External Finance for Low-Income Countries


External Finance for Low-Income Countries


Zubair Iqbal

Ravi Kanbur

Papers presented at the IMF and World Bank Conference on External Financing for Low-Income Countries, December 10–11, 1996

IMF Institute

International Monetary Fund

Washington, D.C.


© 1997 International Monetary Fund

Cover design by IMF Graphics Section

Library of Congress Cataloging-in-Publication Data

External finance for low-income countries / editors, Zubair Iqbal,

Ravi Kanbur.

p. cm.

“Papers presented at the Conference on External Financing for Low-Income Countries, December 10–11, 1996, sponsored by IMF Institute, Policy Development and Review Department, International Monetary Fund [and] the World Bank.”

Includes bibliographical references.

ISBN 1-55775-673-2

1. Debts, External—Developing countries. 2. Debt relief—Developing countries. 3. Capital movements—Developing countries. I. Iqbal, Zubair. II. Kanbur, S. M. Ravi. III. Conference on External Financing for Low-Income Countries (1996: Washington, D.C). IV. IMF Institute. V. International Monetary Fund. Policy Development and Review Dept. VI. World Bank.

HJ8899.E968 1997

336.3’435’091724—dc21 97-28125


Price: $22.50

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As part of its continuing efforts to address the debt problems of low-income countries and to promote growth, the International Monetary Fund, in collaboration with the World Bank, conducted a Conference on External Financing for Low-Income Countries on December 10–11, 1996. The conference focused on the impact of external indebtedness on low-income countries, particularly the heavily indebted poor countries (HIPCs), steps being taken to deal with their debt problems, the role of official and private capital flows in the period ahead in promoting sustained growth, and policies that could be implemented to catalyze private capital flows. It afforded an important opportunity for government officials to exchange views on the complex debt issues and options to address them. This volume brings together papers presented during the conference by scholars from universities and international research organizations, and the staffs of the Fund and the World Bank.

Developing an appropriate framework and action plan for addressing the debt problems of HIPCs is an arduous task from any number of perspectives. How to design an approach that would respond to a variety of individual country circumstances? How to reward adjustment and reform and avoid potential moral hazard? How to ensure that the approach would improve countries’ ability to attract external financing in the future? How to finance such an undertaking, particularly at a time of increasing resource constraints? These are just a few of the issues that the Staffs of the Fund and the Bank—and the many other interested parties whose input we have sought—have had to address. But however complex the task, a workable approach had to be found. Certainly, it would be unacceptable to allow the debt and debt-service burdens of some member countries to stand in the way of attaining macroeconomic stability leading to sustained, high-quality growth.

The newly established HIPC Debt Initiative aims to reduce the external debt burdens of HIPCs to sustainable levels and to allow the debtor countries to exit from the rescheduling process, provided they are prepared to adopt and pursue strong programs of adjustment and reform. In the process, the Initiative is expected to eliminate external debt as an impediment to sustained economic growth. The Fund and Bank staffs have already prepared—with the authorities of the debtors concerned—detailed debt sustainability analyses for a number of potentially eligible countries that could be considered close to or at their “decision points” in the near future. But beyond this analysis, there is still a considerable amount of work ahead on all sides—not just to put the Initiative into effect, but to see it through to fruition. For this, we will need to count on the continuing efforts of all our partners in this endeavor. We must look to the other creditors that will be involved in this Initiative to move quickly to finalize the modalities of their own participation. And of course, all creditors—including the Fund, the Bank, other multilaterals, other bilateral creditors, and private creditors—will have to work together very closely to engineer the massive coordination that will be required to achieve a concerted reduction in countries’ debt burdens.

But beyond all of this, there is another, and I believe, far more critical ingredient for the Initiative’s ultimate success. That is the sustained adjustment and reform effort that will have to be undertaken by the eligible countries themselves—not just to qualify for, and take advantage of, the Initiative, but more important, to become successful economies in their own right. In this regard, we must bear in mind that as important as the Debt Initiative is, it will by no means solve all the problems of the heavily indebted poor countries. At best, it will help remove one impediment among many to these countries’ future growth and development. But the fact remains that there is much else that needs to be done to establish the conditions for growth and development in the HIPCs—and in low-income countries as a group. Thus, as hard as we must all work to put the Debt Initiative into effect, we must continue to keep our sights on the broader and more challenging task at hand: establishing the conditions for sustained high-quality growth and development—not just in the HIPCs, but in all low-income countries.

It is an immense task. Good policies, consistently applied, pay off. We should take encouragement from the growing number of countries that are already reaping the benefits of sound macroeconomic policies and appropriate structural reforms. Let us not forget, for example, that less than a generation ago, some of the most successful Asian economies were impoverished. To take a more recent example, in 1995–96 there were 25 African countries that achieved growth rates of about 5 percent—nearly double the number of countries growing at that rate at the beginning of the decade.

