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HIPC Expenditures, Ownership and the Role of Donors Robrecht Renard University of Antwerp I. Introduction Financial flows between low-income countries and public donors consist of outflows of debt service payments plus inflows of grant aid and new loans resulting in considerable net inflows Net transfers to SSA countries billions $ Long-term official debt New loans Principal reimbursement Interests Net transfers Grants Technical assistance IMF net transfers Official Net Transfers* Long-term private debt New loans Principal reimbursement Interests Net transfers Foreign investment Net flows Dividends Net transfers Private Net Transfers Total Net Transfers * : inclusive of technical assistance and IMF Source: Global Development Finance 2002 1980 1990 1995 1996 1997 1998 1999 2000 2001 4.2 -0.7 -0.7 2.9 3.6 2.7 0.7 9.9 7.2 -2.6 -2.7 1.9 12.0 5.0 -0.5 18.4 5.9 -3.0 -2.0 0.9 11.4 5.0 0.1 17.3 5.3 -3.3 -2.7 -0.7 10.2 4.9 -0.1 14.4 4.9 -3.0 -2.1 -0.1 9.6 4.4 -0.6 13.3 4.3 -3.1 -2.0 -0.9 10.4 3.9 -0.4 13.0 3.8 -3.2 -2.0 -1.4 10.8 3.4 -0.1 12.6 3.8 -2.7 -1.6 -0.4 10.3 3.7 -0.1 13.6 4.6 -3.4 -2.1 -1.0 9.9 3.6 -0.2 12.3 6.3 -2.1 -1.7 2.5 2.5 -2.1 -1.7 -1.2 5.2 -4.1 -2.0 -0.9 4.3 -5.5 -2.2 -3.3 7.2 -7.0 -1.6 -1.4 3.4 -4.8 -1.8 -3.2 4.3 -5.0 -1.6 -2.3 4.4 -4.9 -1.6 -2.1 5.8 -5.6 -1.7 -1.5 0.0 -2.9 -2.9 -0.4 9.5 0.8 -1.7 -0.9 -2.1 16.3 9.3 -4.4 4.9 4.0 21.3 6.5 -4.2 2.3 -1.1 13.3 9.7 -3.9 5.8 4.3 17.6 7.0 -4.2 2.8 -0.4 12.7 11.8 -4.5 7.3 5.0 17.7 7.6 -4.8 2.8 0.7 14.3 14.3 -5.9 8.4 6.9 19.2 Financial conditions unweighted averages for HIPCs for which data are availabe 1970 1980 1990 1995 1999 OFFICIAL CREDITORS Average interest (%) 2.6 3.6 2.5 1.9 1.1 Average grant element (%) average 58 47 59 66 73 maximum 83 91 83 81 83 minimum 23 11 20 6 8 Average maturity (years) 31 26 31 33 37 Average grace period (years) 9 7 8 9 9 ALL CREDITORS Average interest (%) 3.5 4.8 2.9 2.0 1.5 Average grant element (%) average 49 38 56 63 69 maximum 83 91 83 81 83 minimum 14 -6 14 5 3 Average maturity (years) 27 22 29 31 35 Average grace period (years) 7 6 8 8 9 source: Global Development Finance 2001, World Bank • Notwithstanding positive net transfers and high loan concessionality, • many recipients have difficulty servicing their old debts, • while facing severe administrative and managerial constraints in absorbing new aid, • suggesting a recurrent fiscal constraint • and a mismatch of aid instruments (project aid versus budget support) and financial conditions (soft loans versus grants). Debt relief is akin to budget support • and has similar advantages – relieves the recurrent fiscal constraint – enhances fiscal ownership – has low transaction costs for the recipient • and then some more – is predictable – is not pro-cyclical – reduces debt overhang Debt relief as an instrument of aid makes extra sense in view of the fact that • LICs might be unable to absorb the extra new aid required to achieve the MDGs • donor public opinion favours debt cancellation over identical new flows Extra ODA to achieve MDGs Additional aid levels required to halve poverty (income growth) Current Additional ODA levels ODA 1999 required ($ billion) “On Track” countries 33 -“Uphill” countries 24 54 Adequate policies and institutions 19 39 Weak policies and institutions 5 15* Official development assistance 57 54* Total aid (% of DAC GNP) 0.25 0.49 * assuming improved policies and institutions source: World Bank Debt relief also has some disadvantages, such as • moral hazard, • adverse selection, and it raises complex issues of creditor burden sharing All in all, one would expect a substantial effort at debt cancellation Does HIPC live up to the expectation? II. Characteristics of HIPC G-8 meeting Toronto (1988) London (1991) Naples (1995) Lyon (1996) HIPC I Cologne (1999) HIPC II reduction 33% 50% 67% 80% modalities service service stock stock >80% stock creditors bilateral bilateral bilateral bilateral+ multilateral bilateral+ multilateral HIPC II eligibility criteria • low-income country • unsustainable debt • track record of sustained adjustment – up to decision point: 3 years – up to completion point: variable • PRSP Unsustainable debt NPV of debt 150 % Exports NPV of debt 250% Fiscal revenue if Exports 30% GDP and Fiscal revenue 15% GDP Situation September 2002 • • • • • • 26 countries reached their decision point of which 6 countries their completion point debt relief of > $40 billion (nominal) debt as a per cent of GDP from 56% to 30% debt service requirements cut by one-third $1.3 billion annual savings III. Some topics for discussion • Is debt relief really additional? • Should donors extend deeper debt relief? • Is the conditionality right? Is aid additional? • virtual or illusory resources? – compared to effective debt service, or – compared to contractual debt service • additional to other aid • EURODAD “ a glorified accounting excercise” Fungibility could undermine additionality Pressure from Purpose of pressure Defensive tactic Outcome Fungibility caused by evasive action on behalf of the aid recipient (in the case of project aid) Donor, in form of project conditionality Implement the project, with a view of increasing investment in the sector concerned Accept project, reduce own effort in same sector what you see is not what you get: the project is there, but the intended sector impact is missing Fungibility caused by evasive action on behalf of the aid donor (in the case of debt relief) International public opinion, in the form of moral exhortation Grant debt relief, with a view of increasing net transfers Accept to provide debt relief, reduce aid effort elsewhere What you see is not what you get: debt relief has been granted, but without an increase in net transfers Share of Debt Relief in DAC Members' Total Net ODA in 2000 Net ODA (US$ million) Net ODA Debt Relief (US$ million) of which: Bilateral Debt Relief as per cent of Net ODA NetODA Debt Relief for HIPC countries (U$ million) (a) HIPC Debt Relief as per cent of Net ODA source: DAC (a): including multilateral contributions to the HIPC Initiative 53,737 2,236 1,988 4.2 1,180 2.2 ODA from DAC countries (billion US$ - 1998 prices) billion US$ 70 60 50 40 30 20 1960 1970 1980 1990 2000 years ODA inclusive debt relief ODA exclusive debt relief Should donors go further? • by moving the cut-off date forward in time? • by redefining sustainability? • by radically cancelling all public debt to low-income countries? The sustainability debate • present definition is – arbitrary – non developmental • proposal by anti-debt campaigners – consider debt relief as an aid instrument – take MDGs seriously – define sustainability with respect to fiscal spending for development Which conditionality for HIPC? • ex ante: adjustment plus pro-poor spending • ex post: pro-poor expenditure tracking – virtual funds – comprehensive – who should do the tracking?