Debt and HIPC
The prospects for foreign debt sustainability in post-completion point countries: implications of the HIPC-MDRI framework
Will the HIPC-MRDI framework succeed in reaching and maintaining long-term external debt sustainability?
Authors:
J. Nwachukwu
Publisher:
Brooks World Poverty Institute, University of Manchester, 2008
This paper applies a growth-with-debt model to sixteen post-completion point HIPCs. This is in order to assess if the enhanced Highly Indebted Poor Country (HIPC) initiative will reduce the Net Present Values (NPV) of poor country foreign debt to a sustainable threshold of 150 percent of their exports by 2015. The document particularly focuses on looking at the enhanced HIPC- Multilateral Debt Relief Initiative (MDRI).
It is argued that participation in the current HIPC-MDRI initiative will only reduce the Net Present Values (NPVs) of their external debt as a whole to 176 percent of exports by this date. Sensitivity tests carried out which expose these 16 HIPC countries to adverse exogenous shocks help draw attention to policies that could ensure that unsustainable debt levels are not again accumulated by the world’s poorest countries.
Some of the key conclusions and policy options put forward include:
- it is unlikely that any of the 16 post-HIPCs will reach a stage in the next 25 years at which they can afford to pay out of their own domestic savings
- the impact on the debt sustainability outlook – of the proposal to cancel all multilateral debt outstanding at the end of 2004 – is only marginal
- policy initiatives which address the problems faced by post-HIPC-MDRI countries, in terms of a low marginal savings rate, would be most effective in helping them to reach and maintain sustainable external debt levels
- to reduce their vulnerability to external trading conditions, HIPC countries should expand the share of exports in their GDP.
