrained thefull ownership of the HIPC process by govern-ments.

• The link between the HIPC Initiative andthe PRSP has been beneficial.

Most discussants considered the link between theHIPC Initiative and the PRSP process to havebeen useful in promoting dialogue among do-mestic development partners. The participatoryPRSP process has set an important precedent formore inclusive policymaking, promoting own-ership and transparency. Several of the repre-sentatives underlined the important contributionof the HIPC-PRSP link in mobilizing civil societyto participate in the process. Nonetheless, therole of civil society in ongoing policy formationremains novel in many countries. The PRSPprocess helped to highlight the need for capac-ity building in several areas, including data col-lection and effective stakeholder participation inpolicy decisionmaking.

• But involvement in the process has raisedpolitical risks for governments.

While the participatory process has been bene-ficial, it has raised a lot of expectations. In theshort to medium term, the failure to deliver onpromises of tangible results poses significantcredibility problems for governments. Partici-pants highlighted the need to take into accountthe political realities facing governments andcalled for faster delivery and moving away from“an excessively narrow definition of poverty.”Speakers expressed concern that HIPCs face a


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real risk of sliding back into indebtedness in thenext two decades without higher growth, in-creased savings, and access to new markets.

External and internal delays are reducing theimpact of debt relief, with improvements duringthe interim period

• Uneven creditor participation sloweddown the delivery of debt relief.

Representatives held that delays in the delivery ofdebt relief and variable creditor participationposed obstacles to achieving HIPC objectives insome countries. They emphasized the lack of uni-form delivery mechanisms, slow progress in reach-ing agreements with some Paris Club creditors,and nonparticipation by others as top concerns.A number of speakers noted that the World Bankand International Monetary Fund had been themost timely creditors in making debt relief avail-able and had provided the most straightforwardaccounts of the amounts of debt to be relieved.Across creditors, there is a need to harmonize andsimplify procedures, which were considered toocumbersome. A development that was worryingto many of the participants was the potential forlitigation, as experienced recently by Uganda, bynonparticipating creditors to recover debt and theHIPCs’ need for assistance to deal with such cases.

• For many countries, internal bottlenecksand inflexibility have also constrainedthe timely use of HIPC debt relief.

Officials identified two factors causing delays inaccessing and/or using debt relief: (a) challengesarising from existing institutional processes withinHIPC governments, both at the national and sec-toral levels, and (b) absorptive capacity con-straints in targeted line ministries/sectors. Somespeakers held that legislative requirements andother procedural delays have prevented the draw-ing down of financing available from debt relief.In some cases, human and institutional con-straints to implementation at the line ministrylevel, particularly in the social sectors, kept gov-ernments from fully utilizing the resources made

available through HIPC relief. Many representa-tives maintained that they had not been able totransfer unabsorbed HIPC resources to otherpriority sectors, although this would have beenpreferable.

Main risks to achieving HIPC objectives andchallenges for the future

The following is the summary of the issues iden-tified by the participants as central to achievingand sustaining the HIPC objectives.• Need for more flexibility:There was strong

consensus among the representatives that thepotential gains from participation in the HIPCInitiative—long-term debt sustainability and“breathing space” for increasing social expen-ditures—could not be sustained without in-creased economic growth. Several speakersidentified the need for greater flexibility in thedesign of the initiative to focus on job cre-ation and to invest in essential infrastructureto provide a more enabling environment forprivate sector development.

• Need to improve export performancethrough diversification and market ac-cess: The most important risk to achievingthe HIPC objectives was identified as the needto overcome longstanding vulnerabilities ofthe HIPC economies. The dependence on pri-mary commodities with volatile markets andlack of access to key markets were consideredmajor impediments to stability and growth inexports. Building resilience to external shocks,possibly through appropriate safety net mech-anisms, remains an important challenge.

• Need for more realism:The assumptionsunderlying the debt sustainability analysis(DSA) were considered by some speakers to bevery optimistic, particularly in light of the vul-nerability of HIPC economies to externalshocks. Some speakers suggested that the re-alism of the DSAs could be improved by in-creased input from debtor countries.

• Need for capacity building:Most speakersidentified the continued need for technical as-sistance for capacity building in key areas ofdebt management and debt negotiations. An-

ANNEX G: DEBTOR COUNTRY PERSPECTIVES ON THE HIPC INITIATIVE

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other area is the need for assistance to deal withpotential litigation from commercial and non-cooperating creditors.

• Need for faster progress to bring re-maining HIPCs into the debt reliefprocess:Several representatives urged accel-erated efforts and greater flexibility to bring theremaining countries to their decision points.They noted that the initiative could play a par-ticularly critical role in promoting the eco-nomic viability of postconflict countries.


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Summary Findings from Interviews withCreditor Country Representatives in theOffices of the Executive Directors of theWorld BankAs part of the review of the HIPC Initiative by theOperations Evaluation Department of the WorldBank, 10 interviews were conducted in Wash-ington, D.C., from May 17 to July 2, 2002, withrepresentatives from a spectrum of 14 creditorcountries.1 These interviews sought the views ofthe major creditor countries on issues related tothe design and implementation of the HIPC Ini-tiative. The interviews covered issues related tothe goals, structure, and implementation of theinitiative, as well as its future. The following is asummary of the key issues and views discussedin the interviews.

Relevance of the HIPC concept and theeventual focus on poverty reduction

• The main original objective of HIPC wasto bring each country to a position oflasting debt sustainability by the time itreached the completion point. Povertyreduction was added as a major objectivewith the advent of the enhanced HIPC (E-HIPC) in 1999. Most countries believedthat achieving both goals seems unlikely.

Quite generalized agreement existed that HIPCalone would not provide overall debt sustain-ability for this group of countries as a whole, al-though it might make some individual countriessustainable, at least for a while. Less consensusexisted, however, on what this means for futuredevelopment strategy for these countries.Nonetheless, all of the creditors now believe

that HIPC was the right thing to do despiteworries about “slippery slope” expansion ofthis form of debt relief to other countries, therisks of moral hazard, and the quality of im-plementation. Several countries noted that debtrelief would leave the larger problems of thesecountries untouched, resulting in “wasted” debtrelief.

• There was almost unanimous agreementthat expectations about what HIPC canand will achieve are way out of line withwhat is likely to happen. This poses realdangers for the initiative and for theHIPCs themselves.

The expectations problem exists at both the in-ternational level and the domestic levels withinHIPCs. The credibility of HIPC and that of theWorld Bank and the International Monetary Fund(IMF) were seen to be at stake. One creditorlinked much of this problem to the very use ofthe term “debt sustainability,” preferring some-thing along the lines of “robust exit” from debtburdens or “dynamic sustainability” to the ex-isting term. This creditor believes that all of thepublic stakeholders involved in HIPC’s emer-gence in 1996 realized at the time that HIPCwould not solve the debt problem, but that thisgot lost in the process of legitimizing, selling, anddefending the initiative. This country sees HIPCas but one milestone on the road to real debt sus-tainability, believing that something “beyondHIPC” must emerge, given the limitations it seesin the existing framework. Debt sustainability,presuming that one could actually determinewhat it entails, is simply too high a bar in prac-tice, if not in rhetoric.

ANNEX H: CREDITOR COUNTRY PERSPECTIVES ON THE HEAVILY INDEBTED POOR COUNTRY (HIPC) INITIATIVE

• There was general concern that insuffi-cient attention is being paid to growth andhow to get it. About half of the countriespointed to a real tension in the initiativebetween the goals of debt sustainabilityand poverty reduction.

A majority of the creditors agreed that there isat least some tension between debt sustainabil-ity—and hence the need for growth—and thenew emphasis on poverty reduction. A majorcreditor noted quite strongly that a concertedfocus on growth is still missing, and yet theboards of the World Bank and the IMF go alongas each new HIPC case comes before them be-cause the process is already well under way andout of a desire to be fair to all HIPCs. This wasseen by one major creditor as constituting a sortof herd-like mentality that ignored the centralissue of growth. Another major creditor notedthat growth is being taken into account, if onetakes a “very broad” view of growth. Smallercreditors and a couple of G-7 supporters ofHIPC, however, were less concerned about theproblem of growth and where it is to come from,seeing a focus on this issue as a tactic to waterdown HIPC, prevent the reinforcement of it, orweaken its focus on poverty reduction.

• The Poverty Reduction Strategy Paper(PRSP) process was generally seen as amajor positive innovation; several cred-itors pointed out, however, that it didnot emerge as a direct result of HIPC,but rather from a general shift in the de-velopment discourse that first becameinstitutionalized in HIPC.

Most creditors believed that the key change wasan emphasis on poverty reduction combinedwith broad consultations on how to achieve it.This innovation has now led to the extension ofthe PRSP process to other countries beyond theHIPCs. Many creditors were worried, however,about some key aspects of the process, includ-ing the level of actual HIPC-PRSP ownership, thequality of consultations, and the eventual im-plementation of the strategies. A couple of coun-tries felt that the initiative, and especially the

PRSP process, would help the better-developedHIPCs that have good leadership, but would havesignificantly less of an impact on others.

Implementation and process issues

• A majority of creditors believed that theprocess of determining debt sustainabil-ity needed some rethinking. Several coun-tries went further, to say that themethodology remains pretty murky andits analytic base is weak.

Most creditors agreed, for example, that thegrowth projections built into debt sustainabilityanalyses (DSAs) have been generally too opti-mistic, even before taking various shocks into ac-count. A few creditors mentioned that much ofthe work on debt sustainability in the early daysof the original HIPC had been quite political innature, with the desire of keeping the scopeand cost of the initiative as limited as possible,and were concerned that the concept was notbased on solid analytic footing. One creditorspeculated that perhaps the IMF and World Bankstaff were trying to keep within the parametersestablished by the major creditors, resulting inoverly optimistic DSA projections to keep costsin check.

• Most creditors agreed that additionalityis a problem, while admitting that itwould be hard to measure accurately,much less achieve.

