Developing Countries: Challenges in Financing Poor Countries'
Economic Growth and Debt Relief Targets (20-APR-04, GAO-04-688T).
The Heavily Indebted Poor Countries (HIPC) Initiative,
established in 1996, is a bilateral and multilateral effort to
provide debt relief to poor countries to help them achieve
economic growth and debt sustainability. Multilateral creditors
are having difficulty financing their share of the initiative,
even with assistance from donors. Under the existing initiative,
many countries are unlikely to achieve their debt relief targets,
primarily because their export earnings are likely to be
significantly less than projected by the World Bank and
International Monetary Fund (IMF). In a recently issued report,
GAO assessed (1) the projected multilateral development banks'
funding shortfall for the existing initiative and (2) the amount
of funding, including development assistance, needed to help
countries achieve economic growth and debt relief targets. The
Treasury, World Bank, and African Development Bank commented that
historical export growth rates are not good predictors of the
future because significant structural changes are under way in
many countries that could lead to greater growth. We consider
these historical rates to be a more realistic gauge of future
growth because of these countries' reliance on highly volatile
primary commodities and other vulnerabilities such as HIV/AIDS.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-688T
ACCNO: A09835
TITLE: Developing Countries: Challenges in Financing Poor
Countries' Economic Growth and Debt Relief Targets
DATE: 04/20/2004
SUBJECT: Debt
Developing countries
Economic growth
Exporting
Foreign economic assistance
Future budget projections
International cooperation
International relations
Heavily Indebted Poor Countries
Initiative
******************************************************************
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GAO-04-688T
United States General Accounting Office
GAO Testimony
Before the Subcommittee on Domestic and International Monetary Policy,
Trade, and Technology, Committee on Financial Services, House of
Representatives
For Release on Delivery
Expected at 2:30 p.m. EDT DEVELOPING COUNTRIES
Tuesday, April 20, 2004
Challenges in Financing Poor Countries' Economic Growth and Debt Relief Targets
Statement of Mr. Thomas Melito
Acting Director
International Affairs and Trade
GAO-04-688T
Highlights of GAO-04-688T, a testimony before the Subcommittee on Domestic
and International Monetary Policy, Trade, and Technology, Committee on
Financial Services, House of Representatives
The Heavily Indebted Poor Countries (HIPC) Initiative, established in
1996, is a bilateral and multilateral effort to provide debt relief to
poor countries to help them achieve economic growth and debt
sustainability. Multilateral creditors are having difficulty financing
their share of the initiative, even with assistance from donors. Under the
existing initiative, many countries are unlikely to achieve their debt
relief targets, primarily because their export earnings are likely to be
significantly less than projected by the World Bank and International
Monetary Fund (IMF).
In a recently issued report, GAO assessed (1) the projected multilateral
development banks' funding shortfall for the existing initiative and (2)
the amount of funding, including development assistance, needed to help
countries achieve economic growth and debt relief targets.
______________________________ The Treasury, World Bank, and African
Development Bank commented that historical export growth rates are not
good predictors of the future because significant structural changes are
under way in many countries that could lead to greater growth. We consider
these historical rates to be a more realistic gauge of future growth
because of these countries' reliance on highly volatile primary
commodities and other vulnerabilities such as HIV/AIDS.
www.gao.gov/cgi-bin/getrpt?GAO-04-688T.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Thomas Melito at (202)
512-9601, or e-mail [email protected].
April 20, 2004
DEVELOPING COUNTRIES
Challenges in Financing Poor Countries' Economic Growth and Debt Relief Targets
The three key multilateral development banks we analyzed face a funding
shortfall of $7.8 billion in 2003 present value terms, or 54 percent of
their total commitment, under the existing HIPC Initiative. The World Bank
has the most significant shortfall--$6 billion. The African Development
Bank has a gap of about $1.2 billion. Neither has determined how it would
close this gap. The Inter-American Development Bank is fully funding its
HIPC obligation by reducing its future lending resources to poor countries
by $600 million beginning in 2009. We estimate that the cost to the United
States, based on its rate of contribution to these banks, could be an
additional $1.8 billion. However, the total estimated funding gap is
understated because (1) the World Bank does not include costs for four
countries for which data are unreliable and (2) all three banks do not
include estimates for additional relief that may be required because
countries' economies deteriorated after they qualified for debt relief.
