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

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| 72 | International debt relief initiatives and their effects study on the impact of (multilateral) debt relief on the private sector is that by Raddatz (2009). Using an event study methodology rather than standard econometric regressions, he shows that market values of South African multinational firms with subsidiaries operating in (African) HIPCs responded positively and significantly to formal announcements of the Enhanced HIPC Initiative and the MDRI, supporting (albeit indirectly) the debt overhang argument for providing debt relief. One sign of the improved creditworthiness that some HIPCs seem to enjoy nowadays is the fact that a number of these countries have started to explore new, commercial forms of borrowing. Ghana, for instance, which graduated from the HIPC Initiative in July 2004 issued a 750 million US$ bond in September 2007. Another example is the Republic of Congo (see Dömeland and Kharas, 2009). Of course, it would be wrong to ascribe these countries’ participation in international capital markets solely to debt relief. Favourable commodity price trends, among other factors, have also played their part in making these countries more attractive to investors. Pro-poor spending Has debt relief increased pro-poor spending into the new millennium? According to IDA and IMF (2009) it has. Poverty-reducing expenditures of the 35 post-decision point HIPCs, as defined in their respective PRSPs 48 , are claimed to have risen by approximately 2 percent of GDP on average between 2001 and 2008, or practically by as much as the estimated decline in debt service over that period. Presbitero (2009) however rightly points at the underlying heterogeneity of pro-poor spending at country level, with some interim- (and even post-completion point) HIPCs seriously lagging behind. Econometric analysis by Depetris Chauvin and Kraay (2005) moreover fails to detect upward trends in health and education spending as a share of total government expenditure within the five-year period 1999-2003 of debt relief. Crespo Cuaresma and Vincelette (2008) suggest that, although post-completion HIPCs spend on average almost 1 percentage point of GDP more than interim- and pre-decision point HIPCs, the effect of debt relief on education expenditures is not statistically significant (for 1998-2005). In a similar fashion, Schmid (2009) concludes that the HIPC initiative has not affected health expenditures (neither in per capita terms, nor as a percentage of GDP). So even if pro-poor spending as a percentage of GDP has increased over the past ten years, debt relief may not necessarily have played a major role. 2.5.2.3 Relevance Notwithstanding the (largely) positive results studies find on debt relief efficiency and effectiveness from 2000 onwards (in sharp contrast with Dijkstra’s (2003) findings for the 1990s), the evidence on debt relief relevance, or its potential to generate economic growth and reduce poverty, is still inconclusive. 48 These IMF-World Bank estimates are inevitably very crude since countries may have quite dissimilar views on what qualifies as ‘poverty-reducing expenditures’ and in some countries its definition has changed over time to include more sectors (see IDA and IMF, 2009). Coming to Terms with Reality Economic growth Covering debt relief to 62 low- and lower middle-income developing countries from 1989 to up to 2003, Presbitero (2009) shows that, especially for HIPCs, the correlation between the amount of debt stock forgiven (in NPV) and changes in GDP growth in the subsequent 4-year period are positive and generally significant. More rigorous analysis applying difference-in-difference methods, however, invalidates these findings, concluding that from 2000 onwards there is no evidence of debt relief triggering economic growth. These results are in line with those earlier obtained by Depetris Chauvin and Kraay (2005) for the sub-period 1999-2003. The latest study by Johansson (2010) considers besides the improved incentive channel (linked to the theory of debt overhang) also the fiscal space mechanism through which debt relief could possibly enhance economic growth. Using a sample of 118 low- and middle-income countries (with observations from 1989 to 2004) and GMM estimation techniques, it finds no general proof for the hypothesis that debt relief boosts growth directly through either of the two channels. With respect to non-HIPCs however, debt relief appears to facilitate growth through increased volumes of investment. Johansson (2010:9) argues that this implies that, ‘[i]ronically, debt relief thus seems to work best where it is needed the least’. Poverty reduction Probably even more difficult to demonstrate than the causal link between debt relief and growth is that between debt relief and poverty reduction. Looking at the progress of post-completion point HIPCs towards achieving the MDGs, it appears that many of them will likely miss their goals. African HIPCs lag behind, most importantly in bringing down child mortality and ensuring gender equality, when compared to the five Latin American that completed the HIPC process (see IDA and IMF, 2009). However, Crespo Cuaresma and Vincelette (2008) and Schmid (2009), in spite of the insignificant effects on education and health expenditures they present, do find robust proof of HIPC debt relief reducing primary schooling drop-outs and infant mortality rates, respectively. Economic and political reforms (included in HIPC Initiative conditionality) that improve social service delivery are deemed to be important explanatory factors. 