Debt Sustainability in Low-Income Countries HIPC and Beyond

1. Debt Sustainability in Low-Income CountriesHIPC and Beyond World Bank, Economic Policy and Debt Department, 2005

2. Presentation Outline 1. What led to debt distress in the 1990s? 2. What is HIPCand what has it achieved? 3. How do we avoid debt distress?

3. What led to debt distress in the 1990s?

4. 250% 200% HIPC Countries 150% 100% 50% Low-Income Countries 0% 1970 1974 1978 1982 1986 1990 1994 1998 2002 Debt Burdens in Some Low-Income Countries Rose Dramatically from 1973 to 1993 The Share of External Debt to GDP (in NPV terms) 4

5. Governments Don’t Go Bankrupt –However, They Can End Up in Debt Distress • Governments do not go bankrupt, but they can default on payments to creditors – in which case debts can be rescheduled as part of an agreement with creditors • We use the term “debt distress” to describe a situation with significant risks of government default • Debts are “sustainable” when a government is likely to have enough income and foreign currency to pay back its loans 5

6. Alternative Debt Scenarios for LICs Historical “The government has not done enough to create an environment for growth.” Robert  Kabushenga, Corporation Secretary, New Vision (newspaper), Uganda 5% Growth With Solid Growth, Most Countries Would Not Have Experienced Debt Distress “I have not seen a lot of productivity increase, but I have seen more importation.” Siapha Kamara, Executive Director, SEND Foundation, Ghana “Growth in the productive sectors are needed for Tanzania to meet the MDGs.” Abbas Beriya, Deputy Director, Bank of Tanzania Note: Source: World Bank Global Development Finance Statistics. The graph shows the actual unweighted average of debt-to-GDP ratios across LICs versus the simulated ratio had all countries grown at 5% in dollar terms, a performance achieved by just over one in three LICs during the period. 6

7. Commodity Prices are Declining Crude oil Coffee Many Countries Depend Heavily on Commodities Commodities’ Share of Exports Commodities’ Share of GDP Major Commodity Zambia 99.8% 23.4% Copper Cotton Mauritania 99.5% 39.4% Iron Ore Guinea Bissau 97.7% 23.7% Cashew Nuts Copper Benin 93.7% 16.1% Cotton Uganda 90.5% 11.1% Coffee Developing Countries are Highly Dependent on Commodities – And Prices are Declining “Our debts in Ghana started accumulating after the 1973 oil crisis and with the tipping of the cocoa prices” Samuel Sallas-Mensah, Member of Parliament, Ghana Notes: The table includes examples of countries highly dependent on commodities. Numbers are an average for the period 1998-2000. In the graph, the numbers are indexed commodity prices deflated by Manufactures Unit Value Prices (1970=100). 7

8. Local Voices: Debts and Government Funds Were Poorly Managed “During the mid 1990s a lot of donor funds were being lost through the process. One study found that only 30% of every dollar reached the poor.” John Okidi, Executive Director, EPRC (Uganda) “Prior to HIPC, Ghana had a problem with revenue mobilization.” Samuel Sallas-Mensah, Member of Parliament, Ghana “An ambassador or junior minister could borrow on behalf of the government. If somebody had financing for a project, it was easy to get it accepted.” Fred Matayama, Principal Economist, Ministry of Finance (Uganda) “There is a need to increase the transparency and effective management of government funds.” Ngunga Tepani, Policy Officer, Tanzania Association of Non-Governmental Organizations 8

9. Donor Governments Have Forgiven Increasing Amounts of Debts Owed to Them Proportion of Grant Element in Paris Club Forgiveness 90% 80% 67% 50% 33% Toronto London Naples Lyon Cologne (1988) (1991) (1994) (1996) (1999) Note: The forgiveness listed is the reduction in the NPV of the rescheduled debts owed to the Paris Club members. 9

