HIPC Expenditures, Ownership and the Role of Donors Robrecht Renard University of Antwerp

I. Introduction Financial flows between low-income countries and public donors consist of outflows of debt service payments plus inflows of grant aid and new loans  resulting in considerable net inflows

Financial conditions

Notwithstanding positive net transfers and high loan concessionality, many recipients have difficulty servicing their old debts, while facing severe administrative and managerial constraints in absorbing new aid, suggesting a recurrent fiscal constraint and a mismatch of aid instruments (project aid versus budget support) and financial conditions (soft loans versus grants).

Debt relief is akin to budget support and has similar advantages –relieves the recurrent fiscal constraint –enhances fiscal ownership –has low transaction costs for the recipient and then some more –is predictable –is not pro-cyclical –reduces debt overhang

Debt relief as an instrument of aid makes extra sense in view of the fact that LICs might be unable to absorb the extra new aid required to achieve the MDGs donor public opinion favours debt cancellation over identical new flows

Extra ODA to achieve MDGs

Debt relief also has some disadvantages, such as moral hazard, adverse selection, and it raises complex issues of creditor burden sharing

All in all, one would expect a substantial effort at debt cancellation Does HIPC live up to the expectation?

II. Characteristics of HIPC

HIPC II eligibility criteria low-income country unsustainable debt track record of sustained adjustment –up to decision point: 3 years –up to completion point: variable PRSP

Unsustainable debt

Situation September countries reached their decision point of which 6 countries their completion point debt relief of > $40 billion (nominal) debt as a per cent of GDP from 56% to 30% debt service requirements cut by one-third $1.3 billion annual savings

III. Some topics for discussion Is debt relief really additional? Should donors extend deeper debt relief? Is the conditionality right?

Is aid additional? virtual or illusory resources? –compared to effective debt service, or –compared to contractual debt service additional to other aid EURODAD “ a glorified accounting excercise”

Fungibility could undermine additionality

Share of Debt Relief in DAC Members' Total Net ODA in 2000

ODA from DAC countries (billion US$ prices)

Should donors go further? by moving the cut-off date forward in time? by redefining sustainability? by radically cancelling all public debt to low-income countries?

The sustainability debate present definition is –arbitrary –non developmental proposal by anti-debt campaigners –consider debt relief as an aid instrument –take MDGs seriously –define sustainability with respect to fiscal spending for development

Which conditionality for HIPC? ex ante: adjustment plus pro-poor spending ex post: pro-poor expenditure tracking –virtual funds –comprehensive –who should do the tracking?