Copyright
ã
Author(s) 2001
* Bernhard_Gunter@altavista.com
This is a revised version of the paper originally prepared for the UNU/WIDER development conference
on Debt Relief, Helsinki, 17-18 August 2001.
UNU/WIDER gratefully acknowledges the financial contribution fro m the governments of Denmark,
Finland and Norway to the 2000-2001 Research Programme.
Discussion Paper No. 2001/100
Does the HIPC Initiative Achieve
its Goal of Debt Sustainability.
Bernhard G. Gunter *
September 2001
Abstract
This paper examines the question if the Heavily Indebted Poor Country (HIPC)
Initiative provides a good basis for the HIPCs to exit from repeated debt rescheduling.
Building on other reviews of the HIPC Initiative, the paper begins with a short summary
of some key problems of the HIPC Initiative. It then reviews critically the growth
assumptions of HIPC debt sustainability analyses, whereby the paper examines the
changes in (i) public and private capital flows before and after the adoption of the HIPC
Initiative, (ii) investment and savings rates, and (iii) sectoral transformations. The last
analytical part explores the appropriateness of the HIPC debt sustainability indicators.
Before summarizing the main results, the paper makes some suggestions on possible
modifications in the HIPC framework that are more likely to provide debt sustainability
than the current framework.
Keywords: debt sustainability, structural change, growth
JEL classification: F34, O11, F35
pg_0002
pg_0003
UNU World Institute for Development Economics Research (UNU/WIDER)
was established by the United Nations University as its first research and
training centre and started work in Helsinki, Finland in 1985. The purpose of
the Institute is to undertake applied research and policy analysis on structural
changes affecting the developing and transitional economies, to provide a
forum for the advocacy of policies leading to robust, equitable and
environmentally sustainable growth, and to promote capacity strengthening
and training in the field of economic and social policy making. Its work is
carried out by staff researchers and visiting scholars in Helsinki and through
networks of collaborating scholars and institutions around the world.
UNU World Institute for Development Economics Research (UNU/WIDER)
Katajanokanlaituri 6 B, 00160 Helsinki, Finland
Camera-ready typescript prepared by Liisa Roponen at UNU/WIDER
Printed at UNU/WIDER, Helsinki
The views expressed in this publication are those o f the author(s). Publication does not imply
endorsement by the Institute or the United Nations University, nor by the programme/project sponsors, of
any o f the views expressed.
ISSN 1609-5774
ISBN 92-9190-022-2 (printed publication)
ISBN 92-9190-023-0 (internet publication)
Author’s note
Though the author is currently a consultant in the World Bank’s Africa Region, and was
an economist in the World Bank’s HIPC unit from 1998-2000, this paper is not related
to either position and the views expressed here are his own. The views should not be
associated to the World Bank, its executive directors, or the countries they represent.
Some valuable comments from conference participants are acknowledged. If not
otherwise stated, the data is taken from the World Bank’s Global Development Finance
2001.
pg_0004
pg_0005
1
1 Introduction
Today, it is a well-known fact that unsustainable debt has a negative impact on
investment, growth, and development; the so-called debt-overhang effect. The empirical
evidence provided since the early 1990s for a debt overhang in many of the poorest and
highly indebted countries has led—though with considerable delay—to the adoption of
the Heavily Indebted Poor Country (HIPC) Initiative in fall 1996.
1
Compared to earlier
decades of bilateral debt rescheduling, the original framework of the HIPC Initiative
was a major break-through, mainly due to the HIPC Initiative’s key goal to reduce the
debt of the poorest countries to a level that would allow them to permanently exit the
process of repeated debt rescheduling.
However, three years after launching the HIPC Initiative, it was clear that the original
HIPC framework was not a sufficient solution for many poor countries to reach debt
sustainability. Largely due to public pressure, IMF and World Bank agreed in
September 1999 to enhance the HIPC framework. The enhancements provide broader,
deeper and faster debt relief mainly through (i) a lowering of the ratios considered to
provide debt sustainability (together with a lowering of the minimum thresholds to
qualify for the openness/fiscal criteria), (ii) replacing the principally fixed three-year
period between decision and completion points by the concept of a floating completion
point, and (iii) the provision of interim relief from some creditors between the decision
point and the completion point. Another key enhancement was to link HIPC debt relief
to the preparation of country-owned poverty reduction strategies.
Nevertheless, there remain many problems with the enhanced HIPC Initiative. First of
all, evidence is once again mounting that even the enhanced HIPC framework does not
provide long-term debt sustainability for many of the poorest countries, mainly because
(i) its growth assumptions are considered too optimistic, (ii) its debt sustainability
analysis inappropriate, and (iii) its country selection too narrow. For example, in spring
2000, the United States General Accounting Office (GAO 2000) concluded that the
HIPC Initiative might not provide a lasting exit from debt problems, unless strong and
sustained economic growth is achieved. The report cautions that the growth assumptions
used by IMF and World Bank staff for the country-specific debt sustainability analyses
(DSAs) may be overly optimistic.
2
Recognizing the possibility that the HIPC Initiative may not achieve debt sustainability,
the IMF and World Bank have recently issued a paper on the challenge of maintaining
long-term debt sustainability.
3
The paper emphasizes the importance of establishing an
environment conducive to growth and poverty reduction, particularly in the areas of
macroeconomic policies, structural reforms, public sector management, governance and
social inclusion. It also notes that HIPCs are typically dependent upon a narrow export
base, which makes them vulnerable to externally induced shocks. It examines the
sensitivity of long-term debt sustainability to possible shortfalls in export revenues and
1 The theoretical rational for the negative impact of a debt overhang on investment and growth have
been provided by the seminal contributions by Sachs (1989) and Krugman (1988); for a listing of the
early empirical studies, see Gunter (forthcoming).
2 For example, IMF and World Bank assume that export earnings will grow in excess of 9 per cent
every year for 20 years in fo ur of the seven HIPCs the GAO analysed (GAO 2000: 9).
3 IMF and World Bank (2001).
pg_0006
2
less concessional financing than assumed in the DSAs, yet, the paper does not assess the
likelihood of these and other factors influencing growth prospects. Without addressing
the broad critique of possibly overly optimistic growth rates,
4
the paper concludes that
the HIPC Initiative provides a good basis for HIPCs to exit from future debt
rescheduling.
As reviewed in more detail in Gunter (forthcoming), other major critiques to the
enhanced HIPC Initiative can be grouped into overall problems with the HIPC
framework and specific problems related to HIPC debt relief. Overall problems of the
HIPC framework are that (i) developing countries’ suggestions have not been taken
serious enough, (ii) the initiative’s burden sharing is unrelated to economic power,
(iii) the HIPC Initiative is confronted with major financing problems, some of which
have been pushed to deal with in the future, (iv) the anticipation of HIPC eligibility is
likely to defer traditional development assistance, and (v) discounts rates are used
inappropriately and inconsistently. Given that all of these problems have been
mentioned in one way or the other in the extensive HIPC review undertaken before the
adoption of the enhanced framework, a broader discussion of the various suggestions
could have avoided many of the current problems. More specific, but equally crucial
problems are that HIPC debt relief is (i) not calculated based on a country’s need for
sustainable development, (ii) likely to be deducted from traditional development
assistance, (iii) unnecessarily delayed by the adoption and implementation of poverty
reduction strategies, and (iv) partly delivered through debt rescheduling.
2 Growth assumptions of HIPC DSAs
Table 1 shows the actual growth rates in real GDP and the projected real growth rates
assumed in HIPC DSAs of the 22 countries that had reached the enhanced decision
point by December 2000. Based on the experience of the 1990s and without analysing
the growth projections further, some projections seem realistic (i.e., for Uganda and
Mozambique), however, most projections seem highly unrealistic. Considering world
history, any long-term real GDP growth rate of more than 6 per cent is highly
exceptional. It seems unlikely that Mauritania, Guinea-Bissau, Madagascar, and
Rwanda will repeat what has been known as the East Asian miracle. The average
growth rates for 2000-10, assumed for the first 22 enhanced decisions-point countries,
are 5.5 per cent for real GDP and 8.6 per cent for exports (expressed in nominal US
dollars, ranging from 4.4 per cent for Guyana to 13.7 per cent for Rwanda).
Too optimistic growth rates affect the HIPC framework’s debt sustainability in two
ways: first, they imply too optimistic growth rates of a country’s exports, and second,
they underestimate a country’s future financing needs. Overestimations of exports
(which are in the denominator of the ratio) and underestimations of future financing
needs/new debt (which are in the nominator of the ratio) result in highly unrealistic low
future debt-to-export ratios, which then indicate unrealistic long-term debt
sustainability. As the GAO (2000: 15) report points out, if Tanzania’s exports grow at
an annual 6.5 per cent (instead of the 9 per cent projected by the IMF and World Bank),
4 For example, even the World Bank (2001a: 102) has cautioned that the projected growth rates may not
be realistic.
pg_0007
3
Tanzania’s debt-to-export ratio could be more than twice of what the IMF’s and World
Bank’s forecast shows for the projection period.