10. 40% 35% 30% 25% 20% 15% 10% 5% 0% 1970 1974 1978 1982 1986 1990 1994 1998 2002 Traditional Debt Relief Reduced Bilateral and Commercial Debt - Not Multilateral Debt Share of Multilateral Debt of Overall External Debt Note: “Traditional Debt Relief” includes that of the Paris Club (bilateral debt owed to donor governments) and the London Club (commercial debt). Source: World Bank Global Development Finance 2005. 10

11. Conclusion Some Low-Income Countries experienced a debt crisis in the 1990s 1 Low growth led to unsustainable debt burdens, fueled by poor policies, inadequate debt management and shocks 2 “Traditional debt relief” reduced bilateral and commercial debt, but was not designed to reduce multilateral debts 3 International consensus was reached on the need for a comprehensive debt relief mechanism to reduce all debts – including multilateral debts – based on good policies 11

12. What Is HIPC and What Has It Achieved?

13. HIPC Was the First Comprehensive Global Debt Reduction Initiative to Include Multilateral Debt Rationale • The “HIPC Initiative” funds debt relief for all Highly Indebted Poor Countries (HIPCs) Objectives • Reduce external debts owed by HIPC governments • Finance increase in governmentspending on poor people Design • Eligibility is based on external debts and income per capita • Requires government to formulate a poverty reduction strategy paper (PRSP) through local consultation • Requires satisfactory performance based on an IMF program • Then irrevocably provides debt relief 13

14. Multilateral Institutions Have Provided Half of All HIPC Debt Relief Committed Total Amount of Debt Forgiven (USD bn) 13.8 9.2 7.6 3.6 3.0 0.9 Paris Club Other Bilaterals Commercial World Bank IMF Other Multilaterals Note: The figures of committed debt relief are current as of April 2005 measured in end-2004 NPV terms, and includes the 38 HIPCs. 14

15. Local Voices: HIPC Produced Meaningful Debt Reduction “There is no doubt that the HIPC Initiative reduced Uganda’s debt to a sustainable level.” Daniel Lukwago, Policy Officer, Uganda Debt Network “HIPC brought quite a bit of relief that the government invested in the social sector.” Siapha Kamara, Executive Director, SEND Foundation, Ghana “Thanks to HIPC, the level of debt service was reduced.” Kwasi Osei, Director-General, Social Security and National Insurance, Ghana “Participation in HIPC contributed toward a reduction of Tanzanian debt by forcing us to rethink how we did business” Singi Madata, Assistant Commissioner, Ministry of Finance, Tanzania 15

16. 84 Before Traditional Relief 71 After Traditional Relief After HIPC Relief 36 30 After Add. Bilateral Debt Relief Statistics Show That Debt Levels Are Much Lower After the Relief Provided by HIPC Note: The figures encompass the debt stocks of 28 decision point countries measured in USD billion 2004 in NPV terms (April 2005). 16

17. Local Voices: HIPC Financed Pro-Poor Water, Health Care and Education Services “HIPC provided greater access to education and health services in districts.” Ngunga Tepani, Policy Officer, Tanzania Association of Non-Governmental Organizations “HIPC savings provided for 88,000 new classrooms, 123,000 teachers, and the child-to-textbook ratio has declined from 20:1 to 4:1… Ms. Hyuha Dorothy, Chairman, Social Service Committee, Parliament (Uganda) “ “HIPC focused on increasing social spending for Ugandans.” John Okidi, Executive Director, EPRC (Uganda) “A lot of schools have been built, but it is going to take a long time before we know what the impact will be.” Kwasi Osei, Director-General, Social Security and National Insurance, Ghana 17

18. Ghana: HIPC Financed the Upgrading of Sarpeiman School Before After 18

19. Ghana: HIPC Funds Helped Increase School Enrollment in the Amansaman District Enrollment in HIPC Funded Schools 19

20. Ghana: HIPC Financed the Nurse’s Quarters in the AmansamanDistrict • The building of a nurse’s home brought the first public nurse to the village • Only options were an out-of-town clinic or paying thousands of cedis up front at a private clinic • Typical problems relate to malaria and maternal health • This day by noon, the nurse had treated seven patients 20

