Development Policy Review, 2002, 20 (1): 5-24
Overseas Development Institute, 2002.
Published by Blackwell Publishers, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA.
What’s Wrong with the HIPC Initiative and
What’s Next.
Bernhard G. Gunter
This article reviews the problems of the enhanced HIPC initiative and
outlines possible steps towards a more efficient debt and poverty reduction
initiative. After brief comments on the rationale for debt relief, it analyses
some key issues related to the HIPC initiative’s aim to achieve debt
sustainability, describes other fundamental problems of the HIPC
framework, and discusses some less known but still crucial flaws of the
initiative. It then proceeds with necessary improvements for an efficient
debt reduction programme, possible modifications for a revised HIPC
initiative, and some suggestions on how to overcome financing constraints.
Apart from being in several respects unfair, the current framework is
unlikely to permit a lasting exit from unsustainable debt for many HIPCs,
and may lead to a decline in traditional development assistance.
Between 1980 and 1990, the low-income countries’ total stock of external debt grew
rapidly from US$125 billion (in 1980) to US$419 billion (in 1990). In contrast, gross
national product increased only from US$0.9 trillion (in 1980) to US$1.3 trillion (in
1990). In other words, the debt-to-GNP ratio increased from less than 14% in 1980 to
over 31% in 1990. Even though the rescheduling terms of the Paris Club (PC)
increasingly concessional for low-income countries,
most of them continued to face
severe debt-service problems during the 1990s.
Owing to increasing evidence that the
development prospects of many of the heavily indebted and poor countries (HIPCs)
Consultant for the World Bank and Oxfam America/New Rules for Global Finance Coalition. From 1998
to 2000, the author was an economist in the World Bank’s HIPC unit. The views expressed here are the
author’s own and should not be associated with any position or organisation. He wishes to thank Jo Marie
Griesgraber, Eric A. Friedman and Tony Killick for useful comments. For communications, please contact
1. An informal group of creditor governments from mostly industrialised countries that has met regularly in
Paris since 1956 to reschedule bilateral debts, see for more information.
2. Following the Group of Seven (G-7) summits in Toronto (1988), London (1991), and Naples (1994), debt
relief provided on eligible debt was 33%, 50%, and 67%, respectively, with eligible debt defined as pre-
cutoff date, non-ODA (official development assistance) bilateral debt. The cutoff date refers to the date a
debtor country first approached the Paris Club for a debt rescheduling. ODA debt was excluded from debt
reduction, but was usually rescheduled. Note that Easterly’s (1999) argument that substantial debt relief
had been provided to heavily indebted and poor countries (HIPCs) before the HIPC initiative is misleading
as traditional debt relief provided only temporary relief on largely unpayable debt and was only provided
on eligible debt.
3. Of the 37 low-income countries that have rescheduled their debt with the Paris Club during the last two
decades, fewer than one quarter have graduated from the rescheduling process (IMF Survey, Supplement,
Vol. 29, September 2000, p. 17). For a historical description of debt relief for low-income countries from
the Toronto terms to the HIPC initiative, see Daseking and Powell (1999).
6 Bernhard G. Gunter
suffer from unsustainable debt, the member governments of the International Monetary
Fund (IMF) and the World Bank agreed in the autumn of 1996 to the HIPC Initiative.
This initiative defines a country as ‘heavily indebted’ if so-called ‘traditional debt
relief mechanisms’
are unlikely to reduce its external debt to a sustainable level, debt
sustainability being largely determined by a net present value (NPV) debt-to-export
ratio of 200-250% (see more details below). The criterion for being ‘poor’ is to be an
‘IDA-only’ country, i.e. a country that relies on financial resources from the World
Bank’s International Development Association (IDA).
The key slogan of the HIPC
Initiative was that sustainable development requires sustainable debt, and thus the goal
was to reduce the HIPCs’ external debt to a sustainable level.
Compared with decades
of bilateral debt rescheduling, the HIPC initiative was a major break-through with
respect to two related issues. First, it was intended to be a comprehensive solution to the
HIPCs’ unsustainable debt, which would allow HIPCs to exit permanently from
repeated debt rescheduling by reducing their external debt stock to sustainable levels.
Second, given that more and more external debt owed by the HIPCs was multilateral
debt, the HIPC initiative also included a reduction of multilateral debt. The provision of
multilateral debt relief was a difficult step for the international community to take.
However, three years after launching the initiative, it was clear that the original
HIPC framework was not a sufficient solution, and following public pressure, the IMF
and the World Bank formally agreed in September 1999 to enhance the framework. The
enhancements provide broader, deeper, and faster debt relief 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, in
principle, fixed three-year period between decision and completion points by the
concept of a floating completion point (which is reached by the successful
implementation of so-called ‘triggers for the floating completion point’), and (iii) the
provision of interim relief from some creditors between the decision point and the
completion point. At the time the new framework was adopted, it was estimated that the
original and enhanced HIPC frameworks combined would reduce the public and
publicly guaranteed (PPG) debt stocks of the 41 HIPCs by about US$50 million (about
US$28 billion in NPV terms).
4. A net present value (NPV) debt reduction of two-thirds on eligible (see Note 2) bilateral debt (Naples
Originally, Equatorial Guinea and Nigeria were considered to be HIPCs, but have been dropped from the
list of HIPCs as they were later considered to be no longer IDA-only countries. The Comoros, The
Gambia, and Malawi were added once they sati sfied the requirements and asked to be considered for HIPC
debt relief. For the current list of HIPCs and a more detailed description of the HIPC initiative, see the
World Bank’s HIPC website:
6. Based on the original framework, debt relief would be provided irrevocably to each HIPC after reaching
its HIPC completion point, totalling for the group of HIPCs approximately US$20 billion in nominal terms
(approximately US$13 billion in NPV terms); not a huge amount compared with the more than US$200
billion total debt outstanding at the time the original framework was adopted.
7. For a description of the politics and economics delaying HIPC debt relief since 1987, see Evans (1999).
Given that less than 4% of HIPCs’ total external debt was private non-guaranteed (PNG) debt, the
architects of the HIPC framework decided to exclude this debt.
8. Under the enhanced framework, a NPV debt-to-export ratio above 150% (down from 200-250%) is
considered to be unsustainable. For countries having an export-to-GDP ratio of at least 30% (down from
40%) and a government revenue-to-GDP ratio of at least 15% (down from 20%), a NPV debt-to
government revenue ratio of more than 250% (down from 280%) is considered to be unsustainable.
What’s Wrong with the HIPC Initiative and What’s Next. 7
Furthermore, by linking enhanced HIPC debt relief to the preparation and
implementation of nationally-owned participatory poverty reduction strategies –
embodied in Poverty Reduction Strategy Papers (PRSPs) – an important step forward
has been made in placing debt relief within an overall framework of poverty reduction.
However, there are also some problems in linking HIPC debt relief to poverty reduction
strategies. It has been argued that the PRSP requirement either delays enhanced HIPC
assistance or leads to a lower level/quality of country ownership and civil society
participation. Furthermore, evidence is once again mounting that even the enhanced
HIPC framework does not provide long-term debt sustainability for many of the poorest
countries, and various critiques have pointed out a couple of other problems and flaws
of the initiative. Before addressing these critiques that argue that further revisions and
enhancements are needed to make the HIPC initiative an effective instrument for
poverty reduction, we shall first address briefly some of the key arguments against
further debt relief.
