Download Debt Sustainability in LICs

Debt Sustainability in Low-Income Countries
World Bank
Economic Policy and Debt Department
May 2006
Debt and Debt Relief in the World Bank
“Sector Units”
Environment and
Socially Sustainable
Finance, Private
Development
Sector, Infrastructure
Human
Development
Poverty Reduction
and Economic
Management
Economic Policy
and Debt
2
Outline
1. Why is debt relief a global issue?
2. What led to debt distress in the 1990s?
3. How did the international community respond?
4. How can we avoid debt distress in future?
Why is debt relief to low-income countries a
global issue?
 Despite access to highly concessional financing,
many low-income countries have needed
significant debt relief
 The need to meet the MDGs has led many to
question why the poorest countries should pay
debt service to rich creditors
4
The Main Arguments for Debt Relief*
 Moral argument
 Financing argument
 Debt overhang or growth argument
 “Evergreening” or efficient lending argument
* Acknowledgement: the following 8 slides are adapted from work by Christina Daseking; all views expressed are
those of the current presenter and should not be attributed to the IMF, its Executive Board, or its management.
5
The Moral Argument
 Poor countries should not devote scarce
resources to pay rich creditors
 But...
 No debt service means no borrowing
 Smaller overall aid envelope
 How pessimistic should we be?
6
Are poor countries doomed to stay poor?
Per Capita Income in U.S. dollars
8,000
7,000
6,000
5,000
Thailand
4,000
3,000
2,000
Ghana
1,000
0
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
7
The Financing Argument
 Debt relief generates additional predictable
resources in support of the MDGs
 But...
 Additionality cannot be taken for granted
 There may be better ways to provide MDG
financing, as debt relief is:
 Backloaded
 Allocated based on past lending decisions
 Small relative to new development assistance
8
Debt Service and ODA for 28 Post-DecisionPoint HIPCs, 1999-2003
80,000
70,000
60,000
50,000
40,000
30,000
20,000
Total Debt Service
($14 billion)
Total Official
Development
Assistance
($68 billions)
10,000
0
9
The Debt Overhang or Growth Argument
 As a high debt burden weakens incentives to
invest, debt relief will foster growth
 But...
 Growth effect beyond financing controversial: Is high
debt ratio cause or symptom of low growth?
 HIPC Initiative has already removed large portion of
debt
 Other factors are likely to be much more important
(trade deal, policies, institutions)
10
The “Evergreening” or
Efficient Lending Argument
 Debt relief removes roll-over concerns,
allowing creditors to allocate new resources
more efficiently
 But...
 Allocation of debt relief resources itself benefits
heavy borrowers
 Performance-based lending already possible
 Debt relief may create incentive problems of its
own by raising expectations for more
11
“Caveat Emptor”
 All arguments for debt relief have some
appeal and merit…
 … but none is without caveats
 Bottom line: don’t expect too much!
 Debt relief generates predictable aid, but it
cannot generate sustainable growth
12
What led to debt problems in
the 1990s?
Debt burdens in some low-income countries
rose dramatically from 1973 to 1993
The Share of External Debt to GDP (in NPV terms)
250%
200%
HIPC Countries
150%
100%
50%
Low-Income Countries
0%
1970
1974
1978
1982
1986
1990
1994
1998
2002
14
Low Growth is the Main Cause of Debt Distress
Average External Public Dyanamics, 1980-2002
(NPV, percent of GDP)
120
100
Actual
80
60
Simulated
5% growth
40
20
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
0
Note: Source: World Bank Global Development Finance Statistics. The graph shows the actual unweighted average of debt-to-GDP
ratios across LICs versus the simulated ratio had all countries grown at 5% in dollar terms, a performance achieved by just over one
in three LICs during the period.