Many countries agreed that it was very unclearwhether HIPC debt relief is actually additional as-sistance from official sources as a whole. Indi-vidually, only a couple of the creditors couldassert with some certainty that their contribu-tions to the HIPC relief efforts were additionalto their official development assistance (ODA).Beyond ODA, one country saw HIPC as a nega-tive “seal of approval” that stigmatized thesecountries in regard to the private markets, mak-ing additionality significantly harder to achieve.Another creditor, however, saw it as a positive“seal of approval” once a country reached thecompletion point, while admitting that this “sig-


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naling” effect would take time to have a realpositive impact in the private markets.

• Tracking was generally seen to be a majorproblem, both in terms of getting themost from debt relief and being able todefend HIPC as it exists now by beingable to show its concrete results. Mostcreditors believed, however, that thetracking problem is but one symptom ofmuch larger capacity issues in the HIPCs.

HIPC was widely seen as being responsible forputting the issue of debtor government capac-ity and public expenditure and debt manage-ment even more starkly on the table. Onecountry pointed out that the limited capacity ofsome debtor countries was even keeping themfrom a proper evaluation of the benefits andcosts of participation in the HIPC Initiative. Track-ing of expenditures is seen as a step in the rightdirection, but it is still in its infancy. In addition,it still does not begin to assess the actual impactof poverty reduction spending or any relation-ship it might have to growth or debt sustainability.

• About half of the countries expressedconcern about what they consider to bethe inadequate level of funding for HIPC,especially given the likely demands oftopping up and pressures for more of it.

The smaller creditor countries seemed moreworried about this issue than others, and also feltthat they are shouldering a larger share of the bur-den than other creditors, especially for the trustfund. A couple of countries expressed the beliefthat early HIPC decisions by World Bank and IMFstaff had been unduly affected by cost issues,the amount of relief to be given squeezed into ex-pected available resources, thereby slowing up theprocess and distorting the way the initiative de-veloped. They believed that the focus was moreon cost than on the goal of debt sustainability.

• Most creditors agreed that flexibility in theimplementation of HIPC is a good thingand has been managed relatively wellgiven the complexity of the process and

the quite varied conditions of the HIPCs.But some concerns were raised.

Two major creditors believed that too much flex-ibility exists, seeing a speed versus quality prob-lem, while one small creditor felt that HIPC’scomplexity had increased at the expense of itsmanageability. A couple of creditors believedthat clearer and more consistent rules are neededon topping up and other forms of flexibility. Ona related matter, several creditors mentionedthat the December 2000 “big push” to get morethan 20 countries to the decision point was a nec-essary political move, but one that set in play pro-cedural problems of quality and equal treatment.On a related point, one creditor felt that thereis a tendency to treat politically more importantHIPCs better than others. Most agreed that qual-ity will become even more of an issue as the re-maining countries reach their decision point. Inshort, the cases get tougher and tougher as yougo down the list. A couple of creditors werequite concerned about whether the quality of theprocess would balance out by the time the com-pletion point is reached. One G-7 creditorthought that current levels of conditionality andcompletion point triggers are too stringent, want-ing only “reasonable” ones.

• Most countries agreed that HIPC had sig-nificantly and positively improved coor-dination and collaboration between theIMF and the World Bank, and with thedebt relief and aid processes more gen-erally.

Several countries pointed favorably to the exis-tence and performance of the World Bank andIMF HIPC units, while indicating that there is stillplenty of room for improvement.

• About two-thirds of the countries notedthat HIPC had reoriented their ODA ac-tivities by focusing them on the PRSPprocess, and not just for the HIPCs.

• Most creditors agreed that the lack ofcomparable treatment by non–Paris Clubcountries and private creditors is a real

ANNEX H: CREDITOR COUNTRY PERSPECTIVES ON THE HIPC INITIATIVE

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problem because debt sustainability can-not be reached without it.

Implications for the future

• Most countries acknowledged that HIPCis but one, quite limited, part of the over-all development picture for these coun-tries. In short, it is far from being apanacea.

Yet this line of argument led to two differentviews on policy directions for HIPC, one morerestrictive, the other more expansive: (1) themore restrictive view, held by more than half ofthe countries, was that other elements of theoverall development picture would take upwhere HIPC leaves off, thereby eliminating theneed to alter HIPC in an effort to achieve moredebt relief, and (2) the more expansive, lesscommon view was that the HIPC process oughtto be pushed as far as possible in order to achievethe maximum amount of debt relief, while theother elements of the larger development con-text are addressed simultaneously in a more ag-gressive way. The existence of these twoviewpoints reflects less unity of opinion amongthe group of G-7 and other creditors than existedat the time the E-HIPC was introduced.

• Almost all creditor countries agreed thatthere should not be an HIPC 3, regardlessof existing and future “beyond HIPC”problems and pressures.

Despite this view, however, it was generally rec-ognized that debt sustainability is not likely to bereached for an important number of countries,and thus there will be pressure for significanttopping up and going “beyond HIPC” in someway. One G-7 country said that while it does notfavor an HIPC 3 now, it might be willing to dis-cuss one at some future date. Related to this,

most countries felt that HIPC should not be ex-tended in time or number of countries covered.A couple, however, did believe that new coun-tries might be added, as has already happened,if the new countries meet existing eligibility cri-teria. A couple of countries mentioned the pos-sibility of including some of the members of theCommonwealth of Independent States. At thesame time, reflecting the views of some middle-income countries, one country expressed con-cern that other highly indebted countries mightbe ignored if only existing criteria were used—other International Development Association(IDA) or IDA blend countries with real debtproblems, for example.

• A corresponding, generally recognized,worry had to do with creating new debtburdens through international financialinstitution, donor, and private lending, de-spite the existence of borrowing ceilingsin Poverty Reduction and Growth Facili-ties (PRGFs), with the possible result ofcreating yet another debt problem downthe road.

The new emphasis on poverty reduction, and thehigh level of expectations linked to it, leads topressure to find new resources to sustain povertyreduction spending beyond the use of HIPCdebt relief. Borrowing is one major possibility. Re-lated to this is the issue of the level of conces-sionality of any new lending and the weightbetween PRGF, IDA, and grant (whether IDA orother) resource flows. Several creditors worriedabout continued, and even increased, HIPC de-pendency on bilateral and multilateral public re-sources. One major creditor has stoppedextending ODA loans to any country that joinsthe HIPC process, while putting more emphasison grants. Several countries worried about theimpact of HIPC on the future level of IDA re-sources available to non-HIPCs.


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As part of this Operations Evaluation Depart-ment review, five country case studies wereconducted to assess the Heavily Indebted PoorCountry (HIPC) Initiative implementation ex-perience—Cameroon, Guyana, Malawi, Uganda,and Zambia. This synthesis gives the main find-ings from the five country cases. It puts to-gether the key similarities/contrasts to drawsome stylized facts. The focus is on four as-pects of country experience with HIPC relief:how the countries became highly indebted, thequality at entry to the HIPC programs, imple-mentation experience, and prospects for debtsustainability.

Since this is a small sample, the findings donot provide a robust basis for generalization butdo provide valuable insight into the shared ex-perience across this range of countries. Thegroup includes two countries (Uganda andGuyana) that reached the completion pointunder the original HIPC (O-HIPC) and one(Uganda) under the enhanced HIPC (E-HIPC);

gross national product (GNP) per capita levelsrange from US$190 to US$760; and theireconomies are dependent on a range of domi-nant exports, from oil to mining to agriculture.

How These Countries Became HeavilyIndebted There are strong similarities among the casestudy countries regarding the genesis of theirdebt problems, with the notable exception ofUganda, given its unique postconflict context.Most countries became severely indebted in re-sponse to terms of trade shocks and a subse-quent decline in revenues, but continuedmaintenance of overextended public sectors.Their economies were particularly sensitive to ex-port commodity price fluctuations, with adverseweather conditions also playing an importantrole in the agriculture-dominated economies.The main problem is the high concentration ofexport earnings in one or a few natural resourceor agricultural commodities (table I.1).

ANNEX I: SYNTHESIS OF MAIN FINDINGS FROM CASE STUDIES

Percent of Percent share Country Decision point NPV of debt Main export product total exports of top 3 exports

Cameroon 205 percent of exports Oil 27 47

Guyana 469 percent of revenues Sugar 25 61

Malawi 269 percent of exports Tobacco 61 75

Uganda 294 percent of exports Coffee 56 63

Zambia 486 percent of exports Copper 48 60

All 24 HIPCs 39 60

Note:NPV= net present value.Source: World Bank and IMF 2002e and decision point documents.

Debt Levels at Decision Point and ExportConcentration

Table I.1

Terms of trade shocks in the 1980s and 1990sreduced government revenues from exports. Inresponse, the countries looked to externalsources to finance their high public sector spend-ing rather than undertaking fiscal adjustments.External debt stocks typically rose sharply in ashort period of time, accompanied in some casesby poor economic performance, even in light ofsatisfactory adherence to adjustment programs.The growing debt service and limited foreignexchange earnings added demand for foreignborrowing. In the case of Zambia, debt serviceobligations were a major contributor to a balanceof payments shortfall over the 1990s. Extensivebalance of payments support, including overUS$1 billion in adjustment lending from theWorld Bank over the decade, was necessary tokeep the country from default with the interna-tional finance institutions.

Shift in Debt CompositionFour of the five countries studied experienceda significant shift in debt stock composition to-ward the multilateral institutions. Uganda has thehighest concentration of its debt to multilater-als in the group, with nearly 90 percent; this isup from 44 percent in 1986. Cameroon, in con-trast, stands out as the only country with a de-clining share of its debt to multilaterals over thelast decade. Net transfers from multilaterals werenegative for the majority of the 1990s.

