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Debt Relief: A Risk Management Failure? (or: You may be in shock but . . .)

Debt Relief: A Risk Management Failure? (or: You may be in shock but . . .). Nancy Birdsall The Center for Global Development. External Debt Panel 1 December 2008, Doha. The message, in summary form. To address vulnerability – structural and episodic:

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Debt Relief: A Risk Management Failure? (or: You may be in shock but . . .)

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  1. Debt Relief: A Risk Management Failure?(or: You may be in shock but . . .) Nancy Birdsall The Center for Global Development External Debt Panel 1 December 2008, Doha

  2. 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

  3. 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

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

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

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

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

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

  9. Terms of Trade Volatility, 1975-2005 Source: Calderon (2007) in Perry (2008)

  10. Terms of Trade Shock Frequency, 1975-2005 Source: Calderon (2007) in Perry (2008)

  11. Natural Disasters Frequency, 1975-2005 *Central America and the Caribbean Source: Calderon (2007) and Gurenko (2007) in Perry (2008)

  12. 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)

  13. 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 . . .

  14. 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

  15. Who’s accountable? Who’s in charge?

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