15
Developing countries are dependent on
commodities
Commodity Price Trends
400
350
Commodities’
Commodities’
Share of Exports Share of GDP
Crude oil
300
Major
Commodity
250
Zambia
99.8%
23.4%
Copper
Mauritania
99.5%
39.4%
Iron Ore
Guinea Bissau
97.7%
23.7%
Cashew Nuts
Benin
93.7%
16.1%
Cotton
Uganda
90.5%
11.1%
Coffee
200
Coffee
150
100
Cotton
50
Copper
0
1970
1975
1980
1985
1990
1995
2000
16
Other factors played a part…
 Waste of resources due to weak institutions,
poorly designed projects, corruption
 Poor debt management and unrestrained nonconcessional borrowing; “loan pushing” by
creditors
 Wars, civil strife, conflict
17
How did the international
community respond?
Bilateral creditors have forgiven increasing
amounts of debts owed to them
Proportion of Grant Element in Paris Club Forgiveness
90%
80%
67%
50%
33%
Toronto
(1988)
London
(1991)
Naples
(1994)
Lyon
(1996)
Cologne
(1999)
Note: The forgiveness listed is the reduction in the NPV of the rescheduled debts owed to the Paris Club members.
19
Traditional debt relief reduced bilateral and
commercial debt; not multilateral debt
Share of Multilateral Debt of Overall External Debt
40%
35%
30%
25%
20%
15%
10%
5%
0%
1970
1974
1978
1982
1986
1990
1994
1998
2002
Note: “Traditional Debt Relief” includes that of the Paris Club (bilateral debt owed to donor governments) and the
London Club (commercial debt). Source: World Bank Global Development Finance 2005.
20
HIPC Was the First Comprehensive Global Debt
Reduction Initiative to Include Multilateral Debt
Objectives
 Reduce external debts owed by HIPC governments
 Finance increase in government spending on poor people
Design
 Eligibility is based on external debts and income per
capita
 Requires government to formulate a poverty reduction
strategy paper (PRSP) through local consultation
 Requires satisfactory performance based on an IMF
program
 Then irrevocably provides debt relief – up to a pre-defined
threshold
21
Multilateral Institutions Have Provided Half of
All HIPC Debt Relief Committed
Total Amount of Debt Forgiven (USD bn)
13.8
9.2
7.6
3.6
3.0
0.9
Paris Club
Other Bilaterals
Commercial
World Bank
IMF
Other
Multilaterals
Note: The figures of committed debt relief are current as of April 2005 measured in end-2004 NPV terms, and include 38 HIPCs as of 2005.
22
The HIPC Process
Interim period
Decision
Point
Determination of:
- NPV of debt
- Debt Relief
- Triggers
Completion
Point
- Satisfactory Performance
under PRGF
Irrevocable debt relief
Country
fulfills HIPC
Eligibility
Criteria
Preliminary
Discussion
- Implementation of
PRSP for one year
- Meeting triggers
23
March 2006: 29 Countries are receiving debt relief,
nine countries had yet to benefit…
18
Benin
Bolivia
Burkina Faso
Ethiopia
Ghana
Guyana
Honduras
Madagascar
Mali
Mauritania
Mozambique
Nicaragua
Niger
Rwanda
Senegal
Tanzania
Uganda
Zambia
Post-HIPC
Causes
 Conflict
 Arrears
 Weak governance
11
Burundi
Cameroon
Chad
Congo, Dem. Rep.
Congo, Rep.
The Gambia
Guinea
Guinea-Bissau
Malawi
São Tomé & Principe
Sierra Leone
Interim-HIPC
9
Central African Rep.
Comoros
Côte d’Ivoire
Lao PDR
Liberia
Myanmar
Somalia
Sudan
Togo
Pre-HIPC
24
May 2006: “Ring-Fencing” has identified four
potentially eligible countries that may opt in…
19
Cameroon
Benin
Bolivia
Burkina Faso
Ethiopia
Ghana
Guyana
Honduras
Madagascar
Mali
Mauritania
Mozambique
Nicaragua
Niger
Rwanda
Senegal
Tanzania
Uganda
Zambia
Post-HIPC
11?
Eritrea
Haiti
Kyrgyz Rep.