Quality at EntryThe qualification process:There are twomain criteria for a country to qualify for HIPCdebt relief: (a) a debt burden above the sus-tainability target after the full application of tra-ditional debt relief mechanisms and (b) anestablished track record of policy performance(normally three years). All case study countriesmet the net present value (NPV) of debt-to-ex-ports criteria, with the exception of Guyana,which qualified on fiscal grounds. The record onprior policy performance across the five cases isuneven. Cameroon, Guyana, and Uganda (forthe O-HIPC) had an unambiguously satisfactorythree-year track record. Guyana, Malawi, andZambia (for the E-HIPC) had episodes of policyslippage before qualifying for HIPC relief. In

terms of policy performance after the decisionpoint, performance has kept roughly at the samepace as before. Cameroon and Uganda have con-tinued their good policy performance. Zambiashowed strong performance in the year imme-diately prior to its decision point and has main-tained good performance under two subsequentPoverty Reduction and Growth Facility (PRGF)reviews. Guyana and Malawi, however, have ex-perienced mixed performance since their E-HIPC decision points, which resulted ininterruptions of their respective InternationalMonetary Fund (IMF) programs. An emergencyIMF program of assistance was approved forMalawi in September 2002, and the Guyana PRGFwas belatedly approved in September 2002 afteralmost a year-long interruption.

In some cases, social sector strategies havebeen enhanced as a result of the HIPC Initiative.Developing formal strategies in the health andeducation sectors was required in Cameroon asa prior action in order to reach the decisionpoint. These strategies will help to coordinate theexpected significant increases in expenditures inthese sectors. For all five case studies, the prepa-ration of interim Poverty Reduction Strategy Pa-pers (I-PRSPs) was a requirement for decisionpoint. The case study experiences with thisprocess point to significant gains from initiatinga participatory dialogue between governmentand civil society, and, to a somewhat lesser ex-tent, directly with the poor. In all countries, civilsociety assessment of the participatory processwas very positive.

The substantive quality of the four full povertyreduction strategies that have been completedso far has been varied. The most common criti-cisms from the joint staff assessments of theWorld Bank and IMF were the need for greaterrealism in ability to implement, greater attentionto prioritization of activities, and costing of theproposed programs. All staff assessments for I-PRSPs in these five countries reported to theirboards that they provided adequate foundationsfor moving forward with the HIPC decisionpoints.

The amount of HIPC reliefthat each coun-try qualifies for is calculated on the basis of theestablished ratios and using actual data, and


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debt sustainability analyses (DSAs) are conductedto demonstrate the countries’ ability to repay ex-isting and projected new debt in a sustainablemanner. However, the realism of the DSA as-sumptions made at the decision point, given re-cent and past experience, was almost uniformlyraised as a concern by those consulted for all fivecase studies. The April 2002 update of projectionsby the HIPC unit confirms significantly lowergrowth and export performance in many coun-tries, and revises the projections for many HIPCs,including those in the sample. Uganda currentlyhas very high debt indicators as a result of thefall in coffee prices and the subsequent sharplylower export figures. The export shortfall for2000–01 in Uganda was 27 percent, and for Zam-bia it was 16–18 percent.

Completion point triggers:The floatingcompletion points for all HIPCs are linked to trig-ger conditions agreed at the decision point.With the exception of Uganda, which did nothave any triggers for the E-HIPC, in the othercases the triggers cover both social sector ob-jectives and structural reforms. For Cameroon,Guyana, and Zambia, the triggers cover the keyreforms, which, if adopted, should substantiallyimprove the prospects for economic growthand, ultimately, repayment capacity. In Malawi,the study concludes that many of the key struc-tural reforms necessary to attain HIPC objectiveswill have to wait until after the completion point.In most cases, the triggers included existingconditions from ongoing programs. ForCameroon, Uganda, and Zambia, triggers sup-ported the structural adjustment reforms thatwere part of ongoing PRGF and World Bank ad-justment programs. In Guyana, the dialogue fordetermining HIPC completion triggers provideda framework to push discussions forward onmacroeconomic and structural reforms, espe-cially solidifying and heightening attention tocivil service reform that complemented prepa-ration of an Inter-American Development Bankadjustment loan. In Malawi, while not explicitlyincluded as HIPC completion point conditions,the key structural reforms were covered in aWorld Bank Structural Adjustment Credit thatwas approved at roughly the same time as theHIPC decision point.

Implementation ExperienceInterim debt relief receivedhas on balancebeen near the decision point projections forthese countries. Multilaterals have mostly deliv-ered as agreed, but frequent delays have been ex-perienced with reaching formal agreements withthe Paris Club members. In the case of Zambia,the Paris Club framework was not signed until 16months after the decision point, which delayedbilateral agreements with members. Protractedbilateral negotiations with Russia resulted in adebt repayment schedule much higher thanplanned. More significant problems were notedin some countries regarding non–Paris Club andcommercial creditor relief. Separate negotia-tions for these creditors are ongoing in most ofthe five countries, although the amounts aregenerally relatively small. In some isolated cases(e.g., in Uganda and Zambia), lawsuits have beenfiled against the government for repayment ofdebt by commercial creditors or private entitiesthat have purchased sovereign debt on second-ary markets.

HIPC-related expendituresin most coun-tries have not been fully spent, with the excep-tion of Uganda. Delays in setting up ring-fencingarrangements and line ministry capacity con-straints have contributory factors in some cases.In Cameroon, no spending had occurred 18months after the decision point, though overUS$100 million in debt service relief had been ac-cumulated. Delays center around developingagreed selection and approval procedures in theHIPC Consultative Committee, made up of gov-ernment, civil society, and donor representa-tives. In addition, original project proposalsneeded strengthening. In Guyana, the imple-mentation rate for using HIPC resources is esti-mated at 75 percent, with capacity constraints ofline ministries for effectively absorbing the ad-ditional resources and late finalization of the2001 budget cited as key causes for the delay.

Additionalityof HIPC implies that the netresource transfers from external sources are notreduced as a result of the debt relief. This is dif-ficult to assess definitively, largely because ofthe lack of a “clean” counterfactual against whichto benchmark changes in resource transferssince the decision point. Uganda is a clear case


83

of full additionality, with large and sustained in-flows of external aid. But donor support has de-clined relative to historical levels in Malawi andZambia, largely because of governance concernsand for political reasons. However, more analy-sis is needed to determine the share of these de-clines that are related to the provision of HIPCrelief, as opposed to other factors (such as gov-ernance issues or perceived election irregulari-ties). It is possible that debt relief, by reducingthe strain put by debt service on governmentbudgets, and hence the need to provide finan-cial support by donors, is now permitting greaterselectivity by donors. In this case, while it maybe desirable to be selective for good reasons, ad-ditionality is not being achieved.

Fungibilityof relief resources has to do withthe level of total resources made available at thelevel of sectors targeted by HIPC. It is possiblethat additional resources directed at certain sec-tors through conditionality attached to HIPC re-lief may substitute for some (or all) of thegovernment’s own resources. The Malawi casestudy found that although the overall resourcesavailable to key sectors (e.g., health, education,and agriculture) had increased, governments’own resources had declined since the decisionpoint relative to the pre-HIPC allocations. Gov-ernment contributions to the Poverty ActionFund (PAF) in Uganda were also found to beflat, while the overall size of the budget has in-creased. Donors’ contributions to the PAF havebeen substantial in recent years.

Monitoring mechanisms:All five countrieshave processes for tracking debt relief inflows,as well as adequate monitoring of HIPC-relatedexpenditures at the central budget level. Somehave transparent dissemination of this informa-tion, such as Zambia’s practice of quarterly pub-lication of HIPC account inflows andexpenditures in local newspapers. However,there is relatively poor tracking of actual cash ex-penditures at the lower levels. This reflects morewidespread public expenditure managementproblems, not specific to HIPC. Monitoring theeffectiveness of HIPC-related expenditures wasfound only in Uganda, and some efforts areunder way in Malawi. Performance indicatorsfor priority social sectors in Uganda (education,

health, water and sanitation) have been estab-lished and are regularly monitored. These indi-cators track effectiveness of all PAF resources, ofwhich HIPC relief is the largest source. In Malawi,the Budget and Finance Committee of Parlia-ment with the Malawi Economic Justice Net-work track outcomes in the education, health,and agriculture sectors.

Fulfillment of or progress toward thecompletion triggers has been mixed acrossthe five countries. While Uganda successfullycompleted O-HIPC triggers on time, Guyana’sO-HIPC completion point was delayed from De-cember 1998 to May 1999 because of policy slip-pages. Cameroon and Zambia are progressingas scheduled (that is, a notional three-year interimperiod, although completion points are in effectfloating). They are likely to hit their expected E-HIPC completion dates, but both face risks (portreform in Cameroon and the mining crisis inZambia). Guyana and Malawi are currently show-ing mixed progress, due partly to recent weak-nesses in macroeconomic management.

PRSP progress:Four of the five case studycountries have completed their first PRSPs.Cameroon is expected to complete its PRSPwithin the coming months. As noted for the I-PRSPs prepared for HIPC qualification, most fieldconsultations with civil society confirmed no-table advances in the dialogue with governmentunder PRSP preparation. One-tenth of the pop-ulation participated in some form under theGuyana PRSP consultations. A successful featureof the consultations noted in Malawi, Uganda, andespecially Zambia was the interaction of civil so-ciety with government policymakers throughworking group arrangements. These groups al-lowed close consultations over an extended pe-riod, and in most cases resulted in tangibleoutputs for incorporation into the overall strat-egy. As noted in most joint staff assessments forthe completed PRSPs, further work is needed inoperationalizing the strategies, in terms of pri-oritizing intrasectoral activities, costing, and in-tegration into the budget. The exception isUganda, which was already developing a PovertyEradication Action Plan in 1995, prior to HIPC.This framework has been strengthened over timeand is fully linked to the budget and sector plans.