Is debt relief needed, and how much.
Though clearly a minority in terms of popular voice, there are some people who believe
that no further debt relief should be provided. Some of the key arguments against
further HIPC debt relief are (i) that debt relief is not just, since the majority of the
world’s poor people live in countries that are not eligible for HIPC debt relief; (ii) that
excessive debt is not the cause of growing poverty but a symptom of waste; and (iii)
that debt service cannot crowd out social expenditures as long as a country receives a
multiple of its debt-service payments in terms of new loan disbursements and grants.
While all three arguments seem to be correct at first sight, a more careful examination
does not support their conclusion against further debt relief.
First, the fact that the majority of the world’s poor people live in countries that are
not eligible for HIPC debt relief may indicate inappropriate HIPC eligibility criteria, not
an argument against debt relief per se. Indeed, some of the world’s poorest countries
have been excluded from the HIPC initiative because – according to the HIPC
initiative’s narrowly defined debt-to-export and debt-to-revenue criteria – their debt is
considered to be sustainable. However, as suggested in Sachs et al. (1999) and in more
detail in EURODAD (2001b), if debt sustainability is approached from a human and
social development perspective, most of the poorest countries do have an unsustainable
Second, while it is true that excessive debt is the result of failed investments, there
are many reasons for these failures. To mention a few: corruption, falling terms of trade,
drought, and internal and external conflicts. Only some of these reasons could be
considered as waste on the part of the debtor countries, but even then, they also reflect
poor lending decisions on the part of creditor countries. As Dittus (1989: 364) pointed
out more than ten years ago, ‘donors have to shoulder part of the responsibility of
assuring that aggregate lending is consistent with debt service capability’. Moreover,
9. For the latest information on issues related to PRSPs, see the World Bank’s comprehensive PRSP website: For a recent review of PRSP documentation, see Booth
and Lucas (2001); for a recent human rights assessment of the PRSP see Cheru (2001); for a human rights
assessment of the HIPC initiative, see Friedman (2000).
8 Bernhard G. Gunter
some reasons for failed investments are beyond the control of either debtor or creditor,
and the outcome, had there been no investments, is likely to have been worse. Simply to
blame the debtor countries only, and to ask the next generation of debtor countries to
pay for the failed investments of earlier decades, does not seem to be appropriate on
either moral or economic grounds.
Third, while it is true that, from a static point of view, debt service cannot crowd
out social expenditures as long as new loans and grants exceed debt-service payments,
social expenditures could be higher if debt service were lower. More importantly, the
seminal contributions by Krugman (1988) and Sachs (1989) have shown that debt relief
is more efficient than the provision of new loans in cases where debt has accumulated
beyond some critical level (point A in Figure 1). Debt accumulated beyond point A
constitutes a debt ‘overhang’ that has a negative impact on private investment, growth
and development. In other words, even new loans and increased social expenditures
may prove ineffective as long as a country is trapped in a situation of unsustainable
debt. Indeed, during the early 1990s, empirical evidence grew that many of the poorest
countries had acquired unsustainably high external debt stocks that had a significantly
negative impact on investment and growth.
1 0
The empirical studies showed that
unsustainable debt burdens crippled development, especially in sub-Saharan Africa.
Figure 1: Relationship between external debt and GNP growth
Given that there is a trade-off between the provision of debt relief and the provision
of new loans and grants, the question that arises is: how much debt relief should be
provided. The theoretically simple answer is that debt relief should be provided until
the debt overhang is removed, in other words, until debt sustainability is secured. As
will be shown in more detail in the next section, the practical answer is more difficult as
there is no agreement on what level of debt is sustainable. In any case, there is a
problem if debt sustainability indicators are derived based on financing limits for debt
10. The main initial contributions are Borensztein (1990), Cardoso (1993), Cohen (1993), Faini and de Melo
(1990), Greene and Villanueva (1991), Schmidt-Hebbel and Müller (1992), and Serven and Solimano
(1993). For more recent evidence see Elbadawi et al. (1997) and Gunter (2001).
GNP Growth
External Debt
What’s Wrong with the HIPC Initiative and What’s Next. 9
relief instead of on empirical analyses. In theory, there is also broad agreement that debt
relief should be additional to existing traditional development assistance and that this
cannot be achieved without increases in overall development budgets.
1 1
However, the
evidence so far seems to indicate that HIPC debt relief has been deducted from
traditional development assistance.
The financing constraints are especially severe for multilateral development banks
As the case of the World Bank’s IDA shows,
multilateral assistance to the
HIPC initiative can only be additional to traditional multilateral development assistance
if overall budget allocations to MDBs are increased in real terms. Excluding increases
earmarked to fight the HIV/AIDS epidemic, there is currently little indication that this
will happen.
1 5
It is thus realistic to assume that HIPC debt relief will reduce traditional
multilateral assistance. With non-increasing development budgets, the only possibility
of increasing the total assistance to HIPCs would be to cut assistance levels to non-
HIPCs. In view of the fact that past aid has flowed to countries that were not committed
to poverty reduction, some reallocation of aid may be justified in line with the recent
efforts to improve aid effectiveness.
1 6
However, considering that some of these non-
HIPCs are actually poorer than the average HIPC (though less indebted), this could
hamper the achievement of the international development goals (IDGs, now also called
millennium development goals, MDGs).
Finally, given that the enhanced HIPC framework determines that each creditor’s
burden-sharing of HIPC debt relief is based on its share in the total NPV debt as of the
decision point, it is only logical that some creditors have reduced their traditional
11. See Culpeper (2001) for a recent analysis of long-term financing needs for the poorest countries.
12. As shown in more detail in Gunter (2001), comparing the three-year average of 1994-6 with the three-year
average of 1997-9, there is a significant decrease in both bilateral disbursements and grants to each of the
four HIPCs that had reached their original decision points in 1997.
13. Some MDBs did not even have enough resources to provide their share of original HIPC assistance. For
example, though Uganda had reached its completion point under the original framework in April 1998, it
is currently (November 2001) still waiting to receive original HIPC assistance from two sub-regional
MDBs (the East African Development Bank and the PTA Bank).
14. IDA’s share of enhanced HIPC assistance will come from two sources, using a pay-as-you-go approach.
Initially, IDA’s share will be financed through IBRD net income allocated into the HIPC Trust Fund (as
was the case in the past). Once these resources are used up, the remaining share of IDA’s enhanced HIPC
assistance will come out of the then current IDA budget. The World Bank estimates that, from 2005
onwards, an annual US$500 million will need to be taken out of then current IDA budgets. Though the
World Bank management stressed that resources taken out of IDA are supposed to be returned in
subsequent IDA replenishments, there is a realistic fear (based on struggles over previous IDA
replenishments) that donor contributions to IDA may not be increased. Thus, IDA resources used for HIPC
debt relief will reduce traditional IDA development projects.
15. This conclusion is drawn from announcements by various OECD countries, some of which intend to
increase thei r aid budgets (e.g., Germany, see Süddeutsche Zeitung, 12 October 2001, p.13) and some of
which intend to decrease their aid budgets (e.g., Japan, see Wall Street Journal, 7 November, p. A14), and
the reactions to the pleas for doubling ODA by World Bank President James Wolfensohn and British
Chancellor of the Exchequer Gordon Brown at the Bank-Fund Meetings in Ottawa, 17-18 November 2001
(as reported in Les Echos, 20 November 2001, p. 9).