Nepal
10
Burundi
Chad
Congo, Dem. Rep.
Congo, Rep.
The Gambia
Guinea
Guinea-Bissau
Malawi
São Tomé & Principe
Sierra Leone
Interim-HIPC
Central African Rep.
Comoros
Côte d’Ivoire
Liberia
Somalia
Sudan
Togo
Pre-HIPC
25
HIPC has substantially reduced debts
and pro-poor spending has increased
Debts have been reduced1…
Before Traditional Relief
and so have payments to creditors2…
6
After Add. Bilateral Debt Relief
30
USD Billions
84
Before HIPC Relief
5
4
3
2
After HIPC Relief
1
2001
2002
2003
2004
2005
2006
reducing budget spent on debt payments3… and increasing pro-poor spending4.
21.8%
40.9%
47.6%
13.4%
1999
2003
1999
2003
Notes: 1) Debt stocks of 28 decision point countries, USD billion 2004 NPV terms. 2) Projected debt service obligations of 28 decision point
countries. 3) Debt service to government revenue for 28 decision point countries. 4) Ratio of poverty-reducing expenditures to government revenue.
26
Pre-Conditions for Effective Debt Relief
Donors
HIPC
Creditors
Gov’t
Budget
HIPC
Initiative
Priority
Sectors
1. Additional to
aid inflows
2. Beyond arrears
clearance
3. Economically
significant
MDGs
MDRI
Preliminary Results:
Debt Relief and Priority Sector Spending
Debt Relief vs. Education (top) and
Health (bottom) Expenditures
20.0%
10.0%
18.0%
9.0%
16.0%
8.0%
14.0%
7.0%
EDUC/GDP
PRE/GDP
Debt Relief vs. Poverty-Reducing Expenditures
(IMF definition)
12.0%
10.0%
y = 0.9989x + 0.0501
8.0%
R2 = 0.2329
5.0%
4.0%
6.0%
3.0%
4.0%
2.0%
2.0%
1.0%
0.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
0.0%
0.0%
14.0%
y = 0.292x + 0.0349
R2 = 0.1711
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
5.0%
Other measures of
poverty-reducing
expenditures are also
increasing with debt
relief
4.5%
4.0%
3.5%
HEALTH/GDP
DR/GDP
6.0%
3.0%
2.5%
2.0%
1.5%
y = 0.2073x + 0.0158
R2 = 0.2097
1.0%
0.5%
0.0%
0.0%
2.0%
4.0%
6.0%
8.0%
DR/GDP
10.0%
12.0%
14.0%
Institutions and policies are better in
countries that have gone through HIPC
HIPCs: Evolution of CPIA ratings (1998 and 2003)
3.80
3.60
CPIA ratings
3.40
3.20
3.00
2.80
2.60
2.40
2.20
2.00
Post-HIPC
Interim-HIPC
Pre-HIPC
Note: Post, interim and pre-HIPC refer to the countries that are at the pre-decision point (10 countries), decision point (10 countries) and
completion point (18 countries) as of end 2005. The first bars refer to 1998, the second bars to 2003.
29
Further Debt Cancellation for HIPCs
1
HIPCs will receive 100 percent debt cancellation from
IDA, AfDF and the IMF under Multilateral Debt Relief
Initiative
2
Debt relief is to be provided at HIPC completion point
3
Average debt/export ratios in post-completion point HIPCs
would fall from about 140 percent to 50 percent in present
value terms
4
Donors will compensate IDA and AfDF for reflows lost
due to debt relief. This should result in approximately $50
billion in additional flows to low-income countries
30
MDRI significantly reduces debt stock ratios in
HIPCs
(18 CPs: NPV of Debt to Exports, Post MDRI)
300
250
Prior to MDRI
Post MDRI
200
150
100
50
0
31
Debt service reduction due to MDRI
(18 completion point HIPCs)
$ billions
IDA
1.0
0.5
IMF
AfDF
0.0
2006
2011
2016
2021
2026
2031
2036
2041
32
How MDRI Affects IDA Allocations
Composition of IDA Assistance to 18 completion point HIPCs, FY07-FY26 (SDR Million)
1900
900
1850
Total debt relief
800
1800
700
1750
600
500
1700
400
1650
300
200
1600
Total debt relief
100
0
Total New IDA commitment
1000
Total new IDA commitments
1550
1500
Source: IDA staff estimates
33
How do we avoid future debt
problems?