At a more general level, the impact of various levels of export growth rates on long-
term debt-to-export ratios are illustrated in Figure 1, showing the paths of NPV debt-to-
export ratios of export growth rates of 5 per cent, 7 per cent, and 9 per cent. Note that
we keep the NPV debt constant in all three cases. Thus, the reductions in NPV debt-to-
export ratios are simply due to growth in exports. Comparing these NPV debt-to-export
ratios with the projections as they can be found in most HIPC documents, it becomes
clear that most of the projected NPV reductions are not due to HIPC debt relief, but due
to optimistic export growth rates.
Table 1
Real GDP growth, 1990-99 and 2000-10
Real GDP growth,
1990-99 average
GDP growth, 2000-10,
HIPC DSA assumptions
Difference in
percentage points
Mauritania
4.3
7.3
3.0
Guinea-Bissau
0.3
7.0
6.7
Madagascar
1.8
6.2
4.4
Rwanda
-1.6
6.1
7.7
Cameroon
1.2
6.0
4.8
Mozambique
6.3
5.9
-0.4
Honduras
3.2
5.9
2.7
Burkina Faso
3.6
5.9
2.3
Tanzania
3.1
5.9
2.8
Gambia, The
3.0
5.6
2.6
Uganda
6.7
5.6
-1.1
Nicaragua
2.6
5.6
3.0
Benin
4.3
5.5
1.2
Guinea
3.9
5.3
1.4
Bolivia
4.1
5.3
1.2
Zambia
1.0
5.2
4.2
Senegal
3.0
5.0
2.0
Mali
3.4
5.0
1.6
Malawi
4.0
4.4
0.4
Niger
2.4
4.4
2.0
Guyana
6.0
4.2
-1.8
Sao Tome & Principe
-0.5
4.1
4.6
Source: IMF and World Bank (2001: Table 5)
pg_0008
4
Figure 1
Evolution of NPV debt-to-export ratios
with zero NPV debt reduction
0
50
100
150
200
2000 2004 2008 2012 2016 2020
5% growth of exports
7% growth of exports
9% growth of exports
Today, the international community understands better than ever what the sources of
economic growth are: macroeconomic stability, increases in labour participation rates,
investments in physical and human capital, increasing saving rates and financial market
development, openness to trade and investment, and a political system that provides for
human rights and freedom, effective governance, and increasing democratization.
5
Furthermore, there are also a couple of African-specific growth analyses that emphasize
the role of a hostile internal and external environment (ethnic diversity, lack of social
capital, particularly dysfunctional government, limited trade openness, conflict and slow
growth in neighbouring countries).
6
Finally, there is a large literature that stresses that
sustainable growth can only be achieved if the economy undergoes a structural
transformation, which results in export-led growth in manufactures.
7
Basedonthis
background, we look at four aspects that can shed some light on future growth prospects
of HIPCs: (i) changes in capital inflows, (ii) changes in investment and savings ratios,
(iii) an economy’s structural transformation, and (iv) implications of AIDS, climate
change, and armed conflict.
5 Until recently, the new growth literature was a collage of theoretical and empirical studies, many of
them stressing the importance of one or a few sources of growth. Furthermore, there were some
influential studies suggesting that most of the high growth experiences were due to a rapid
accumulation of labour and capital (either physical capital or human capital, or both). See Krugman
(1994) and Young (1995). However, over the last few years, evidence has been mounting that the
accumulation of labour and capital do not explain the huge differences in growth experiences across
countries. Instead, attention has been shifting to wards the residual representing total factor
productivity. For example, see Easterly and Levine (2000) and Senhadji (2000).
6 See Branson, Guerrero and Gunter (forthcoming) for a list of empirical growth analyses for Sub-
Saharan Africa.
7 For example, see Sachs et al. (1999: 12). For further references, as well as for an assessment o f the
role of capital accumulation and adjustment, see Berthélemy and Söderling (2001).
pg_0009
5
2.1 Capital flows before and after the HIPC Initiative
In this section, we look at various capital flows before and after the adoption of the
HIPC Initiative for two reasons. First, certain increases in capital flows could be viewed
as indicators for a country’s debt sustainability, and second, changes in the amount and
composition of capital flows have direct implications on a country’s debt sustainability.
Both factors are related to the fact that the growth prospects of HIPCs will continue to
depend crucially on future foreign capital inflows. In this regards, most observers agree
that a necessary condition for the success of the HIPC Initiative is that debt relief should
be additional to the existing resource transfers.
8
Previous analyses found little evidence
of additionality with regards to the resource transfers to HIPCs.
9
Basedonthelatest
data generally available, we compare various capital flows during the three years before
and after the adoption of the HIPC Initiative, i.e., we compare capital flows of 1994-96
with those of 1997-99. We first look at private non-guaranteed capital flows, then at
official capital flows, and finally at private but publicly guaranteed capital flows.
2.1.1 Changes in private non-guaranteed capital flows
The formal adoption of the HIPC Initiative in fall 1996 could have been a positive
signal for the future prospects of HIPCs, and given that private non-guaranteed debt is
excluded from HIPC debt relief, we could have expected an overall increase in private
non-guaranteed capital inflows to HIPCs after the adoption of the HIPC Initiative, or at
least after a country reached its decision or completion point. However, the overall
picture in this regard is quite dim.
First, the total disbursement of non-guaranteed debt to the group of HIPCs decreased
from more than US$1.54 billion
10
during 1994-96 to less than US$1.39 billion during
1997-99. Excluding Bolivia, disbursements of commercial banks to the group of HIPCs
decreased from US$1.1 billion during 1994-96, to US$0.85 billion during 1997-99,
even though disbursements of commercial banks to Sub-Saharan Africa increased
during the same time from US$1.98 billion to US$3.04 billion. Second, while the group
of HIPCs received a marginal US$250 million in disbursements of private non-
guaranteed bonds during 1994-96, no such bonds were issued during 1997-99. The only
positive trend in private capital flows to the group of HIPCs is with regards to net flows
of foreign direct investment (FDI), which have increased by US$8 billion (from US$13
billion during 1994-96, to US$21 billion during 1997-99), though about US$5 billion of
this increase was due to sharp increases in FDI to Angola and Bolivia.
We now look at the changes in private capital inflows to the four HIPCs (Uganda,
Bolivia, Burkina Faso, and Guyana) that have—due to their good track record—been
the first countries reaching the decision point under the original framework of the HIPC
Initiative in 1997. These four HIPCs have been outstanding performers in terms of
macroeconomic policies and structural reforms for many years, which justified their
8 See UNCTAD (2000).
9 For example, see the Concluding Report of the November 2000 Bretton Woods Co mmittee
Roundtable Discussion on Reassessing Debt Relief (available at: www.brettonwoods.org), which
states that roundtable participants, including Bank and Fund officials, were discouraged that at an
early stage, little evidence of additionality could be found.
10 We use the US definition, whereby one billio n is thousand millio ns: 1.5 billion is 1,500 million.
pg_0010
6
original HIPC decision points in 1997. Uganda and Bolivia even reached their
completion points under the original HIPC framework in 1998.
Though Uganda was unable to attract any private capital flows in terms of non-
guaranteed loans or bonds, it was successful in attracting some foreign direct
investment, whereby the net inflows increased steadily from US$88 million in 1994 to
over US$220 million in 1999. However, compared to Angola, where net inflows of FDI
increased during the same period from US$170 million to over US$2,470 million,
Uganda’s increase looks pale (see Figure 2).
Bolivia also shows a steady increase in net inflows in FDI. However, new
disbursements of private non-guaranteed loans by commercial banks to Bolivia
decreased after reaching its first decision point under the HIPC Initiative (see Figure 3).
Bolivia was also unable to receive any private non-guaranteed bonds.
The trends of private capital flows to Burkina Faso and Guyana are even more
disappointing. Not only did neither country receive any disbursement of private non-
guaranteed loans
11
or bonds, their net inflows of FDI decreased after reaching their first
decision points under the HIPC Initiative (see Figure 4).
Figure 2
Net inflows in FDI
(current US$ million)
0
500
1,000
1,500
2,000
2,500
1994 1995 1996 1997 1998 1999
Uganda
Bolivia
Angola
11 With exception that Guyana received a marginal US$27 million from a semi-commercial bank in
1999.
pg_0011
7
Figure 3
Private non-guaranteed disbursements of commercial banks
(in current US$ million)
269
0
0
0
0
0
2.9
25
67
91
127
131
0
100
200
300
1994
1995
1996
1997
1998
1999
Bolivia
Sum of Uganda, Burkina Faso, and Guyana
Figure 4
Net inflows in FDI
(current US$ million)
107
10
10
13
17
10
18
74
93
48
47
53
0
20
40
60
80
100
120
1994
1995
1996
1997
1998
1999
Burkina Faso
Guyana
2.1.2 Changes in official capital flows
As Figure 5 shows, disbursements of public and publicly guaranteed (PPG) debt to the
group of HIPCs have been decreasing since 1995, even though they increased sharply
for the group of non-HIPC low-income countries from 1996-98. Note that the decrease
to the group of HIPCs would be even worse if the data would be expressed in real terms.