84

ProspectsAll countries have a reduced fiscal burden fromlower debt service and a distinct increase in so-cial and poverty-reducing expenditures. How-ever, prospects for long-term debt sustainability,under current HIPC debt relief arrangements, aremixed across the five case study countries. Atpresent, none of the countries has achieved theHIPC target of 150 percent NPV of debt-to-ex-ports, or 250 percent NPV of debt-to-govern-ment revenues for Guyana (table I.2).1 Based onrecent data, only Cameroon is projected to be-come sustainable within the next three to fiveyears. Guyana is expected to be just over the 280percent fiscal threshold. Malawi, Uganda, andZambia are not expected to reach sustainabledebt levels by the end of the decade. Progresson addressing structural causes or risks to re-payment capacity have so far been modest.

Key risk factorsto repayment capacity notedin the case studies include continued export con-centration and the link to commodity price fluc-tuations, continued weaknesses in publicexpenditure management, lack of private sectoractivity, and the accumulation of new debt. Littleprogress has been noted in the area of export di-versification, with the exception of Zambia, which

showed good performance from its nonmining ex-ports in 2001. Work is reported to be under wayin all countries to strengthen diversification strate-gies. The most pressing case is in Cameroon,where the stock of oil reserves is expected to de-cline markedly over the coming years. The im-portance of export diversification has beenunderscored by the deterioration of debt indica-tors in many HIPCs, given the further recent de-clines in commodity prices and the globaleconomic slowdown (World Bank and IMF 2002d).

The terms and volume of new lending arenaturally a concern for all HIPCs. While HIPC debtrelief can greatly reduce the debt stock as of thedecision point, there are no guarantees againstslippage back to original levels of indebtedness.For the group of five case study countries, theissue is particularly relevant for Cameroon,Uganda, and, in the near term, for Zambia. Ac-cording to the latest HIPC unit projections,Uganda is expected to borrow on average wellover US$300 million annually through the endof this decade. Cameroon and Zambia will bor-row on average over US$200 million per year. Theterms of the large magnitude of expected fu-ture borrowing will have direct effects on thesecountries’ debt sustainability.


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NPV of debt External debt service Country to exports ( percent) to exports (percent)

Cameroon 197 11

Guyana 136 9

Malawi 194 12

Uganda 254a 13

Zambia 441 15

a. The latest estimate for the NPV of debt-to-exports for Uganda is 209 percent, based on an updated DSA using end-June 2002 data.

Source: World Bank and IMF 2002e.

Current Debt Ratios (latest estimate for 2002)

Table I.2

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Burkina Côte Constraint Bolivia Faso Cameroon d’Ivoire Ethiopia Ghana Malawi a

Political instability/civil war

Natural calamities

Macroeconomic imbalances

1. Low/negative growth

2. Inflation

3. Fiscal deficit

4. Current account deficit

External shocks

1. Falling commodity prices

2. Adverse terms of trade

3. Falling exports

4. Misalignment of currency

5. Reliance on primary commodities

6. Declining external remittances/

foreign aid

Constraints to private sector

development b

Institutional and capacity

constraints

1. Poor economic management

2. Poor governance

3. Corruption

4. Weak/ineffective civil service

5. Weak legal/judicial system

6. Weak regulatory system

7. Population growth

8. Higher poverty

9. Adverse social conditions

ANNEX J: CONSTRAINTS TO GROWTH AS IDENTIFIED BY OED COUNTRY ASSISTANCE EVALUATIONS

(Annex continues on the following page.)

Annex J (continued)

Constraint Mozambique Tanzania a Togo Uganda Zambia Yemen

Political instability/civil war

Natural calamities

Macroeconomic imbalances

1. Low/negative growth d

2. Inflation

3. Fiscal deficit

4. Current account deficit

External shocks

1. Falling commodity prices

2. Adverse terms of trade

3. Falling exports

4. Misalignment of currency

5. Reliance on primary commodities

6. Declining external remittances/

declining debt

Constraints to private sector

development b

Institutional and capacity

constraints

1. Poor economic management

2. Poor governance

3. Corruption

4. Weak/ineffective civil service

5. Weak legal/judicial system

6. Regulatory system

7. Population growth

8. Higher poverty

9. Adverse social conditions

a. Refugee influx from Mozambique.

b. Poor environment for business.


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89

IntroductionThe Heavily Indebted Poor Countries Debt Ini-tiative (HIPC Initiative) launched in 1996 andenhanced in 1999 represented an advance bythe international community in addressing thechronic external debt burden of the world’spoorest countries. It brought together donors,creditors, NGOs, and academics around a coredevelopment issue, and led to improvementsin the way debt relief is provided. The Initiativespurred the international community to mobi-lize and commit a large amount of money andattention to reducing the debt overhang in thepoorest countries—and thereby began to elim-inate a huge obstacle to growth and develop-ment. For the Bank, it represented one of theinitial efforts to engage in serious dialogue withcivil society and encourage active participationof beneficiaries beyond the project level. This di-alogue resulted in progressively better design ofthe Initiative and improved transparency in itsimplementation.

Progress in Implementing the HIPC Initiative

Since its inception six years ago, the HIPC Ini-tiative has succeeded in bringing substantialdebt relief to 26 of 42 potentially eligible coun-tries. In parallel, efforts are under way to put inplace longer-term poverty reduction strategies—crafted and implemented by the HIPCs using abroad participatory process—helping to steersavings from reduced debt service payments topoverty reducing programs. Partly as a result ofits early successes, expectations on what theHIPC Initiative can achieve are high, and thereare frequent calls for further accelerating, broad-ening and deepening the debt relief providedthrough the Initiative.

The OED Review

Management welcomes this timely and com-prehensive review of the HIPC Initiative under-taken by the Operations Evaluation Department,as it helps take stock of what has been learnedin the implementation of the HIPC Initiative tohelp resolve its shortcomings and better achieveits goals. This Management Response discussesthe OED report’s main findings and presentsviews on key issues that are fundamental to thesuccess of the HIPC Initiative. Nevertheless, it isimportant to remember that all of the 26 coun-tries receiving debt relief under the Initiative sofar reached their decision point only in 2000 orthereafter, so any conclusions regarding the pro-gram’s accomplishments or shortfalls can onlybe tentative at this early stage in the program’simplementation.

Joint Program

The HIPC Initiative is a joint Bank-Fund pro-gram in which the staffs of the two institutionswork closely together. Nonetheless, these com-ments reflect solely the views of World BankManagement and do not in any way purport torepresent nor implicate the Fund.

Main Findings and RecommendationsThis Management Response focuses on the OEDReview’s main findings and recommendations.Also attached are detailed responses in the Man-agement Action Record matrix.

OED Recommendations

The OED Review’s four recommendations are to:“(i) clarify the purpose and objectives of the Ini-tiative, ensure that its design is consistent withthese objectives, and both the objectives and

ANNEX K: MANAGEMENT RESPONSE

how they are to be achieved be clearly commu-nicated to the global community; (ii) improve thetransparency of the methodology and economicmodels underlying the debt projections and therealism of economic growth forecasts in thedebt sustainability analyses; (iii) maintain thestandards for policy performance, and when theestablished criteria are to be relaxed that therebe a clear and transparent rationale to ensure thatthe risks to achieving and maintaining the Ini-tiative’s objectives are minimized; and (iv) focusmore on pro-poor growth and provide a betterbalance among development priorities relativeto the current emphasis on social expenditures.”

Objectives of the HIPC Initiative

The OED Review paper rightly points out that theobjectives of the HIPC Initiative have grown inambition over the years. The original HIPC frame-work aimed to bring about a comprehensivedebt reduction “to achieve a sustainable debt sit-uation” in the eligible countries. The consulta-tive HIPC Review launched in early 1999 with thedebtor countries and the wider donor, NGO andacademic communities, recommended that debtrelief operations be better linked to the overalldevelopment and poverty reduction agenda.Participants in that review also felt that deci-sions regarding the use of debt service savingsshould involve civil society and the poor them-selves. Poverty Reduction Strategies, formulatedand implemented through a wide participatoryprocess concurrent with the HIPC debt reliefprocess, were identified as a viable means tochannel debt savings toward uses consideredto be high priority.

Debt Relief and Development

When the HIPC Initiative was enhanced withlower thresholds and faster provision of debtrelief, it was made clear that there is at best anindirect relationship between debt relief andpoverty reduction. Debt relief was never pre-sented as a panacea that would overcome thetowering challenge of long-term developmentand poverty reduction in HIPCs. On the con-trary, it was always seen as a program that, by re-ducing the external debt stock in HIPCs, wouldultimately contribute to the broader goal of as-

sisting these countries to accelerate growth andreduce poverty. Since the inception of the HIPCInitiative, and particularly after the 1999 en-hancement, the Bank consciously emphasizedthe comprehensive development framework inits country assistance strategies, lining up nu-merous programs, including the HIPC Initiative,in a consistent and comprehensive attack onpoverty. Naturally, the HIPC program—just onebuilding block in a more comprehensive devel-opment architecture—aligned itself with the ob-jectives and goals of this larger program, butwas never meant to supplant it.

Additionality of Resources

We fully support OED’s emphasis that addition-ality is an important underlying principle of theHIPC Initiative, but contend that it should be as-sessed on a country-by-country basis. For ex-ample, lower grants and/or credits may beappropriate in cases where serious policy slip-pages or even reversals lead to slower growth anda deteriorating macroeconomic situation. Nev-ertheless, staff’s preliminary review of the dataindicates that, much as one would expect, loancommitments and grants to HIPCs in aggregateclimbed in 1999 and 2000, just about the time theHIPC Initiative was taking off. And the WorldBank clearly held up its end of the bargain, be-cause there is clear evidence that the combina-tion of net flows and debt relief from IDAincreased sharply at about the same time.

Positive Net Transfers and Debt Sustainability

We agree with OED that net transfers of exter-nal resources to HIPCs must be adequate tosupport development programs needed to reachthe Millennium Development Goals. But thisshould not come at the expense of debt sus-tainability. It is imperative, therefore, that theflow of grants increase significantly to thesecountries, and in this context we welcome thegrant component incorporated in IDA-13. Atthe same time, however, it needs to be ac-knowledged that grants from bilateral and othersources will need to rise further still to eliminatethe tension between these two potentially com-peting objectives (namely, attaining MDGs anddebt sustainability).


