DEBT RELIEF Nicholas Dossett & Rachel Miller November 20 th, 2013.

DEBT RELIEFNicholas Dossett & Rachel Miller

November 20th, 2013

What is Debt Relief? From Google: A partial or total remission of debts, especially those owed by developing countries to external creditors.

What does this mean?

4 International Institutions

2 Major Initiatives

The World Bank GroupThe International Monetary FundThe United NationsThe African Development Fund

The Heavily Indebted Poor Countries Initiative (HIPC)The Multilateral Debt Relief Initiative (MDRI)

The World Bank and IMF• Bretton Woods Institutions• twin intergovernmental pillars • supporting the structure of economic and financial order

How are they different?• World Bank → a development institution • IMF → cooperative institution, maintains system of payments and receipts

The World Bank Activities:•Loans, Credits, & Grants•Supporting investments in:

• Education• Health• Administration• Infrastructure• Development• Agriculture• Environmental & Natural Resource Management

•Co-financing

Made up of 5 institutions:1.The International Bank for Reconstruction and Development (IBRD)2.The International Development Association (IDA)3.The International Finance Corporation (IFC)4.The Multilateral Investment Guarantee Agency (MIGA)5.The International Centre for Settlement of Investment Disputes (ICSID)

The IMFFundamental mission: to ensure stability in the international system•an organization of 188 countries

Goals:•foster global monetary cooperation•secure financial stability •facilitate international trade•promote high employment and sustainable economic growth•reduce poverty around the world

Three Activities:1.Surveillance: ways keeping track of the global economy and the economies of member countries2.Technical Assistance: giving practical help to members3.Lending: to countries with balance of payments difficulties

The United Nations• founded in 1945, after WWII

4 Main Functions:• Keep peace throughout the world• Develop friendly relations among nations• Help nations work together to improve the lives of poor people,

conquer hunger, disease and illiteracy, and encourage respect other’s rights and freedoms

• To be a center for harmonizing the actions of nations to achieve these goals

The AfDFThe African Development Fund (AfDF) is the concessional window of the African Development Bank (AfDB) Group.

Objective: to help reduce the debt burden of eligible Regional Member Countries (RMCs) & free up resources for poverty reduction and development

Functions:•Promotion of economic and social development

• 40 least developed African countries •Concessional funding and technical assistance •Participant in the internationally coordinated debt relief programs

• Enhanced HIPC Initiative & MDRI

The HIPC InitiativeLaunched in 1996 by International Development Association (IDA) and IMF•Comprehensive approach to debt reduction •ensure that no poor country faces a debt burden it cannot manage•provide a fresh start to countries with a foreign debt•voluntary provision of debt relief by all creditors

• multilateral, bilateral, or commercial

Enhanced in 1999 as an outcome of review by IDA and the IMF•debt-burden thresholds adjusted downward•broader group of countries •larger volumes of debt relief

• earlier assistance• “floating completion point”

The UN Millennium Development Goals• Agreed to by all the world’s countries and all the

world’s leading development institutions• Target date of 2015

1. Eradicate extreme poverty and hunger2. Improve maternal health3. Achieve universal primary education4. Combat HIV/AIDS, malaria and other diseases5. Promote gender equality and empower women6. Ensure environmental sustainability7. Reduce child mortality8. Develop a global partnership for development

Poverty Reduction Strategy Papers (PRSP)• Launched September 1999 by the World Bank and the IMF• Officially, MDG and PRSP objectives are not linked• MDGs were conceived within the UN system • PRSP was a Bretton Woods (IMF and World Bank) initiative • World Bank reports annually on progress towards MDGs

The MDRI• A supplement to the HIPC• Proposed by the G-8 in 2005• Provides for 100 percent relief on eligible debt from institutions

• The IMF• The IDA of the World Bank• The AfDF

• Intended to help advance the MDGs• Recipient countries must have met the completion point under the