It is also interesting to look at the longer-term developments among these two groups:
note that until 1986, disbursements to HIPCs have been higher than disbursements to
low-income countries excluding HIPCs, but consistently lower since 1987.
pg_0012
8
We next look at the same flows after excluding disbursements from the IMF, whereby
we concentrate on the period of 1994-99, reflecting three years (1994-96) before and
three years (1997-99) after the adoption of the HIPC Initiative. Figure 6 shows that after
excluding disbursements from the IMF, the decline in disbursements of PPG debt to the
group of HIPCs happens two years later. In other words, the IMF has started earlier than
other official creditors to decrease its disbursements to the group of HIPCs. However,
there still remains a decrease in disbursements to the group of HIPCs from 1997 to 1998
and again from 1998 to 1999, even though disbursements increased sharply for the
group on non-HIPC low-income countries from 1997-98 and decreased less from 1998-
99. In real terms (using the SDR interest rate as discount rate), the 1997-99 average
disbursements of official creditors excluding the IMF to the group of HIPCs have been
18 per cent lower than the 1994-96 average disbursements.
Figure 5
Disbursements on public and publicly guaranteed (PPG) debt by official creditors, including IMF
(in current US$ million)
0
5
10
15
20
25
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
HIPCs
Low income, excl. HIPCs
Figure 6
Disbursements on public and publicly guaranteed (PPG) debt by official creditors, excluding IMF
(in current US$ million)
0
5
10
15
1994
1995
1996
1997
1998
1999
HIPCs
Low income, excl. HIPCs
pg_0013
9
Figure 7
Bilateral and multilateral disbursements to the group of HIPCs
(current US$ billion)
1.4
1.7
1.3
1.0
1.6
1.2
4.1
4.1
5.3
4.8
4.5
5.0
0.6
0.8
0.8
1.2
1.3
1.6
0
2
4
6
1994
1995
1996
1997
1998
1999
bilateral
multilateral (excl. IMF)
bilateral (excl. Vietnam)
We can further differentiate official disbursements between bilateral and multilateral
creditors, which are shown in Figure 7. It shows that within the last six years,
disbursements from multilateral creditors reached a maximum in 1997, followed by a
relatively sharp decrease of more than 22 per cent in nominal terms in 1998. For
disbursements from bilateral creditors, the maximum of the last six years was reached in
1995, followed by two reductions of about 20 per cent per year, a near recovery of
bilateral disbursements to 1995 levels in 1998, and a subsequent reduction in 1999.
However, please note that the only reason for the near recovery of bilateral
disbursements in 1998 was due to a sharp increase in bilateral disbursements to
Vietnam, which increased—related to the Asian Crisis—from US$216 million in 1997
to over US$775 million in 1998. Excluding Vietnam, there is a steady decline in
bilateral disbursements to the group of HIPCs since 1995.
What makes these overall negative trends worse is that even concessional
disbursements, especially bilateral concessional disbursements, have decreased and as
will be shown below, that this picture remains valid even after including grants. As
Table 2 shows, the percentage reduction in bilateral concessional disbursements from
the 1994-96 average to the 1997-99 average was more than 15 per cent in nominal
terms.
Given that HIPC debt relief is calculated based on each creditor’s share in NPV debt,
these reductions in disbursements to HIPCs are quite rational from each creditor’s point
of view. However, from an overall welfare perspective, these reductions in debt flows to
HIPCs are not rational, as they are likely to reduce the growth potentials of HIPCs and
thus undermine their long-term debt sustainability. Hence, the situation is a typical
‘prisoner’s dilemma’ where rational behaviour of each creditor leads to a sub-optimal
macro outcome.
The next question we want to analyse is what the trends of public and publicly
guaranteed disbursements were for the four HIPCs, which have reached their original
decision points in 1997. We first compare the bilateral disbursements during the years
pg_0014
10
directly before the adoption of the HIPC Initiative with the bilateral disbursements of
the early 1990s. Given that under the original framework, each bilateral creditor’s share
in HIPC debt relief was fixed according to its share of NPV debt at the decision point
DSA, the hypothesis is that bilateral disbursements to 1997 decision point HIPCs
decreased shortly before the decision point in order to minimize the costs of the HIPC
Initiative. Indeed, as Table 3 shows, the disbursements to Uganda, Bolivia, Burkina
Faso and Guyana have all been reduced sharply (and beyond the reduction to the group
of HIPCs) in the three years before their decision points, even though bilateral
disbursement to other (non-HIPC) low-income countries remained nearly the same.
Table 2
Average disbursements of concessional debt to the group of HIPCs
Average (current US$, billion)
1994-96
1997-99
Percentage change from
1994-96 to 1997-99
Bilateral concessional
1.32
1.12
-15.12
Multilateral concessional
4.02
3.95
-1.84
Source: World Bank (2001a).
Table 3
Bilateral disbursements, 1990-96
(current US$ million, if not noted otherwise)
Average
1990-93
1994-96
Percentage change from
1990-93 to 1994-96
Uganda (04/97)
68.1
28.6
-57.9
Bolivia (09/97)
96.8
56.3
-41.8
Burkina Faso (09/97)
33.5
8.3
-75.2
Guyana (12/97)
20.1
1.8
-90.9
HIPCs
2,478.1
1,476.9
-40.4
Low-income countries, excl. HIPCs 5,665.7
5,572.6
-1.6
Source: World Bank (2001a).
Second, we compare the average bilateral disbursements during the years before and
after the adoption of the HIPC Initiative (1994-96 vs. 1997-99). The two alternative
hypotheses are the following:
a) As long as bilateral creditors believe that the HIPC Initiative provides debt
sustainability, they have no reason to continue shifting disbursements from
decision point HIPCs to other countries that are not covered under the HIPC
Initiative.
b) However, if bilateral creditors believed that the original HIPC Initiative did not
provide an exit from future debt rescheduling, they would continue to shift
disbursements from HIPC decision point countries to non-HIPCs, even after
reaching the decision point.
Though there may be other explanations, the data provided in Table 4 seem to generally
support the hypothesis that bilateral creditors did not believe that the original HIPC
Initiative would provide a lasting exit from future debt rescheduling. Furthermore, given
that the original HIPC framework allocated the multilateral costs of HIPC debt relief
pg_0015
11
according to multilateral shares at the completion point DSA, we can compare
multilateral disbursements before and after the completion point DSAs. Given that (a)
both Uganda and Bolivia reached their completion point in 1998, with the completion
point DSA based on 1997 debt data, and (b) multilateral disbursements to low income
countries other than HIPCs increased during 1998-99, compared to the 1994-97
average, we should also have expected an increase in multilateral disbursements to
Uganda and Bolivia. However, as Table 5 shows, this was not the case. Again, while
there may be other explanations, the data support the hypothesis that multilateral
creditors did not believe that Uganda and Bolivia would have achieved debt
sustainability after reaching the completion point under the original HIPC framework.
12
One possible explanation for these declining trends in official disbursements to HIPCs,
and especially to the early decision point HIPCs, could be that donors shifted from loans
to grants. We thus look shortly also at changes in grants provided to HIPCs. The usual
distinction made is between grants excluding technical cooperation and technical
cooperation grants. To make a long story short, both categories of grants provided to the
group of HIPCs during 1997-99 decreased compared with the three years before the
adoption of the HIPC Initiative (1994-96): grants excluding technical cooperation
decreased by more than 16 per cent (from an average US$9.4 billion during 1994-96 to
an average US$7.8 billion during 1997-99); technical cooperation grants decreased by
more than 18 per cent (from an average US$3.8 billion during 1994-96 to an average
US$3.1 billion during 1997-99). Looking at the four HIPCs which reached their first
decision points in 1997, the annual average of total grants before the decision point
(1994-97) also decreased compared with the annual average of total grants after
reaching the decision point: Uganda’s average decreased by 0.2 per cent, Bolivia’s
decreased by more than 22 per cent, Burkina Faso’s decreased by 8.8 per cent, and
Guyana’s decreased by 9.5 per cent. Note again that all these flows are in nominal
terms, thus, in real terms, the reductions are much larger.
Table 4
Bilateral disbursements, 1994-99
(current US$ million, if not noted otherwise)
Average
Percentage change:
1994-96 1997-99 1994-96 to 1997-99 1990-93 to 1997-99
Uganda (04/97)
28.6
6.7
-76.6
-90.2
Bolivia (09/97)
56.3 35.2
-37.6
-63.7
Burkina Faso (09/97)
8.3
7.5
-9.2
-77.5
Guyana (12/97)
1.8
7.3
296.4
(a
-63.8
HIPCs
1,476.9 1,273.8
-13.4
-48.4
Low-income countries, excl. HIPCs 5,572.6 6,470.3
16.1
14.2
Note:
(a
Guyana’s tripling of disbursements has to be seen in relationship to the earlier cuts in
disbursements; compared to the early 1990s, disbursements to Guyana are still low.
Source: World Bank (2001a).
12 While it is too early to analyse the implications of the enhanced HIPC initiative, the decisions taken
on the delivery of enhanced HIPC debt relief seem to indicate that bilateral and multilateral creditors
are still unconvinced that the enhanced HIPC initiative provides a lasting exit from future debt
rescheduling.
pg_0016
12
Table 5
Disbursements to Uganda and Bolivia
before and after reaching their completion points
(a
Average (current US$ million)
1994-97
1998-99
Percentage change
%
Disbursements of multilateral creditors, excluding IMF
Uganda (04/97; 04/98))
230.8
169.4
-27
Bolivia (09/97; 09/98)
329.7
245.8
-25
HIPCs
4,918
4,109
-16
Disbursements of official creditors, excluding IMF
Uganda (04/97; 04/98))
254.7
174.6
-31
Bolivia (09/97; 09/98)
375.4
291.6
-22
HIPCs
6,287
5,504
-12
Disbursements of official creditors, including IMF
Uganda (04/97; 04/98))
312.5
217.2
-31
Bolivia (09/97; 09/98)
410.7
325.9
-21
HIPCs
7,170
6,406
-11
Note:
a
Though both countries reached their completion point under the original framework of the
HIPC Initiative in 1998, the completion point DSAs are based on is the 1997 debt data.
