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)| false International Monetary Fund, 2002a, “ Status of Implementation of the Enhanced HIPC Initiative and Update on Financing of PRGF and HIPC Operations and Subsidization of Post-Conflict Emergency Assistance.” Available via the Internet: http://www.imf.org/external/np/hipc/2002/status/092302.htm
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This paper was prepared while Alina Kudina was a summer intern at the Fiscal Affairs Department of the IMF during the summer of 2002. We would like to thank Ali Abbas, Celine Allard, Marco Cangiano, James Daniel, Christina Daseking, Peter Heller, Erik Lueth, Eric Mottu, Shamsuddin Tareq, and participants in an FAD seminar where a first draft of this paper was presented, for useful comments and suggestions. Luis Blancas provided outstanding research assistance. The usual disclaimer applies.
For a detailed history of the HIPC Initiative and its main principles, see Abrego and Ross (2001), IMF(2002a), and http://www.imf.org/external/np/exr/facts/hipc.htm and its references. In this paper, HIPC Initiative refers to “Enhanced” HIPC Initiative, as reformulated in 1999.
“Some three dozen HIPCs are expected to qualify for assistance under the enhanced HIPC Initiative, the great majority of which are sub-Saharan African countries. Debt relief packages are now in place for 26 countries under the enhanced HIPC Initiative framework (Benin, Bolivia, Burkina Faso, Cameroon, Chad, Ethiopia, The Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, São Tome and Príncipe, Senegal, Sierra Leone, Tanzania, Uganda, and Zambia), with total committed assistance estimated at some US$25 billion in NPV terms, or about US$41 billion in nominal terms. Of these countries, six (Uganda, Bolivia, Mozambique, Tanzania, Burkina Faso, and Mauritania) had reached their completion points under the enhanced Initiative by end-2002, at which time debt relief was delivered unconditionally” (PIN/02/122 of September 28, 2002). Easterly (2002) also notes that the HIPC Initiative seems to have been so far more successful than past debt relief efforts.
For example, “the purpose of debt sustainability analysis is to assess whether a country with a given profile of scheduled external debt payments is able in all likelihood to meet its current and future external debt obligations in full without resorting to rescheduling in the future or accumulation of arrears” (IMF, 1996b).
Adam and Bevan (2001) argue that as HIPCs can conceivably rely on positive net transfers, their debt servicing capacity depends not only on their ability to generate foreign exchange earnings, but also on how much foreign assistance is expected in the future. Since HIPCs will be receiving net transfers from abroad, then debt-to-exports ratio can actually underestimate their ability to sustain a given level of debt.
Appendix I in IMF (2001) shows that the incidence of rescheduling during 1993–97 for countries with an NPV of debt-to-exports below 150 percent ratio in 1991–93 was only 12 percent. For those with NPV ratio above 200 percent, the incidence of rescheduling rose to 70 percent. This empirical evidence supports the adequacy of the debt sustainability thresholds defined under the HIPC Initiative.
There is an equivalence between using NPV of debts or using nominal (face value) of debts and explicitly accounting for the associated concessional interest payments. See Edwards (2002).
For specifics on the NPV calculations, see: http://www.imf.org/external/np/exr/facts/hipc.htm. In addition, NPV calculations tend to hide the gross financing needs a government faces from maturing debt. For example, although two loans can be NPV-equivalent, one loan may involve larger bunched principal repayments and higher refinancing needs.
In principle, revenue could be an even more appropriate scale variable, as it measures a government’s ability to raise resources to service the debt. However, projecting revenue into the future—an essential ingredient of our exercise below—would depend on many policy variables and macroeconomic developments whose assessment is beyond the scope of this paper. While the same considerations apply to GDP projections, it is nonetheless more straightforward to use the latter for the sake of simplicity.
This is the main difference from the accounting approach—which defines sustainability as stability of debt ratios—as it is the “willingness” of the government’s creditors that ultimately makes a certain level of debt sustainable. In the accounting approach, it is therefore implicitly assumed that government’s liabilities can continue to grow at the nominal rate of growth of the economy, so that the debt/GDP ratio remains constant.
Seignorage revenue can be seen as a source of fiscal financing, especially in developing countries (see, for example, Cuddington (1997)).
It is assumed that money demand has unitary income elasticity.
In principle, an unbounded debt/GDP ratio could be possible in prolonged periods of high interest rates. Sustainability in such a case would therefore require ever growing primary fiscal surpluses—a unlikely possibility in reality. Hence, the size of primary fiscal surpluses must be constrained, because the government cannot collect more revenue that the economy generates as income. This condition ultimately requires that, if the interest rate is greater than the growth rate, debt ratios need to be bounded. For more analytical details, see Chalk and Hemming (2000) and references therein.
If the exchange rate depreciated faster than nominal GDP growth rate, then even a simple rollover of external debt would not allow for a contraction of the debt to GDP ratio. This is however an extreme scenario. In addition, while it would be possible to include negative values of θ in the admissible set of solutions, this in practice would imply that in each period a country is a net payer of external debt—an unlikely scenario for cash-constrained HIPCs.
The analysis in this paper is based on end-2002 information. Of the selected countries, four (Burkina Faso, Mozambique, Tanzania, and Uganda) had already reached the HIPC Completion Point by end-2002; others are expected to reach it in the course of 2003; while for a small group this goal remains more elusive in the immediate future (for example, Ghana, Malawi, and Zambia are not expected to reach the Completion Point earlier than 2004).
These figures refer to the nominal stock of external debt; the corresponding NPV ratios are obviously much lower, ranging from 20 percent in Uganda and 49 percent and 51 percent in Malawi and Zambia, respectively. Nominal debt levels are used in our simulations, for the reasons explained in Section II.
In addition, improved performance in Benin, Burkina Faso, Cameroon, Mali and Senegal also reflects a 50 percent devaluation for the whole French Common Franc Area in 1994.
Data for simulations are based on HIPC related documents, and projections provided by the area department. As Burkina Faso, Mozambique, Tanzania, and Uganda had reached completion point by end-2001, end-June 2002 data are used for these countries; for the others, data on external debt are based on the projected debt stock after reaching the completion point. For the domestic debt, we have used the latest available historical data. While the coverage of debt should be as broad as possible and consistent across countries, the definition of domestic debt largely refers to explicit domestic liabilities of the central government only.
Domestic interest rates are projected to remain stable over the projection period, which has important implications for the simulation results (see below).
In these countries, external financing is provided almost exclusively by either official bilaterals or multilateral institutions; the former typically charge interest rates comparable to those of the latter. Hence, our assumption of a 0.75 interest rate on external financing is reasonable.
In principle, it would even be possible to assume negative values of θ. However, this would imply that creditors demand to be repaid on a net basis. Given HIPCs’ financing constraints and the proclaimed willingness of the international community to stay engaged in these countries, this scenario is not adopted here.
All the simulation results reflect the impact of seignorage, as per equations (8) and (10). However, given the relatively low projections for inflation, and based on the low stock of reserve money in all these countries due their modest degree of monetization, seignorage does not play a significant role as a source of fiscal revenue.
In addition, given that most HIPCs rely on a very narrow export base, they are particularly prone to commodity price shocks. A case could therefore be made for exploring sensitivity to these shocks. As GDP—rather than exports—is the relevant scale variable in our analysis, this case is not pursued in this paper.