Even if the $7.8 billion gap is fully financed, we estimate that the 27
countries that have qualified for debt relief may need an additional $375
billion to help them achieve their economic growth and debt relief targets
by 2020. This $375 billion consists of $153 billion in expected
development assistance, $215 billion to cover lower export earnings, and
at least $8 billion in debt relief. Most countries are likely to
experience higher debt burdens and lower export earnings than the World
Bank and IMF project, leading to an estimated $215 billion shortfall over
18 years. To reach debt targets, we estimate that countries will need
between $8 billion and $20 billion, depending on the strategy chosen.
Under these strategies, multilateral creditors switch a portion of their
loans to grants and/or donors pay countries' debt service that exceeds 5
percent of government revenue. Based on its historical share of donor
assistance, the United States may be called upon to contribute about 14
percent of this $375 billion, or approximately $52 billion over 18 years.
_________________________________________________________________
Estimated Cost to Achieve Economic Growth and Debt Relief Targets for 27
Countries through 2020 in 2003 Present Value Terms
Mr. Chairman and Members of the Committee:
I am pleased to be here today to discuss the funding of the existing
Heavily Indebted Poor Countries (HIPC) Initiative and the amount of
further assistance needed to help countries achieve economic growth and
debt targets.
The HIPC Initiative is a joint bilateral and multilateral effort to
provide debt relief to up to 42 poor countries to help them achieve
long-term economic growth and debt sustainability.1 The current cost for
the initiative is projected at about $41 billion in present value terms,
funded almost equally between bilateral and multilateral creditors.2
Although the initiative was launched in 1996, multilateral creditors are
still having difficulty financing their share of the initiative, even with
assistance from donors. GAO and others have reported that the existing
initiative is unlikely to provide sufficient debt relief to achieve
long-term debt sustainability, primarily because export earnings are
likely to be significantly less than projected by the World Bank and the
International Monetary Fund (IMF).
My remarks will focus on two key areas, as discussed in our recently
released report:3 (1) the multilateral development banks' (MDB) projected
funding shortfall for the existing HIPC Initiative and (2) the amount of
funding, including development assistance, needed to help countries
achieve economic growth and debt relief targets. I will highlight the key
financing challenges in these two areas.
1Under the HIPC Initiative a country is considered to be "debt
sustainable" if, in most cases, the ratio of a country's debt (in present
value terms) to the value of its exports is at or below the150-percent
threshold, which is believed to contribute to countries' ability to make
their future debt payments on time and without further debt relief.
2All figures in this statement are stated in 2003 present value terms,
unless otherwise noted. The present value of debt is a measure that takes
into account the concessional, or below market, terms that underlie most
of these countries' loans. The present value is defined as the sum of all
future debt-service obligations (interest and principal) on existing debt,
discounted at the market interest rate. The nominal value of the debt is
greater than the present value. The cost estimate is for 34 countries,
because 4 countries are not likely to need relief under the initiative and
data for 4 other countries are considered unreliable.
3U.S. General Accounting Office, Developing Countries: Achieving Poor
Countries' Economic Growth and Debt Relief Targets Faces Significant
Financing Challenges, GAO-04-405 (Washington, D.C.: Apr. 14, 2004).
Our analysis of the funding shortfall focused on the three key MDBs-the
World Bank/International Development Association (IDA), the African
Development Bank (AfDB)/African Development Fund (AfDF), and the
Inter-American Development Bank (IaDB)/Fund for Special Operations
(FSO)-because they account for about 70 percent of multilateral creditors'
debt relief costs. To determine the amount and timing of funding
shortfalls, we analyzed the banks' total and annual cost estimates and
funding sources for 34 countries. To determine the amount of funding
needed to achieve economic growth and debt relief targets, we analyzed
World Bank and IMF projections through 2020 for the 27 countries that have
qualified for debt relief thus far, focusing on estimates of key economic
variables including debt stock, debt service, donor assistance, government
revenue, and exports. In addition, we analyzed the impact of fluctuations
in export growth on the likelihood of these countries achieving debt
sustainability. We performed our work from June 2003 to February 2004 in
accordance with generally accepted government auditing standards.
Summary The three key MDBs we analyzed face a funding shortfall of $7.8
billion in present value terms, or 54 percent of their total commitment,
under the debt relief initiative. The World Bank and the AfDB have not
determined how they would close this gap. The World Bank has the most
significant shortfall-$6 billion. Despite significant assistance from
donor governments, the AfDB has a financing gap of about $1.2 billion. The
IaDB is fully funding its HIPC obligation by reducing its future lending
resources to poor countries by $600 million beginning in 2009. Based on
the rates at which the United States contributes to these three
multilateral development banks, we estimate that the United States could
be asked to contribute an additional $1.8 billion to close the known
financing shortfall for debt relief. However, the total estimated funding
gap is understated because the World Bank does not include costs for four
countries that are eligible for debt relief but for which data are
unreliable. In addition, all three banks do not include estimates for
additional relief that may be provided due to deterioration in the
countries' economic circumstances since they qualified for debt relief
under the existing initiative. The World Bank and the IMF project that
this additional relief could cost from $877 million to $2.3 billion.