Source: World Bank (2001a).
2.1.3 Changes in private capital flows that are publicly guaranteed
For reasons of completeness, we finally look shortly at disbursements of private debt
that are publicly guaranteed. Within the group of HIPCs, private debt that is publicly
guaranteed is highly concentrated among a few countries: Angola, Ghana, Kenya, and
Vietnam. In 1999, more than 68 per cent of the private publicly guaranteed debt
disbursed to the group of HIPCs went to Angola (US$875 million), and more than
28 per cent went to Ghana, Kenya, and Vietnam (US$359 million). Excluding Angola,
the 1998-99 average of disbursements to the group of HIPCs was nearly half of the
average disbursements during 1994-97. For the same periods, average disbursements to
Bolivia decreased by 20 per cent (from US$6.1 million to US$4.9 million), new
disbursement to Guyana ceased (compared to an average US$2.4 million during 1994-
97), and neither Uganda nor Burkina Faso received any disbursement of private debt
(either public guaranteed or non-guaranteed) during 1994-99.
2.1.4 Conclusion on changes in capital flows to HIPCs
Combining the various results so far, there is some indication that (i) the adoption of the
HIPC Initiative led to a reduction in disbursements to HIPCs, (ii) HIPC debt relief has
been deducted from traditional development assistance, (iii) foreign direct investment
flows to HIPCs are largely concentrated to a few countries and unrelated to a country’s
debt sustainability, and (iv) the already marginal private capital flows to HIPCs
generally continue to be decreasing. Given that overall development budgets are
generally decreasing in real terms and that private creditors and investors also face
constraints from a slowing world economy, it is to expect that this negative tendency of
changes in capital flows to HIPCs might continue. In other words, HIPCs could end up
with no additional resources for poverty reduction.
pg_0017
13
2.2 Changes in investment and savings ratios
In this sub-section, we first review the implications of the long-term changes in
investment and savings ratios on the growth sustainability of the four HIPCs with the
highest growth rates of real GDP. We then look at the implications of the most recent
changes in investment and savings ratios on the growth prospects of the four HIPCs that
are expected to grow most during 2000-10. The four HIPCs that grew most during the
last decade were Uganda (6.7 per cent), Mozambique (6.3 per cent), Guyana (6.0 per
cent) and Benin (4.3 per cent).
13
The changes in investment and savings ratios of these
four countries over the last decade are shown in Figures 8 and 9, respectively.
The DSAs’ average annual growth assumptions of real GDP for these four countries
during 2000-10 are 5.6 per cent for Uganda, 5.9 per cent for Mozambique, 4.2 per cent
for Guyana, and 5.5 per cent for Benin. Note that the growth assumptions for Uganda,
Mozambique and Guyana are lower than what these three HIPCs achieved in the last
decade, but higher for Benin (4.3 per cent versus 5.5 per cent). Looking at Figures 8 and
9, there are some indications for the lower growth projections for Uganda and especially
for Guyana. On the other hand, neither the recent trends nor the levels of Benin’s
investment and savings rates justify its higher growth assumptions (which is even higher
than that of Guyana and nearly equal to that of Uganda and Mozambique).
Figure 8
Gross domestic investment, 1990-99
10
15
20
25
30
35
40
45
1990
1992
1994
1996
1998
Uganda (6.7%; 5.6%)
Mozambique (6.3%; 5.9%)
Guyana (6.0%; 4.2%)
Benin (4.3%; 5.5%)
13 Mauritania also grew at an average 4.3 per cent during the 1990s, but is analysed in the group of four
HIPCs, which are supposed to grow most during 2000-10.
pg_0018
14
Figure 9
Gross domestic savings, 1990-99
-25
-15
-5
5
15
25
1990
1992
1994
1996
1998
Uganda (6.7%; 5.6%)
Mozambique (6.3%; 5.9%)
Guyana (6.0%; 4.2%)
Benin (4.3%; 5.5%)
Figure 10
Gross domestic investment, 1990-99
5
10
15
20
25
30
35
40
45
50
1990 1992 1994 1996 1998
Mauritania (4.3%, 7.3%)
Guinea-Bissau (0.3%, 7.0%)
Madagascar (1.8%, 6.2%)
Rwanda (-1.6%, 6.1%)
pg_0019
15
Figure 11
Gross domestic savings, 1990-99
-25
-15
-5
5
15
25
1990 1992 1994 1996 1998
Mauritania (4.3%, 7
.3%)
Guinea-Bissau (0.3%,
7.0%)
Madagascar (1.8%,
6.2%)
Rwanda (-1.6%,
6.1%)
The picture is even worse for the four countries which are expected to grow most during
2000-10: Mauritania (7.3 per cent), Guinea-Bissau (7.0 per cent), Madagascar (6.2 per
cent) and Rwanda (6.1 per cent), whereby we concentrate on the most recent trends
(1997-99) of the investment and savings ratios to check if there is some indication for
the high growth assumption of more than 6 per cent (see Figures 10 and 11).
Mauritania’s investment ratios are stagnating and its savings ratios have declined during
the last three years (1997-99). Guinea-Bissau’s investment and savings ratios were
lower in 1999 than in 1997, Madagascar’s savings and investment ratios have only
marginally improved during the last three years (1997-99), Rwanda’s investment ratio
has been lower in 1999 than it was in 1997 and its savings ratios have remained
negative since 1993. Please see Appendix Table for the graphical illustrations of the
investment and savings ratios as well as the structural transformations of all 22 HIPCs
that reached the enhanced decision point by end-December 2000, with further
information on the data sources.
2.3 Structural transformation
A similar picture emerges from looking at the structural transformation of the four high
growth HIPCs of the 1990s (see Figure 12). While Uganda and especially Mozambique
show a positive structural transformation, Guyana’s and Benin’s structural trans-
formations have stagnated for the last seven years. Furthermore, given that there is usually
no advantage of structural backwardness, looking at the levels of manufacturing shares in
GDP, it seems unlikely that Benin will be able to achieve the assumed growth rates.
Finally, looking at the relatively stagnant structural transformation during the last three
years of Mauritania, Guinea-Bissau, Madagascar, and Rwanda (see Figure 13), there is
no structuralist foundation for the highly optimistic growth rates of more than 6 per cent
for these four countries.
pg_0020
16
Figure 12
Structural transformation, 1990-99
4
8
12
16
1990
1992
1994
1996
1998
Uganda (6.7%; 5.6%)
Mozambique (6.3%; 5.9%)
Guyana (6.0%; 4.2%)
Benin (4.3%; 5.5%)
Figure 13
Structural transformation, 1990-99
4
8
12
16
1990
1992
1994
1996
1998
D
Mauritania (4.3%; 7.3%)
Guinea-Bissau (0.3%; 7.0%
Madagascar (1.8%; 6.2%)
Rwanda (-1.6%; 6.1%)
2.4 AIDS, climate changes, and armed conflicts
The IMF and World Bank (2001: 7) study mentions that ‘longer-term growth prospects
can be undermined by natural disasters, war or health threats such as the AIDS epidemic
affecting many of the HIPCs’. However, the report fails to analyse the impacts of these
factors on growth. It also fails to recognize that these factors are not only possibilities
but also realities. A factor that is not reality yet, but which Lindert and Williamson
(2001) have called a ticking bomb is possible south-north mass migration, especially out
pg_0021
17
of Africa,
14
which would also have a negative impact on the nominal growth rate of
southern exports. A further possibility is that the terms of trade will continue to show a
long-term negative trend, while most DSA assumptions are that HIPCs’ terms of trade
will recover.
With regards to AIDS, current estimates of economic impacts translate to annual
reductions in real GDP growth rates between 0 and 3 percentage points, depending on a
country’s HIV prevalence (ranging up to 35.8 per cent at end-1999 in the case of
Botswana).
15
Note that losses in annual per capita growth are much lower since many
of the infected people are assumed to die. In the words of a recent World Bank (2000: 9)
AIDS study:
The illness and impending death of up to 25 per cent of all adults in some
countries will have an enormous impact on national productivity and
earnings. Labour productivity is likely to drop, the benefits of education
will be lost, and resources that would have been used for investments
will be used for health care, orphan care, and funerals. Savings rates will
decline, and the loss of human capital will affect production and the
quality of life for years to come.
Obviously, all these impacts will also affect the HIPCs’ export growth rates, which are
the key debt sustainability indicator within the HIPC framework.
With regards to natural disasters, the number of hydro-meteorological disasters has
more than doubled over the second half of the last decade. In 2000, the International
Federation of Red Cross and Red Crescent Societies (IFRC) registered 752 natural
disasters, versus 609 in 1999 and 481 in 1998.