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Transparency in Projections

The OED Review recommends greater trans-parency in the methodology and economic mod-els underlying the debt projections and greaterrealism in the economic growth forecasts in thedebt sustainability analyses. It finds that: (i) themacroeconomic projections embodied in thedebt sustainability analyses (DSAs) tend to beoverly optimistic; (ii) models underpinning theseoptimistic projections are not easily understoodor substantiated; and (iii) the sustainable debtoutlook based on optimistic macroeconomicprojections undermines “a better assessment ofthe prospects and risks” facing HIPCs. The WorldBank, in collaboration with country governmentsand the IMF, is already taking steps to make surethat greater realism is introduced into long-termeconomic projections that underpin debt sus-tainability calculations. At the same time, it needsto be recognized that macroeconomic projec-tions for HIPCs are inherently difficult due to un-reliable data, internal conflict, the effect ofunpredictable weather patterns on agrarianeconomies dependent on one or two key com-modity exports, and volatility in commodityprices. To deal with these issues, staff are al-ready required to develop stress tests to assessrisks to their baseline scenarios and prepare al-ternative scenarios that reflect the vulnerabilitiesand uncertainties these countries face.1 As far asgreater transparency in methodology and eco-nomic models underlying the debt projectionsare concerned, the Fund and the Bank apply toHIPCs the same disclosure and reporting stan-dards they apply to all other countries.

Impact of Projections

The OED Review recognizes that HIPCs are notpenalized if projections by Fund and Bank staffsturn out to be optimistic. First, the calculationof debt reduction for any HIPC is not based onprojections but on actual external public debt andthe average export value over the previous threeyears. And second, if the actual NPV debt-to-ex-port ratio at completion point is over the pro-jected ratio on account of factors clearly beyondthe control of the country (such as an unex-pected decline in commodity prices), then theHIPC framework allows the country to receive ad-

ditional debt relief and reduce its NPV debt-to-exports ratio to 150 percent. While over-opti-mistic projections may not penalize HIPCsdirectly, the OED Review correctly points outthat they may have the indirect effect of en-couraging HIPCs (after decision or completionpoint) to borrow at above sustainable levels.Management is alert to this issue and requirescountry assistance strategies to carefully assessthe macroeconomic prospects of all low-incomecountries, including HIPCs, and emphasizes sen-sitivity analyses and preparation of low case lend-ing scenarios.

Standards of Policy Performance

The OED Review paper notes that sustained pol-icy reforms are crucial for countries to maintaindebt sustainability and achieve economic growthand poverty reduction. Therefore, it emphasizesthe importance of maintaining clear standards ofpolicy performance for the HIPC Initiative, es-pecially in the instance of so-called “Millennium-rush countries,” for which OED perceived atendency to lower standards. The original HIPCframework required that HIPCs demonstrate atrack record of reform for three years to qualifyfor debt relief at decision point, followed by a fur-ther period of reforms, to actually benefit fromirrevocable debt relief at completion point. Acounterpoint was posed by many critics partic-ipating in the 1999 HIPC Review who arguedthat a strict track record requirement was a hur-dle intentionally raised by the Bank/Fund and thecreditor countries to delay debt relief. Withoutattempting to judge the merit of this contention,efforts were made under the enhanced frame-work to assist eligible HIPCs in reaching decisionpoint more quickly, as a result of which the re-quirement of the three-year track record wasrelaxed. This was appropriate, because thequicker an eligible HIPC can reach decisionpoint, the earlier the international communitycan engage with the country to assist with reformand development and the greater the likelihoodof success in reaching completion point andbenefiting from irrevocable debt reduction. At thesame time, strong policy performance standardscontinued to be maintained in the design ofcompletion point triggers. Indeed, in line with


91

changing practice in selecting conditions for ad-justment loans, the Management is also trying toreduce the number of completion point trig-gers, and ensure that those that are included areof strategic importance to the success of theprogram.

Emphasis on Social Expenditure

The operational nature of HIPC documents re-quires that they explain how savings from debtrelief will be channeled into poverty reductionexpenditures. A large part of the additional ex-penditures are concentrated in social sectors al-though, in some HIPC documents, they alsoinclude physical infrastructure and economicservices such as water supply, rural electrification,housing, and agricultural services. These ex-penditures, when taken together with the pro-grams of policy and structural reform that are alsoarticulated in HIPC documents, constitute a po-

tentially powerful strategy for pro-poor growth.In all cases, completion point triggers include arequirement that a PRGF program is on track, re-flecting the importance of macroeconomic sta-bility, an essential ingredient for growth.Completion point triggers also include struc-tural reforms designed to adjust incentives to-ward greater efficiency, private sectordevelopment, and improved governance, fur-ther strengthening the focus on growth eventhough they may not call for additional public ex-penditures. And in the future, PRSPs and publicexpenditure reviews will provide a better em-pirical assessment of where incremental re-sources should be allocated.

Attachment

Attached to this Management Response are de-tailed responses in the Management ActionRecord matrix.


92

Major OED Recommendation

1. Clarify the purpose and objectives of the Initiative,

ensure that its design is consistent with these ob-

jectives, and both the objectives and how they are

to be achieved be clearly communicated to the global

community

2. Improve the transparency of the methodology and

economic models underlying the debt projections and

the realism of economic growth forecasts in debt sus-

tainability analyses.


93

Attachment: Management Action Record

Management Response

1. Management will strengthen the communication of the

objective of the HIPC Initiative and clarify that it is to re-

duce debt stocks, and so contribute to broader efforts

aimed at accelerating growth and reducing poverty.

When the HIPC Initiative was enhanced, debt relief in it-

selfwas 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 toa 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 HIPC Initiative are clarified and communicated con-

sistently.

2. All debt sustainability analyses of HIPCs are based on

accompanying PRGF macroeconomic projections where

the key assumptions for debt sustainability are presented.

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, risks 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 risks to the baseline scenarios.

Major OED Recommendation

3.Maintain the standards for policy performance, and

when the established criteria are to be relaxed there

should be a clear and transparent rationale to ensure

that the risks to achieving and maintaining the Ini-

tiative’s objectives are minimized.

4.Focus more on pro-poor growth and provide a bet-

ter balance among development priorities relative to

the current emphasis on social expenditures


94

Management Response

3. Management believes that the earlier HIPCs reach de-

cision point, the greater the engagement of the international

community in assisting with reform and development efforts

and the greater the likelihood of reaching completion point.

At the same time, Management will seek to include few-

eræand the most strategicætriggers in completion docu-

ments to ensure that while standards of policy performance

are maintained, they are not unnecessarily onerous.

It should be noted that floating completion point condi-

tionality has allowed HIPCs to tailor the pace of change in

accordance with their capacity and the constraints they face.

4. Management will continue to assist HIPCs in assuring that

savings from debt relief are allocated to expenditures for

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 HIPC relief to finance expenditures supporting poverty

reduction and growth in line with priorities expressed in

PRSPs. 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 Reduction

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 for pro-poor growth

on a case-by-case basis in accordance with the PRSP or I-

PRSP.

95

Main FindingsThe Heavily Indebted Poor Country Debt Ini-tiative was formally agreed to by governmentsaround the world in September 1996 and “en-hanced” in 1999. Its original objective was toreduce, within a reasonable time horizon, theexternal debt burden of qualifying countries to“sustainable” levels. While the link to growthhas been maintained, the enhanced frameworkadded increased social expenditures for povertyreduction as an explicit objective. The reportconcludes that the HIPC Initiative has been acatalyst for far-reaching changes in theprocesses surrounding development assistanceand that the initiative has been highly relevantin addressing a key obstacle facing many poorcountries. The initiative is likely to achieve itsoriginal fundamental goal of reducing the ex-ternal debt of the HIPCs. While its design hasbeen adequate and appropriate to achieve itsoriginal stated objective of reducing the “debtoverhang,” the report concludes that this de-sign is no longer consistent with the expandedset of objectives of the enhanced HIPC, no-tably to simultaneously provide a “permanentexit” from rescheduling, promote growth, andfree up resources for increased social expen-ditures. Management is in broad agreementwith Operations Evaluation Department’s rec-ommendations but does not concur with partsof OED’s analysis, notably the conclusion thatthe design, as such, is inconsistent with the ob-jectives of the enhanced HIPC Initiative. Themanagement response underlines that by re-ducing debt stocks, the HIPC Initiative was al-ways meant to contribute toward a broader,more comprehensive development architec-ture but not supplant it.

Conclusions and Next StepsCODE commended OED for an excellent re-port. Members supported the thrust of recom-mendations of the report and were overallsatisfied with the management response. Keymessages arising out of the committee’s dis-cussion were that (a) debt relief was not a sub-stitute for a broader, growth oriented,development program and that HIPC needs tobe seen as one of several instruments to supportpoverty reduction; (b) additionality was an im-portant part of the HIPC framework but shouldnot override performance-based allocation ofresources; and (c) realism of debt sustainabilityanalysis (DSA) and a clear external communica-tion supporting wider public understanding ofthe report’s findings were also important. CODErecommended that the OED report be disclosed.The report findings will inform, among otherthings, management’s annual update on HIPCplanned for the Development Committee inSeptember 2003.

IssuesSome of the main issues raised by the commit-tee were the following:

Design and objectives of the HIPC Initiatives:The committee’s discussion of the design and ob-jectives of the initiative largely centered aroundthe disconnect between what the initiative couldrealistically achieve and the overly ambitious ex-pectations held by some stakeholders. The com-mittee agreed that it would be important toclarify the HIPC Initiative’s objectives but ad-vised that it was the role of governors and gov-ernments, not management or a panel of experts,as the objectives were established through a po-litical process and agreed to by governors. CODE

ANNEX L: CHAIRMAN’S SUMMARY: THE COMMITTEE ON DEVELOPMENT EFFECTIVENESS (CODE)

supported the need for management to ensurethat World Bank communications were clear andconsistent, and did not further raise expecta-tions. Management agreed it would address thisissue in its annual update on HIPC.