Even if donors fully fund the current initiative, we estimate that the 27
countries that have qualified for debt relief may need more than $375
billion, in present value terms, in additional assistance from donors to
help them achieve their economic growth and debt relief targets by 2020.
This
Background
$375 billion consists of $153 billion in expected development assistance,
$215 billion in assistance to cover lower export earnings, and at least $8
billion in relief to reach debt targets. Based on our analysis of World
Bank and IMF projections, these countries will need $153 billion to help
them achieve their economic growth projections and debt sustainability.
However, we consider that amount to be an underestimate because it assumes
that countries will achieve overly optimistic export growth rates. Under
lower, more realistic historical export growth rates, 23 of the 27
countries are likely to experience higher debt burdens and lower export
earnings, leading to an estimated $215 billion shortfall over 18 years. In
addition, we estimate that countries will need between $8 billion and $20
billion in debt relief to achieve their debt targets, depending on the
strategy chosen. Under these strategies, multilateral creditors switch a
portion of their loans to grants and/or donors pay countries' debt service
that exceeds 5 percent of government revenue. Based on its historical
share of bilateral and multilateral assistance, the United States may be
asked to contribute about 14 percent of the $375 billion in additional
assistance, or approximately $52 billion over 18 years.
The World Bank and IMF have classified 42 countries as heavily indebted
and poor; three quarters of these are in Africa. In 1996, creditors agreed
to create the HIPC Initiative to address concerns that some poor countries
would have debt burdens greater than their ability to pay, despite debt
relief from bilateral creditors. In 1999, in response to concerns about
the continuing vulnerability of these countries, the World Bank and the
IMF agreed to enhance the HIPC Initiative by more than doubling the
estimated amount of debt relief and increasing the number of potentially
eligible countries. A major goal of the HIPC Initiative is to provide
recipient countries with a permanent exit from unsustainable debt burdens.
To date, 27 poor countries have reached their decision points, and 11 of
these have reached their completion points.4 In 1996, to help multilateral
creditors meet the cost of the HIPC Initiative, the World Bank established
a HIPC Trust Fund with contributions from member governments and some
multilateral creditors. The HIPC Trust Fund has received about $3.4
billion (nominal) in bilateral pledges and contributions, including $750
million in pledges from the U.S. government.
4The 11th country, Niger, reached its completion point just prior to the
publication of our full report. Eligibility for the HIPC Initiative is
scheduled to expire at the end of calendar year 2004. However, previous
sunset dates have been extended.
Key Multilateral
Development Banks Face Significant Challenges to Financing the Existing
Initiative
The World Bank, AfDB, and IaDB face a combined financing shortfall of $7.8
billion in present value terms under the existing HIPC Initiative (see
table 1).
Table 1: Financing Challenges Facing Key Multilateral Creditors (U.S.
dollars in 2003 present value terms)
Estimated Estimated
amount of Financing financing Estimated
debt relief identified gap U.S. share of
Institution (billions) (billions) (billions) financing gap
World Bank IDA 8.8 IDA 2.8 IDA 6.0 1.2 billion
(34 countries)a IBRD 0.7 IBRD 0.7
Total 9.5 Total 3.5
Between 132 and
African 3.5 2.3 1.2 348
Development Bank million
Group (32
countries)b
Inter-American 1.4 0.8 0.6d 300 million
Development Bank
(4 countries)c
Total 14.4 6.6 7.8 Between 1.6 and
1.8
billion
Source: GAO analysis of World Bank, African Development Bank Group, and
Inter-American Development Bank data.
Notes:
IDA = International Development Association
IBRD = International Bank for Reconstruction and Development
aOf the 42 countries potentially eligible for debt relief, 4 countries are
not likely to need relief under the initiative. Of the remaining 38
countries, the World Bank does not include estimates for 4 countries whose
data it considers unreliable.
bOf the 42 countries potentially eligible for debt relief, 34 countries
are members of the AfDB. Of these 34 countries, 2 countries are not likely
to need relief under the initiative.
cOf the 42 countries potentially eligible for debt relief, only 4
countries are members of the IaDB.
dThe IaDB's estimated financing includes a reduction in future lending
resources in the Fund for Special Operations, its concessional lending
arm.