16. See the World Bank’s Aid Effectiveness website: for more information,
including the overview of the recent World Bank (2001a) report on Aid and Reform in Africa. A useful
collection of papers on lessons learnt and future directions can be found in Tarp and Hjertholm (2000). For
an extensive study on phasing out Swedish project aid, see Catterson and Lindahl (1999).
17. For definitions of and progress towards the IDGs, see:
10 Bernhard G. Gunter
development assistance to HIPCs. Once the HIPC decision point is reached, this
‘holding back effect’ should disappear; however, as long as creditors believe that further
debt relief will be required in the future, they have little incentive to provide new loans.
The challenge of achieving debt sustainability
A United States General Accounting Office (US GAO, 2000) report reviewed the HIPC
initiative in Spring 2000 and concluded (p.13) that ‘unless strong, sustained economic
growth is achieved, the initiative is not likely to provide a lasting exit from debt
problems’. Like others, it cautions that the growth assumptions used in the country-
specific debt sustainability analyses (DSAs) may be over-optimistic. For example, the
IMF and World Bank assume that export earnings will grow in excess of 9% every year
for 20 years in 4 of the 7 HIPCs the GAO analysed (ibid.: 9).
Over-optimistic growth rates affect debt sustainability in two ways: first, they
imply over-optimistic growth rates for a country’s exports, and second, they
underestimate a country’s future financing needs. Given that the HIPC framework
defines debt sustainability largely by a debt-to-export ratio, 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 unrealistically low
future debt-to-export ratios, which then indicate unrealistic long-term debt
sustainability. As the GAO report points out (p. 15), if Tanzania’s exports grow at an
annual 6.5% (instead of the 9% projected by the IMF and World Bank), Tanzania’s
debt-to-export ratio could be more than twice what the joint IMF/World Bank’s forecast
shows for the projection period.
Recognising this major challenge and the possibility that the HIPC initiative may
not achieve debt sustainability, the IMF and World Bank have issued a paper (2001a) on
the challenge of maintaining long-term debt sustainability, in which they acknowledge
that the NPV debt-to-export ratio is projected to remain above 150% for 10 years or
more for at least 3 HIPCs (Bolivia, Malawi, and Niger). However, a EURODAD
(2001a) study states that, in 2005, the NPV debt-to-export ratio will be above 150% for
at least 5 HIPCs. The IMF/World Bank report (2001a: 22, Fig. 3) also acknowledges
that an export growth rate 1% lower than was achieved in the past will again lead to
raising debt-to-export ratios above 150%. However, without addressing the broad
critique of over-optimistic growth projections, the report concludes that the HIPC
initiative provides a good basis for HIPCs to exit from rescheduling.
A detailed analysis of capital flows, structural transformation, and investment and
savings rates of HIPCs provided by Gunter (2001) shows that there is little
macroeconomic foundation for the high growth projections of HIPC DSAs. Even before
the developments following 11 September 2001, the IMF and World Bank Boards
recognised that HIPC growth assumptions might be too optimistic, and therefore asked
their staffs to clarify when and how to exercise the option of increasing debt relief at the
completion point. Based on these clarifications (see IMF/World Bank, 2001c), the
Development Committee (meeting on 18 November 2001 in Ottawa) recognised the
need to take account of worsening global growth prospects and declines in terms of
trade, when updating HIPC initiative DSAs at the completion point.
18. See the HIPC website ( for the full statement of the Development Committee.
What’s Wrong with the HIPC Initiative and What’s Next. 11
Finally, there is a widespread criticism that the HIPC initiative uses inappropriate
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.
Gunter (2001) has shown that the HIPC initiative neglects standard debt-to-GNP ratios
and is far too restrictive in the application of the fiscal indicator. As a World Bank
(2001b) report shows,
at least 4 countries (Guinea, Mauritania, Niger, and Zambia) will
continue to pay more than 20% of government revenues as external debt service on PPG
debt after enhanced HIPC debt relief.
Other fundamental problems
First, there is a widespread criticism that it was a fundamental mistake to let the
creditors, led by the IMF and World Bank, work out the original framework of the
HIPC initiative. Though it is acknowledged that the IMF and World Bank had
undertaken an extensive consultation process across the world for the 1999 review of
the initiative, the enhanced HIPC framework clearly followed the suggestions of the G7
summit of June 1999 in Cologne. As is reflected in recent criticism of the HIPC
framework voiced in many NGO circles and some United Nations organisations,
developing countries, and especially debtor countries, had little or no say in the final
adoption of the enhanced framework of the HIPC initiative. Given that some developing
countries are major creditors to some HIPCs, their exclusion from the key decision-
making process constitutes a problem.
Second, it is argued that the HIPC initiative has been designed around the concept
of what debt reduction is needed according to inappropriate debt sustainability
indicators, instead of what debt reduction is needed for sustainable development. This
was especially the case under the original framework, which did not have any explicit
link to poverty reduction. While the enhanced framework makes a formal link to
poverty reduction by requiring HIPCs to develop and implement poverty reduction
strategies, enhanced HIPC debt relief is still not calculated on the basis of a country’s
need for sustainable development.
This brings us to another set of important criticisms related to the linking of HIPC
debt relief to PRSPs. It has been argued that such a link implies excessive conditionality
that has unnecessarily delayed the provision of enhanced HIPC debt relief. This applied
especially to the cases of Uganda and Bolivia, which were required to go through a
further round of enhanced decision and enhanced completion points, even though they
had demonstrated a highly successful track record on poverty reduction. As is described
in more detail in US GAO (2000) and Northover (2000), there is an unacceptable
tension between the urgent need for debt relief and the time required to build a
genuinely participatory PRSP process. On the other hand, it has been argued that PRSPs
do not go far enough in incorporating an analysis of the ethnic, religious, and social
tensions which confront the lives of most Africans. Roy (2000) has pointed out that
PRSPs should be accompanied by and integrated with measures to infuse peaceful
diplomacy, peace-making and peace-keeping. Similarly, Cheru (2001) has argued that
19. For example, the enhanced HIPC initiative could have provided debt relief based on a strategy to achieve
the international development goals which the world’s governments have committed to achieve by 2015.
12 Bernhard G. Gunter
the role of PRSP overseers should not be given exclusively to the IMF and World Bank,
but that other, United Nations, agencies should be brought into the process.
Finally, the stated HIPC debt-service savings – comparing actual payments before
and after the HIPC initiative – are distorted by the fact that some HIPCs made unusually
high debt-service payments shortly before reaching the enhanced decision point in order
to avoid any arrears that could have delayed this.
Looking at the same issue from a
different perspective, we can compare actual debt-service payments in the year before
reaching the enhanced decision point with debt-service payments for the year following
it. Such a comparison shows that Nicaragua paid US$9 million more in 2001 (US$117
million) than in 1999 (US$108 million), Niger paid US$21 million more in 2001
(US$49 million) than in 1999 (US$28 million), and Zambia paid US$22 million more in
2001 (US$158 million) than in 1999 (US$136 million). All three HIPCs reached their
enhanced decision points in December 2000.