HIPC Initiative

HIPC Initiative RequirementsFirst step: Decision pointFour conditions1. Eligible to borrow from the IDA & the IMF’s Poverty Reduction and Growth Trust2. Face an unsustainable debt burden3. Established a track record of reform and sound policies4. developed Poverty Reduction Strategy Paper through a broad-based participatory processWhen a country reaches its decision point it may immediately begin receiving interim debt relief

Second Step: Completion Point3 Conditions1.Establish a further track record of good performance2.Implement satisfactorily key reforms agreed upon at the decision point3.Adopt and implement its PRSP for at least 1 yearWhen a country reaches its completion point it is allowed to receive its full debt relief committed at the decision point

MDRI Requirements• Reach the completion point under the Enhanced HIPC Initiative• Per capita income below $380• Outstanding debt to the Fund at end-2004• Current on obligations to IMF • Demonstrate satisfactory performance in Macroeconomic policies &

implementation of a poverty reduction strategy

HIPC and MDRI Results2005

2006

2010

2011

2012

2013

Future

• HIPC relief to 29 post-decision countries = $41.7 Billion (NPV) • $20 Billion corresponds to completion point countries

• 40 Countries qualified for HIPC• 29 reached decision point• 30 countries received $45.8 Billion in MDRI relief

• $76.4 Billion in HIPC relief committed to 36 countries

• Poverty reduction expenditures increased from 6.3 % of GDP in 2001 to 8.8% of GDP in the 36 HIPC Countries

• Debt-service payment dropped from 2.8% of GDP in 2001 to 1.3% of GDP • Poverty reduction expenditures increased to 10.1% of GDP

• 36 of 39 HIPC eligible countries had reached “completion point” & have received debt relief under HIPC and MDRI

• helping low-income countries achieve their development goals • without creating future debt problems, • keeping countries that have received debt relief on a sustainable track.

Debt Relief in Burkina Faso• Burkina Faso remains committed to the structural adjustment program it launched in 1991• 1997 became the 2nd African Country & 3rd worldwide to benefit from HIPC• 2000 (Feb. ) Reached decision point• Set to receive $115 Million in 2000 (contingent) • Expected to reach completion point in 2001 by fulfilling following conditions

1. Consolidation of macroeconomic progress (PRGF) 2. Implementation of policy reforms in the medium-term policy framework3. Prepare full PRSP4. Implement PRSP for at least 1 year

• Qualified for US$398 Million- a 50% reduction in outstanding stock of debt• 2002 completed enhanced HIPC criteria • 2002 exceptional debt relief, or "topping-up” committed

• additional US$129 million (NPV) • to mitigate results of exogenous shocks to its exports

• Should have finalized its second PRSP covering the years 2004–2006, implementation period was extended into 2007/2008

• 2005 qualified for debt relief under the MDRI• 2009 annual per capita assistance was estimated at $81• Under the Poverty Reduction and Growth Facility (PRGF) IMF noted that

performance criteria were (completely or mostly) met in 2010

Debt Relief in Burkina Faso•Debt relief under the enhanced HIPC Initiative US$195 million (NPV) •In addition to US$229 million ( NPV) under the original HIPC framework in July 2000•In 2010 $638 million had been delivered under the MDRI •Total nominal debt service provided under the HIPC Initiative is about US$930 million

Burkina Faso is recognized as a good development performer and partner

A Critique of Debt Relief ProgramsGeneral •Foreign aid would benefit poor countries more than debt relief•Many countries receiving debt relief lack the ability to make a good use of it•Poor infrastructure•Emotional side of the debate often clouds the efficiency of a project•Aid would be better put to use building up what a country lacks rather than forgiving debts•Un/anti-democratic institutions•Lack of accountability

Burkina Faso, Specific•Liberalization of the economy required with programs marginalizing local artisans and workers•Process of liberalization has been uneven→ Inequality, Social Stratification•industries are vulnerable to competition from imported goods

Questions for Further Study1. Burkina Faso is said to have been very successful with the formal debt

relief programs. Do the people of Burkina Faso feel like they have been successful or that the debt relief programs were/are helpful?

2. How have the working people been affected by economic liberalization?

3. More Questions?

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