The World Bank Has An Estimated Financing Gap of $6 Billion
Financing the enhanced HIPC Initiative remains a major challenge for the
World Bank. The total cost of the enhanced HIPC Initiative to the World
Bank for 34 countries is estimated at $9.5 billion. As of June 30, 2003,
the World Bank had identified $3.5 billion in financing, resulting in a
gap of about $6 billion (see table 1). Donor countries will be reviewing
the financing gap during the IDA-14 replenishment discussions beginning in
spring 2004.5 If donor countries close the financing gap through future
replenishments, we estimate that the U.S. government could be asked to
contribute $1.2 billion,6 which is based on its historical replenishment
rate of 20 percent to IDA.7
Over 70 percent of the funds IDA has identified thus far come from
transfers of IBRD's net income to IDA. Although IBRD has not committed any
of its net income for HIPC debt relief beyond 2005, we estimate that the
financing gap of $6 billion could be reduced to about $3.5 billion, or by
about 42 percent, if the net income transfers from the IBRD continue.8
Similarly, the U.S.'s potential share decreases by the same percentage,
from $1.2 billion to about $700 million.9 However, transferring more of
IBRD's net income to HIPC debt relief could come at the expense of other
IBRD priorities.
5Replenishment refers to periodic contributions by member countries that
are agreed upon by the institution's board of governors to fund
concessional lending operations over a specified period of time, normally
every 3 years. IDA's next replenishment (the 14th) is expected to take
effect in July 2005.
6Factors such as changes in the foreign exchange value of the U.S. dollar
could substantially alter total costs.
7According to IDA's Articles of Agreement, the Association shall review
the adequacy of its resources and authorize an increase in members'
subscriptions. All decisions to increase members' subscriptions are made
by a two-thirds majority of the total voting power. No member is obligated
to subscribe; however, not participating in an increase may affect a
country's voting power and influence in the Association.
8For this analysis, we assumed that IBRD's net income transfers continue
until 2021 at the maximum rate of $240 million per year beginning in 2006
and decline thereafter to cover all remaining scheduled HIPC relief though
2035.
9While the U.S. government is not legally obligated to help close the HIPC
financing shortfall of the MDBs, the United States may have an implicit
fiscal exposure, which is an implied commitment embedded in the
government's current policies or in the public's expectations about the
role of the government. See U.S. General Accounting Office, Fiscal
Exposures: Improving the Budgetary Focus on Long-Term Costs and
Uncertainties, GAO-03-213 (Washington, D.C.: Jan. 24, 2003) for a
discussion of implicit exposures.
AfDB Has a Financing Gap of at Least $1 Billion
The total cost of the enhanced HIPC Initiative to the AfDB for its 32
member countries is estimated at about $3.5 billion (see table 1).10 As of
September 2003, the AfDB has identified financing of approximately $2.3
billion, including $2 billion from the HIPC Trust Fund and about $300
million from its own resources. Thus, AfDB is faced with a financing
shortfall of about $1.2 billion in present value terms. We estimate that
AfDB will need about $400 million to cover its shortfall for its 23
eligible countries, as well as about $800 million for its 9 potentially
eligible countries.11 In addition, we estimate that the U.S. share of the
AfDB's financing shortfall is between $132 and $348 million, depending on
the method used to close the $1.2 billion shortfall.
IaDB Expects to Finance HIPC Commitments at the Expense of Future Lending
The IaDB expects to provide about $1.4 billion for HIPC debt relief to
four countries-Bolivia, Guyana, Honduras, and Nicaragua. Most of the
relief is for debt owed to the Fund for Special Operations (FSO), the
concessional lending arm of the IaDB that provides financing to the bank's
poorer members. As of January 2004, the IaDB has identified financing for
the full $1.4 billion, about $200 million from donor contributions through
the HIPC Trust Fund and $1.2 billion through its own resources. Although
the IaDB is able to cover its full participation in the HIPC Initiative,
the institution faces about a $600 million reduction in the lending
resources of its FSO lending program from 2009 through 2019 as a direct
consequence of providing HIPC debt relief. According to IaDB officials,
the FSO will not have enough money to lend from 2009 through 2013. To
eliminate this shortfall, donor countries may be asked to provide the
necessary funds through a future replenishment contribution.12 Assuming
that donor countries agree to close the financing gap, we estimate that
the U.S. government could be asked to contribute about $300 million so
that the FSO can continue lending to poor countries after 2008. This
estimate is
10Most of the debt of these countries is owed to the AfDF, the
concessional lending arm of the bank.