Less-known problems with the initiative’s framework
As mentioned above, the HIPC initiative’s burden-sharing concept is – compared with
earlier debt initiatives – a major step forward, as all creditors share the costs of the
initiative based on each creditor’s NPV share in outstanding and disbursed debt. Within
the group of some 70 bilateral creditors, the costs for Paris Club members are estimated
at nearly US$12 billion; the costs for non-members are estimated at around US$3
billion. However, to understand this breakdown, it is important to note that the PC is not
a fixed group of countries, but depends on the debtor country’s main creditors. This
explains why in some cases, the PC includes some developing country creditors (Brazil,
Israel, South Africa, Trinidad and Tobago).
Based on current estimates, the top 12 bilateral creditors include three developing
countries (Costa Rica, Brazil and Guatemala; see Table 1). Though the list of bilateral
creditors includes in some cases even HIPCs, no provision has been made to exempt
creditors that are HIPCs from the burden-sharing of the initiative. So far, the experience
has been that it is largely developing country creditors and sub-regional MDBs that
have – due to financial constraints – not fully participated in the provision of HIPC debt
2 2
20. Calculations based on the data provided in Table 4a of World Bank (2001b) seem to indicate that this was
t he case for Guinea, Guinea-Bi ssau, Malawi, Mauritania, Nicaragua, Rwanda, and Zambia, where actual
debt-service payments in the decision-point year increased by 30%, 117%, 26%, 11%, 17%, 90%, and
24%, respectively, compared with actual debt-service payments in the year before the decision point.
Excluding these increases, the actual annual debt-service savings of the enhanced HIPC initiative are at
least US$140 million less.
21. Calculations based on data provided in Table 4a of World Bank (2001b).
22. The HIPC initiative does not constitute international law. HIPCs are therefore obliged to pay their debt
service in full until bilateral agreements have been signed with each bilateral and multilateral creditor.
What’s Wrong with the HIPC Initiative and What’s Next. 13
Table 1: Bilateral and multilateral creditors with the largest HIPC
costs (US$ bn, in 1999 NPV terms)
Bilateral creditors
14.6 Multilateral creditors
of which
of which
2.8 World Bank
2.3 African Development Bank/Fund 2.3
1.4 IMF
1.1 Inter-American Development Bank 1.1
1.0 Other MDBs
United Kingdom
Costa Rica
United States
Other bilateral creditors
Source: HIPC Review 2000: The Enhanced Initiative for Heavily Indebted Poor Countries –
Review of Implementation, September 2000 (available on the HIPC website:; data for multilateral creditors are based on Table 6; data for
individual bilateral creditors are estimates based on combining Tables 6, 10 and 11.
Currency-specific discount rates
A second, less frequently cited problem is related to the fact that the HIPC framework
uses currency-specific discount rates to calculate the NPV debt (which provides the
basis for HIPC assistance). The discount rates used are the currency-specific
commercial interest reference rates (CIRRs) averaged over the last six months before
the reference date of the DSA. CIRRs are provided by the OECD for its member
countries’ currencies, based on commercial lending rates.
2 3
The way the HIPC
framework decided to use these CIRRs entails four problems:
currency-specific CIRRs imply an unfair burden-sharing;
the averaging of CIRRs over 6 months enforces the unfair burden-sharing and
causes a high volatility in estimations of assistance and costs;
23. The CIRR of the Special Drawing Right (SDR) is calculated based on its composite currencies’ CIRRs.
24. Currency-specific discount rates imply a highly unfair burden-sharing whereby booming creditor countries
get rewarded and creditor countries facing or recovering from recession get punished. This is because
booming economies generally have higher CIRRs than countries in or recovering from a recession.
25. As interest rates are changing over time, any change in the DSA reference date implies changes in the
discount rates and thus represents changes in NPV debt and HIPC assistance. As Uganda’s reassessment
under the enhanced HIPC initiative showed, high discount rates and over-optimistic export projections can
make a country’s debt look sustainable, even though it is not. (Based on Uganda’s original completion
point DSA, Uganda’s NPV debt-to-export ratio at end-June 1999 was supposed to be 207%; however, as
the enhanced decision point DSA showed, the actual NPV debt-to-export ratio was 240%.) Together with
volatile exports (or volatile government revenues), this methodology results in highly unpredictable
numbers for HIPC assistance and HIPC costs.
14 Bernhard G. Gunter
the averaging of CIRRs over 6 months implies that HIPCs assessed during a
period of relatively high world interest rates will, ceteris paribus, receive less
HIPC assistance than countries assessed during relatively low interest rates;
the gap in clear rules as to what CIRR to use for non-OECD currencies has led
to arbitrary uses of discount rates in some cases.
2 6
All four problems imply arbitrary results on assistance levels and costs of the HIPC
initiative. The impact of differences in discount rates on the NPV is illustrated by the
following comparison. Consider a US$10 million loan repayable at an interest rate of
4% over 40 years (including 10 years’ grace). Using a discount rate of 6% results in an
NPV of US$7.5 million. Using a discount rate of 2% results in an NPV of US$13.9
million (nearly twice as much). In other words, in this example, every percentage point
difference in the discount rate implies a change in the NPV of about US$1.6 million (or
about 16%).
The impact of different discount rates on a country’s HIPC assistance depends on
(a) the size of the difference in discount rates, (b) the share of NPV debt affected by
differences in discount rates, and (c) the level of indebtedness. If a HIPC’s debt level is
close to what is considered to be sustainable, differences in discount rates could
determine the country ’s eligibility under the initiative.
As the comparison of the costs for Japan and the United States shows, the impact of
different discount rates also has important implications for the creditor country. Among
other factors, especially Japan’s larger exposure, the large difference in discount rates at
the time of the HIPC cost calculations between the US dollar (6.23%) and the Japanese
Yen (2.22%) partly explains why Japan’s costs of the HIPC initiative are so much
higher (US$2.8 billion) than those of the United States (less than US$0.4 billion).
Oxfam International (2000: 10) reports, the Japanese government had threatened some
HIPCs (Ghana, Malawi, and Laos) with a withdrawal of future aid should they ask to be
considered for HIPC debt relief. In addition to Japan’s high exposure to these three
countries, it is likely that the unfair burden-sharing implied by the Yen ’s low discount
rate triggered Japan’s action. In any case, partly through mediation and partly based on
a cost-benefit analysis, Malawi decided in Summer 2000, and Ghana in Spring 2001, to
request HIPC assistance.
Debt rescheduling
Given that the key goal of the HIPC initiative is to provide a lasting exit from repeated
debt rescheduling, it does not make sense for some HIPC debt relief to be provided
through debt rescheduling. However, following previous Paris Club arrangements,
official development assistance (ODA) was to be rescheduled over 40 years (including
16 years grace) at original interest rates.
26. This arbitrariness is reflected in various HIPC documents. For example, the Preliminary HIPC document
of Tanzania (prepared in October 1999) used the SDR’s CIRR for all currencies which do not have their
own CIRR; however, the Guinea document (prepared in December 1999) used the US dollar’s CIRR
(6.23%) for the Chinese Yuan, the French Franc’s CIRR (5.35%) for currencies pegged to the French
Franc, and the SDR’s CIRR (5.25%) for the other currencies which do not have an established CIRR.