2.5.3 Second generation debt swaps As highlighted before, in recent years we can witness the return of debt swaps, mainly considering countries or debt claims that were not eligible in the HIPC/MDRI initiatives. Analysis of this debt swap practice has been very much limited to single case studies (see e.g. Cassimon et al., 2008; 2009a; 2009b). Above all, these case studies hint at very low debt relief efficiency, effectiveness and relevance due to two main reasons. First, second generation debt swaps typically share a great number of pitfalls with pre-HIPC debt relief mechanisms. In fact, they can often be characterised as similar to old-style project aid. Of course, in theory, there is no problem to better ‘engineer’ these transactions. Swaps could be made to adhere to basic principles of providing additional resources to the debtor country and increasing the latter’s net fiscal space (e.g. by targeting debt that would have been likely to be serviced in the absence of the swap). Also, more attention could be given to make such operations more policy- as well as system-aligned | 73 |
| 74 | International debt relief initiatives and their effects (i.e. supporting debtor countries’ national development strategies and using existing debtor (government) systems for implementation), in which case they would fit better into the NAA and look like new-style project aid (see section 2.2.2.1). Second, these individual, bilateral swaps are just too small to resort any noticeable (more indirect) effects on the debtor country, such as debt overhang elimination or improved creditworthiness. Even if properly engineered, the problem of scaling up swaps remains. 49 Again, this leads to the conclusion that, also for currently non-HIPC/MDRI eligible countries, more comprehensive operations with a setup similar to HIPC/MDRI have to be initiated if donors want to use debt relief as an intervention tool beneficial to these countries. 49 One promising (and seemingly realistic) avenue, for a limited selection of non-HIPC countries, may be to convince creditors that are favourable towards debt swaps to pool the resources generated by the relief given on their claims into one single fund, managed by (or at least in cooperation with) the debtor country itself. Coming to Terms with Reality | 75 |
Page 1 and 2: Main report Coming to Terms with Re
Page 3 and 4: | 2 | The Office of the Special Eva
Page 5 and 6: | 6 | List of abbreviations ODA Off
Page 7 and 8: | 10 | Executive Summary internatio
Page 9 and 10: | 14 | Executive Summary comprehens
Page 11 and 12: | 18 | Executive Summary instead of
Page 13 and 14: 1 Methodological approach of evalua
Page 15 and 16: | 26 | Methodological approach of e
Page 17 and 18: | 30 | International debt relief in
Page 37: | 70 | International debt relief in
Page 41 and 42: | 78 | Debt relief policy and pract
Page 53 and 54: | 102 | Debt relief policy and prac
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Page 57 and 58: | 110 | Case study Cameroon The spe
Page 59 and 60: | 114 | Case study Cameroon Table 4
Page 61 and 62: | 118 | Case study Cameroon The sec
Page 63 and 64: 5 General conclusions and recommend
Page 65 and 66: | 126 | General conclusions and rec
Page 67 and 68: | 130 | References Cassimon, D. and
Page 69 and 70: Annexes Coming to Terms with Realit
Page 71 and 72: | 138 | Annexes Annex 2.2: A note o
Page 73 and 74: | 142 | Annexes including forgiven
Page 75 and 76: | 146 | Annexes Annex 3.1: Cash bal
Page 77 and 78: | 150 | Annexes Restructuration Fin
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Page 81 and 82: | 158 | Annexes Coming to Terms wit
Page 83 and 84: | 162 | Annexes Figure 26 Gross Fix
Page 85 and 86: | 166 | Annexes We started out on t
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| 174 | Annexes 3 Debt Relief under
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| 178 | Annexes Figure 6 Bilateral
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| 182 | Annexes Source: BEAC This l
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| 186 | Annexes 4 Efficiency of the
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| 190 | Annexes 4.4 Implementation
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| 194 | Annexes Our analysis sugges
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| 198 | Annexes Figure 20 Total and
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| 202 | Annexes The second group of
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| 206 | Annexes 6 Impact on Economi
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| 210 | Annexes The 2004 survey rep
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| 214 | Annexes Figure 30 Debt serv
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| 218 | Annexes evolution is in lin
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| 222 | Annexes National Institute
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Published by: Kingdom of Belgium Fe
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