NANCY BIRDSALL THE CENTER FOR GLOBAL DEVELOPMENT Debt Relief: A Risk Management Failure? (or: You may be in shock but...) External Debt Panel 1 December 2008, Doha

The message, in summary form To address vulnerability – structural and episodic: Simplify the rule that determines access to IDA grants (vs. loans) Create a contingency facility that delays debt service or otherwise relieves debt in the event of an external shock to a post completion point HIPC

Debt and Other Indicators for Low Income, Post-Completion Point HIPC, and Middle Income countries, 2006 Source: Author, using WDI 2008 data; *LICs excluding India; Low and Middle Income classification by World Bank standards Low Income*P-C HIPCMiddle Income GDP per capita (constant 2000 US$) , External Debt, total (% of GNI) Infant Mortality (per 1,000 live births) International Aid (% of GNI)

Aid (% of GNI): Post-Completion-Point HIPCs, 2006 Source: Author, using WDI 2008 data

Aid (% of GNI): Post-Completion Point HIPCs, 2006 Source: Author, using WDI 2008 data

Total Debt Service (% of GNI): Post-Completion Point HIPCs, 2006 Source: Author, using WDI 2008 data

External Debt (% of GNI), 2006 Source: Author, using WDI 2008 data

External Debt, Total (% of GNI): Post-Completion Point HIPCs, 2006 Source: Author, using WDI 2008 data; excluding Sao Tome and Principe (296%) for scaling

Terms of Trade Volatility, Source: Calderon (2007) in Perry (2008)

Terms of Trade Shock Frequency, Source: Calderon (2007) in Perry (2008)

Natural Disasters Frequency, *Central America and the Caribbean Source: Calderon (2007) and Gurenko (2007) in Perry (2008)

Responses to volatility and risk Coping after the fact: pro-cyclical fiscal adjustment; more aid Prevention in the first place: stabilization funds; export diversification Self-insurance: reserves Market and market-like insurance (missing option for LICs)

What’s been missing in aid “architecture” Two proposals: Response to structural vulnerability: IDA grants for countries under $800(?) income per capita and subsidies to make IMF financing grant-equivalent Response to episodic external shocks: a LIC contingency or insurance facility, probably housed at IMF – automatic and timely – that would allow more borrowing under current DSF...

In conclusion HIPC debt relief, for all its success, has failed to reduce high vulnerability of poor countries – structural and episodic But there is still hope..... fixes to HIPC rules could lead the way on fixes to aid transfers overall

Who’s accountable? Who’s in charge?