The committee agreed with the OED report’sfinding that the HIPC Initiative had objectives thatcould not be met through design improvementsalone. Members discussed varying interpreta-tions of what a “permanent exit” from debtrescheduling was intended to mean and sug-gested caution in automatically linking debt re-lief to debt sustainability and poverty reduction.The committee supported management’s viewthat HIPC is one of several instruments to sup-port poverty reduction and underlined the needto link HIPC to a broader development programthat addressed the underlying structural prob-lems. The committee believed the evaluationcould have taken greater account of Poverty Re-duction Strategy Papers (PRSPs) as the frameworkto address long-term development problems inthese countries. OED noted that it was in theplanning stages of a separate and in-depth reviewof the PRSP process.

Management noted that while the HIPC isnow clearly linked to the PRSP process and, byextension, to supporting countries in achievingtheir growth and poverty reduction goals,throughout its evolution the initiative has re-tained its central objective of reducing the ex-ternal debt burden of beneficiary countries.Management also noted that the growth agendais central to the PRSP approach in many coun-tries where the PRSP is advanced. Several speak-ers confirmed that the HIPC review was animportant learning process and underlined theimportance of continued frank and open con-sultations with all stakeholders.

Social sector spending: The committee wasin agreement with the review’s finding that theearly focus on the use of HIPC debt-service sav-ings had focused too narrowly on social expen-ditures. The committee felt that a broader growthand development framework to accommodateother factors that also affect growth—such as theinvestment climate, infrastructure development,and economic productivity—was preferable.Some members noted that the lack of emphasis

on economic growth was symptomatic of PRSPsnot adequately addressing growth. They foundthat this was an area that required further at-tention and supported management’s proposalto give greater consideration to economic growthwhen designing completion point triggers. Man-agement agreed that the support for povertyreduction under the HIPC Initiative will be con-sistent with the broad policy framework ex-pressed in PRSPs and noted that high-prioritypublic expenditures, together with programs ofpolicy and structural reform, constitute a po-tentially powerful strategy for pro-poor growth.

Resources:The committee discussed the im-plications of reallocation of funds from non-HIPCs to HIPCs. Some chairs stressed that theintention of the additionality principle did not ex-empt countries from the performance-based al-location framework. The management responsenoted that strong policy performance standardswere integral to the development of lendingtriggers. Some chairs pointed to a potential con-flict between the Country Policy and Institu-tional Assessment (CPIA) allocations and debtrelief. The committee noted the apparent over-all decline in resource transfers to HIPC coun-tries through 2000, and while recognizing it wasearly in the HIPC process, underlined that if re-sources were to be freed up for poverty reduc-tion it would be important to (a) assess thepublic expenditure priorities expressed in thePRSP to gain a better understanding of how tobest use HIPC resources, (b) ensure that aidflows and savings from HIPC debt relief supportthose priorities and reach the poor, and (c) en-sure that longer-term measures are in place toaddress potential country absorptive capacity.Some members underlined the need to identifynew sources of concessional financing, includ-ing grants. The committee also noted that sincetrends in aid flows are influenced strongly by pol-icy and economic performance, they should beassessed on a country-by-country basis ratherthan in aggregate.

Debt sustainability analysis : The committeesupported OED’s recommendation on the needfor more transparency in the methodology forDSA and for more realistic growth forecasts.Some members, however, noted that OED could


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have gone deeper into some of the factors thatcontributed to the debt difficulties so that ap-propriate lessons could be drawn. The commit-tee also supported the idea of monitoringpost-HIPC performance and stressed that debtsustainability would require giving more atten-tion to the investment climate, volatility of tradeexports, access to markets, and domestic debt.The need to address possible conflicts betweendebt sustainability and increased Bank lendingwere also cited. It would also be important to en-sure that resources are productively used sothat sufficient capacity to service the debt is cre-ated. Improvement of debt management ca-pacity of HIPCs would also be key. Managementinformed the committee that the Bank, in col-laboration with country governments and the In-ternational Monetary Fund, was already takingsteps to ensure that greater realism was intro-duced into long-term economic projections andalso noted that the Fund and Bank apply to HIPC

the same disclosure standards they apply toother countries and programs.

Management of expectations:The committeeagreed that some stakeholders had overly highexpectations of the enhanced HIPC and wereconcerned that the Bank, as one of the principalcaretakers of this initiative, could be vulnerableto criticism on the final outcomes, even thoughkey decisions and actions needed to realize thebroader outcomes were beyond the initiative’spurview. The committee underlined the needfor management to put into place an effective in-ternal and external communication strategy re-garding the initiative and what it could and couldnot do, to minimize the risk of misinterpreta-tion of the review’s findings. Emphasis should beon what is required to achieve the objectivesrather than the realism of the expectations. OEDis planning dissemination activities for its report.Management confirmed that it would undertakea proactive communication strategy.

ANNEX L: REPORT FROM THE COMMITTEE ON DEVELOPMENT EFFECTIVENESS (CODE)

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Finn JonckChairman

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Executive Summary1. Management comment: The context of this evo-

lution is worth noting. The enormousness and com-plexity of the development challenges facing theheavily indebted poor countries were well recog-nized. Overcoming these challenges needed the jointefforts of the countries themselves together with theconcerted financial and technical support of the in-ternational community. More recently, the Monter-rey and Johannesburg Summits acknowledged this andhelped enormously in shaping and advancing this di-mension of the global agenda. Using a broad range ofinstruments, the Bank was already heavily engaged insupporting development in low-income countries, inpartnership with other multilateral agencies, bilateralagencies, HIPC governments, and civil society. TheHIPC Initiative became one element—albeit an im-portant one—in this broad effort. It was seen as justone building block in more comprehensive develop-ment architecture, with sustainable development andpoverty reduction as its ultimate goals.

1. Comentário da administração: O contexto destaevolução é digno de nota. A enormidade e complexi-dade dos desafios ao desenvolvimento que enfrenta-vam os países pobres muito endividados era bemreconhecido. Para superar esses desafios eram ne-cessários os esforços conjuntos dos próprios paísescom o apoio financeiro e técnico concertado da co-munidade internacional. Mais recentemente, as Ci-meiras de Monterrey e de Joanesburgo reconheceramisso e ajudaram imenso a configurar e a impulsionaresta dimensão da agenda mundial. Utilizando umaampla gama de instrumentos, o Banco já estava fir-memente envolvido em apoiar o desenvolvimentos dospaíses de baixos rendimentos, em parceria com outrosorganismos multilaterais, organismos bilaterais, go-vernos dos PPME, e a sociedade civil. A Iniciativa paraos PPME tornou-se um elemento—se bem que um ele-mento importante—neste amplo esforço. Era consi-

derado como mais um elemento na construção deuma arquitectura de desenvolvimento abrangente,com o desenvolvimento sustentável e a redução da po-breza como os seus objectivos finais.

1. Observation de la direction : le contexte decette évolution vaut d’être noté. L’ampleur extraor-dinaire et la complexité des problèmes de dévelop-pement auxquels étaient confrontés les pays pauvrestrès endettés n’étaient plus à démontrer. Pour sur-monter ces problèmes, il fallait que les pays eux-mêmes joignent leurs efforts au soutien financier ettechnique concerté de la communauté internatio-nale. Plus récemment, les Sommets de Monterrey etde Johannesburg l’ont reconnu et ont largementcontribué à modeler et à faire avancer cette dimensiondu programme d’action international. S’appuyant surun large éventail d’instruments, la Banque s’était déjàrésolument engagée à promouvoir le développementdes pays à faible revenu, en partenariat avec d’autresorganismes multilatéraux, des organismes bilatéraux,les gouvernements des PPTE et la société civile. L’Ini-tiative PPTE est devenu un élément—importantcertes—de cette vaste entreprise. Elle n’était consi-dérée que comme l’une des pièces d’une architectureplus vaste du développement, dont les objectifs ul-times étaient le développement durable et le recul dela pauvreté.

1. Observación de la administración: Conviene se-ñalar el contexto de esta evolución. La enormidad ycomplejidad de los desafíos que plantea el desarrollopara los países pobres muy endeudados era un hechoampliamente reconocido. Para superar esos desafíos senecesitaban esfuerzos comunes de los mismos paísesjunto con apoyo financiero y técnico concertado de lacomunidad internacional. Más recientemente, las Cum-bres de Monterrey y de Johannesburgo reconocieronesa realidad y ayudaron enormemente a configurar ypromover esta dimensión del programa de acción mun-dial. Utilizando una gran variedad de instrumentos, el

ENDNOTES

Banco dio muestras de fuerte compromiso con el de-sarrollo de los países de ingreso bajo, en asociación conotros organismos multilaterales y bilaterales, los go-biernos de los PPME y la sociedad civil. La Iniciativa paralos PPME era sólo un elemento—importante, sinduda—de este amplio esfuerzo. Era una de las piedrasangulares de la arquitectura general del desarrollo,cuyos objetivos últimos eran el desarrollo sostenible yla reducción de la pobreza.

Chapter 11. Of the seven that reached the decision point

under O-HIPC, Côte d’Ivoire has yet to reach its com-pletion point.

2. Including Liberia, Somalia, and Sudan, the costsin 2001 NPV terms are estimated to be US$46.0 billion.

Chapter 21. The developing world is defined as all low-,

lower-middle-, and upper-middle-income countriesas defined by the World Bank, a total of 156 countries(see World Bank 2002).

