The Enhanced Heavily Indebted Poor Countries (HIPC) Initiative and the Achievement of Long-Term External Debt Sustainability

The Enhanced Heavily Indebted Poor Countries (HIPC) Initiative and the Achievement of Long-Term External Debt Sustainability

Abstract

The Enhanced Heavily Indebted Poor Countries (HIPC) Initiative and the Achievement of Long-Term External Debt Sustainability

I. Introduction

1. As a background to the report on the Status of Implementation under the Heavily Indebted Poor Countries (HIPC) Initiative, this paper assesses the impact of the recent global economic slowdown on the external debt sustainability outlook of the HIPCs. The study focuses on the twenty-four HIPCs that had reached their decision points under the enhanced HIPC Initiative as of January 2002 and is based on available information on the economic performance of these countries in 2000-01 and updated projections made after September 2001.1 On the basis of this analysis, the paper examines the role of debt relief under the HIPC Initiative and discusses additional measures that could be taken to help HIPCs maintain long-term debt sustainability.

2. In April 2001, during the discussion of the staff paper on the challenges of maintaining long-term debt sustainability in HIPCs, Directors noted HIPCs’ vulnerability to adverse exogenous developments.2 Directors agreed that achieving long-term debt sustainability required concerted and sustained efforts by the HIPCs, their creditors and the international community at large and called for the staffs of the IMF and World Bank to assist HIPCs to meet these challenges. The recent global economic slowdown has heightened these concerns. At their November 2001 meetings, the IMFC and Development Committees recognized the need to take into account the worsening global growth prospects and the declines in terms of trade when updating HIPC Initiative debt sustainability analyses and encouraged HIPCs to reach their completion points, thereby securing access to full debt relief without delay.3

3. External debt sustainability is a comprehensive concept and no single debt indicator or a particular level of a debt indicator can fully inform an assessment of debt sustainability. Analytically, public sector external debt sustainability depends on three key determinants (and their development over time): the existing stock of public and publicly guaranteed debt; the development of fiscal and external repayment capacity, which is closely related to the outlook for output and export growth; and the prospective volume and concessionality of new external borrowing. An assessment of debt sustainability would thus involve a range of indicators, including both stock concepts and debt-service concepts relative to variables associated with a country’s potential repayment capacity.

4. The remainder of the paper is organized as follows. Section II presents available evidence on the recent economic performance of the 24 HIPCs and compares these developments with projections made at their decision points. Section III provides a brief assessment of the extent to which the HIPC Initiative has provided a solid basis for the four countries that have reached the completion point to maintain debt sustainability over the medium term, and whether countries in the interim period between their decision points and completion points have made progress toward this goal. Section IV discusses issues that are important in maintaining long-term debt sustainability, including the appropriate response to exogenous shocks, policy measures to reduce HIPCs’ external vulnerability, additional debt relief at the completion point in exceptional cases, and appropriate external financing for HIPCs.

II. Hipcs’ Recent Economic Performance

A. Exports and Growth

5. HIPCs’ growth and export performance has been heavily influenced by developments in commodity prices in world markets. The average export price index (in U.S. dollars terms) declined by 2.6 percent in 2001 for the 24 HIPCs, after a 0.9 percent increase in 2001, but the weakening of export prices over the past two years was much more pronounced for some countries. For instance, on a cumulative basis, the prices of coffee and cotton—two major export commodities for a number of HIPCs—fell by 60 percent and 10 percent, respectively during 2000 and 2001 (Figure 1). The decline in coffee prices affected mainly Ethiopia, Honduras, Nicaragua, Rwanda, Tanzania, and Uganda, while Benin, Burkina Faso, Chad, and Mali were affected by the fall in cotton prices (Appendix Table 1).4 The largest declines in overall export prices in 2001 were experienced by Guinea-Bissau, Nicaragua, Rwanda, and Uganda, owing mainly to the decline in the prices of their major export commodities (cashew nuts for Guinea-Bissau and coffee for Nicaragua, Rwanda and Uganda) (Appendix Tables 1, 9 and 10). Since most HIPCs are net oil importers, the adverse impact of the commodity price decline on the balance of payments and economic activity was partially compensated by lower oil import prices. On average, the terms of trade for these countries weakened by 0.4 percent in 2000-01; there were 12 countries where the terms of trade developments were unchanged or better than initially projected (Table 1 and Appendix Tables 9-10).

Figure 1.
Figure 1.

HIPCs: Main Export Commodity Prices, 1996 - 2005

Index: 1996 = 100

Citation: Policy Papers 2002, 017; 10.5089/9781498328661.007.A001

Source: IMF World Economic Outlook.
Table 1.

HIPCs: Commodity Export Dependence

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Sources: World Bank World Development Report; IMF World Economic Outlook and IMF staff reports.
1/

Unless otherwise indicated, all data refer to 1999.

2/

2001 data.

3/

WEO data and projection.

4/

2000 data for GNP per capita.

Table 1.

HIPCs: External Environment and GDP and Export Growth, 2000-2001

(Annual percentage changes)

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Sources: Decision Point documents; IMF World Economic Outlook, 2001; and IMF and World Bank staff estimates.
1/

Simple average.

2/

Exports of goods and non-factor services.

3/

As defined in the IMF WEO.

Table 9.

HIPCs: Terms of Trade, 2000-2010

(Percent change)

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Sources: World Bank and IMF staff estimates and projections.
1/

Based on fiscal year data (e.g., FY 2000/01 is 2001).

2/

Simple averages.

Table 10.

HIPCs: Terms of Trade Index, 2000-2010

(1999=100)

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Sources: World Bank and IMF staff estimates and projections.
1/

Based on fiscal year data (e.g., FY 2000/01 is 2001).

2/

Simple averages.

6. The unweighted average export growth for the 24 HIPCs in 2000-01, at 5.4 percent, was significantly less than the 9.4 percent projected at the decision points

(Table 1 and Appendix Table 6). Staff estimates suggest that the loss of export earnings due to the decline in commodity prices could amount to 1.5-2 percent of GDP for the 24 countries during these two years. While export growth accelerated in the completion point HIPCs, albeit at a less than projected pace, at 4½ percent it was only half the average projected export growth in the 20 interim HIPCs. Again, there are significant variations across countries behind these averages. Sixteen out of 24 countries experienced lower-than-projected exports in 2000-01, two countries were broadly on target, and six countries recorded a better-than-projected export performance (Madagascar, Mali, Niger, Rwanda, Mozambique, and Tanzania) (Appendix Tables 5 and 6). The export shortfalls during 200001 were particularly large in Uganda (27 percent), Burkina Faso and Guinea-Bissau (20 percent), Guinea, Senegal, and Zambia (16-18 percent), Benin, Honduras, and Mauritania (10-13 per-cent). The lower exports in these countries reduced the basis for export projections over the medium term, thus shifting downward the level of projected exports and, ceteris paribus, upward the projected NPV of debt-to-exports ratios and worsening the medium-term projections for these countries’ debt sustainability (Figure 2). The realism of export projections is assessed in Section III.C below.

Table 6.

HIPCs: Export Growth, 2000-2010 1/

(In percent)

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Sources: World Bank and IMF staff estimates and projections.
1/

Exports of goods and non-factor services.

2/

Based on fiscal year data (e.g., FY 2000/01 is 2001).