11According to the AfDB, the $800 million is likely to be an
underestimate, given that most of the nine remaining countries are
post-conflict countries that will require high levels of debt relief when
the international community determines that they are ready to become
eligible for HIPC debt relief.
12According to the IaDB's Articles of Agreement, the FSO shall be
increased through additional contributions by a three-fourths majority of
the total voting power of the member countries when the Board of Governors
considers it advisable. No member, however, is obligated to contribute any
part of such increase, although not contributing may affect a country's
voting power and influence in the Bank.
based on the 50-percent rate at which the United States historically
contributes to the FSO.
Financing Shortfall Is Understated
The $7.8 billion shortfall for the three MDBs is understated for two
reasons. First, the estimated financing shortfall for two institutions-IDA
and the AfDB-is understated because the data for four likely recipient
countries-Laos, Liberia, Somalia, and Sudan-are unreliable. The World Bank
considers existing estimates of the countries' total debt and outstanding
arrears to be incomplete, subject to significant change, and it is
uncertain when the countries will reach their decision points. Similarly,
the estimated costs of debt relief for three of AfDB's countries-Liberia,
Somalia, and Sudan-are likely understated due to data reliability
concerns.
Second, the financing shortfall does not include any additional relief
that may be provided to countries because their economies deteriorated
since they originally qualified for debt relief. Under the enhanced HIPC
Initiative, creditors and donors could provide countries with additional
debt relief above the amounts agreed to at their decision points, referred
to as "topping up." This relief could be provided when external factors,
such as movements in currency exchange rates or declines in commodity
prices, cause countries' economies to deteriorate, thereby affecting their
ability to achieve debt sustainability. The World Bank and IMF project
that seven to nine countries may be eligible for additional debt relief,
and their preliminary estimates range from $877 million to about $2.3
billion, depending on whether additional bilateral relief is included or
excluded from the calculation.13 The additional cost to the U.S.
government could range from $106 million to $207 million for assistance to
the World Bank and AfDB, based on the U.S. historical replenishment rates
to these banks.14 Furthermore, the topping-up estimate considered only the
27
13Declines in discount rates and the U.S. dollar exchange rate since these
preliminary cost estimates were calculated could further increase total
costs. The World Bank and IMF estimate that the cost in the baseline
scenario could rise to between $1.5 billion and $3.4 billion, using lower
exchange and discount rates prevailing as of June 30, 2003 (end-December
2002 for those countries likely to reach completion point in 2003).
14Using updated exchange and discount rates, the estimated additional cost
to the U.S. government could range from $179 million to $316 million for
assistance to the World Bank and AfDB.
countries that have reached their decision or completion point; the
estimate may rise as additional countries reach their decision points.15
Achieving Economic Growth and Debt Relief Targets Requires Substantial
Financial Assistance
Even if the $7.8 billion shortfall is fully financed, we estimate that, if
exports grow slower than the World Bank and IMF project, the 27 countries
that have qualified for debt relief may need more than $375 billion in
additional assistance to help them achieve their economic growth and debt
relief targets through 2020. This $375 billion consists of $153 billion in
expected development assistance, $215 billion in assistance to fund
shortfalls from lower export earnings, and at least $8 billion for debt
relief (see fig. 1). If the United States decides to help fund the $375
billion, we estimate it would cost approximately $52 billion over 18
years.
Figure 1. Estimated Cost to Achieve Economic Growth and Debt Relief
Targets for 27 Countries through 2020 in 2003 Present Value Terms
Countries Projected to According to our analysis of World Bank and IMF
projections, the Receive Development expected level of development
assistance for the 27 countries is $153 Assistance through 2020 billion
through 2020. This estimate assumes that the countries will follow
their World Bank and IMF development programs, including undertaking
recommended reforms. It also assumes that countries achieve economic
15When IDA performed the analysis, 19 countries were between the decision
and completion points, and 8 had reached their completion points for a
total of 27 countries. Currently, 11 countries have reached their decision
points, and 16 are between decision and completion points.
growth rates consistent with reducing poverty and maintaining long-term
debt sustainability.16 These conditions will help countries meet their
development objectives, including the Millennium Development Goals that
world leaders committed to in 2000. These goals include reducing poverty,
hunger, illiteracy, gender inequality, child and maternal mortality,
disease, and environmental degradation. Another goal calls on rich
countries to build stronger partnerships for development and to relieve
debt, increase aid, and give poor countries fair access to their markets
and technology.