2. The nominal stock of debt is not a good indica-tor of the actual burden of debt on a country when aproportion of the debt is contracted on concessional(or below-market) rates. Data on present value arefrom William Easterly’s dataset (discussed in Easterly2001a), which uses GDF debt inventories to calculatefuture obligations on publicly guaranteed debt, dis-counted using the London interbank offered rate(LIBOR) as the market rate. These data are supple-mented with the present value estimates from GDFpublications after 1998.

3. There are some exceptions to this at the indi-vidual country level, but the occurrences are few andnot sustained.

4. Thirty-six countries were classified as SILICs, allof whom, with the exception of Nigeria, are currentlyclassified as HIPCs.

5. The rapid increase in arrears and repeatedrounds of Paris Club reschedulings are a strong indi-cator that the previous strategy was not effectively ad-dressing the HIPCs’ problems.

6. Early efforts to address the problem throughnonconcessional rescheduling, and even the subse-quent rescheduling on concessional terms, simplypostponed reckoning with the problem of excessivedebt stocks. Instead, with continued weak economic

performance, these reschedulings exacerbated thedebt stock buildup.

7. At end-1993, the share of multilateral creditorsin total nominal debt stock was 27 percent, with theBank accounting for half of this (both IDA and IBRD).In terms of present value, the multilateral share was19 percent (with the Bank accounting for 37 percentof the multilateral share). Bilateral creditors’ shareswere 59 percent in nominal stock and 64 percent inpresent value terms.

8. The theory postulates that beyond an optimalpoint, the debt stock has a negative impact on growthby discouraging investment.

Chapter 31. There has been a “triple helix” of relationships,

as Callaghy (2002) calls them, between three sets ofactors that were central to the debt relief movementfrom the late 1980s: the official agencies and processesof the international debt regime, the NGO networks,and an epistemic community of economists and otherscholars who have played key advisory roles on bothsides of the debate on how to deal with the debtproblem.

2. The Jubilee 2000 campaign was highly success-ful in creating a mass movement in support of debtforgiveness by mobilizing the support of prominentpublic figures, religious leaders, academics, and en-tertainers. The broad political resonance of the sim-ple and forceful “debt relief for poverty reduction”message helped to mobilize a coalition that com-bined the forces of mainstream development advo-cates with those of radical critics of the aid process,thus overcoming opposition to debt forgiveness at atime of decline in overall development aid.

3. At the time it was created, the principal objec-tive of the HIPC Initiative was to reduce the externaldebt of eligible countries to a level that would be sus-tainable, thereby removing a major constraint on in-vestment and growth and spurring further adjustment,in part by galvanizing private external investment.The victory by the NGOs—in establishing a directlink between debt relief and poverty reduction, by ex-plicitly targeting debt service “savings” to social spend-ing—was the outcome of a very successful campaignby the Jubilee 2000 movement.

4. HIPC addresses only the long-term public andpublicly guaranteed disbursed and outstanding debt.


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5. The PRSP represents a long-term program forpoverty reduction, prepared by the country authoritiesin consultation with all stakeholders. PRSPs mark anew kind of interaction of the Bank and the interna-tional development community with borrowers. Theyput into practice the principles of the new Compre-hensive Development Framework adopted by the Bank,promoting country ownership and broader stakeholderparticipation, improving coordination among devel-opment partners, and increasing the focus on results.

Chapter 41. That is, the initiative is intended to reduce debt

service obligations so that the country can more eas-ily meet with its export revenues and future transfers,eliminating the need for future reschedulings, de-fensive lending, and debt forgiveness.

2. A press release was more emphatic, stating, “Thedebt reduction operation . . . will create room for ad-ditional public expenditures on poverty reduction.”

3. Net resource transfer is defined as disburse-ments (including loans and grants) less debt servicepayments (principal repayments and interest pay-ments). Debt relief reduces the debt service obliga-tions of a debtor, but for this to lead to an increase innet resource transfers, disbursements need to bemaintained at the previous levels (for full additional-ity) or decline less than the reduction in debt service(for partial additionality). If both the inflows (dis-bursements) and outflows (debt service payments) de-cline by equal amounts, the net transfer into thedebtor country would remain unchanged.

4. Investment incentives may improve, for exam-ple, through indirect positive economic effects froma more stable economic climate or eliminating the ex-pectation of future crises.

5. An assessment of the net efficiency gains ofmoving from project to budget support, however,needs to weigh the relative inefficiency of project fi-nance versus the inefficiency of budget systems. Re-cent analyses by the Bank and IMF have identified theneed for substantial improvements in the budgetmanagement systems in most of the HIPCs (see WorldBank and IMF 2001a, 2002a).

6. Thus, debt reduction may lead to efficiency ben-efits that could also be secured through reform in aiddelivery mechanisms. However, attempts at such re-forms have so far not been successful.

7. In the O-HIPC, the amount of relief was deter-mined at the decision point based on the projecteddifference between the indicators and the HIPC tar-get ratios at the completion point. In the E-HIPC, theDSA projections have no bearing on the calculationof the amount of relief to be delivered.

8. Debt service will not be an accurate indicator ofthe debt burden facing a country if the debt is notbeing fully serviced. NPV of debt is more accurate: byremoving the grant element embedded in conces-sional terms, it makes the debt stock comparableacross countries and should better reflect the burdenof debt service due. The available data show a constantrelationship between debt service paid as a ratio of NPVof debt to the level of NPV of debt for non-HIPCs. Forthe HIPCs, the ratio of debt service paid to NPV of debtfalls sharply with the level of debt, indicating that athigh levels, debt is not being fully serviced.

9. The “sustainable development” approach pro-poses a bottom-up costing of the Millennium Devel-opment Goals that makes social and other “essential”expenditures top priority in the government budgets(EURODAD). Being budget based, this approach raisesthe same concerns as the revenue-based indicators dis-cussed above (Birdsall and Williamson 2002).

10. The empirical evidence on the choice betweenthe debt-to-exports and debt-to-GDP as a better pre-dictor of a debt crisis is ambiguous: debt-to-exportsis a better predictor if no other factors are included;debt-to-GDP is a better predictor if some economicvariables (liquidity of the economy and openness)are included (Cohen 2001). An alternative way of as-sessing the choice of indicator is to determine whichindicator, exports or GDP, better explains arrears.Using 1980–2000 annual data from Global Develop-ment Finance for the 26 HIPCs that have reachedtheir decision points, results from a fixed effects re-gression of total arrears on a time trend (year), GDPand exports show that exports have a statistically sig-nificant negative impact on arrears, while the impactof GDP is not significant.

11. This is the current operational cutoff for IDA,measured in GNI per capita in 2001 U.S. dollars. Bo-livia and Honduras currently exceed this cutoff.

12. Developing nations are defined as 63 LICs and54 lower-middle-income countries.

13. Underwood’s analysis was heuristic, assessingthe likelihood of countries running into debt service

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problems as determined by Paris Club reschedulings.Cohen (1997) confirmed these findings using formalstatistical methods. Cohen (1996) used alternativemethods to arrive at similar conclusions.

14. The sample of MICs used here does not includeany of the 1980s MIC debt crisis countries.

15. In addition, counterfactual scenarios with dif-ferent projections about exports and the terms of fu-ture lending should compare the situation with andwithout the HIPC Initiative.

16. The appendix concludes, “Critical informationthat we derived from the debt sustainability analysesis not presented explicitly within HIPC documents. Insome of the decision point documents, the actualamount of debt relief a country would receive is notexplicitly presented and had to be deduced fromother data provided. In addition, the amount of bor-rowing that each country would need after debt re-lief is not reported and required a complexmethodology for us to derive. Finally, although the doc-uments discuss the resources that debt relief wouldcontribute to poverty reduction activities, they donot mention that these are financial resources thateach country would have to borrow” (page 110).

17. The processes for the multilateral develop-ment banks (MDBs) have been streamlined, withtechnical problems and methodological issues ad-dressed through semiannual MDB meetings chairedby the World Bank. This has helped secure smootherand more timely debt relief from most of the MDBs.

18. Technical assistance has been provided by otheragencies, primarily UNCTAD, through some bilateraldonor-financed agencies such as DRI and regionalinitiatives.

Chapter 51. The historical growth rates are obtained using

econometric regressions, which have the advantageover the average year-on-year growth rates in notbeing as influenced by the starting and ending datesand by outliers.

2. The bounds represent the commonly used 95percent statistical confidence interval for the esti-mated growth rates.

3. The detailed comparisons are restricted to theperformance in the period 1990–2000. Economicperformance in many countries was much better inthe 1990s than in the 1980s because of more effec-tive policy reforms and, in some cases, buoyant ex-

port markets for primary products, such as coffee, inthe mid-1990s. Thus, although a longer historical pe-riod (say from 1980 to 2000, as used by GAO 2000)may be better for increased precision, this would ig-nore possible structural breaks marking a departurefrom the past.

4. On average, for the 24 countries that reachedtheir decision points by end-2000, the assumed realGDP growth rates are more than double the averagegrowth rates achieved in 1990–2000.

5. This finding is consistent with the external re-view of ESAF, which notes that the impact of structuraladjustment has been varied across countries. In coun-tries where the program has been implemented, eco-nomic performance has improved (Botchwey andothers 1998).

6. Of these 13 millennium rush countries, all 11reaching their decision point in November and De-cember 2000 had a mixed track record.

7. The CPIA Index is a summary measure of the pol-icy and institutional performance of a country as as-sessed by the World Bank’s country team. It covers abroad range of areas, including macroeconomic andstructural policies, public sector management andservice delivery, and policies for equity and social in-clusion. The CPIA ratings are used, among otherthings, to allocate IDA resources.

8. Annex G gives a summary of proceedings fromdebtor feedback workshops, and Annex I gives a syn-thesis of the country case studies. This finding sup-ports the conclusions of the PRSP review by the WorldBank and IMF (2002b).

9. These findings are in line with the PRSP reviewconducted by the Bank and the IMF in early 2002.

10. By rural development, this report refers specif-ically to activities that enhance agriculture and agri-cultural productivity, rather than social services orpoverty alleviation that may have a rural dimension.

