Debt Relief

Question 1

What is debt relief?

Answer 1

• cancellation of a LIC’s debts to an industrialised nation or institute, to allow LIC to shift funds towards social dev.

Question 2

What is the Heavily Indebted Poor Countries (HIPC) initiative?

Answer 2

• launched in 1996 by World Bank + IMF, to provide debt relief to poorest countries that have sig. external debts + are struggling to repay them

Question 3

What is the Multilateral Debt Relief Initiative (MDRI)?

Answer 3

• launched in 2005, by World Bank, IMF + African Dev. Fund, to provide additional debt relief to HIPCs that had reached completion point
• the HIPCs receive full debt cancellation on debts owed to World Bank, IMF + African Dev. Fund, on top of debt relief provided by HIPC initiative

Question 4

How does the HIPC initiative work?

Answer 4

• countries have to complete a 2 step process, in which they must fulfil certain conditions to reach decision point (step 1), which enables them to receive partial debt relief from HIPC initiative
• when completion point (step 2) is reached, countries receive full debt relief

Question 5

What must a country have to reach decision point?

Answer 5

• have a track record of political stability
• face an unsustainable debt burden
• have prepared a Poverty Reduction Strategy Programme (PRSP)
• be eligible to borrow from World Bank international dev. programme

Question 6

What must a country do to reach completion point?

Answer 6

• maintain a good record of macro-economic stability supported by loans from World Bank + IMF
• implement its PRSP for at least 1 yr
• implement satisfactory key reforms, agreed at decision point

Question 7

What are the strengths of this HIPC initiative?

Answer 7

• frees up resources for spending on health, education + other social services (e.g. after HIPC initiative, avg social spending for a country was 5x amount of debt service payments)
• between 2001 + 2015, debt service dec GDP by ab. 1.5% in 36 countries receiving debt relief
• has improved public debt management for HIPCs, however, they remain vulnerable to shocks so must pursue cautious borrowing policies + strengthen their public debt management

Question 8

What are the weaknesses of the HIPC initiative?

Answer 8

• HIPC initiative is currently unable to finance debt relief to all countries that reach decision point, which is estimated to be a total of $77B
• although largest creditors have provided full share of debt relief, smaller multilateral institutions, non-Paris club official bilateral creditors + commercial creditors, which accounts for 27% of HICP initiative costs, have only delivered a small share of expected debt relief
• doesn’t help pre-decision point countries, that face political instability + war
• has a long application process + review (several yrs) in which debt charges are still required to be paid, so debt inc due to interest charges

Question 9

Is the HIPC initiative effective?

Answer 9

• extremely effective at relieving debt of LICs, that aren’t politically instable due to corrupt gov.s or landlocked + heavily involved in war
• e.g. 36 countries out of 39, have successfully reached completion point, thus have had all their debts relieved by HIPC initiative
• however, HIPC initiative does have limitations, shown by 3 countries being unable to successfully reach decision points, + so aren’t eligible to receive debt relief they require

Question 10

How did the HIPC initiative help Uganda relieve its debts?

Answer 10

• Uganda, which was 1st to qualify for HIPC initiative, entered process in April, 1997, + attained its completion point in April 1998
• before HIPC initiative, it had a debt of $19B, so had little to spend on social services, however, after, 30,000 ppl in Uganda benefited from improved access to healthcare + medicine
• also, access to water + sanitation inc by 10% + 2M more children are now attending primary school
• however, not all of Uganda’s debts have been cancelled, as HIPC creditors haven’t paid their expected relief

Question 11

Why has the HIPC initiative not benefited Sudan?

Answer 11

• bc countries are required to meet a criteria in order to receive debt relief, however Sudan is unable to meet criteria for decision point bc it’s gov. is politically corrupt + unstable