Countries Face a Substantial Financial Shortfall in Export Earnings
We estimate that 23 of the 27 HIPC countries will earn about $215 billion
less from their exports than the World Bank and IMF project. The World
Bank and IMF project that all 27 HIPC countries will become debt
sustainable by 2020 because their exports are expected to grow at an
average of 7.7 percent per year. However, as we have previously reported,
the projected export growth rates are overly optimistic.17 We estimate
that export earnings are more likely to grow at the historical annual
average of 3.1 percent per year-less than half the rate the World Bank and
IMF project. Under lower, historical export growth rates, countries are
likely to have lower export earnings and unsustainable debt levels (see
table 2). We estimate the total amount of the potential export earnings
shortfall over the 2003 to 2020 projection period to be $215 billion.18
16Debt sustainability under the current HIPC standard is defined as a
present value external debt stock-to-export ratio less than or equal to
150 percent. The World Bank and IMF established a different debt
sustainability indicator for countries with very open economies. Because
these countries have a large export base compared with other measures of
debt servicing capacity, the fiscal criterion of present value
debt-to-fiscal revenues (250 percent) is considered a more appropriate
debt sustainability measure. The four countries that qualify under this
criterion are Ghana, Guyana, Honduras, and Senegal.
17U.S. General Accounting Office, Developing Countries: Status of the
Heavily Indebted Poor Countries Debt Relief Initiative, GAO/NSIAD-98-229
(Washington, D.C.: Sept. 30, 1998); Developing Countries: Debt Relief
Initiative for Poor Countries Faces Challenges, GAO/NSIAD-00-161
(Washington, D.C.: June 29, 2000); Developing Countries: Switching Some
Multilateral Loans to Grants Lessens Poor Country Debt Burdens, GAO-02-593
(Washington, D.C.: Apr. 19, 2002); and Developing Countries: Challenges
Confronting Debt Relief and IMF Lending to Poor Countries, GAO-01-745T
(Washington, D.C.: May 15, 2001).
18If future export growth rates exceed historical levels, the projected
export earnings shortfall would be lower. We estimate that for every
percentage point increase (decrease) in export growth rates from the
historical average, the export earnings shortfall would decrease
(increase) by about $35 billion.
Table 2: World Bank/IMF and Historical Export Growth Rates, Debt-to-Export
Ratios, and Export Earnings Shortfall
Debt-to-export ratios in 2020 (percentage) Export growth rates
(percentage)
Under Export
World earnings
Bank/IMF Under World Historical shortfall
growth historical Bank/IMF (billions of
rate growth ratea (projected) (1981-2000) dollars)
Benin 80.6 150.9 8.3 5.1
Bolivia 122.5 225.7 7.6 4.0
Burkina Faso 118.3 477.9 9.0 1.4
Cameroon 71.1 228.5 6.3 -0.1
Chad 119.5 137.0 11.9 7.9
DRC 90.6 625.9 9.4 -3.2
Ethiopia 75.5 199.0 8.0 2.9
The Gambia 83.2 75.9 6.3 7.5
Ghana 94.5 81.1 6.6 8.0
Guinea 90.3 217.2 6.6 1.7
Guinea-Bissau 120.1 153.7 8.8 7.8
Guyana 49.8 48.7 3.7 4.2
Honduras 31.3 46.0 9.4 7.2
Madagascar 79.0 111.0 7.7 6.0
Malawi 121.6 132.5 4.8 4.3
Mali 139.7 119.0 6.3 6.9
Mauritania 82.9 236.1 6.3 1.3 3.9
Mozambique 40.6 79.7 10.3 5.2 21.1
Nicaragua 59.6 94.3 8.0 5.7 6.9
Niger 137.5 643.2 7.0 -1.6 3.8
Rwanda 131.6 1,403.7 10.7 -3.6 4.2
Sao Tome and 144.0 946.3 7.4 -4.2 0.4
Principe
Senegal 56.9 98.7 6.0 3.0 11.2
Sierra Leone 104.3 831.8 9.1 -3.4 2.9
Tanzania 117.1 149.2 7.0 6.2 5.3
Uganda 104.3 263.8 9.5 4.3 9.6
Zambia 100.7 270.3 6.6 0.6 12.3
Average 95.1 298.0 7.7 3.1 Total 214.5
Source: GAO analysis of IMF and World Bank debt sustainability analyses.
aThis analysis assumes countries incur no further debt as a result of
their export earnings shortfall. Under this assumption, 12 countries are
projected to be sustainable: Chad, The Gambia, Ghana, Guyana, Honduras,
Madagascar, Malawi, Mali, Mozambique, Nicaragua, Senegal, and Tanzania.
