1 Debt Relief for Poor Countries: Rationale and Expectations Christina Daseking Deputy Division Chief Policy Development and Review Department, IMF The views expressed in this presentation are those of the author and should not be attributed to the International Monetary Fund, its Executive Board, or its management.

2 Slide 1: Main Arguments for Debt Relief to Poor Countries Moral argument Moral argument Financing argument Financing argument Debt overhang/growth argument Debt overhang/growth argument “Evergreening”/efficient lending argument “Evergreening”/efficient lending argument

3 Slide 2: The Moral Argument Poor countries should not devote scarce resources to pay rich creditors Poor countries should not devote scarce resources to pay rich creditors But... But... No debt service means no borrowingNo debt service means no borrowing Smaller overall aid envelopeSmaller overall aid envelope How pessimistic should we be?How pessimistic should we be?

4 Slide 3: Are poor countries doomed to stay poor? Per Capita Income in U.S. dollars Ghana Thailand 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,

5 Slide 4: The Financing Argument Debt relief generates additional predictable resources in support of the MDGs Debt relief generates additional predictable resources in support of the MDGs But... But... Additionality cannot be taken for grantedAdditionality cannot be taken for granted There may be better ways to provide MDG financing, as debt relief is:There may be better ways to provide MDG financing, as debt relief is: Backloaded Backloaded Allocated based on past lending decisions Allocated based on past lending decisions Small relative to new development assistance Small relative to new development assistance

6 Slide 5: Debt Service and ODA for 28 Post-Decision-Point HIPCs,

7 Slide 6: The Debt Overhang/Growth Argument As a high debt burden weakens incentives to invest, debt relief will foster growth As a high debt burden weakens incentives to invest, debt relief will foster growth But... But... Growth effect beyond financing controversial: Is high debt ratio cause or symptom of low growth?Growth effect beyond financing controversial: Is high debt ratio cause or symptom of low growth? HIPC Initiative has already removed large portion of debtHIPC Initiative has already removed large portion of debt Other factors are likely to be much more important (trade deal, policies, institutions)Other factors are likely to be much more important (trade deal, policies, institutions)

8 Slide 7: The “Evergreening”/Efficient Lending Argument Debt relief removes roll-over concerns, allowing creditors to allocate new resources more efficiently Debt relief removes roll-over concerns, allowing creditors to allocate new resources more efficiently But... But... Allocation of debt relief resources itself benefits heavy borrowersAllocation of debt relief resources itself benefits heavy borrowers Performance-based lending already possiblePerformance-based lending already possible Debt relief may create incentive problems of its own by raising expectations for moreDebt relief may create incentive problems of its own by raising expectations for more

9 Slide 8: Conclusions All arguments for debt relief have some appeal and merit All arguments for debt relief have some appeal and merit But none is without caveats But none is without caveats Bottom-line: Don’t expect too much! Bottom-line: Don’t expect too much! Debt relief generates predictable aid, but it cannot generate sustainable growth. Debt relief generates predictable aid, but it cannot generate sustainable growth.