The World Bank, Debt Relief and Poverty Reduction

1. The World Bank, Debt Relief and Poverty Reduction Global Issues Seminar October 3, 2007 Mark Roland Thomasmthomas1@worldbank.org

2. 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 don’t 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 Economic Policy and Debt Department

3. 250% 200% HIPC Countries 150% 100% 50% Low-Income Countries 0% 1970 1974 1978 1982 1986 1990 1994 1998 2002 The Practical… Some countries got into trouble The Share of External Debt to GDP (in NPV terms)

4. The Ethical and the Political… What’s in the media • Rich countries should forgive: • Debts that a country can't afford to repay without meeting its people’s 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 weren’t gone through [Source: Jubilee UK website] Economic Policy and Debt Department

5. 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… Economic Policy and Debt Department

6. 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 Economic Policy and Debt Department

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

8. 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) Economic Policy and Debt Department

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

10. 22 Debt Relief:the Countries 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 d’Ivoire Congo, Rep. Senegal Liberia The Gambia Sierra Leone Somalia Guinea Tanzania Sudan Guinea-Bissau Uganda Togo Haiti Zambia Pre-HIPC Interim-HIPC Post-HIPC

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

12. 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 Economic Policy and Debt Department

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

14. 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 Economic Policy and Debt Department

15. 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 Economic Policy and Debt Department

16. 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 Economic Policy and Debt Department

17. 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 Economic Policy and Debt Department

18. 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 Economic Policy and Debt Department

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