27. CIRRs are six-month averages of July-December 1998, as used for most 1999 DSAs.
What’s Wrong with the HIPC Initiative and What’s Next. 15
In most cases, the ODA debt rescheduling does not provide much NPV debt
reduction, and thus, large debt reductions in non-ODA had to compensate for the
insufficient NPV reduction from the ODA rescheduling. In cases where the original
ODA debt interest rate is higher than the discount rate, the ODA rescheduling actually
increases the NPV of ODA. The case of Tanzania’s Naples terms stock of debt
reduction (67% reduction in NPV terms) shows how strong this impact of ODA debt
rescheduling can be. Even though some non-ODA debt gets cancelled, it still turns out
that total debt service during fiscal years 2000 to 2018 is higher after the Naples terms
stock of debt reduction than before these terms stock.
Note that this example does not
even take into account the additional increases in debt service for the fiscal years after
2018. This implies that even though a HIPC can obtain a relatively high debt reduction
in NPV terms, its nominal debt-service payments (spread over time) can actually
The delivery of HIPC debt relief through debt reschedulings applies also to some
MDBs. A variety of MDBs claim that their charters do not allow them to cancel debt
stock or debt service. Given these legal constraints (or the inability/unwillingness to
change charters) and the HIPC framework’s gap in defining how HIPC assistance will
need to be provided, IMF and World Bank staff have left it to each creditor to decide on
how to provide its share of NPV debt relief. While concessional reschedulings can
provide the NPV assistance required under the HIPC initiative, the actual benefit to the
debtor country may be marginal. The simplified example in Annex 1 illustrates this
Necessary improvements
Based on the above analysis, an efficient debt reduction programme would benefit from
various improvements.
With regard to HIPC DSAs, (i) DSA growth projections would
need to be based on realistic growth assumptions, which, for example, take into account
the negative impact of AIDS, (ii) debt sustainability indicators would need to focus on
sustainable development instead of on inappropriate debt sustainability criteria, which
also implies that (iii) the amount of debt relief would need to be based on globally
agreed debt sustainability indicators that include a debtor country’s fiscal constraints in
achieving the international development goals. With regard to HIPC debt relief, it
should (i) not be deducted from traditional (bilateral and multilateral) development
assistance, and (ii) not be provided through debt rescheduling. Furthermore, (i)
solutions need to be found for current financing constraints as well as for any further
enhancements of the initiative, (ii) mechanisms need to be designed to provide faster
debt relief without calling into question the efficiency of debt relief, and (iii)
modifications are needed with regard to the use of currency-specific discount rates in
order to make the initiative fairer, more predictable, and even simpler. Finally, to avoid
donors holding back their assistance to countries that have not yet reached their decision
28. Table 11 of Tanzania’s Enhanced Decision Point Document (published on the HIPC website) compares
the average external debt service before and after a Naples Terms stock of debt reduction. It shows that the
average annual debt service for fiscal years 2000 to 2009 decreases after the Naples terms stock of debt
reduction (from US$283m. to US$255m.), but increases by more than that for fiscal years 2010 to 2018
(from US$345m. to US$379m.).
29. A more Jubilee 2000-oriented set of suggestions for solutions can be found in Roodman (2001).
16 Bernhard G. Gunter
points, assistance levels should be based on relative shares in NPV debt as they existed
before creditors adjusted their new lending.
Possible modifications
There is a wide range of suggestions on how to improve the enhanced HIPC initiative.
At one end of the spectrum are suggestions for further marginal improvements in the
enhanced framework, like the acceleration of the provision of HIPC relief. At the other
end are suggestions to replace the initiative, for example, with an international
bankruptcy court (see Raffer, 1993). Even though the IMF has recently agreed to work
out a sovereign bankruptcy scheme that would allow countries to seek legal protection
from creditors that stand in the way of restructuring, it is unlikely that a completely new
framework will replace the HIPC initiative. It is more likely that further enhancements
may be adopted over time. Most of the enhanced HIPC framework could be used as a
first round of country-specific debt reduction. A second round, using a modified
framework, could concentrate on how more debt-service cancellations would be needed
to achieve the international development goals.
The following are some suggestions for possible modifications. They should not be
understood as a blueprint for the next level of the HIPC initiative. The next set of
modifications should be based on extensive consultations, whereby the voice of
developing countries should have more influence in the outcomes than they have had up
to now. Given the dominance of industrial countries in the decision-making of the IMF
and World Bank, a series of conferences organised by the United Nations (like those
organised in the first half of the 1990s for the definition of the international
development goals for 2015) may provide a better organisational setting, especially as
debt sustainability would need to be discussed in the context of achieving the
international development goals. It is not yet clear how much attention will be given to
debt reduction at the March 2002 International Conference on Financing for
Development, as the emerging synthesis seems to be that debt reduction is only one of
many possible actions and instruments to support poverty reduction strategies.
Possible modifications in the HIPC framework
Unify discount rates All of the problems related to currency-specific discount rates
could be avoided by adopting a single fixed discount rate for all currencies, all creditors,
and all debtors. For example, a ten-year (1990-9) backward-looking average of the
SDR’s CIRR could be used to establish a simple and consistent discount rate.
Apply efficient debt sustainability criteria Evidence is growing that the only
useful debt sustainability criteria for HIPCs have to be related to fiscal indicators. The
NPV debt-to-government-revenue indicator could, together with poverty levels and
other country-specific vulnerability factors, be used for the assessment of long-term
debt sustainability. A debt-service-to-government-revenue indicator could, together
with necessary investments for anti-poverty programmes, be used to determine the
maximum annual debt service due. In any case, there should be no minimum thresholds
to apply these fiscal indicators. Furthermore, countries should not be discouraged from
improving their revenue collection and should at the same time not be punished (in the
form of lower HIPC assistance) for improvements in government revenue collection.
What’s Wrong with the HIPC Initiative and What’s Next. 17
Thus, the reference revenue components should be based on long-term backward-
looking averages ending with the year before the modification is adopted as a
framework, not the country-specific decision points. An international agreement on
some limits of debt-service payments (defined as long-term debt-to-government-
revenue ratios) could help to avoid the effects of debt overhang.
Adjust burden-sharing according to economic power The non-participation of
some creditors and the comparison of burdens across countries
3 0
indicate that the HIPC
initiative’s burden-sharing concept will need to be revised at some time. The current
burden-sharing concept may be acceptable for industrialised country creditors, but is
less acceptable for developing country creditors, which are sometimes not much better
off than the debtor. The initiative’s burden-sharing makes sense for relatively resource-
rich multilateral institutions, but is less convincing for regional MDBs which depend on
non-regional bilateral donor support in order to be able to provide their share.
the HIPC initiative has attempted to co-ordinate the donor assistance to MDBs through
the HIPC Trust Fund, there is no obligation for an industrialised country to contribute
its ‘fair’ share (what fair means would need to be defined). This implies a co-ordination
failure of donor contributions and results in an under-funding of the HIPC Trust Fund.
A possible modification could be to adjust the bilateral burden-sharing according to
the creditor’s economic power.
In the case of burden-sharing among multilateral
creditors, it could be made dependent on the availability of industrialised country
An economic power-adjusted burden-sharing also makes sense based on
the further integration of debt relief and poverty reduction.