High export growth rates are unlikely because HIPC countries rely heavily
on primary commodities such as coffee, cotton, and copper for much of
their export revenue. Historically, the prices of these commodities have
fluctuated, often downward, resulting in lower export earnings and
worsening debt indicators. A 2003 World Bank report found that the World
Bank/IMF growth assumptions had been overly optimistic and recommended
more realistic economic forecasts when assessing debt sustainability.19
Since HIPC countries are assumed to follow their World Bank and IMF reform
programs, any export shortfalls are considered to be caused by factors
outside their control such as weather and natural disasters, lack of
access to foreign markets, or declining commodity prices. Although failure
to follow the reform program could result in the reduction or suspension
of development assistance, export shortfalls due to outside factors would
not be expected to have this result. Therefore, if countries are to
achieve economic growth rates consistent with their development goals,
donors would need to fund the $215 billion shortfall. Without this
additional assistance, countries would grow more slowly, resulting in
reduced imports, lower gross domestic product (GDP), and lower government
revenue. These conditions could undermine progress toward poverty
reduction and other goals.
Additional Assistance Will Lead to Debt Sustainability in Most Countries
Even if donors make up the export earnings shortfall, more than half of
the 27 countries will experience unsustainable debt levels.20 We estimate
that these countries will require $8.5 to $19.8 billion more to achieve
debt sustainability and debt-service goals.21 After examining 40
strategies for providing debt relief, we narrowed our analysis to three
specific strategies: (1) switching the minimum percentage of loans to
grants for future multilateral development assistance for each country to
achieve debt
19World Bank, Operation Evaluations Department, The Heavily Indebted Poor
Countries Debt Initiative, An OED Review, February 20, 2003.
20Under historical export growth rates, countries experience unsustainable
debt levels. These debt levels can be reduced regardless of whether donors
address the export earnings shortfall. However, if donors do not fund the
export earnings shortfall, countries will likely experience significant
reductions in economic growth.
21This estimate assumes that donors fund the $215 billion export shortfall
with grants only, as grants avoid the build up of new debt.
sustainability,22 (2) paying debt service in excess of 5 percent of
government revenue, and (3) combining strategies (1) and (2). We chose
these strategies because they maximize the number of countries achieving
debt sustainability while minimizing costs to donors.23 We found that,
with this debt relief, as many as 25 countries could become debt
sustainable24 and all countries would achieve a debt service-to-revenue
ratio below 5 percent over the entire 18-year projection period (see table
3).
Table 3: Cost and Impact of Three Strategies for Providing Debt Relief to
27 Poor Countries
Number of countries
paying
Number of countries 5 percent or less of
revenue
Cost of debt relief achieving debt in debt service every
year
(billions of 2003-2020
Strategy dollars) sustainability in 2020
1. Switch the minimum percentage of loans to $8.5 25 grants for each
country to achieve debt sustainability
2. Pay debt service in excess of 5 percent of $12.6 12 government revenue
3. Switch the minimum percentage of loans to $19.8 25 grants and then pay
debt service in excess of 5 percent of revenue
Source: GAO analysis of World Bank and IMF data.
In the first strategy, multilateral creditors switch the minimum
percentage of loans to grants for each country to achieve debt
sustainability in 2020. We estimate that the additional cost of this
strategy would be $8.5 billion.25 The average percentage of loans switched
to grants for all countries under
22Of the $153 billion in expected future development assistance, $75
billion is comprised of loans from the multilateral development banks.
This strategy would switch the minimum amount of these loans to grants to
achieve debt sustainability. Because these loans would raise a country's
debt to an unsustainable level under historical growth rates, we consider
switching them to grants to be the equivalent of debt relief.
23Our analysis assumes that under historical export growth rates,
countries will have difficulty repaying their future debt burdens. As
such, we did not take into account any reduction in future costs to
bilateral donors that could arise if HIPCs were able to repay their
multilateral loans.
24Niger and Rwanda do not achieve debt sustainability, even with
100-percent grants, because their historical export growth rates are
negative and their existing debt levels are high.
