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

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General conclusions and recommendations
debt claims from ONDD at a discount, and swapping them with the original debtor country
in exchange for local counterpart funds to be used for development purposes (the so-called
debt swaps). Although this swap window to some extent allowed DGD to become a
pro-active internationally-recognised player in the debt relief field, generating additional
debt relief and also ODA, ex post assessment of these swaps is fairly negative, as already
indicated above. During the period 1988-99, Belgium provided about 500 million EUR of
debt relief, as measured on the basis of gross ODA accounting rules. In short, Belgian debt
relief operations during the period before 2000 were not efficient overall, as they mimicked
SAPs (through the Paris Club debt relief) and old style project aid (through the debt
swaps). Moreover, despite trying to incorporate elements of ‘economic value’ reasoning
when renegotiating the compensation agreements later on, the compensation formula used
continued to lead to compensation payments higher than the one deemed appropriate from
a development perspective. This is because the starting point of the compensation formula
was the nominal value of the debt (instead of its lower PV), as well as because the discount
applied to take into account default risk, taken from ONDD’s own internal scoring model,
was not appropriate in case of such small (‘marginal’) debt relief operations; as such, DGD
kept ‘overpaying’ for the debt claims they acquired for swaps or compensated. To the
extent that these compensations had to be paid out of the regular budget, and did not
produce budget additionality, this came at the expense of the regular DGD aid
interventions. Finally, DGD was not very successful in increasing its leverage on the other
Belgian actors involved, the reasons being a.o. political power imbalances between the
agencies, information asymmetry, as well as ‘institutional’ problems at DGD level (with
respect to sustained expert capacity, cabinet-administration information sharing, constant
restructuring of the administration). As a result, Belgium, mainly on the ONDD claims,
continued to use its remaining policy space in Paris Club decisions in a conservative way,
in the sense that it tried as much as possible to keep the face value of the claims intact.
The key question, that presents itself in this evaluation, is whether the efficiency,
effectiveness and relevance of international debt relief practices, and Belgian interventions,
has improved in the period from 2000 onwards, when poverty reduction was explicitly
formulated as an additional objective of debt relief in the (enhanced) HIPC Initiative?
Our analysis concludes that, overall, the international debt relief efforts during the last
decade can be evaluated as broadly efficient as well as effective. The HIPC Initiative
managed to reduce debt levels of the HIPCs to sustainable levels, at least after completion
point, with additional bilateral and MDRI relief reducing debt burdens even further.
Moreover, the (PRSP) process conditionality attached, focusing on improving institutional
governance and an increase of the overall pro-poor commitment of recipient country
policies and budgets, did increase pro-poor resources available and improved the
governance level. There is less (robust) evidence that recent debt relief was truly relevant,
i.e. did cause an increase in economic growth and in poverty reduction. Furthermore, the
HIPC Initiative further strengthened global creditor coordination and harmonisation in the
debt field from the Paris Club to the complete international (donor) community, with the
G-8 and multilateral institutions such as IMF and the World Bank now taking the lead,
adding to coherence with other aid interventions internationally. These results are quite
Coming to Terms with Reality
similar to results from evaluations of (general) budget support. Again this is hardly
surprising: from an aid modality equivalence perspective, most of the debt relief granted in
this period indeed looks very much like (general) budget support, both in terms of the
conditionality attached, as well as with respect to the cash flow equivalence, especially for
additional bilateral Paris Club debt relief (where Paris Club donors decided to go beyond
strict HIPC terms and grant HIPCs 100% cancellation of bilateral claims) and MDRI debt
relief by four multilaterals, again on top of HIPC debt relief, albeit for HIPCs only. The
international community also engaged in a number of (sometimes large scale) debt relief
interventions outside the HIPC framework, such as for Iraq and Nigeria. This raises the
issue of the considering debt relief for other, so far excluded, countries, for both motives of
equity and appropriateness. In the absence of perspectives of new major initiatives in this
respect, the debt swaps practice reappeared at the debt relief scene; it was usually
promoted by sector multilaterals or global funds, or in the field of climate change. Overall,
this approach remains inefficient and ineffective, unless engineered very carefully.
Finally, regarding types of debt relief, the current interventions, resembling very much
general budget support also fit very well in the new aid approach (NAA); in fact, the NAA
was pioneered through the HIPC initiative and mainstreamed later on.
As debt relief decisions continued to be determined and governed largely at the
international level, and even more so than in the nineties, also Belgian debt relief, as part
of the total effort, became more efficient and effective. Although Belgium was not
particularly pro-active in designing and implementing the new debt relief approach under
the HIPC/MDRI Initiatives, it was very accommodating in executing it. In the Paris Club,
the policy space for Belgium to keep choosing more conservative options in debt relief
operations on ONDD claims reduced, and together with Belgium joining the EU-consensus
to move to full cancellation of Paris Club bilateral claims, this lead to a number of
substantial debt relief operations for say Cameroon, DRC, and also, on ONDD claims, for
Iraq and Nigeria. Furthermore, Belgium, largely on the DGD budget, also engaged in a
number of other types of (multilateral) debt relief interventions, some voluntary and some
not, in the context of the HIPC/MDRI initiative, such as contributing to the HIPC Trust
Fund, or MDRI financing, or financing the clearance of arrears towards the IMF, such as in
the case of a Burundi operation. All these multilateral operations are evaluated as efficient
and effective operations. Altogether, during the recent decade, Belgian provided about 2.3
billion EUR of debt relief, expressed (largely) in nominal terms; of this total, nearly 2
billion EUR was on ONDD-claims. Nearly all of this debt relief could also be accounted as
extra ODA. However, as ODA accounting rules did not change, overvaluation remains an
issue here. This is an important element in the Belgian policy, as debt relief is as such very
instrumental in helping to increase ODA efforts to the targets promised in the growth path
policy (aiming for 0.7% of GNI in 2010).
On top of the 1991 compensation agreement, two new compensation agreements were
negotiated during this period to (partly) compensate MINFIN and ONDD for their
cancellation efforts in HIPC countries (only); the 2001 agreement dealt with strict HIPC
initiative debt relief, while the 2005 agreement dealt with the additional effort to go
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