16
Predictions are that this trend is likely
to accelerate,
17
whereby agricultural production in many tropical and subtropical
countries, especially in Sub-Saharan Africa and Latin America (hence mostly in HIPCs)
is likely to decrease. Furthermore, even less dramatic weather changes can have
significant impacts on export growth. For example, Uganda’s reassessment under the
enhanced HIPC Initiative has shown that the projections on NPV debt and exports made
in Uganda’s original completion point document were too optimistic.
18
14 See Hatton and Williamson (2001).
15 See IMF Survey of November 6, 2000, which reports that for Swaziland (which had an HIV
prevalence rate of 25 per cent at end-1999) the IMF staff estimates that, by 2010, the rate of GDP
growth will be about 2 per cent lower than it would be if Swaziland were not experiencing an AIDS
epidemic.
16 For the IFRC, a disaster means that at least 10 people died, 100 people were affected, and a state of
emergency was declared or international aid sought; see Reuters Business Briefings, June 28, 2001.
17 See the United Nations’ third assessment on climate change of July 2001 which states that global
temperatures are rising nearly twice as fast as previously thought; see also the recent statements by
Robert Watson, World Bank Chief Scientist and Chairman of the Intergovernmental Panel o f Climate
Change.
18 As reported in Uganda’s enhanced decision point document of January 2000 (available on the HIPC
website: www.worldbank.org/hipc) lower commodity prices and adverse weather conditions caused
an unexpected decrease of exports of nearly 25 per cent in fiscal year 1998.
pg_0022
18
With regards to war and civil conflicts, it is unlikely to assume that all these internal and
external conflicts will cease after having reached the HIPC decision or completion
points.
19
Given that these conflicts have generally a devastating impact on growth,
especially if prolonged, realistic growth projections need to account for the economic
impact of such conflicts. For example, though it was already known in December 2000
that Guinea’s growth rate for 2000 would be less than two per cent due to the armed
conflict at its southern borders, the December 2000 DSA for Guinea nevertheless
assumed a growth rate of more than 4 per cent for year 2000. Finally, the delay in Côte
d’Ivoire’s enhanced decision point shows how real conflicts are even in cases where a
country has reached a HIPC decision point.
3 HIPC debt sustainability indicators
As Ajayi and Khan (2000) have pointed out recently, given that it is in practice nearly
impossible to calculate the sustainable level of foreign borrowing, various ratios—such
as that of debt to exports, debt service to exports, and debt to GDP (or GNP)—have
become standard measures of sustainability. However, the HIPC framework defines
debt sustainability largely by a debt-to-export ratio, whereby under the enhanced
framework, a NPV debt-to-export ratio of 150 per cent (down from 200-250 per cent) is
considered to be sustainable. Only for countries having an export-to-GDP ratio of at
least 30 per cent (down from 40 per cent) and a government revenue-to-GDP ratio of at
least 15 per cent (down from 20 per cent), a NPV debt-to government revenue ratio of
250 per cent (down from 280 per cent) is considered to be sustainable. Of the
23 countries having reached the decision point under the enhanced HIPC Initiative by
end-June 2001, only four countries (Guyana, Honduras, Mauritania, and Senegal) have
qualified under the fiscal criteria. This section analyses first the appropriateness of the
HIPC debt sustainability indicators based on the recent literature and provides then
some empirical evidence on the relevance of various debt sustainability indicators.
3.1 Appropriateness of the HIPC debt sustainability indicators
One of the most serious critiques of the HIPC framework is that it uses inappropriate or
at least insufficient debt sustainability criteria. For example, Sachs (2000) has expressed
the view that the HIPC sustainability criteria have nothing to do with debt sustainability
in any real sense. Others have stressed that ‘the ratios of debt and debt service to
exports, which are more frequently used, are hard to justify on theoretical grounds’, and
that ‘at the very least, indicators relative to GDP should be taken as seriously as
indicators relative to exports’.
20
Finally, there is some doubt if the NPV calculations
used in the HIPC framework are appropriate. Among many problems related to
discounting, the key argument is that discounting unpayable debt at market discount
rates gives the wrong picture about a HIPC’s debt burden.
21
19 For a theoretical and empirical analysis of the effects of econo mic policy and the receipt of foreign aid
on the risk of civil war, see Collier and Hoeffler (2000).
20 See IMF (1998: 39-40).
21 See Gunter (forthcoming) for some further details.
pg_0023
19
While the debt-to-export ratio has some justification for the determination of an upper
limit of a country’s debt sustainability, it says very little about a government’s ability to
repay its external public debt. As a World Bank (2001b: Table 3) HIPC study shows, at
least four countries (Guinea, Mauritania, Niger, and Zambia) will continue to pay
between 20-23 per cent of their government revenues as external debt service on public
or publicly guaranteed debt after enhanced HIPC debt relief. While this is largely due to
the highly restrictive thresholds for the application of the HIPC fiscal indicator, a more
flexible debt-to-export criterion could also avoid such problems.
22
In any case, as is well-known, the debt-to-export ratio has been used for mostly middle-
income Latin American countries in the aftermath of the 1982 debt crisis, whereby a
substantial part was private debt and exchange rate adjustments ensured substantial
trade surpluses. However, most HIPCs import not only more than they export
(Cameroon and Côte d’Ivoire are two exceptions). Indeed, as was shown for example by
López and Thomas (1990), Sub-Saharan African economies depend highly on imports.
Furthermore, due to access constraints to industrialized countries’ markets for
developing country exports as well as some market saturations for HIPC exports, trade
deficits are likely to remain for HIPCs at least over the next 10 to 20 years.
23
Even if HIPCs would be forced to cut their imports and increase their exports to earn the
foreign exchange needed to repay external debt, the government owing the debt may
only get a small amount of the export revenues.
24
For example, multinational
enterprises own close to 90 per cent of Guinea’s exports and use most of the foreign
exchange earnings for imports of equipment, salaries of expatriate workers, and
transfers of profits. In some cases, exports of HIPCs reflect a large degree of re-exports
(the exports simply pass through the country and no foreign exchange is earned by
anybody).
25
Finally, the way the NPV debt-to-export criterion is currently used in the
HIPC framework discourages a HIPC’s export-led growth strategy, especially in HIPCs
where the decision point is some time in the future.
26
Related to the inappropriate debt sustainability indicator is the critique that the HIPC
Initiative’s country selection is too narrow.
27
Some of the world’s poorest countries
22 Indeed, Cohen’s (1996) analysis has shown that the sustainable debt-to-export ratios associated to a 25
per cent discount o f estimated secondary market prices would be 68 per cent for Guinea, 90 per cent
for Niger, and 79 per cent for Zambia.
23 See Hersel (1998) for a more detailed analysis of sustained trade deficits and the interdependency
between external debt and trade policy.
24 These budgetary aspects of the transfer problem have been analysed by Dani Rodrik and especially by
Helmut Reisen, see Hjertholm (1999) for further references.
25 Thus far, the HIPC framework has not been consistent in either including or excluding re-exports in
the calculation of the debt-to-export criteria.
26 Though some precaution had been taken to capture export volatility by defining exports as a three-
year backward looking average, it wo uld have been better to take a much longer backward looking
average ending with the year before the framework of the initiative is adopted, not with year previous
to the HIPC decision point.
27 The HIPC initiative defines a country as ‘heavily indebted’ if traditional debt relief mechanisms are
unlikely to reduce a country’s external debt to a sustainable level. The criterion for being ‘poor’ is to
be an IDA-only country. An IDA-only is considered to rely on financial resources from the World
Bank’s International Development Association (IDA), whereby the main criterion is based on a
country’s GDP per capita. However, a few other exceptions have been made to this income per capita
pg_0024
20
have been excluded from the HIPC Initiative as their debt is—according to the narrowly
defined HIPC criteria—considered to be sustainable. In the words of a recent
EURODAD (2001) report, the concept of debt sustainability has to be approached from
a human and social development perspective. The fact that IDA-only countries like
Bangladesh, Cambodia, Haiti, Nepal, and Tajikistan have a GDP per capita of less than
one-dollar-a-day, makes it obvious that these countries do not have their own resources
to repay their external debt, not now and not in the foreseeable future.
28
The only
reason these poor countries can service their external debt currently is that they receive
currently new loans that are more than sufficient to repay old debt. However, this
continuous repaying of old debt with new debt cannot be considered to constitute debt
sustainability.
There are also cases in which low-income heavily indebted countries are not part of the
HIPCs, as they are considered to be not IDA-only countries. The example of Nigeria is
relatively well-known. Nigeria is highly indebted: its NPV debt-to-export ratio is
estimated to be 188 per cent (38 per cent higher than what is considered to be
sustainable under the enhanced framework). It is also a poor country: GDP per capita is
below US$300 a year and more than 70 per cent of its 120 million population live in
absolute poverty (below one-dollar-a-day). The official reason for Nigeria’s exclusion
from the group of HIPCs is that Nigeria does—due to its large oil reserves—not rely on
IDA assistance. In other words, it is expected that Nigeria extracts and sells its oil to
generate the foreign exchange and revenues necessary to repay its external debt, most of
which was contracted by corrupt previous governments.
3.2 Empirical evidence on the relevance of debt sustainability indicators
While there are overwhelming theoretical arguments for extending the debt
sustainability indicators of the HIPC Initiative, little empirical evidence for the relative
importance of various debt sustainability indicators has been presented so far.