We must build on past experience. A good point of departure is the “Declaration on Sustainable Global Growth,” which the Interim Committee issued last September. As the distillation of the membership’s adjustment experience, this Declaration contains a message for all Fund members. The Declaration reiterates the importance of pursuing sound monetary, fiscal, and structural policies over the medium term. But it also identifies a number of additional policy requirements that all countries need to establish to create an environment conducive to private saving and investment. Among these, I would highlight

  • The need to improve the quality and composition of fiscal adjustment—by reducing unproductive spending and ensuring adequate investment in basic infrastructure, health, and education, as well as targeted and affordable social safety nets.

  • The need to tackle structural reforms more boldly with a view to reducing distortions that impede the efficient allocation of resources.

  • The need to promote good governance in all its aspects—this includes ensuring the rule of law, improving the efficiency and accountability of the public sector, and tackling corruption.

Turning an economy around takes sustained effort. For the countries concerned, this means the steadfast pursuit of sound policies, not only to improve domestic economic performance, but also to attract external financing, which low-income countries will continue to need for some time to come, and to mobilize private savings—domestic, and eventually external. Likewise, for the international community, this means giving adequate support to reforming countries—by providing external financing on appropriate terms, improving market access for developing country exports, and giving continued support to the international financial institutions and the framework they provide for adjustment and reform.

Michel Camdessus

Managing Director

International Monetary Fund


We wish to thank the following for their advice and encouragement: Jack Boorman, Director, Policy Development and Review Department, IMF; Mohsin S. Khan, Director, IMF Institute; Masood Ahmed, Head, Poverty Reduction and Economic Management, Development Economics, The World Bank; Nawal Kamel, Director, Partnerships Group, Strategy and Resource Management, The World Bank; and Enrique Rueda-Sabater, Manager, Replenishment Operations, Resource Mobilization Department, Resource Mobilization & Cofinancing, The World Bank. Thanks are also due to Alfred F. Imhoff for editing the volume; to Juanita Roushdy, External Relations Department, IMF, for editorial guidance; to Rosa Vera-Bunge, IMF Institute, for research assistance; and to Susan E. Jones, IMF Institute, for preparing the manuscript.

Zubair Iqbal

Ravi Kanbur

List of Abbreviations


African Economic Research Consortium


African Development Bank


Communauté francophone d’Afrique


Enhanced Structural Adjustment Facility


Foreign direct investment


Foreign Investment Advisory Service, World Bank


Harvard Institute for International Development


Heavily indebted poor countries


International Bank for Reconstruction and Development


International Development Association


International Finance Corporation


International Monetary Fund


London interbank offered rate


Multilateral Investment Guarantee Agency


National Bureau of Economic Research


Net present value


Official development assistance


Organization for Economic Cooperation and Development


Structural Adjustment Facility


Severely indebted low-income countries


United Nations Conference on Trade and Development


  • Preface

    • Michel Camdessus

  • Acknowledgment

  • List of Abbreviations

    • 1 Welcoming Address

      • Alassane Ouattara

    • 2 Welcoming Address

      • Sven Sandström

    • 3 External Debt and Finance for Low-Income Countries—An Overview

      • Zubair Iqbal and Ravi Kanbur

  • Part I. External Debt of Low-Income Countries

    • 4 Analytical Aspects of the Debt Problems of Heavily Indebted Poor Countries

      • Stijn Claessens, Enrica Detragiache, Ravi Kanbur, and Peter Wickham

    • 5 Debt Overhang and Economic Growth in Sub-Saharan Africa

      • Ibrahim A. Elbadawi, Benno j. Ndulu, and Njuguna Ndung’u

    • 6 An Analysis of External Debt and Capital Flight in the Heavily Indebted Poor Countries of Sub-Saharan Africa

      • S. Ibi Ajayi

  • Part II. The Debt Initiative for Heavily Indebted Poor Countries and Debt Management Strategy

    • 7 Debt Relief for Low-Income Countries and the HIPC Debt Initiative

      • Anthony R. Boote, Fred Kilby, Kamau Thugge, and Axel van Trotsenburg

    • 8 Debt Relief for Heavily Indebted Poor Countries: Lessons from the Debt Crisis of the 1980s

      • William R. Cline

    • 9 Assessing the Efficiency of Mechanisms for Dealing with the Debt Problems of Low-Income Countries

      • Tony Killick and Simon Stevens

  • Part III. Prospects for Capital Flows and Growth

    • 10 Institutions as Investments

      • Robert H. Bates

    • 11 Prospects for Increasing Foreign Direct Investment in Low-Income Countries

      • Guy Pfeffermann

    • 12 Private Capital Flows to Sub-Saharan Africa: An Overview of Trends and Determinants

      • Amar Bhattacharya, Peter j. Montiel, and Sunil Sharma

    • List of Participants

The following symbols have been used in this book:

… to indicate that data are not available;

– between years or months (e.g., 1995–96 or January-June) to indicate the years or months covered, including the beginning and ending years or months; and

/ between years (e.g., 1996/7) to indicate a fiscal (financial) year.

“Billion” means a thousand million.

Dollars are U.S. dollars.

Minor discrepancies between constituent figures and totals are due to rounding.