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

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International debt relief initiatives and their effects
following debt relief). Conversely, Dömeland and Kharas (2009) argue that the HIPC Initiative
has neither resulted in a greater net transfer of resources to participating countries, nor caused a
major shift from donor resources toward HIPCs away from non-HIPCs. They maintain that the
initiative may have simply prevented a decline in resource flows to HIPCs that were facing high
debt service obligations before. The validity of this counterfactual is however difficult to assess.
Governance
Also regarding the use of debt relief as an instrument for rewarding ex post institution
building of countries, it looks like there have been some improvements over the years.
Dömeland and Kharas (2009) graphically show that, on average, gains in HIPCs’ policy
and institutional quality become apparent three years before the reaching of completion
point and continue for some years thereafter. Depetris Chauvin and Kraay (2007), which
examine the factors underlying debt relief allocation to 62 low-income countries, discover
that 1999-2003 debt relief, in particular that by multilateral creditors, responded positively
to higher debtor country policy and institutional ratings (more than aid did), although there
appeared to be some ‘path dependency’ 43 in debt relief incidence among countries.
Similarly, Freytag and Pehnelt (2009) report for a sample of 123 developing countries that,
while changes in governance ratings seemed uncorrelated with HIPC debt relief eligibility,
the amounts of debt relief granted in 2000-2004 were positively associated with
improvements in countries’ governance quality. In addition, HIPCs which improve on the
rule of law, government effectiveness and control of corruption (all dimensions of the
quality of country governance) are found to reach completion point earlier than those that
perform worse in these domains. Presbitero (2009) largely corroborates these findings
using 1988-2007 debt relief figures, but denounces the hypothesis that causality also runs
in the other direction, from debt relief in one period to improved governance in the next.
2.5.2.2 Effectiveness
Debt sustainability
As indicated before, debt relief provision is futile if the whole process of countries
amassing unsustainable levels of debt starts all over again thereafter. To avoid renewed
unsustainable debt accumulation, the IMF, which carries out debt sustainability analyses
(DSAs) of countries’ external and public debt on a regular basis, together with the World
Bank launched the joint Debt Sustainability Framework (DSF) for low-income countries in
2005 (see section 2.2.1). The overall objective of this framework has been to govern
prospective lending decisions (to finance the MDGs) while preventing the need for another
future round of systemic debt relief. The DSF compares debt burden indicators, such as
e.g. NPV debt-to-export ratios, with indicative thresholds over a 20-year projection period
to assess the debt sustainability of individual countries. On the basis of such comparisons,
additional stress tests and taking into account differences in policy performance, countries
are then rated and categorised as bearing low risk, moderate risk, high risk or as being in
debt distress (when debt repayment difficulties are already present) (see IMF, 2010d).
43 Path dependency means here that debt relief patterns were driven by fairly persistent country characteristics,
with countries receiving debt relief in a certain time period more likely to also receive it in the next period.
Coming to Terms with Reality
Beddies et al. (2009) suggest that HIPC and MDRI debt relief has significantly improved
debt sustainability when they indicate that, at end-2007, post-completion HIPCs on
average had a rosier debt outlook and lower risk of debt distress than other HIPCs and
low-income non-HIPCs. In a recent report the IMF and the World Bank furthermore note
that the 2007-2009 global financial and economic crisis, although certainly having a
significant impact on low-income countries’ debt vulnerabilities, is not expected to translate
in new systemic debt difficulties (see IMF and World Bank, 2010). These contentions
however assume a non-permanent impact of the crisis on long-term growth and substantial
country efforts to speed up policy and institutional enhancement. This may well turn out to
be overly optimistic 44 . Leo (2009) points out that IMF and World Bank projections for GDP
and export growth in HIPCs, which serve as inputs into the DSF, have proven to be
structurally higher than actual and historical economic performance 45 . He further urges
caution when using country policy performance measures, as they continue to be volatile for
a number of HIPCs.
Another point of importance is that, despite a relative shift to more grant funding, new
lending volumes disbursed to HIPCs remain large in absolute terms, approximating
pre-MDRI levels (Leo, 2009). Indeed, there seems to be some sort of tension between the
MDG-PRSP logic, i.e. financing national development strategies of low-income countries to
support their progress towards the MDGs, and guaranteeing debt sustainability in those
countries (thus avoiding new debt relief). Solving this tension starts with adhering to a
framework for responsible borrowing and lending, as advocated by, among others, UNCTAD
and the OECD 46 (see e.g. Buchheit and Gulati, 2009 and OECD, 2008). It is argued that, on
the one hand, lenders to sovereign borrowers should show due diligence in investigating the
(intended) use of the financing they make available prior to (as well as after) disbursement of
funds. In the past, all too often governments have been held to honour the debts contracted
by their irresponsible predecessors or (military) dictators 47 . On the other hand, borrowing
countries should proceed with restraint and prudence, and disclose all information necessary
for lenders to make informed credit decisions (Buchheit and Gulati, 2009).
Debt overhang elimination and creditworthiness
In accordance with debt overhang theory, Cassimon and Van Campenhout (2007) provide
evidence of a positive trend in HIPC government investment (i.e. capital expenditure) in
the years following debt forgiveness (with a certain time lag or j-curve effect). Cassimon
and Van Campenhout (2008) largely confirm this result for a sample of African HIPCs and
a longer time interval. Both studies remain however vigilant in acknowledging that this is
only an average trend which cannot be generalised to hold for all HIPCs. One exceptional
44 UNCTAD (2009), for example, presents a grimmer picture of the impact of the crisis on debt sustainability
in developing countries.
45 This compares to an underestimation of growth figures for low-income non-HIPCs (Leo, 2009).
46 The OECD primarily focuses on sustainable lending practices in the provision of (commercial) export
credits to low-income countries, whereas UNCTAD considers the broader responsibilities of sovereign
borrowers and lenders. In Belgium, the official export credit agency ONDD adheres to the international
(OECD) standards on sustainable lending.
47 See e.g. World Bank (2007) for more information about such ‘regime debts’ or other instances of ‘odious debt’.
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