The World Bank, Debt Relief and Poverty Reduction

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The World Bank, Debt Relief and Poverty Reduction

• Global Issues Seminar
• October 3, 2007

Mark Roland Thomasmthomas1_at_worldbank.org
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Why is Low Income Country Debt a Global Issue?

• The Practical
• From the late 1980s, many countries had
  difficulties repaying
• Debt relief is a means of delivering aid and a
  means of lobbying for more aid
• The Ethical
• People dont like the idea of poor countries
  paying money to rich countries
• Some of the debt dates back to the 1970s and
  1980s and some outcomes were disappointing
• The Political
• Some advocacy groups have made this their sole
  issue
• Some may see it as a way to further political
  agendas

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The Practical Some countries got into trouble
The Share of External Debt to GDP (in NPV terms)
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The Ethical and the Political Whats in the media

• Rich countries should forgive
• Debts that a country can't afford to repay
  without meeting its peoples basic needs
• Debts on loans that the lender knowingly gave to
  dictators or oppressive regimes
• Debts on loans that the lender knew was going to
  be stolen through corruption
• Debts in payment for projects that failed because
  of bad advice or incompetence by the lenders
• Debt on unfair terms, such as very high interest
  rates
• Debts contracted illegally, where proper
  processes werent gone through

Source Jubilee UK website
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Why not just forgive everything?

• This would cut into future aid flows
• A dollar of debt relief without donor
  replenishment is a dollar that cannot be lent or
  given to a new recipient
• This would make future borrowing costlier for
  developing countries
• Lenders would have to price risk of future
  write-off into their cost structure
• This would set the wrong incentives
• We should aim to reward aid recipients that use
  resources successfully, not poorly

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What Does the World Bank Do on LIC Debt?

• Debt Relief
• HIPC
• MDRI
• Commercial Debt Buybacks
• The Debt Reduction Facility
• Debt Sustainability
• The joint Bank-Fund framework (DSF)
• Outreach to other creditors
• Debt Management Capacity Building
• A global partnership
• Performance measurement and technical assistance
  with debt management strategy

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Debt Relief the Process
Completion Point
Post-completion point
Interim period
Pre-decision point
Preparation of an interim PRSP
Satisfactory performance under PRGF
Arrears Clearance Plan
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The Two Debt Relief Initiatives

• HIPC
• Comprehensive burden sharing
• Threshold debt ratios
• 150 of exports or 250 of revenues
• MDRI
• Four institutions
• Debt write-off
• With cut-off date (2003/2004)

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Debt Relief the Countries

• 41 countries (33 in Africa)
• 22 completion-point
• 10 decision-point
• 9 pre-decision point
• HIPCMDRI about 95 billion in 2006 dollars
• HIPC 68 billion (2006)
• 33, 12, 23 billion for the three groups,
  respectively
• MDRI 27 billion (2006)

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Debt Reliefthe Countries
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Benin
Bolivia
Burkina Faso
Cameroon
Ethiopia
Ghana
Guyana
Honduras
Madagascar
Malawi
Mali
10
9
Mauritania
Afghanistan
Mozambique
Eritrea
Burundi
Nicaragua
Kyrgyz Rep.
Central African Rep.
Niger
Nepal
Chad
Rwanda
Comoros
Congo, Dem. Rep.
São Tomé Principe
Côte dIvoire
Congo, Rep.
Senegal
Liberia
The Gambia
Sierra Leone
Somalia
Guinea
Tanzania
Sudan
Guinea-Bissau
Uganda
Togo
Haiti
Zambia
Interim-HIPC
Pre-HIPC
Post-HIPC
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Breakdown of Debt Relief
MDRI
HIPC
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IDA the largest single provider

• 1/5 of HIPC commitments to date
• 14 billion of 68 billion
• 2/3 of MDRI commitments to date
• 17 billion of 27 billion
• 1/3 of total commitments to date
• 31 billion of 94 billion

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Remaining Debt Stocks(22 completion points)
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Debt Service Ratios

• HIPC
• From 18 of exports at decision point to 8 4
  years later
• MDRI
• From 9.7 in 2005 to 3.3 in 2011

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Spending

• Pro-poor spending in decision-points went from
  about 6 billion in 2000 to about 17 billion in
  2006
• 5 times debt service
• Some success stories in terms of growth and
  poverty reduction
• Tanzania, Ghana, Mozambique, Uganda
• E.g., In Tanzania, underweight children fell from
  30 to 22 between 2000 and 2005
• Hard to attribute causal effect solely to debt
  relief

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Avoiding Future Debt Distress

• The financial landscape has changed
• Debt relief gives the impression of borrowing
  space even if policies have not changed
• Commercial lenders and emerging bilateral
  creditors now lend much more to LICs
• Countries have large financing needs to meet the
  MDGs
• What is the right amount of new borrowing?
• In 2005 the Bank and the Fund introduced the
  joint debt sustainability framework (DSF) for
  LICs

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Strengthening Debt Management

• The Bank and the Fund reach out to all creditors
  to encourage coordination and agreement on
  principles of debt sustainability
• But only the borrower can ensure creditor
  coordination
• Capacity building efforts are increasing in LICs
• Training on debt sustainability analysis
• Performance measurement tool piloted in several
  LICs
• Moving towards medium-term debt strategy
  technical assistance for LICs

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Conclusions

• Debt burdens have been dramatically cut in 32
  countries, allowing more spending on the poor
• Debt relief can bring more (and more predictable)
  financial flows to poor countries but is not an
  antidote to poor policies aid needs to be used
  effectively
• Debt service relief is small in relation to
  overall aid flows new flows are needed on a
  large scale to reach MDGs
• The financial landscape facing LICs has now
  changed
• Rapid new debt build-up needs to be avoided,
  implying the need for better debt management by
  countries and greater awareness among creditors
  of the risks to debt sustainability

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Thank You

• For further information
• www.worldbank.org/debt
• mthomas1_at_worldbank.org