Apply country-specific vulnerability factors Another modification could be to
take country-specific vulnerability factors, especially poverty levels, into account in
determining the amount of debt relief. Country-specific vulnerability factors were used
30. For example, based on the current burden-sharing concept, costs for Costa Rica (US$358m.) are higher
than those for the United States (US$347m.). Looking at the current initiative’s burden-sharing in terms of
per capita costs, each person in Costa Rica, Kuwait, and Trinidad & Tobago is supposed to contribute
around $100, while the highest per capita costs for industrialised countries are around $40. For the United
States, the per capita costs of the enhanced HIPC Initiative are just over $1.
31. Cline (1997) has suggested that not even the IMF and World Bank are supposed to use their resources for
HIPC debt relief, but that the bilateral creditors should cover their shares, as they are the shareholders of
the multilateral institution. See especially Cline's interesting section on Peter or Paul.
32. Unfortunately, the Paris Club has recently gone in the other direction. Instead of shifting the burden of
HIPC assistance from the poor creditor countries to the rich creditor countri es, a change in the
methodology of how to share the costs among the bilateral creditors in late 1999 shifted the burden
towards the non-PC countries. Under the original framework, the costs among bilateral creditors were
calculated based on the NPV of pre-cutoff date and non-ODA debt. Under the new framework, the burden-
sharing among bilateral creditors is based on total NPV debt outstanding at the decision point.
Comparisons between the two methodologies show that the bilateral costs have been shifted towards non-
PC creditors as they have relatively more post-cutoff-date debt than the PC creditors.
33. An interesting point is that the resource-richest MDB, the World Bank’s IBRD, has asked bilateral donors
to provide its share of HIPC assistance. In contrast, the IBRD has used part of its net income to support the
World Bank’s IDA. The reason for these manoeuvres and accounting tricks is that the IBRD fears negati ve
impacts on its creditor ratings if it were to provide its own HIPC assistance. Yet, most other MDBs do not
constitute two legally separated entities and are asked to use their own resources as far as possible to
provide their HIPC assistance.
18 Bernhard G. Gunter
in the original framework but were dropped in the enhanced framework, as Bank and
Fund staff often disagreed on specifics. Instead of dropping these useful considerations
and adopting a Joint Bank-Fund Implementation Committee of the HIPC initiative in
Summer 2000, it might have been more efficient to divide some HIPC implementation
tasks as well as some PRSP assessments according to each institution’s comparative
Ease eligibility criteria Once debt sustainability indicators and debt relief are based
fully on fiscal indicators that take account of the need for expenditures on poverty
reduction, it would make sense to extend the debt initiative to all IDA-only countries as
long as they spend the debt-service savings on poverty reduction. Furthermore, it might
be more appropriate to exchange the current nominal income-related eligibility criterion
with one based on purchasing-power-adjusted income.
Possible modifications related to debt relief
Accelerate HIPC debt relief One way to accelerate HIPC debt relief would be to
reduce permanently the requirements for reaching the enhanced HIPC decision point.
Following a suggestion of Oxfam International (2000), the enhanced decision point
could be reached once a government produces an Interim Poverty Reduction Strategy
Paper that provides some details on the workings of a poverty fund.
3 4
Indeed, partly
related to a temporary lowering of requirements, which was due to the IMF’s and World
Bank’s promise that 20 countries would reach the enhanced decision point by the end of
2000, 15 countries reached their enhanced decision points between July and December
2000. In contrast, between January and June 2001, only one country (Chad) reached the
enhanced decision point.
Once the decision point has been reached, another way to accelerate HIPC debt
relief would be to front-load the relief. Much rhetoric has surrounded the front-loading
of HIPC debt relief, but the facts are different. Based on data provided by the World
Bank (2001b), for the 23 countries that had reached their enhanced decision point by the
end of June 2001, the average annual debt-service savings during 2001-3 are only 5%
(US$1.7 billion) of the total HIPC debt-service savings (US$34 billion) for these 23
countries. In other words, assuming that all HIPC debt-service savings will be provided
within 20 years of reaching the enhanced decision point, there is (at the aggregate level
of these 23 HIPCs) zero front-loading of HIPC debt relief. With regard to our discussion
on a possible strengthening of requirements to reach the HIPC completion point, this
may only be acceptable if interim relief were to be more front-loaded.
Base annual amounts of debt relief on economics The profile of HIPC debt
relief should be based on a combination of development needs and the debt profile,
instead of on fixed rules established independently by each creditor. Given that interim
relief may not be provided by all creditors, the World Bank could revise its interim
assistance rules to cover for this shortfall when it is most needed to reach the
completion point. Note that this would not imply any costs to the Bank, as HIPC
assistance is determined in NPV terms except, of course, if another round of HIPC debt
34. The main purpose of the poverty fund would be to ensure that debt-service savings are spent on poverty-
reducing activities that are additional, compared with poverty-related expenditures of previous years.
What’s Wrong with the HIPC Initiative and What’s Next. 19
relief (HIPC-3) is expected and HIPC-3 assistance were to be based on a new round of
HIPC-3 decision points.
Cancel ODA debt Some creditors have already indicated that they intend to provide
debt relief beyond what is required under the enhanced HIPC initiative, especially with
regard to existing ODA debt. The cancellation of ODA debt is long overdue, especially
as a United Nations resolution called for the cancellation of all ODA debt more than
twenty years ago. Some countries followed the UN resolution by cancelling all their
ODA claims many years before the HIPC initiative. The fact that only some creditor
countries had cancelled contributed to the current burden-sharing concept of the HIPC
initiative. If all creditors were to cancel their ODA claims, it might also be easier to
revise the HIPC initiative’s burden-sharing concept to include a component related to a
creditor’s economic power.
Overcoming financing constraints
Some of the most serious deficiencies of the HIPC framework can be related to
financing constraints and the mind-set that a sparrow in the hand is better than two in
the bush. Financing constraints have led to the adoption of an inadequate framework, (a)
in terms of achieving definitive debt sustainability, and (b) in terms of the time it will
take HIPCs to reach the enhanced completion point. Yet, even the enhanced framework
implies financing constraints, especially for developing country creditors and regional
and sub-regional MDBs. Given the existing financing constraints, it seems unrealistic to
demand further enhancements without making some suggestions as to where these
additional resources could come from.
Building public support for debt reduction
If debt relief were seen as part of an overall strategy to eradicate extreme poverty
worldwide, the burden-sharing concept would need to be related to economic power.
While this would eliminate the financing gap for the poor creditors, it would increase
the financing requirements of the rich creditors. Given that the 21 Development
Assistance Committee (DAC) members of the OECD spend, on average, only 0.24% of
their gross national product on official aid for developing countries and multilateral aid
3 5
the financing constraints of the DAC members seem to be more political
than real. A coalition of governments, MDBs, NGOs and church groups, all working
together to persuade the public that debt relief and poverty eradication are a necessity
based on moral as well as on economic grounds, could lead to broad-based support to
increase the development budgets in the most delinquent industrialised countries to at
least financing the eradication of extreme poverty worldwide. Indeed, a recent
IMF/World Bank (2001b: 5) statement indicated that the heads of the IMF and World
Bank ‘would gladly join a campaign to convince industrial countries to move to the
longstanding UN target for official development assistance of 0.7% of GNP within ten
35. See Prof. Thirlwall’s letter to the edit or of the Financial Times, 25 July 2001, p.12.
20 Bernhard G. Gunter
A more comprehensive poverty reduction strategy
It is crucial to integrate debt relief into a global poverty reduction strategy and not to
suggest an unconditional write-off of all HIPC debt. An unconditional write-off will
neither foster growth nor help the poor, since no country will achieve sustainable
growth without internal and external peace, progress towards which can only be made
by improved governance, covering a broad range of policies that aim at enhancement of
the rule of law, the establishment of property rights, less corruption, an improvement in
the overall legal system, and an uncorrupted public leadership. However, in cases where
it is obvious that a country is serious about reducing poverty but has not reached the
completion-point triggers because of factors beyond its control (such as, for example, a
flood), reaching the enhanced completion point should not be based on checking off
completion-point triggers.
