1. The World Bank, Debt Relief and Poverty Reduction Global Issues Seminar October 3, 2007 Mark Roland Thomas mthomas1@worldbank.org

2. Economic Policy and Debt Department2 Why is Low Income Country Debt a Global Issue? The Practical The Practical From the late 1980s, many countries had difficulties repaying 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 Debt relief is a means of delivering aid… and a means of lobbying for more aid The Ethical The Ethical People dont like the idea of poor countries paying money to rich countries 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 Some of the debt dates back to the 1970s and 1980s and some outcomes were disappointing The Political The Political Some advocacy groups have made this their sole issue Some advocacy groups have made this their sole issue Some may see it as a way to further political agendas Some may see it as a way to further political agendas

3. 0% 50% 100% 150% 200% 250% 197019741978198219861990199419982002 HIPC Countries Low-Income Countries The Share of External Debt to GDP (in NPV terms) The Practical… Some countries got into trouble

4. Economic Policy and Debt Department4 The Ethical and the Political… Whats in the media Rich countries should forgive: Rich countries should forgive: Debts that a country can't afford to repay without meeting its peoples basic needs 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 knowingly gave to dictators or oppressive regimes Debts on loans that the lender knew was going to be stolen through corruption 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 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 Debt on unfair terms, such as very high interest rates Debts contracted illegally, where proper processes werent gone through Debts contracted illegally, where proper processes werent gone through [Source: Jubilee UK website]

5. Economic Policy and Debt Department5 Why not just forgive everything? This would cut into future aid flows 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 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 This would set the wrong incentives –We should aim to reward aid recipients that use resources successfully, not poorly…

6. Economic Policy and Debt Department6 What Does the World Bank Do on LIC Debt? 1. Debt Relief HIPC HIPC MDRI MDRI 2. Commercial Debt Buybacks The Debt Reduction Facility The Debt Reduction Facility 3. Debt Sustainability The joint Bank-Fund framework (DSF) The joint Bank-Fund framework (DSF) Outreach to other creditors Outreach to other creditors 4. Debt Management Capacity Building A global partnership A global partnership Performance measurement and technical assistance with debt management strategy Performance measurement and technical assistance with debt management strategy

7. 7 Interim period Conditional interim relief Pre-decision point Irrevocable Topping up MDRI Preparation of an interim PRSP Satisfactory performance under PRGF Decision Point Satisfactory performance under PRGF Implementation of PRSP for one year Structural reform triggers met Completion Point Post-completion point 9 countries 10 countries 22 countries Debt Relief: the Process Arrears Clearance Plan Preliminary Stage

8. Economic Policy and Debt Department8 The Two Debt Relief Initiatives HIPC HIPC –Comprehensive burden sharing –Threshold debt ratios 150% of exports or 250% of revenues 150% of exports or 250% of revenues MDRI MDRI –Four institutions –Debt write-off With cut-off date (2003/2004) With cut-off date (2003/2004)

9. Economic Policy and Debt Department9 Debt Relief: the Countries 41 countries (33 in Africa) 41 countries (33 in Africa) –22 completion-point –10 decision-point –9 pre-decision point HIPC+MDRI about $95 billion in 2006 dollars HIPC+MDRI about $95 billion in 2006 dollars –HIPC $68 billion (2006$) $33, 12, 23 billion for the three groups, respectively $33, 12, 23 billion for the three groups, respectively –MDRI $27 billion (2006$)

10. 10 Debt Relief: the Countries Interim-HIPC São Tomé & Principe Guinea-Bissau Guinea The Gambia Chad Congo, Dem. Rep. Pre-HIPC Togo Sudan Somalia Liberia Congo, Rep. Comoros Côte dIvoire Central African Rep. 9 Burundi Eritrea Haiti Kyrgyz Rep. Nepal Afghanistan Zambia Post-HIPC Uganda Tanzania Senegal Rwanda Niger Nicaragua Mauritania Madagascar Guyana Ethiopia Bolivia Mozambique Mali Honduras Ghana Burkina Faso Benin 22 Sierra Leone Malawi Cameroon 10

11. Economic Policy and Debt Department11 Breakdown of Debt Relief HIPC MDRI

12. Economic Policy and Debt Department12 IDA: the largest single provider 1/5 of HIPC commitments to date 1/5 of HIPC commitments to date –$14 billion of $68 billion 2/3 of MDRI commitments to date 2/3 of MDRI commitments to date –$17 billion of $27 billion 1/3 of total commitments to date 1/3 of total commitments to date –$31 billion of $94 billion

13. Economic Policy and Debt Department13 Remaining Debt Stocks (22 completion points)

14. Economic Policy and Debt Department14 Debt Service Ratios HIPC HIPC –From 18% of exports at decision point to 8% 4 years later MDRI MDRI –From 9.7% in 2005 to 3.3% in 2011

15. Economic Policy and Debt Department15 Spending Pro-poor spending in decision-points went from about $6 billion in 2000 to about $17 billion in 2006 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 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 Hard to attribute causal effect solely to debt relief

16. Economic Policy and Debt Department16 Avoiding Future Debt Distress The financial landscape has changed 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 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 In 2005 the Bank and the Fund introduced the joint debt sustainability framework (DSF) for LICs

17. Economic Policy and Debt Department17 Strengthening Debt Management The Bank and the Fund reach out to all creditors to encourage coordination and agreement on principles of debt sustainability 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 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

18. Economic Policy and Debt Department18 Conclusions Debt burdens have been dramatically cut in 32 countries, allowing more spending on the poor 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 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 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 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 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

19. Economic Policy and Debt Department19 Thank You For further information: www.worldbank.org/debt mthomas1@worldbank.org