Coming to Terms with Reality. Evaluation of the Belgian Debt Relief ...

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International debt relief initiatives and their effects
Note that the approach used by DAC does not fit nicely in a donor category. In fact, it
consists of a strange mix of elements of all approaches. First of all, it uses a net flow
concept instead of a net transfer concept. This means that interest payments made on the
original ODA loan are not subtracted from ODA in the year they are made, but,
equivalently, that they can be added as ODA when they are cancelled.
Second, it applies a mix of ODA accountability at nominal terms and at PV terms. As can
be seen from table 1 in Annex 2.2, debt cancellation (debt stock relief) can be accounted
for in nominal terms; for debt service relief, it is the PV of debt relief that is counted as
ODA. As such, in the case of a cancellation, one does not take into account the original
debt service schedule of the underlying debt claims that are cancelled. In the case where
the original claims only had to be serviced in the distant future 38 , the real cost forgone to
the creditor, and the real value of it to the debtor, to be measured in PV terms, is much
lower. In case of debt service relief, the PV calculation is done using a donor-based market
interest rate.
Finally, the implicit assumption here is that these loans would have been fully serviced in
the absence of the debt relief, implying no correction for default risk whatsoever.
From comparing this approach with our preferred ‘economic value’ (economic cost/
acquisition value) approach, we can state that the debt relief component of ODA, grossly
overestimates the ‘real value’ of debt relief both from a donor as well as from a creditor
perspective. However, this does not mean that this is completely worthless, and should be
completely eliminated from ODA statistics, as some critics advocate for. Theoretically
speaking, the correct measure is to include them at their economic cost to the creditor,
taking into account some element of default risk. Of course this is easier said than done,
and difficult to implement in a decision forum such as the DAC, as DAC rules are clearly a
political compromise solution acceptable to all donors involved 39 .
Of course this only focuses on two types of interventions, i.e. the rescheduling/cancellation
of ODA and non-ODA loans. How can we judge the other components of our taxonomy?
Basically, most of them are new grant-type of transfers, for which it is straightforward to
add them as ODA at the full value, when they are granted.
38 As is the case e.g. in the exit HIPC cancellation for Cameroon in 2006, discussed in section 4.2 of the
report.
39 It is interesting to note that this economic value concept, more specifically the recipient side acquisition
value concept, is applied in practice in the context of the HIPC Initiative, where IMF and World bank
require HIPC countries to in some way ‘budgetise’ the real cash flow savings of debt relief (only), i.e. the
annual cash flow savings of the part of debt relief that would have been serviced in the absence of debt
relief. See also the discussion in the Cameroon case in Annex 4.1 on the HIPC account.
Coming to Terms with Reality
2.5 Assessing the international debt relief practice
International debt relief has been the subject of numerous theoretical analyses, many of them
with their own distinctive view on what really matters. Evaluating debt relief practice
remains however ultimately an empirical question. This section therefore attempts to
summarise the key findings of existing empirical work according to the criteria efficiency,
effectiveness and relevance (as developed in the framework of Chapter 1). Since the focus of
this report is on the years 2000 to 2009, most attention will go out to assessing international
debt relief as it has been practised within this time span. By means of introduction, a first
(shorter) sub-section looks at debt relief before this period.
2.5.1 International debt relief until 1999
Comprehensive studies evaluating international debt relief before the initiation of the HIPC
Initiative are scarce, in part because debt relief did not feature as an important point on the
international agenda at that time. Also in the first years of the (original) HIPC Initiative rigorous
and independent analyses are certainly not prolific. One noteworthy contribution is a study
performed by the Policy and Operations Evaluation Department (IOB) of the Dutch Ministry of
Foreign Affairs which uses a theoretical framework for evaluation that is similar to that applied in
this report. The study, authored and supervised by Geske Dijkstra, appraises the results of a decade
of international debt relief (from 1990 to 1999) on the basis of eight debtor country case studies 40 ,
an extensive review of the literature and original econometrical evidence (see Dijkstra, 2003).
First, on the subject of international debt relief efficiency, Dijkstra (2003:37-66) finds that
the extent to which the inputs of donors’ debt relief expenditures and policy dialogue
translated into outputs such as a reduction of debt stocks, diminished debt servicing and
consequent increase in net fiscal space of debtor countries, as well as improved governance,
was overall limited during the 1990s. Important factors here were, among other, the fact that
debt relief was often carried out by debt rescheduling rather than outright cancellation, the
fact that debt service forgiveness concerned obligations which would not have been fulfilled
in the first place, and also the fact that countries were put under pressure to fulfil their
obligations that were left outside debt relief arrangements. Conditions on good (or better)
governance were also seldom implemented.
Second, the effectiveness of debt relief, being the degree to which donor inputs via outputs
contribute to outcomes on the level of improved debt sustainability, the elimination of debt
overhang and augmented pro-poor spending, was also low, according to Dijkstra (2003:67-
96). Debt burdens were found to have become only marginally less unsustainable in the
countries studied (and only in the short run), partly due to a new surge in multilateral and
bilateral lending, often aimed at repaying earlier multilateral (IMF and IBRD) credits. Only
in one case (Peru) private investment seemed to have benefited from a lower debt overhang.
The combination of project aid provision (which cannot be used for debt repayment) with
limited debt service relief moreover led to a decrease, rather than an increase, in pro-poor
(social sector) spending in five out of the six HIPCs considered.
40 Bolivia, Jamaica (non-HIPC), Mozambique, Nicaragua, Peru (non-HIPC), Tanzania, Uganda and Zambia.
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