New global taxes or reallocations of existing budgets
There are two ways to increase development budgets worldwide. The more familiar one
would be to introduce a global tax, like a global Tobin tax
on cross-border currency
transactions or a global tax on carbon-emitting fossil fuels. The other way would be to
reallocate funds from expenditures that are a waste from a global point of view to
expenditures aimed at development assistance. What comes to mind is a cut in world
military expenditure. Unfortunately, neither suggestion is currently feasible owing to a
lack of political support (though the Tobin tax has gained some attention, especially in
Europe, over the last few months). However, given that a one-off 1% cut in
industrialised countries’ defence budgets would be enough to cancel 100% of the
external debt of all IDA-only countries over the next twenty years, more of such
maximum solutions should be considered.
Finally, besides increasing development
budgets, steps are also under way to increase the efficiency of current donor
programmes and the poverty reduction programmes of recipients.
Compared with other debt initiatives implemented over the past two decades, the HIPC
initiative represents a huge step forward. It was a breakthrough in terms of (a) its aim to
provide a lasting exit from unsustainable debt and achieve debt sustainability and (b) its
approach to including multilateral creditors in sharing the costs related to debt relief.
The HIPC initiative is to be commended for providing more debt relief to HIPCs than
the sum of all previous debt reschedulings. The enhanced initiative has also started to
link debt reduction to poverty reduction.
36. See the Tobin Tax Initiative website: for more up-to-date information.
37. The annual defence expenditures of the industrialised countries are estimated to be about US$650 billion;
the total external debt of all IDA-only countries is estimated to be about US$125 billion (in NPV terms).
38. As Lancaster (2000: 80) has pointed out, at the end of the 1990s, there were more than 40 poorly co-
ordinated aid agencies working in numerous African countries, pursuing their own priorities, and
expecting their own separate administrative and procurement requirements to be met. This has
overwhelmed African officials and disrupted government budgets.
What’s Wrong with the HIPC Initiative and What’s Next. 21
However, the enhanced HIPC initiative (a) is unlikely to achieve a lasting exit from
unsustainable debt for many HIPCs, (b) suffers from some fundamental flaws in its
design, (c) continues to face considerable financing constraints, (d) applies an
inappropriate burden-sharing concept, and (e) may lead to a reduction in traditional
development assistance. The first and last problems are certainly the most critical ones
in determining the success of the initiative in terms of long-term poverty reduction and
the achievement of the international development goals. As the IMF/World Bank
(2001b) statement has pointed out, ‘a decline of just 10% in new flows would wipe out
the benefits of HIPC debt relief’.
A first step towards reaching debt sustainability would require the IMF and World
Bank to stop praising the current HIPC framework and acknowledge the need for
further enhancements. This would allow their staff to join others in the search for better
solutions. At a broader level, this requires primarily a rethinking towards a long-term
interdependence between rich and poor countries. To reduce poverty is a shared
responsibility of all countries.
Finally, the costs of debt relief and poverty reduction programmes should not be
seen as an economic burden but as investments in the future. Experience from the past
(for example, the 1953 debt relief provided to Germany after World War II) shows that
debt relief can pay for itself in terms of political stability and contributions to world
growth. It should not be surprising that political instability, ethnic conflicts and war are
re-occurring in poor countries facing unsustainable debt (see also Collier and Hoeffler,
2000). A marginal cut in world military expenditures allocated to a global poverty
reduction strategy would boost global peace and reduce the costs of future peace-
keeping efforts around the globe.
Booth, David and Lucas, Henry (2001) ‘Initial Review of PRSP Documentation’.
Report commissioned by DFID for the Strategic Partnership with Africa. London:
Overseas Development Institute. (Also available at
Borensztein, Eduardo (1990) ‘Debt Overhang, Credit Rationing, and Investment’,
Journal of Development Economics 32 (2): 315-35.
Cardoso, Eliana (1993) ‘Private Investment in Latin America’, Economic Development
and Cultural Change 41 (4): 833-48.
Catterson, Julie and Lindahl, Claes (1999) The Sustainability Enigma: Aid Dependency
and the Phasing Out of Projects: The Case of Swedish Aid. Stockholm: Ministry of
Foreign Affairs, Department for International Development Co-operation, Expert
Group on Development Issues (EGDI). (Also available at
Cheru, Fantu (2001) ‘The Highly Indebted Poor Countries (HIPC) Initiative: A Human
Rights Assessment of the Poverty Reduction Strategy Papers (PRSP)’. New York:
United Nations, Economic and Social Council, Commission on Human Rights.
(Available at
Cline, William R. (1997) ‘Debt Relief for Heavily Indebted Poor Countries: Lessons
from the Debt Crisis of the 1980s’, in Z. Iqbal and R. Kanbur (eds), External
22 Bernhard G. Gunter
Finance for Low-Income Countries. Washington, DC: International Monetary
Cohen, Daniel (1993) ‘Low Investment and Large LDC Debt in the 1980s’, American
Economic Review 83 (3): 437-49.
Collier, Paul and Hoeffler, Anke (2000) ‘Aid, Policy and Peace’ (mimeo). (Available at
Culpeper, Roy (2001) Capital Volatility and Long-Term Financing for the Poorest
Countries. London: International Development Committee (IDC). (Also available
Daseking, Christina and Powell, Robert (1999) From Toronto Terms to the HIPC
Initiative: A Brief History of Debt Relief for Low-income Countries. IMF Working
Paper No.142. Washington, DC: International Monetary Fund. (Available at
Dittus, Peter (1989) ‘The Budgetary Dimension of the Debt Crisis in Low-Income Sub-
Saharan Countries’, Journal of Institutional and Theoretical Economics 145 (2):
Easterly, William (1999) How Did Highly Indebted Poor Countries Become Highly
Indebted. Reviewing Two Decades of Debt Relief. Policy Research Working Paper
No.2346. Washington, DC: World Bank. (Also available at www.econ.worldbank.
Elbadawi, Ibrahim A., Ndulu, Benno J. and Ndung’u, Njuguna (1997) ‘Debt Overhang
and Economic Growth in Sub-Saharan Africa’, in Z. Iqbal and R. Kanbur (eds),
External Finance for Low-Income Countries. Washington, DC: International
Monetary Fund.
EURODAD (2001a) Debt Reduction for Poverty Eradication in the Least Developed
Countries: Analysis and Recommendation on LDC Debt. Brussels: EURODAD.
(Available at
EURODAD (2001b) Putting Poverty Reduction First: Why a Poverty Approach to Debt
Sustainability Must be Adopted. Brussels: EURODAD. (Available at www.eurodad.
