NANCY BIRDSALLTHE CENTER FOR GLOBAL DEVELOPMENT

Debt Relief: A Risk Management Failure?

(or: You may be in shock but . . .)

External Debt Panel1 December 2008, Doha

The message, in summary form

To address vulnerability – structural and episodic:

Simplify the rule that determines access to IDA grants (vs. loans)

Create a contingency facility that delays debt service or otherwise relieves debt in the event of an external shock to a post completion point HIPC

Debt and Other Indicators for Low Income, Post-Completion Point HIPC, and Middle Income countries, 2006

Source: Author, using WDI 2008 data; *LICs excluding India; Low and Middle Income classification by World Bank standards

Low Income* P-C HIPCMiddle Income

GDP per capita(constant 2000 US$)

354.49 442.26 2,318.30

External Debt, total(% of GNI)

69.65 55.50 26.80

Infant Mortality(per 1,000 live births)

79.59 82.73 26.04

International Aid(% of GNI)

14.56 14.47 34.62

Aid (% of GNI):Post-Completion-Point HIPCs, 2006

Source: Author, using WDI 2008 data

Aid (% of GNI):Post-Completion Point HIPCs, 2006

Source: Author, using WDI 2008 data

Total Debt Service (% of GNI):Post-Completion Point HIPCs, 2006

Source: Author, using WDI 2008 data

External Debt (% of GNI), 2006

Source: Author, using WDI 2008 data

External Debt, Total (% of GNI):Post-Completion Point HIPCs, 2006

Source: Author, using WDI 2008 data; excluding Sao Tome and Principe (296%) for scaling

Terms of Trade Volatility, 1975-2005

Source: Calderon (2007) in Perry (2008)

Terms of Trade Shock Frequency, 1975-2005

Source: Calderon (2007) in Perry (2008)

Natural Disasters Frequency, 1975-2005

*Central America and the Caribbean

Source: Calderon (2007) and Gurenko (2007) in Perry (2008)

Responses to volatility and risk

Coping after the fact: pro-cyclical fiscal adjustment; more aid

Prevention in the first place: stabilization funds; export diversification

Self-insurance: reservesMarket and market-like insurance (missing

option for LICs)

What’s been missing in aid “architecture”

Two proposals:

Response to structural vulnerability: IDA grants for countries under $800(?) income per capita and subsidies to make IMF financing grant-equivalent

Response to episodic external shocks: a LIC contingency or insurance facility, probably housed at IMF – automatic and timely – that would allow more borrowing under current DSF . . .

In conclusion

HIPC debt relief, for all its success, has failed to reduce high vulnerability of poor countries – structural and episodic

But there is still hope . . . . . fixes to HIPC rules could lead the way on fixes to aid transfers overall

Who’s accountable? Who’s in charge?