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Zambia: Debt Reduction Doesn’t Guarantee Debt Sustainability - World Bank
by Mwila Nkonge
5 September 2006

DEBT reduction is insufficient for debt sustainability, the World Bank has noted.

According to the Bank’s Independent Evaluation Group (IEG), a study of 18 Highly Indebted Poor Countries (HIPC) initiative beneficiary countries shows that the initiative does not guarantee debt sustainability. The study, entitled Debt Relief for the Poorest: An Evaluation Update of the HIPC Initiative, shows that while a reduction in debt was good, most post-HIPC completion point countries were still vulnerable to export shocks.

The study, whose results were published on Tuesday, indicates that due to this, 11 out of 13 post-HIPC countries for which data is available have experienced deterioration in their conditions. “The Enhanced HIPC Initiative has reduced US$19 billion of debt in 18 countries, thereby halving their debt ratios. But in 11 of 13 post-completion-point countries for which data are available, the key indicator of external debt sustainability has deteriorated since completion point,” the IEG study report states. "In eight of these countries, the ratios once again exceed HIPC thresholds.

Changes in discount and exchange rates have worked to increase debt ratios. The effect of improved exports and revenue mobilisation on debt ratios has been offset by new borrowing. Six of eight post-completion-point countries with new debt sustainability analyses are considered to have only a moderate risk of debt distress, but all remain vulnerable to export shocks and still require highly concessional financing and sound debt management.
“Debt reduction alone is not a sufficient instrument to affect the multiple drivers of debt sustainability. Sustained improvements in export diversification, fiscal management, the terms of new financing, and public debt management are also needed measures that are outside the ambit of the HIPC Initiative.”

The report, however, adds that debt relief has become a significant vehicle for transfer of resources to poor countries, with net transfer of resources doubling from US$8.8 billion in 1999 to US$17.5 billion in 2004.
The report further stressed the need for an engagement shift that allows recipient countries to spend these resources on priority poverty reduction programmes.
The IEG recommends that with these experiences, future debt relief initiatives should address the issue of policy actions that would enable beneficiary governments and their external partners build capacity to repay.

Mwila Nkonge