25This cost represents loan receipts from 2003 to 2060 that are forgone
after switching a percentage of new loans to grants.
this strategy would be 33.5 percent.26 Twelve countries are projected to
be debt sustainable with no further assistance. In addition, 13 countries
would achieve sustainability by switching between 2 percent (Benin) and 96
percent (Sao Tome and Principe) of new loans to grants. A total of 25
countries could be debt sustainable by 2020, although only 2 countries
would achieve the 5-percent debt service-to-revenue target over the entire
period.
The second strategy is aimed at reducing each country's debt-service
burden. Under this strategy, donors would provide assistance to cover
annual debt service above 5 percent of government revenue. We estimate
that this strategy would cost an additional $12.6 billion to achieve the
goal of 5-percent debt service to revenue for all countries throughout the
projection period. Under this strategy, no additional countries become
debt sustainable other than the 12 that are already projected to be debt
sustainable with no further assistance. While this strategy would free
significant resources for poverty reduction expenditures, it could provide
an incentive for countries to pursue irresponsible borrowing policies. By
guaranteeing that no country would have to pay more than 5 percent of its
revenue in debt service, this strategy would separate the amount of a
country's borrowing from the amount of its debt repayment. Consequently,
it could encourage countries to borrow more than they are normally able to
repay, increasing the cost to donors and reducing the resources available
for other countries.
The third strategy combines strategies 1 and 2 to achieve both debt
sustainability and a lower debt-service burden. Under this strategy,
multilateral creditors would first switch the minimum percentage of loans
to grants to achieve debt sustainability, and then donors would pay debt
service in excess of 5 percent of government revenue. We estimate that
this strategy would cost an additional $19.8 billion, including $8.5
billion for switching loans to grants, and $11.3 billion for reducing debt
service to 5 percent of revenue. Under this strategy, 25 countries would
achieve debt sustainability in 2020-that is, 13 countries in addition to
the 12 that are projected to be debt sustainable with no further
assistance. All 27 countries would reach the 5-percent debt-service goal
for the duration of
26The percentage of loans switched to grants necessary to achieve debt
sustainability varies by country and results in different costs and
impacts for each country. For a breakdown of costs and impact by country,
see U.S. General Accounting Office, Developing Countries: Achieving Poor
Countries' Economic Growth and Debt Relief Targets Faces Significant
Financing Challenges, GAO-04-405 (Washington, D.C.: Apr. 14, 2004).
the projection period. However, similar to the debt-service strategy
above, this strategy dissociates borrowing from repayment and could
encourage irresponsible borrowing policies.
If the United States decides to help fund the $375 billion, we estimate
that it could cost approximately $52 billion over 18 years, both in
bilateral grants and in contributions to multilateral development banks.
This amount consists of $24 billion, which represents the U.S. share of
the $153 billion in expected development assistance projected by the World
Bank and IMF, as well as approximately $28 billion for the increased
assistance to the 27 countries. Historically, the United States has been
the largest contributor to the World Bank and IaDB, and the second largest
contributor to the AfDB, providing between 11 and 50 percent of their
funding. The U.S. share of bilateral assistance to the 27 countries we
examined has historically been about 12 percent.
We also analyzed the impact of fluctuations in export growth on the
likelihood of these countries achieving debt sustainability. The export
earnings of HIPC countries experience large year-to-year fluctuations due
to their heavy reliance on primary commodities, as well as weather
extremes, natural disasters, and other factors.27 We found that the higher
a country's export volatility, the lower its likelihood of achieving debt
sustainability. For example, Honduras has low export volatility, resulting
in little impact on its debt sustainability. In contrast, Rwanda has very
high export volatility, which greatly lowers its probability of achieving
debt sustainability. Since volatility in export earnings reduces
countries' likelihood of achieving debt sustainability, it is also likely
to further increase donors' cost as countries may require an even greater
than expected level of debt relief to achieve debt sustainability.
Volatility in Export Earnings Likely to Further Increase the Cost of
Achieving Debt Sustainability
Mr. Chairman and Members of the Committee, this concludes my prepared
statement. I will be happy to answer any questions you may have.
27While the previous analysis assumed constant export growth rates,
consistent with the projections of the World Bank and IMF, the export
earnings of HIPC countries are in fact highly volatile.
Contacts and Acknowledgments
(320272)
For additional information about this testimony, please contact Thomas
Melito, Acting Director, International Affairs and Trade, at (202)
512-9601 or Cheryl Goodman, Assistant Director, International Affairs and
Trade, at (202) 512-6571. Other individuals who made key contributions to
this testimony included Bruce Kutnick, Barbara Shields, R.G. Steinman,
Ming Chen, Robert Ball, and Lynn Cothern.
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