11. Total allocations, including HIPC allocations,have gone up, but governments’ budgetary contri-butions have either declined somewhat or have re-mained flat, while the overall (non-HIPC) budget hasincreased.

12. For the 26 countries that have reached their E-HIPC decision points, in 2000 about 10.4 percent and2.5 percent of the nominal value of total external debtwas owed to non–Paris Club and commercial creditors,respectively. Of the total debt relief to be delivered (in2001 NPV terms), 11.2 percent and 2.3 percent are the


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respective shares of the non–Paris Club and com-mercial creditors.

13. Of the total obligations to commercial credi-tors of US$2.2 billion, about US$350 million or 16 per-cent is currently subject to litigation. Ten countrieshave been sued, some by multiple creditors, in atotal of 23 different cases. These include two lawsuitsby non–Paris Club official bilateral creditors, Iraq andBurundi, although Burundi has recently suspendedits court claim. The face value of total claims isUS$345.8 million. Of the total original claims ofUS$167.4 million on which the judgments have beenmade in favor of the creditors, the total reward isUS$416 million.

14. It should be noted that the creditors with courtjudgments in their favor have not as yet been suc-cessful in converting them into payments by HIPCs.This may possibly discourage other creditors—espe-cially those with speculative motives—from pursu-ing further litigation.

15. These organizations also include public agen-cies such as the International Development ResearchCenter in Canada, the Agence Intergouvernementalede la Francophonie,andthe United Nations Institutefor Training and Research.

Chapter 61. Between 1996 and 1998, exports fell by US$28

million, central government fell as a percentage of GDPfrom 4.3 percentage points, and the Guyanese dollardepreciated from $141 to $165 per U.S. dollar.

2. Bilateral debt forgiveness above and beyond theHIPC Initiative is taken into account in this calculation.Excluding bilateral debt forgiveness, the debt-to-rev-enue at the completion point would have been 174percent.

3. Updated information on the NPV of debt is notavailable for 8 of the 17 countries. As new data becomeavailable, the prospects for these countries might change.

4. Bank management notes that this conclusion wasbased on a rough exercise to estimate the costs of top-ping up. Many of the parameters used in the calcula-tion of the NPV of debt were unchanged from thedecision point.

5. With some exceptions, export growth was lowerthan projected for most interim HIPCs. At the sametime, countries that had the same or improved debtsustainability indicators also had significantly im-proved export performance.

6. Benin and Honduras had higher than expectedborrowing, and projections were broadly in line withactual borrowing in four countries.

7. The one exception is Nicaragua, where new bor-rowing was overestimated at the decision point.

8. The fiscal indicator, debt service-to-revenue,also shows that, with the exception of Bolivia andpossibly Mauritania, all countries would reach 10 per-cent or lower in the next two to three years.

9. The expansion in the use of grants to assistdebt-vulnerable countries in the IDA13 replenish-ment will to some extent help in addressing the con-flict between the need for new resources andmaintaining debt sustainability. The share of IDA13 fi-nancing to be delivered in the form of grants over thenext three years is expected to be between 18 and 21percent. Of this, a maximum of 44 percent (amount-ing to 8 percent of total IDA13 funds) can be allocatedas grants to assist debt-vulnerable countries with percapita GNP of less than US$360 (and NPV of debt-to-exports above 150 percent). Individually, these coun-tries can get up to 40 percent of their IDA allocationin the form of grants. On average, with annual IDAdis-bursements of about US$7.7 billion for the next threeyears, this amounts to about US$600 million annually.

10. All countries met the macroeconomic per-formance criteria under the IMF program.

11. The ratio of the assumed real GDP growthrates for 2000–05 to the historical 1990–2000 actualgrowth rates was 1.4 for the early entrants, but 2.4 forthe millennium rush group.

12. This problem, however, is not specific to HIPCand is part of the broader set of problems with pub-lic expenditure management in most countries.

13. The Ghana Public Expenditure Tracking Surveyfound that only two-thirds of the funds for recurrentexpenditures reach their intended destinations (pri-mary schools and primary health care clinics).

14. The envisaged decline in debt service in 2005(that is, with the full impact of HIPC relief) as a ratioof current ( 2000) exports would decline to under 15percent for all countries but Bolivia and Zambia, withan average of about 10 percent. For most countries,it would be at or below 10 percent. The ratio for Zam-bia is expected to fall after 2005, and for Bolivia, someyears later.

15. The debt service envisaged by 2005 (that is, withthe full impact of HIPC) would be equivalent to 14.5percent of the current (2000) revenues.

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16. As noted in endnote 14 to Chapter 5, how-ever, so far the litigating creditors with court judgmentsin their favor have not been successful in convertingthe judgments into payments by the HIPCs.

17. A majority of the countries that have qualifiedfor HIPC debt relief reached their decision points in2000, whereas the data on financial flows are cur-rently available only up to 2000.

18. Some of the similarity in trends in the DAC andthe DRS data is a result of both systems using the samesource of data for multilateral flows (directly fromthe multilateral institutions).

19. The group of developing countries includes low-and lower-middle-income Part I countries as definedby DAC (that is, excluding countries in transition), butexcludes the three East Asian financial crisis countriesin the group to remove large movements in1997–2000.

20. The shares were roughly constant, with a flattrend, between 1990 and 1998.

21. The average 1998 CPIA score was 3.10 forHIPCs, 3.30 for IDA non-HIPCs, and 3.42 for lower-middle-income non-HIPCs. The corresponding av-erages for 2000 are 3.07, 3.25, and 3.54, respectively.

22. The report underscores that these countrieswere among the better performing HIPCs and thatfindings are based on a self-assessment.

23. See Chapter 5 and box 5.3 on the various ca-pacity building efforts currently under way.

Annex F1. The theory postulates that beyond an optimal

point, the debt stock has a negative impact on growthby discouraging investment.

2. Gross fixed capital formation (as percent ofGDP) rose faster for the HIPCs through the 1990sthan for IDA non-HIPCs and lower-middle-incomenon-HIPCs, the comparator groups representing otherpoor but not heavily indebted countries.

3. A comparison of HIPCs with IDA non-HIPCs andlower-middle-income non-HIPCs shows similar trendsand magnitudes. Starting from very low levels at thebeginning of the 1990s, the average foreign direct in-

vestment as a percent of GDP increased to about 4 per-cent for all three groups.

4. DAC data show that of the total aid recorded for2000, about 25 percent is in the form of program aidand “actions relating to debt.”

Annex G1. The discussion questions were as follows: (a)

From your country’s perspective, what was the ra-tionale of the HIPC Initiative and what was the ex-pected outcome of your country’s participation in theinitiative? (b) Is the HIPC Initiative’s design adequateand appropriate to achieve its stated objectives and in-tended outcomes? (c) Is the HIPC Initiative likely toachieve its objectives and achieve them efficiently?(d) To what extent does the design of the initiative helpbuild capacity and foster institutional change to ensureHIPC objectives are achieved and sustained?

Annex H1. Unless otherwise indicated, HIPC will be used

here to refer to the overall process, including theevolution from the original HIPC (O-HIPC) in 1996 tothe enhanced HIPC (E-HIPC) in 1999. One of the 14creditor countries interviewed is not a Paris Clubcreditor.

Annex I1. Bank management noted that the original HIPC

long-term debt sustainability paper explains that thesenumbers do not reflect the full extent of HIPC debtrelief that would become available after the comple-tion point. Figures cited in table I.2 are higher thanthe 150 percent HIPC threshold because four of thesecountries have not yet reached the completion point.

Annex K1. “Heavily Indebted Poor Countries (HIPC) Ini-

tiative – Status of Implementation ,” DC2002-0020,September 21, 2002, pp. 31-32; “The Enhanced HIPCInitiative and the Achievement of Long-Term Exter-nal Debt Sustainability,” http://www.worldbank.org/hipc/Long-Term.pdf, April 15, 2002, p. 21.


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Austrian Development Cooperation. 1999.Uganda’s External Debt: Management, Re-structuring, and the HIPC Initiatives. A CaseStudy. Vienna.

Birdsall, Nancy, and John Williamson. 2002. De-livering on Debt Relief: From IMF Gold to aNew Aid Architecture. Washington, D.C.: Cen-ter for Global Development and the Institutefor International Economics.

Birdsall, Nancy, Stijn Claessens, and Ishac Diwan.2001. “Will HIPC Matter? The Debt Game andDonor Behavior in Africa.” Paper presented atthe WIDER Development Conference on DebtRelief, August 17–18, Helsinki, Finland.

Botchwey, Kwesi, Paul Collier, Jan Willem Gun-ning, and Koichi Hamada. 1998. “ExternalEvaluation of the ESAF: Report by a Group ofIndependent Experts.” IMF, Washington, D.C.

Brooks, Ray, Mariano Cortes, Francesca For-nasari, Benoit Ketchekmen, and Ydahlia Met-zgen. 1998. “External Debt Histories of TenLow-Income Developing Countries: Lessonsfrom Their Experience.” Working PaperWP/98/72. IMF, Washington, D.C.

Callaghy, Thomas. 2002. “Innovations in the Sov-ereign Debt Regime.” Background paper.OED, Washington, D.C.

Claessens, Stijn, Enrica Detragiache, Ravi Kan-bur, and Peter Wickham. 1997. “Analytical As-pects of the Debt Problems of Heavily IndebtedPoor Countries.” In External Finance for Low-Income Countries. Washington, D.C.: IMF.

Cline, William R. 1997. “Debt Relief for HIPCs:Lessons from the Debt Crisis of the 1980s.” InExternal Finance for Low-Income Countries.Washington, D.C.: IMF.

Cohen, Daniel. 2001. “The HIPC Initiative: Trueand False Promises.” International Finance4(3):363–80. (Also published by the OECD

Development Centre in 2000 as TechnicalPaper 166. Available at http://www.oecd.org/dev/publication/tp1a.htm)

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