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

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Executive Summary
international concerted debt relief policy, as well as the extent to which it has dealt with
available policy space in an efficient as well as effective way. In doing so, it reviews the
Belgian inputs, in terms of the amounts of debt relief granted, as well as the modalities
attached. Fourth and finally, at the level of coherence, it assesses to what extent Belgium, in
executing a debt relief policy, has adhered to the principles of the new aid effectiveness
agenda, and, at the domestic level, to what extent the Belgian debt relief policy is coherent
with the overall Belgian aid strategy, so that it can genuinely be classified as a relevant
development intervention, with development cooperation budget expenditures being devoted
to it, as well as this outlays being classified as Official Development Assistance (ODA).
So, In line with this methodological framework, the current report discusses this debt relief
policy at three levels, namely the international level, discussing debt relief interventions by
the total international donor community (towards all recipient countries), then at the Belgian
level, as such zooming in on the interventions of one donor (towards all recipient countries),
and finally at the level of one recipient country, discussing the effects of the debt relief efforts
of the global donor community, and Belgium in particular, on one recipient country,
Cameroon. The remainder of this executive summary will follow the same structure.
Before starting this analysis, it is important to use precise concepts to define debt relief,
how best to measure its relative usefulness from a development (assistance) perspective,
and to provide a taxonomy of the different types of aid interventions that can be classified
as debt relief interventions. First of all, debt relief itself is best measured at its present
value (PV), i.e. the discounted, present value (PV) of all the (future) contractual debt
service payments due on a given nominal amount of debt outstanding; as a lot of this debt
is at concessional terms (low interest rates, long maturities), typically there the PV can be
substantially lower than the nominal value. Furthermore, to measure the usefulness of a
given debt relief intervention, as measured in PV, as a development intervention, one
should try to measure its so-called ‘economic value’, i.e. the present value (PV) of all the
debt service payments which the debtor would have done on the debt relieved, in the
absence of this debt relief intervention; the difference between PV and economic value is
then the degree of default on the debt: conceptually, to the extent that the debtor would not
have paid anything, this economic value is zero; also from the recipient country
government perspective, the direct cash flow (fiscal space) gains are then absent. However,
as the debt relief intervention will likely come with some strings attached (‘conditionalities’),
it may well be that there are some indirect gains resulting from the debt relief intervention,
through these conditionalities, beyond the direct fiscal cash flow effect.
As such, the efficiency, effectiveness and relevance of a given debt relief intervention will
be mainly determined by the combined direct cash flow (economic value) and indirect
conditionality effect, very much similar to other types of more traditional aid interventions,
such as project aid, aid linked to structural adjustment programme (SAP) interventions by
the multilateral financial institutions (such as the World bank and the IMF), or forms of
budget support. In fact, debt relief is a chameleon: it can take on different colours, making
it resemble several others of these more traditional aid modalities, basically depending on
the type of conditionalities attached.
Coming to Terms with Reality
A chronology and ‘generational’ overview of debt relief,
leading to a taxonomy of donor-financed debt relief
interventions
In the study we have distinguished between three ‘generations’ of debt relief: the pre-HIPC
initiative period, debt relief under the HIPC Initiative, and then debt relief beyond and
additional to this HIPC initiative; the evaluation focuses on the last two generations.
Pre-HIPC debt relief was largely confined to debt relief provided by the bilateral official
creditors (such as Belgium) gathered in the Paris Club, both on their official bilateral
concessional loans (so-called ODA-loans), as well as on non-ODA claims, mainly
originating from insured export credits in the hands of official export credit agencies
(ECAs, such as ONDD in Belgium). From 1988 on, the Paris Club introduced ‘common
terms’ to include an element of debt relief in their debt restructuring agreements with
debt-distressed low-income countries. Even if these common terms gradually included a
higher degree of debt relief (from 1/3 to 2/3 of the debt rescheduled), these debt
rescheduling agreements only affected a limited set of future debt service payments, and so
debt relief on it was considered to be marginal, and dealt largely with debt service unlikely
to be serviced anyhow, i.e. with a low economic value; in terms of the conditionality
attached, it was typically framed within an IMF-monitored SAP package. Apart from this
type of debt relief, pre-HIPC debt relief was also included in debt exchange operations,
both on debt claims within or outside the Paris Club, i.e. small debt buybacks, or debt
swaps, in which debt claims were cancelled in return for the recipient country to deposit
counterpart local currency in a separate fund, to be used for earmarked development
spending. Again, in these operations, the economic value was typically very low, and
conditionality very similar to the traditional project aid logic.
As the economic prospects of a fair number of low-income countries bearing heavy
external debt burdens continued to look bleak, the international community in September
1996 launched the Heavily Indebted Poor Country (HIPC) Initiative, aimed at committing
the international community to bring back to manageable levels the debt burdens of
eligible heavily-indebted poor countries with a proven track record of strong policy
performance and exhibiting a willingness for macroeconomic adjustment programmes and
structural reform. From this point onwards, international debt relief got on two distinct
tracks: one for HIPCs, which would be broadened and deepened in the subsequent years; and
one for non-HIPCs, which would largely be a continuation of the practices before 1996.
The HIPC Initiative’s objective was to engage in a comprehensive, one-off debt relief
effort that would make an end to consecutive rounds of debt rescheduling, make debt
levels sustainable again and launch those countries on a path of increased economic
growth. Countries were selected on the basis of their ‘unsustainable levels’ of debt. After
having successfully implemented reforms through IMF- and IDA-supported programmes
for three years, eligible HIPCs would reach their so-called ‘decision point’ at which the
IMF and World Bank would decide on the amount of debt relief needed (through a debt
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