21. 18 Benin Bolivia Burkina Faso Ethiopia Ghana Guyana Honduras Madagascar Mali Mauritania Mozambique Nicaragua Niger Rwanda Senegal Tanzania Uganda Zambia Post-HIPC 28 Countries are Receiving Debt Relief, But 10 Countries have Yet to Benefit • Causes • Conflict • Arrears • Weak governance 10 10 Comoros Burundi Cameroon Central African Rep. Chad Congo, Republic of Congo DRC Cote d’Ivoire The Gambia Lao PDR Guinea Liberia Guinea-Bissau Myanmar Malawi Somalia Sao Tome & Principe Sudan Sierra Leone Togo Interim-HIPC Pre-HIPC 21

22. Debts have been reduced1… and so have payments to creditors2… 6 84 Before Traditional Relief Before HIPC Relief 5 30 4 After Add. Bilateral Debt Relief USD Billions 3 2 After HIPC Relief 1 2001 2002 2003 2004 2005 2006 reducing budget spent on debt payments3… and increasing pro-poor spending4. 21.8% 47.6% 40.9% 13.4% 1999 2003 1999 2003 HIPC Has Substantially Reduced Debts And Pro-Poor Spending Has Increased Notes: 1) Debt stocks of 28 decision point countries, USD billion 2004 NPV terms. 2) Projected debt service obligations of 28 decision point countries. 3) Debt service to government revenue for 28 decision point countries. 4) Ratio of poverty-reducing expenditures to government revenue. 22

23. Local Voices: HIPC Promoted Transparency and Accountability “After 1992, there has been much more transparency. Loans are scrutinized. We decided in Parliament, e.g., to stop a $5m IDA loan for studies.” Samuel Sallas-Mensah, Member of Parliament, Ghana “The HIPC Initiative made us take greater responsibility and accountability for our actions.” Singi Madata, Assistant Commissioner, Ministry of Finance, Policy Debt and Strategy “We go and ask the ministers: ‘How come you have spent the money in this way, why have you not done anything about that.’ We put them on the carpet and ask questions. Even if I am from the same party.” Hyuha Dorothy, Chairman of the Social Service Committee in Parliament (Uganda) “With the implementation of HIPC, we outside the government have increased access to learn about projects as a result of HIPC savings.” Daniel Lukwago, Policy Officer, Uganda Debt Network “I get the information I need from the government to monitor what they do. This came about with the HIPC Initiative - it is a major result.” Siapha Kamara, Executive Director, SEND Foundation, Ghana “We are paying more attention to monitoring social programs.” Ngunga Tepani, Policy Officer, Tanzania Association of Non-Governmental Organizations 23

24. Local Voices: HIPC Promoted Economic Reform and Strengthened Debt Management “I don’t think anybody believes that HIPC reduced the government’s commitment to reform. The govern-ment initially did not want to accept HIPC. I can say that the government is genuinely committed to reform.” Samuel Sallas-Mensah, Member of Parliament, Ghana “Although there is room for improvement, we are doing a better job at debt management through increased coordination among internal and external partners.” Singi Madata, Assistant Commissioner, Ministry of Finance, Policy Debt and Strategy “HIPC led to efforts to improve revenue collection.” Abbas Beriya, Deputy Director, Bank of Tanzania “An ambassador or junior minister can no longer borrow on behalf of the government. It is only the Minister of Finance.” Mr. Fred Matayama, Principal Economist, Ministry of Finance “ 24

25. Statistics: Institutions and Policies Are Better in Countries That Have Gone Through HIPC HIPCs: Evolution of CPIA ratings (1998 and 2003) 3.80 3.60 3.40 3.20 3.00 CPIA ratings 2.80 2.60 2.40 2.20 2.00 Post-HIPC Interim-HIPC Pre-HIPC Note: Post, interim and pre-HIPC refer to the countries that are at the pre-decision point (10 countries), decision point (10 countries) and completion point (18 countries). The first bars refer to 1998, the second bars to 2003. 25