Low debt ratios in HIPCs could result in
“free riding” by commercial creditors
Debt Burden Indicators - Post MDRI Debt Relief:
18 CP HIPCs vs. Selected Lower Middle Income Countries
400
350
NPV of debt-to-Exports
300
Peru
250
Syria
Ecuador
200
Brazil
Jordan
150
Nicaragua
Bolivia
100
Philippines
Guatemala
Mauritania
Honduras
50
Guyana
China Thailand
0
0
10
20
30
40
50
60
70
80
90
100
NPV of debt-to-GDP
18 CP HIPCs
Lower Middle Income Countries
35
Reaching the MDGs must not create a new
debt problem
 The Debt Sustainability Framework for Low-Income
Countries (DSF) tries to ensure that countries receive
financing on terms that are commensurate with their
ability to service debt
 The DSF determines up front the mix of World Bank
(IDA) loans and grants
 Countries with high risk of a debt crisis only receive grants
 Over 40 low-income countries will now receive either 100% or
50% of their World Bank finance in the form of grants
 Countries with low debts receive more resources
 The DSF is an “ex-ante” tool for addressing issues
related to debt sustainability.
36
Sustainable levels of debt burden depend on
a country’s institutions and policies
Institutional strength and quality of policies
Weak
CPIA<3.25
Medium
3.25<CPIA<3.75
Strong
CPIA>3.75
NPV of debt-to-GDP
30
40
50
NPV of debt-to-exports
100
150
200
NPV of debt-to-revenue
200
250
300
Debt service-to-exports
15
20
25
Debt service-to-revenue
25
30
35
Notes: Thresholds apply to public and publicly guaranteed (PPG) external debt, only. The Country Policy and Institutional
Assessment (CPIA) assesses the quality of a country’s present policy and institutional framework. “Quality” means how conducive
that framework is to fostering sustainable, poverty-reducing growth and the effective use of development assistance.
37
Debt burdens determine the mix of world
bank loans and grants
High Risk
100% Grants
+10%
Threshold
Medium Risk
50% Grants
-10%
Low Risk
100% Soft Loans
38
From July 2006, grants will be based on debt
sustainability analyses under the LIC DSF
80
250
NPV of debt-to-GDP ratio
70
NPV of debt-to-exports ratio
Baseline
Historical scenario
Baseline
Historical scenario
200
60
Most extreme stress test
50
Threshold
Most extreme stress test
Threshold
150
40
100
30
20
50
10
0
0
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
40
Debt service-to-exports ratio
35
Baseline
Historical scenario
30
Most extreme stress test
25
Threshold
20
15
10
5
0
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
 Accurate debt data
 Macroeconomic and
financing assumptions
 Baseline scenario and
standardized stress tests
 Staff judgment
39
Conclusions
1
Low-income countries experienced debt repayment difficulties
due to a variety of factors, both exogenous and endogenous
2
Debt relief is only one part of the solution to financing needs and policy
dialogue: expectations should be realistic about what it can deliver
3
Debt reduction under the HIPC Initiative has reduced external
debts (multilateral and other) by two-thirds. It has helped increase
pro-poor spending and promoted economic reform
4
Debt cancellation under the Multilateral Debt Relief Initiative will
have a beneficial impact on HIPC debt ratios and provide
additional resources for all IDA-only borrowers
5
Going forward, the World Bank has adopted an ex-ante framework
to promote debt sustainability in low-income countries
40
A wealth of information is available on the
World Bank website
http://www.worldbank.org/debt
41
Q&A