29
We
intend to draw some conclusions on the relative importance of debt sustainability
indicators by substituting three debt sustainability indicators in otherwise standard
specifications of a macroeconomic investment function.
30
The three debt sustainability
criterion. Originally, Nigeria and Equatorial Guinea were also considered to be HIPCs, but have been
dropped from the list of HIPCs as they were later on considered to be no more IDA-only eligible
countries. Malawi and The Gambia have been added recently as it became clear that their debt is
higher than initially estimated. For the most current list of HIPCs, see the HIPC website:
www.worldbank.org/hipc/
28 Even if these countries would have an income per capita growth rate of 5 per cent per year (none of
them did so in the past or do so currently), they would still remain to be IDA-only countries in 20
years.
29 See Hjertholm (1999) for an excellent review o f the analytical history of HIPC debt sustainability
targets, whereby he points out that there is no analytical basis for the appropriate level of the HIPC
fiscal indicator.
30 The traditional investment literature has go ne through considerable changes from the accelerator
theory, to the neoclassical theory of investment and finally, Tobin's q-theory. However, based on the
poor empirical performance of these traditional investment theories, recent research of the investment
theory has led to a revised and extended account of the determinants of investment. This holds
particularly true for the determinants of investment in developing countries. A good review of
empirical investment function specifications for developing countries is provided by Rama (1993).
The specification here broadly follows that of Gunter (1998) and Oshiko ya (1994).
pg_0025
21
indicators analysed are (i) the debt-to-export ratio [DEXP], (ii) the debt-to-GNP ratio
[DGNP], and (iii) the debt-to-government revenue ratio [DREV]. In algebraic terms, we
estimate the following three regressions:
31
INVFIPR = +ßlog(INTLEN)+ HESLAG + log(DEXP)
(1.a)
INVFIPR = +ßlog(INTLEN)+ HESLAG + log(DGNP)
(1.b)
INVFIPR = +ßlog(INTLEN)+ HESLAG + log(DREV)
(1.c)
whereby
INVFIPR = the ratio of fixed private domestic investment to GDP,
INTLEN = the nominal lending interest rate,
32
HESLAG = the lagged real growth rate (based on PPP adjusted GDP),
33
Given that the Durbin-Watson statistics of the initial regressions ranged from 0.31-0.34
(indicating autocorrelated errors), an AR(1) specification has been applied to the
regressions to take care of first order autocorrelation. After invoking the AR(1) error
correction, the Durbin Watson statistics range from 1.7 to 2.2, thus indicating no further
autocorrelation.
31 All data come from the Branson, Guerrero and Gunter (forthco ming) database, a database compiled
mainly fro m various World Bank and IMF databases b ut also fro m other sources, like the Penn World
Tables (the Summers and Heston database). The database covers 25 years of time-series data of 21
industrialized and 72 developing countries (including 30 HIPCs), whereby the number of countries
included in the databases has been limited to have a near balanced panel. Since data on debt indicators
are limited to developing countries, we have excluded the 21 industrialized countries, leaving us—due
to other constraints on data availability—with a minimum of at least 1000 observations for each
variable.
32 The usual proxy for the cost of capital is the real interest rate. However, given that data on real interest
rates are highly distorted, many earlier investment studies have sho wn that real interest rates are
hardly a significant determinant of investment. This is consistent with the view that the cost of capital
is determined by other factors besides interest rates, they are not easy to get a hold of. Also, instead of
using inflation biased real interest rates, nominal interest rates may serve as a better proxy of both the
cost of capital and the availability of credit.
33 There is little doubt that the income accelerator is a considerable determinant of investment. One
simple and good measure of the inco me accelerator is the current growth rate of GDP. However, given
the likely bivariate causality between the current growth rate and investment, the growth rate needs to
be lagged by one period. It is obviously real, not no minal growth, which is the more appropriate
variable in the determination of investment. The lagged real growth rate serves also as broad
approximation of the availability of investment funds, which constitute another important determinant
of investment.
pg_0026
22
Table 6
Regression results
LOG
(INTLEN) HESLAG FDI FINDEV1 FINDEV2
LOG
(DEXP)
LOG
(DGNP)
LOG
(DREV)
Part 1: Simple basic specification
(R-squared varies between 0.80 and 0.82; DW statistic varies between 1.74 and 2.13)
EQ. 1.a
-0.26 0.04
-1.84
t-stat
-0.4
1.9
-2.4
EQ. 1.b
-0.03 0.03
-1.92
t-stat
-0.1
1.8
-2.5
EQ. 1.c
-0.18 0.05
-2.59
t-stat
-0.3
2.4
-3.2
Part 2: Specification with foreign direct investment
(R-squared varies between 0.80 and 0.81; DW statistic varies between 1.74 and 2.17)
EQ. 2.a
-0.66 0.04 0.17
-2.24
t-stat
-1.1
1.7
1.5
-2.7
EQ. 2.b
-0.42 0.04 0.26
-2.80
t-stat
-0.7
1.7
2.3
-3.3
EQ. 2.c
-0.46 0.06 0.21
-3.02
t-stat
-0.7
2.4
1.6
-3.4
Part 3: Specification with financial market development indicator #1
(R-squared varies between 0.81 and 0.82; DW statistic varies between 1.75 and 2.19)
EQ. 3.a
-0.47 0.04 0.18 7.40
-1.85
t-stat
-0.8
1.8
1.6
1.7
-2.2
EQ. 3.b
-0.26 0.04 0.27 7.79
-2.58
t-stat
-0.4
1.7
2.4
1.8
-3.0
EQ. 3.c
-0.37 0.07 0.21 6.54
-0.17
t-stat
-0.5
2.6
1.7
1.3
-3.1
Part 4: Specification with financial market development indicator #2
(R-squared varies between 0.81 and 0.82; DW statistic varies between 1.73 and 2.16)
EQ. 4.a
-0.68 0.04 0.17
4.70 -2.02
t-stat
-1.1
1.6
1.5
2.2 -2.4
EQ. 4.b
-0.48 0.03 0.26
4.75
-2.60
t-stat
-0.8
1.5
2.2
2.2
-3.0
EQ. 4.c
-0.55 0.06 0.21
5.08
-2.75
t-stat
-0.8
2.3
1.6
2.2
-3.1
The results for the three basic regressions (1.a to 1.c) are presented in Part 1 of Table 6.
It turns out that—among the three debt sustainability indicators—the debt-to-
government revenue ratio (DREV) is the most significant determinant for private fixed
investment, followed by the debt-to-GNP (DGNP) and debt-to-exports (DEXP) ratios.
We have tested the robustness of the results with a variety of alternative investment
specifications, all of which provide the same results with regards to the relative
importance of the three debt sustainability indicators. First, given the importance
foreign direct investment plays as a catalyst for private investment in developing
pg_0027
23
countries, we have added net foreign direct investment (in per cent of GDP) to the
model specification. It has also been suggested that FDI is a better indicator than the
partly complementary, partly substitutionary public fixed investment. Second,
recognizing that the recent literature
34
has shown that financial market development is
one of the most robust determinants for investment and growth, we have added two
standard indicators for financial marked development: (i) the ratio of liquid liabilities of
the financial system to GDP, and (ii) the ratio of deposit money bank domestic assets to
deposit money bank domestic assets plus central bank domestic assets. While the more
detailed results of these alternative model specifications are presented in Parts 2-4 of
Table 6, the important point is that the relative significance of the three debt
sustainability indicators remains the same, whatever the change in the model
specification.
35
4 Some possible modifications
While more comprehensive suggestions on necessary improvements and possible
modifications of the HIPC Initiative are presented in Gunter (forthcoming), the goal of
this section is to make some more specific suggestions on issues related to the HIPC
Initiative’s long-term debt sustainability.
4.1 Aid coordination, additionality, and burden-sharing
First of all, more aid coordination is needed to reverse the currently decreasing trends in
development assistance, especially to HIPCs. More specifically, to avoid the current
prisoner’s dilemma for new disbursements to HIPCs that have not reached their decision
point, the HIPC Initiative’s burden-sharing should be based on a simplified end-2000
DSA. The discount rates used for such an end-2000 DSA, as well as any future DSA,
should be low, fixed, and uniform across currencies (e.g. 3 per cent). The burden-
sharing concept should also be enhanced, by taking the creditor’s economic power into
account.
4.2 Realistic growth assumption
Second, the DSA growth assumptions should be more realistic. This could be achieved
by projecting future growth rates based on macroeconomic principles like analysing
34 See Levine (1997) for a review and synthesis.
35 We have also tested the robustness o f the relative significance of the three debt sustainability
indicators by substituting the three debt ratios (DEXP, DGNP, and DREV) with three corresponding
debt service ratios: (i) the debt service-to -export ratio [DSEXP], (ii) the debt service-to-GNP ratio
[DSGNP], and (iii) the debt service-to -government revenue ratio [DSREV]. The rational is that
substituting the three debt ratios with corresponding debt service ratios should give us the same results
in terms of relative importance of three indicators. However, we should keep in mind that private
investors are more likely to look at the implications of the debt stock on future debt service payments
than at the current debt service payments. Thus, we should expect lower significance levels for the
three debt service indicators. Indeed, our regression results show that substituting the debt ratios with
corresponding debt service ratios results in insignificant t-statistics for the three debt service ratios,
however, the message on the relative importance of the three indicators remains valid.
pg_0028
24
recent trends in structural transformations, investment and savings rates, as well as by
accounting explicitly for negative impacts related to AIDS and climate change.