26. Evaluation: HIPC Has Achieved a Number of Successes - Yet Challenges Remain “Clarify theobjective… the goal of debt reduction needs to be clearly distinguished from the goal of poverty alleviation.” “Improve the transparency of the methodology and economic models underlying the debt projections and the realismof economic growth forecasts…” “Maintain standards for policy performance” “Performance criteria need to increase the focus on pro-poor growth… [relative to the] heavy emphasis on social expenditures…” “The Initiative is likely to achieve its original fundamental goal–to … [reduce] … debt stocks and debt service burdens.” “The HIPC Initiative has been a catalyst for far-reaching changes in the processes surrounding development assistance…” “It has made the processes of the sovereign debt regime more open and accountable and spurred development cooperation…” “…budgetary resources for targeted sectorshave indeed increased appreciably.” Note: The evaluation was undertaken by the Operations Evaluation Department (OED), a unit independent of World Bank management that reports to the Bank’s shareholders. Source: Debt Relief for the Poor – An OED Review of the HIPC Initiative, 2003. 26

27. Voices: HIPC Did Not Meet Everyone’s Expectations “Debt relief received through the HIPC Initiative should not necessarily only be tied to social spending.” John Okidi, Executive Director, EPRC (Uganda) “It has been difficult to make creditors follow through with their commitments.” Mr. Fred Matayama, Principal Economist, Ministry of Finance “HIPC did not provide our economy a new flow of funds. It simply reduced the debt stocks. There was no new money!” Abbas Beriya, Deputy Director, Bank of Tanzania “The rate of delivery for social services were slower than anticipated.” Daniel Lukwago, Policy Officer, Uganda Debt Network 27

28. Conclusion 1 HIPC reduced multilateral and other debts – external debts have been cut by two-thirds HIPC helped increase pro-poor spending– on water, health and education 2 HIPC also helped promote economic reform, transparency and sound debt management 3 HIPC met the its original goal of debt reduction 28

29. How Do We Avoid Future Debt Distress?

30. Reaching the MDGs Must Not Create A New Debt Problem • The Debt Sustainability Framework for Low-Income Countries (DSF) ensures that the government does not borrow more money from the World Bank than it is able to pay back • DSF determines up front the mix of World Bank (IDA) loans and grants • Countries with high risk of a debt crisis only receive grants • Over 40 Low-Income Countries will now receive either 100% or 50% of their World Bank finance in the form of grants • Countries with low debts receive more resources • DSF does not finance debt reductions – HIPC does 30

31. Sustainable Levels of Debt Burden Depend on a Country’s Institutions and Policies Notes: Thresholds apply to public and publicly guaranteed (PPG) external debt, only. The Country Policy and Institutional Assessment (CPIA) assesses the quality of a country’s present policy and institutional framework. “Quality” means how conducive that framework is to fostering sustainable, poverty-reducing growth and the effective use of development assistance. 31

32. Debt Burdens Determine the Mix of World Bank Loans and Grants High Risk 100% Grants +10% Medium Risk 50% Grants Threshold -10% Low Risk 100% Soft Loans 32

33. Conclusion

34. Much Progress Has Been Made – Yet Challenges Remain 1. Debt Distress • Debt distress culminated in the late 1990s • Caused primarily by low growth, fueled by borrowing, fiscal deficits, shocks, declining export prices, and weak institutions 2. HIPC • Reduced debt in LICs from $84bn to $21bn • Increased poverty-related expenditures from 41% to 48% • Helped promote reforms, strengthen debt management, and increase fiscal discipline and parliamentary oversight 3. Debt Framework • Ensures that borrowing to finance the MDGs does not come at the expense of a debt crisis • Complements the HIPC debt reduction program 34

35. Q & A

36. A Wealth of Information is Available on the World Bank Web Site The website contains extensive information on: • Country cases (full HIPC documents available) • Description of HIPC • Progress report and debt relief provided • FAQ • HIPC partners Visit http://www.worldbank.org/debt/ ORhttp://www.worldbank.org/economicpolicyanddebt 36