1. HIPC and Beyond Debt Sustainability in Low-Income Countries HIPC 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 HIPC and what has it achieved? 3. How do we avoid debt distress?

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

4. Debt Burdens in Some Low-Income Countries Rose Dramatically from 1973 to 1993 4 0% 50% 100% 150% 200% 250% 197019741978198219861990199419982002 HIPC Countries Low-Income Countries The Share of External Debt to GDP (in NPV terms)

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. With Solid Growth, Most Countries Would Not Have Experienced Debt Distress “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. “The government has not done enough to create an environment for growth.” Robert Kabushenga, Corporation Secretary, New Vision (newspaper), Uganda “I have not seen a lot of productivity increase, but I have seen more importation.” Siapha Kamara, Executive Director, SEND Foundation, Ghana Historical 5% Growth Alternative Debt Scenarios for LICs 6

7. 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 7 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). Many Countries Depend Heavily on Commodities Commodities’ Share of Exports Commodities’ Share of GDP Major Commodity Zambia99.8%23.4%Copper Mauritania99.5%39.4%Iron Ore Guinea Bissau97.7%23.7%Cashew Nuts Benin93.7%16.1%Cotton Uganda90.5%11.1%Coffee Crude oil Cotton Copper Coffee Commodity Prices are Declining

8. Local Voices: Debts and Government Funds Were Poorly Managed 8 “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) “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) “There is a need to increase the transparency and effective management of government funds.” Ngunga Tepani, Policy Officer, Tanzania Association of Non-Governmental Organizations “Prior to HIPC, Ghana had a problem with revenue mobilization.” Samuel Sallas-Mensah, Member of Parliament, Ghana

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

10. Traditional Debt Relief Reduced Bilateral and Commercial Debt - Not Multilateral Debt 0% 5% 10% 15% 20% 25% 30% 35% 40% 197019741978198219861990199419982002 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 Share of Multilateral Debt of Overall External Debt

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

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 government spending 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) 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 13.8 3.6 0.9 3.0 7.6 9.2 Paris ClubOther BilateralsCommercialWorld BankIMFOther Multilaterals

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 15 “Thanks to HIPC, the level of debt service was reduced.” Kwasi Osei, Director-General, Social Security and National Insurance, Ghana “HIPC brought quite a bit of relief that the government invested in the social sector.” Siapha Kamara, Executive Director, SEND Foundation, 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

16. 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 30 36 71 84 Before Traditional Relief After Traditional Relief After HIPC Relief After Add. Bilateral Debt Relief

17. Local Voices: HIPC Financed Pro-Poor Water, Health Care and Education Services “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) “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 “ “HIPC focused on increasing social spending for Ugandans.” John Okidi, Executive Director, EPRC (Uganda) 17 “HIPC provided greater access to education and health services in districts.” Ngunga Tepani, Policy Officer, Tanzania Association of Non-Governmental Organizations

18. Ghana: HIPC Financed the Upgrading of Sarpeiman School 18 AfterBefore

19. Ghana: HIPC Funds Helped Increase School Enrollment in the Amansaman District 19 20032004 Boys164190 Girls139192 Total303382 Enrollment in HIPC Funded Schools

20.  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 Ghana: HIPC Financed the Nurse’s Quarters in the Amansaman District

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

22. 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 Debts have been reduced 1 … 30 84 Before Traditional Relief After Add. Bilateral Debt Relief and so have payments to creditors 2 … 1 2 3 4 5 6 200120022003200420052006 USD Billions Before HIPC Relief After HIPC Relief and increasing pro-poor spending 4. 40.9% 47.6% 19992003 reducing budget spent on debt payments 3 … 21.8% 13.4% 19992003

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 “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) 23 “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 “The HIPC Initiative made us take greater responsibility and accountability for our actions.” Singi Madata, Assistant Commissioner, Ministry of Finance, Policy Debt and Strategy “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 “We are paying more attention to monitoring social programs.” Ngunga Tepani, Policy Officer, Tanzania Association of Non-Governmental Organizations

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 “ 24 “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 “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

25. Statistics: Institutions and Policies Are Better in Countries That Have Gone Through 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 HIPCs: Evolution of CPIA ratings (1998 and 2003) 2.00 2.20 2.40 2.60 2.80 3.00 3.20 3.40 3.60 3.80 Post-HIPCInterim-HIPCPre-HIPC CPIA ratings

26. Evaluation: HIPC Has Achieved a Number of Successes - Yet Challenges Remain “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 sectors have indeed increased appreciably.” 26 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. “Clarify the objective… 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 realism of 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…”

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) 27 “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 “It has been difficult to make creditors follow through with their commitments.” Mr. Fred Matayama, Principal Economist, Ministry of Finance “The rate of delivery for social services were slower than anticipated.” Daniel Lukwago, Policy Officer, Uganda Debt Network

28. Conclusion 28 1 2 3 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 HIPC met the its original goal of debt reduction HIPC also helped promote economic reform, transparency and sound debt management

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. 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. Institutional strength and quality of policies Weak CPIA<3.25 Medium 3.25<CPIA<3.75 Strong CPIA>3.75 NPV of debt-to-GDP304050 NPV of debt-to-exports100150200 NPV of debt-to-revenue200250300 Debt service-to-exports 152025 Debt service-to-revenue253035 Sustainable Levels of Debt Burden Depend on a Country’s Institutions and Policies 31

32. +10% -10% Threshold High Risk 100% Grants Medium Risk 50% Grants Low Risk 100% Soft Loans Debt Burdens Determine the Mix of World Bank Loans and Grants 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 3. Debt Framework  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  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/ OR http://www.worldbank.org/economicpolicyanddebt 36