4.3 Gradual replacement of loans by grants.
Third, following a suggestion made by the US International Financial Institution
Advisory Commission, commonly referred to as the Meltzer Commission,
36
discussion
is currently underway to gradually replace new IDA loans to the poorest countries by
grants. Though this would obviously be favourable for the long-term debt sustainability
of these countries, the biggest problem is that this could reduce the overall availability
of financial assistance to the poorest, especially if annual IDA contributions are not
increased appropriately.
37
In any case, a selected, gradual and fully-funded replacement
should be analysed in more detail.
4.4 Debt sustainability indicators and HIPC eligibility
Finally, it is suggested to eliminate the two threshold ratios for the applicability of the
fiscal debt sustainability indicator (i.e., the requirements of having an export-to-GDP
ratio of at least 30 per cent and a government revenue-to-GDP ratio of at least 15 per
cent). While more analysis would be needed to determine the appropriate level of the
fiscal indicator, whereby a few country-specific vulnerability factors (e.g., export
concentration) should be taken into account, the recommendation to focus less on
export-related and more on government revenue-related indicators is not new. For
example, more than ten years ago, Dittus (1989) had analysed the budgetary dimension
of the debt crisis in low-income Sub-Saharan Africa and suggested to assign the debt
service-to-revenue ratio a central role.
Furthermore, it is suggested to replace the current ‘IDA-only’ requirement with a
purchasing-power parity (PPP) based GDP per capita level, whereby two categories are
suggested: category-one countries would have a PPP-based GDP per capita below
US$1,500;
38
category-two countries would have a PPP-based GDP per capita between
US$1,500 and US$3,000.
39
For category 1 countries it is suggested to limit debt service
payments to 5 per cent of the average 1990-99 government revenues, independent of
what the NPV debt-to-export and the NPV debt-to-government revenue ratios are. The
36 A slightly edited version of the report is available at this University of Michigan site:
www.econ.lsa.umich.edu/~alandear/topics/meltzer.html .
37 On the other hand, there wo uld be no need to worry about such an outcome if all OECD countries
would raise their aid target set at 0.7 per cent of GNP by the UN many years ago, or if the
international co mmunity could agree to suggestion related to the international taxation of exchange
rate speculations. For other problems related to the replacement suggestion, see the US Treasury’s
response to the Meltzer report, available at: http://www.ustreas.gov/press/releases/docs/response.pdf .
38 Category one would include the 31 poorest HIPCs, but also add Bangladesh, Bhutan, Cambodia,
Comoros, Djibouti, Eritrea, Haiti, Nepal, Nigeria, and Tajikistan.
39 Category two would include eight of the 10 richest HIPCs (in terms of PPP-based GDP per capita:
Bolivia, Cameroon, Côte d'Ivoire, The Gambia, Ghana, Guinea, Hond uras, Mauritania, Nicaragua,
and Vietnam) and 15 non-HIPCs with a PPP-based GDP per capita between US$1,500 and US$3,000.
The only two HIPCs excluded in both categories are Angola and Guyana, which have a PPP-based
GDP per capita of US$3,200 and US$3,600, respectively.
pg_0029
25
decision on which creditor would get paid would need to be based on a predetermined
rule that combines (i) the share of debt service due to each creditor with (ii) the
creditor’s ability to provide debt relief based on the creditor’s income level.
For the richer (though still poor) category-two countries, the current eligibility criteria
could be applied after elimination of the threshold requirements for the fiscal indicator.
If eligible, debt service payments should be limited to 10 per cent of the average
1990-99 government revenues. These limits on the annual debt service to government
revenue ratios would not only ensure that governments could spend their revenues on
development tasks, they would also ensure private investors that the government will
not be forced to increase current and future taxes to effect the repayment of external
debts. Hence, it would eliminate a very critical determinant of the debt overhang effect.
5 Summary and conclusion
One of the most serious problems of the HIPC Initiative is that it may not achieve its
key goal of providing a solid exit from future debt rescheduling. In trying to assess how
likely HIPCs are to achieve debt sustainability, we first looked at various capital flows
to HIPCs. Excluding a very few exceptions, it was shown that private capital flows as
well as disbursements of private and public creditors to HIPCs have generally decreased
since the adoption of the HIPC Initiative. Three aspects make these negative trends in
capital flows to HIPCs worse: (i) capital flows to non-HIPC low income countries have
increased (at least in nominal terms), (ii) capital flows continued to decrease for
Uganda, Bolivia, Burkina Faso, and Guyana, even after they reached their original
decision points, and (iii) there are even reductions in grants and disbursements of
concessional loans. These negative trends in terms of capital flows to HIPCs are also
reflected in an overall reduction in net aggregate resource flows to HIPCs (see Figure
14), which imply that compared to previous years, HIPCs had less and less resources for
development tasks at least until 1999. Projections are that net aggregate resource flows
to HIPCs may—due to HIPC debt relief—increase in 2001 and may remain relatively
stable after 2001.
Second, we have looked at changes in investment and savings rates and sectoral
transformations of HIPCs during the last decade, which generally indicated that there is
no macroeconomic foundation for the high DSA growth assumptions of Guinea-Bissau,
Madagascar, Mauritania and Rwanda. A similar analysis for the other HIPCs (provided
in Appendix 1) shows that most of the other growth assumptions (excluding Guyana,
Mozambique, and Uganda) are also highly optimistic. We have also noted that the
impacts of AIDS and climatic changes have been neglected in the growth assumptions
of most HIPCs.
Third, based on the theoretical and empirical examination of the HIPC debt
sustainability criteria, there is some justification to the critique that the HIPC Initiative
uses inappropriate and insufficient debt sustainability indicators. One shoe does not fit
all and the thresholds for the fiscal indicator should be eliminated. We have also made
suggestions with regards to limiting HIPC debt service in terms of debt service-to-
government ratios under a second enhancement of the HIPC Initiative that differentiates
according to PPP-based income per capita levels.
pg_0030
26
Figure 14
Net aggregate resource flows to HIPCs
(current US$ million)
17,000
17,500
18,000
18,500
1994
1995
1996 1997
1998
1999
Based on this background the overall conclusion is that the HIPC Initiative is unlikely to
provide a solid exit from future debt rescheduling for many of the poorest countries.
Indeed, even the IMF and World Bank acknowledge that the NPV debt-to-export ratio is
projected to remain above 150 per cent for 10 years or more for at least three HIPCs
(Bolivia, Malawi, and Niger).
40
Note that even there, optimistic export growth
projections have been used for Bolivia (9.1 per cent per annum for 2000-10, compared
with 5.7 per cent per annum for 1990-99) and Niger (5.4 per cent per annum for 2000-
10, compared with –3.9 per cent per annum for 1990-99).
41
As long as debt
sustainability of many of the poorest countries is questionable, some debt overhang
effects are likely to remain and have a negative impact on investment, growth and
poverty reduction. Though the enhanced HIPC Initiative is likely to have a positive
impact on poverty reduction in many HIPCs, more sustainable development and further
going poverty reduction could be achieved with a more definitive exit from
unsustainable debt than the enhanced HIPC Initiative provides.
40 IMF and World Bank (2001: 19).
41 IMF and World Bank (2001: 24, Table 5).
pg_0031
27
Appendix table
Trends in structural transformation, gross domestic investment rates, and gross domestic savings rates
for the 22 HIPCs that reached the enhanced decision point by end-December 2000
Benin: Structural transformation, 1990-99
0
5
10
15
20
25
1990 1992 1994 1996 1998
Bolivia: Structural transformation, 1990-99
0
5
10
15
20
25
1990 1992 1994 1996 1998
Burkina: Structural transformation, 1990-99
0
5
10
15
20
25
1990 1992 1994 1996 1998
Cameroon: Structural transformation, 1990-99
0
5
10
15
20
25
1990 1992 1994 1996 1998
Gambia: Structural transformation, 1990-99
0
5
10
15
20
25
1990 1992 1994 1996 1998
Guinea: Structural transformation, 1990-99
0
5
10
15
20
25
1990 1992 1994 1996 1998
Benin: Gross domestic investment, 1990-99
5
15
25
35
45
1990 199 2 1994 1996 1998
Bolivia: Gross domestic investme nt, 1990-99
5
15
25
35
45
1 990 19 92 19 94 199 6 19 98
Burkina : Gross domestic investment, 1990 -99
5
15
25
35
45
199 0 19 92 1994 199 6 19 98
Benin: Gross domestic savings, 1990-99
-50
-30
-10
10
30
1990 1992 1994 1996 1998
Bolivia: Gross domestic savings, 1990-99
-50
-30
-10
10
30
1990 1992 1994 1996 1998
Burkina: Gross domestic savings, 1990-99
-50
-30
-10
10
30
1990 1992 199 4 1996 19 98
Cameroon: Gross domestic investment , 1990-99
5
15
25
35
45
1 990 1992 1994 199 6 1998
Cameroon: Gross domestic savings, 1990-99
-50
-30
-10
10
30
1990 1992 1994 1996 1998
Gambia: Gross dome stic investment, 1990 -99
5
15
25
35
45
1990 1992 1994 1996 1998
Gambia: Gross domestic savings, 1990-99
-50
-30
-10
10
30
1990 1992 1994 1996 1998
Guinea: Gross domestic investment, 1990-99
5
15
25
35
45
1990 1992 1994 1996 1998
Guinea: Gross domestic savings, 1990-99
-50
-30
-10
10
30
1990 1992 1994 1996 1998
Appendix table continues….