Evans, Huw (1999) ‘Debt Relief for the Poorest Countries: Why Did it Take so Long.’,
Development Policy Review 17 (3): 267-79.
Faini, Ricardo and de Melo, Jaime (1990) ‘Adjustment, Investment, and the Real
Exchange Rate in Developing Countries’, Economic Policy 5: 492-512.
Friedman, Eric A. (2000) ‘Debt Relief in 1999: Only One Step on a Long Journey’,
Yale Human Rights and Development Law Journal 3: 191-220. (Available at
Greene, Joshua and Villanueva, Delano (1991) ‘Private Investment in Developing
Countries’, IMF Staff Papers 38 (1): 33-58.
Gunter, Bernhard G. (2001) ‘Does the HIPC Initiative Achieve its Goal of Debt
Sustainability.’ Paper presented at the WIDER/UNU Conference on Debt Relief.
Helsinki: WIDER. (Also available at
Hersel, Philip (1998) ‘The London Agreement of 1953 on German External Debt:
Lessons for the HIPC-Initiative’, in EURODAD, Taking Stock of Debt Creditor
Policy in the Face of Debtor Poverty. Brussels: EURODAD.
What’s Wrong with the HIPC Initiative and What’s Next. 23
International Monetary Fund and World Bank (2001a) ‘The Challenge of Maintaining
Long-Term External Debt Sustainability’. Progress Report. Washington, DC: IMF
and World Bank. (Available on the HIPC website:
International Monetary Fund and World Bank (2001b) ‘100 Percent Debt Cancellation.
A Response from the IMF and the World Bank’. Washington, DC: IMF and World
Bank. (Available on the HIPC website:
International Monetary Fund and World Bank (2001c) ‘Enhanced HIPC Initiative –
Completion Point Considerations’. Washington, DC: IMF and World Bank.
(Available on the HIPC website:
Krugman, Paul (1988) ‘Financing vs. Forgiving a Debt Overhang’, Journal of
Development Economics 29 (3): 253-68.
Lancaster, Carol (2000) ‘Redesigning Foreign Aid’, Foreign Affairs 79 (5): 74-88.
Mistry, Percy S. (1996) Resolving Africa’s Multilateral Debt Problem . The Hague:
Forum on Debt and Development.
Northover, Henry (2000) PRS – Poverty Reduction or Public Relations Strategies.
Policy Papers. London: CAFOD. (Available at
Oxfam International (2000) Make Debt Relief Work: Proposals for the G7 . London:
Oxfam International. (Available at index.html.)
Raffer, Kunibert (1993) ‘What’s Good for the United States Must Be Good for the
World: Advocating an International Chapter 9 Insolvency’, in Bruno Kreisky
Forum for International Dialogue (ed.), From Cancun to Vienna . Vienna:
International Development in a New World.
Roodman, David Malin (2001) Still Waiting for the Jubilee: Pragmatic Solutions for the
Third World Debt Crisis. Paper No. 155. Washington, DC: Worldwatch Institute.
Roy, Sumit (2000) ‘Globalization, Debt Relief and Poverty Reduction: Concepts and
Policies’. Paper based on the first millennium Lecture/Seminar of the London
School of Hygiene and Tropical Medicine, London University, London: City
University. (Also available at
Sachs, Jeffrey (1989) ‘The Debt Overhang of Developing Countries’, in J. de Macedo
and R. Findlay (eds), Debt, Growth and Stabilisation: Essays in Memory of Carlos
Diaz Alejandro. Oxford: Blackwell.
Sachs, Jeffrey (2000) ‘The Charade of Debt Sustainability’, Financial Times, 26
September, p. 17.
Sachs, Jeffrey, Botchwey, Kwesi, Cuchra, Maciej and Sievers, Sara (1999)
Implementing Debt Relief for the HIPCs. Cambridge, MA: Center for International
Development, Harvard University. (Available at
Schmidt-Hebbel, Klaus and Müller, Tobias (1992) ‘Private Investment under
Macroeconomic Adjustment in Morocco’, in A. Chhibber, M. Dailami and N.
Shafik (eds), Reviving Private Investment in Developing Countries: Empirical
Studies and Policy Lessons. Amsterdam: North Holland.
Serven, Luis and Solimano, Andres (1993) ‘Debt Crisis, Adjustment Policies and
Capital Formation in Developing Countries: Where Do We Stand.’, World
Development 21 (1): 127-40.
Tarp, Finn and Hjertholm, Peter (eds) (2000) Foreign Aid and Development: Lessons
Learnt and Directions for the Future. Copenhagen: Development Economic
Research Group (DERG). (Also partly available at
24 Bernhard G. Gunter
United States General Accounting Office (GAO) (2000) Developing Countries: Debt
Relief Initiative for Poor Countries Facing Challenges. Washington, DC: United
States General Accounting Office. (Also available at
World Bank (2001a) Aid and Reform in Africa: Lessons from Ten Case Studies,
Washington, DC: World Bank.
World Bank (2001b) Financial Impact of the HIPC Initiative: First 23 Country Cases.
Washington, DC: World Bank. (Available on the HIPC website at www.worldbank.
Annex 1: The impact of debt reschedulings
Assume that a highly indebted poor country exports goods and non-factor services to
the amount of US$30 million a year, growing at an annual real growth rate of 5%. The
country’s bilateral and multilateral debt stock amounts to $96m. each. Assume that all
debt is highly concessional (with an interest rate of 1% and repayable over 20 years).
Applying the original HIPC initiative’s debt-service-to-export indicator of 20-25%, the
country’s debt is not sustainable. Given this situation, all bilateral creditors agree to
grant the country a reduction in its debt stock of more than 80% in NPV terms, reducing
the nominal debt to bilateral creditors to US$18m. This reduces annual debt-service
payments to bilateral creditors to about US$1m. The country’s multilateral creditors
have also agreed to provide more than 80% debt relief in NPV terms, though not
through a reduction in debt stock, but by the cancellation of all interest payments and a
rescheduling of the outstanding principal over 60 years, including 20 years’ grace. To
keep the example simple, assume that all creditors have agreed to provide all new
financing in the form of grants. Let us look at the country’s situation in 20 years’ time:
a) all bilateral debt will have been repaid, b) all interest on multilateral debt will have
been been cancelled, c) there are no debt-service obligations related to new debt, and d)
the country’s exports may have grown to US$80m. (assuming an optimistic annual real
growth rate of 5%). Yet the country still faces unsustainable principal payments on
multilateral debt, amounting to US$24m. a year.
Note that an 80% reduction in debt stock in NPV terms on multilateral debt would
have provided debt sustainability, but that a more than 80% reduction in NPV terms
through rescheduling and interest cancellation does not. The intuitive explanation is that
a debt rescheduling does not solve the problem but simply pushes it into the future.
There is no guarantee that the country will be able to pay currently unsustainable debt in
the future. However, as long as the discount rate is higher than the interest rate, every
grace year implies a reduction in NPV terms. In cases where the discount rate is lower
than the interest rate, debt rescheduling increases the NPV.
Finally, note that debt rescheduling does not usually imply a cancellation of
interest, and thus the nominal sum of interest and principal repayments increases with
every grace year. If a country remains insolvent after the debt rescheduling’s grace
period, it is actually worse off since it has wasted resources on interest payments
without achieving long-term debt sustainability.