pg_0032
28
Appendix table (con’t)
Trends in structural transformation, gross domestic investment rates, and gross domestic savings rates
for the 22 HIPCs that reached the enhanced decision point by end-December 2000
Gu i ne a -B is sa u : St ru c t ur al t ra n sf o rm a t i on , 1 9 90 - 99
0
5
10
15
20
25
1990 1992 1994 1996 1998
Guyana: Structural transformation, 1990-99
0
5
10
15
20
25
1990 1992 1994 1996 1998
Honduras: Structural transformation, 1990-99
0
5
10
15
20
25
1990 1992 1994 1996 1998
Madagascar: Structural transformation, 1990-99
0
5
10
15
20
25
1990 1992 1994 1996 1998
Malawi: Structural transformation, 1990-99
0
5
10
15
20
25
1990 1992 1994 1996 1998
Mali: Structural transformation, 1990-99
0
5
10
15
20
25
1990 1992 1994 1996 1998
Gu i n e a - B is s a u : G r o s s d o me s tic in ve s t m e n t , 1 9 9 0 - 9 9
5
15
25
35
45
1990 1992 1994 1996 1998
G u ine a- Bis s au : G r os s dom es t ic s a v ing s , 1 99 0- 9 9
-50
-30
-10
10
30
1990 1992 1994 1996 1998
G uy a na : Gr o ss d o m es t ic in v es t m en t , 1 99 0 -9 9
5
15
25
35
45
1990 1992 1994 1996 1998
Gu y an a : Gr os s d o m es t ic sa vi n gs , 1 99 0 -9 9
-50
-30
-10
10
30
1990 1992 1994 1996 1998
H o nd u ra s: G ro ss do m e st i c i n ve st m en t , 1 9 90 - 99
5
15
25
35
45
1990 1992 1994 1996 1998
H on d u ra s: G ro ss do m e st i c sa v in g s, 1 9 90 - 99
-50
-30
-10
10
30
1990 1992 1994 1996 1998
Madagascar: Gross domestic investment, 1990-99
5
15
25
35
45
1990 1992 1994 1996 1998
Madagascar: Gross domestic savings, 1990-99
-50
-30
-10
10
30
1990 1992 1994 1996 1998
Ma la wi : Gro ss d om e st ic in vest m en t , 1 99 0 -99
5
15
25
35
45
1990 1992 1994 1996 1998
Ma la wi: Gro ss d om es ti c sav ing s, 19 90 -9 9
-50
-30
-10
10
30
1990 1992 1994 1996 1998
Ma li: G r o s s do m es t i c inv e s t me nt , 19 9 0- 9 9
5
15
25
35
45
1990 1992 1994 1996 1998
M al i : Gro s s d o me st i c s a vi ng s , 19 9 0 -9 9
-50
-30
-10
10
30
1990 1992 1994 1996 1998
Appendix table continues….
pg_0033
29
Appendix table (con’t)
Trends in structural transformation, gross domestic investment rates, and gross domestic savings rates
for the 22 HIPCs that reached the enhanced decision point by end-December 2000
Mauritania: Structural transformation, 1990-99
0
5
10
15
20
25
1990 1992 1994 1996 1998
Mozambique: Structural tra nsf ormation, 1990-99
0
5
10
15
20
25
1990 1992 1994 1996 1998
Nicaragua: Structural transformation, 1990-99
0
5
10
15
20
25
1990 1992 1994 1996 1998
Niger: Structural transformation, 1990-99
0
5
10
15
20
25
1990 1992 1994 1996 1998
Rwanda: Structural transformation, 1990-99
0
5
10
15
20
25
1990 1992 1994 1996 1998
Mau rit a nia : G ro ss d om es ti c inve st me nt , 19 90 -9 9
5
15
25
35
45
1990 1992 1994 1996 1998
Ma urit a nia : G ros s do me st ic sa ving s, 19 90 -9 9
-50
-30
-10
10
30
1990 1992 1994 1996 1998
Mo za m bi q u e: Gr os s d o m es t ic i n ve st m e nt , 1 9 90 - 99
5
15
25
35
45
1990 1992 1994 1996 1998
M o za mb i q ue : Gro s s d om e st i c s av in g s, 1 9 90 -9 9
-50
-30
-10
10
30
1990 1992 1994 1996 1998
N ic ar ag u a : Gro ss do m e st i c i nv es t me n t , 19 9 0 -9 9
5
15
25
35
45
1990 1992 1994 1996 1998
N ic ar ag u a : G ro ss do m e st i c sa vi n gs , 1 99 0 -9 9
-50
-30
-10
10
30
1990 1992 1994 1996 1998
N i ge r: G ro ss d o m es t ic in ve st m e nt , 1 9 9 0- 99
5
15
25
35
45
1990 1992 1994 1996 1998
Nig e r : G ro ss d o m es tic sa v in g s, 1 9 9 0 -9 9
-50
-30
-10
10
30
1990 1992 1994 1996 1998
R w a nd a : Gro ss d om e st i c i nv es t m en t , 1 99 0 -9 9
5
15
25
35
45
1990 1992 1994 1996 1998
Rwa n d a : G ro ss d o me s tic sa v in g s, 1 9 9 0 -9 9
-50
-30
-10
10
30
1990 1992 1994 1996 1998
Appendix table continues….
pg_0034
30
Appendix table (con’t)
Trends in structural transformation, gross domestic investment rates, and gross domestic savings rates
for the 22 HIPCs that reached the enhanced decision point by end-December 2000
Source: World Bank, World Development Indicators, except forGuinea-Bissau's and Madagascar's 1998 and 1999 percentage shares of
manufacturing, which have been updated from more recent IMF country reports (available on the IMF website).
Sao T&P: Structural transformation, 1990-99
0
5
10
15
20
25
1990 1992 1994 1996 1998
Senegal: Structural transformation, 1990-99
0
5
10
15
20
25
1990 1992 1994 1996 1998
Tanzania: Structural transformation, 1990-99
0
5
10
15
20
25
1990 1992 1994 1996 1998
Uganda: Structural transformation, 1990-99
0
5
10
15
20
25
1990 1992 1994 1996 1998
Zambia: Structural transformation, 1990-99
0
5
10
15
20
25
1990 1992 1994 1996 1998
Sa o T &P .: G ro ss do me st ic in ves tm e nt , 1 99 0 -99
5
15
25
35
45
55
65
1990 1992 1994 1996 1998
Sa o T &P .: G ro ss do m es t ic sa vi n gs , 19 9 0 -9 9
-50
-30
-10
10
30
1990 1992 1994 1996 1998
Se ne ga l: G ros s do me st ic in ves tm en t , 1 99 0- 99
5
15
25
35
45
1990 1992 1994 1996 1998
S en eg a l : Gro ss do m e st i c sa vi n g s, 1 99 0 -9 9
-50
-30
-10
10
30
1990 1992 1994 1996 1998
Ta n za ni a : Gro s s d om e st i c i n ves t m en t , 1 99 0 -9 9
5
15
25
35
45
1990 1992 1994 1996 1998
Tan za n i a: G ro ss d o m es t ic sa vi ng s , 19 9 0 -9 9
-50
-30
-10
10
30
1990 1992 1994 1996 1998
U g an d a : G ro ss do m e st ic in v es t me n t , 19 9 0 -9 9
5
15
25
35
45
1990 1992 1994 1996 1998
Za m b ia : Gr o ss d o m es t ic i n ve st m e nt , 1 9 90 - 99
5
15
25
35
45
1990 1992 1994 1996 1998
U ga nd a: G ro ss do me st ic sa vin gs, 1 99 0-9 9
-50
-30
-10
10
30
1990 1992 1994 1996 1998
Za m bi a : Gro ss do m e st i c sa vi n g s, 1 99 0 -9 9
-50
-30
-10
10
30
19 90 1 992 1994 1996 1998
Appendix-Summary Analysis
Given that we are interested to draw conclusions on the macroeconomic foundation of the DSA growth assumptions,
we define a positive trend in the three categories as having realized (1) a total increase between 1990 and 99 of at
least 1 per cent, and (2) a total increase of at least 0.2 per cent during the last 2 years (1997-99). Based on these
minimal criteria for a positive trend, of the 22 HIPCs that have reached the enhanced decision point by end-
December 2000:
-
only 5 countries experienced a positive trend in their structural transformation (Burkina Faso, Guyana, Mozambique,
Rwanda, and Uganda);
-
only 7 countries experienced a positive trend in their share of investment to GDP (Burkina Faso, Cameroon, Honduras,
Mozambique, Nicaragua, Senegal, and Uganda; and
-
only 5 countries have experienced a positive trend in their share of investment to GDP (Benin, Mozambique, Niger, Sao
Tome & Principe, and Senegal.
Finally, note also that within this group of 22 HIPCs, only Mozambique experienced a positive trend in all three
categories.
pg_0035
31
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