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A Chameleon Called Debt Relief: Aid Modality Equivalence of Official Debt Relief to Poor Countries

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Development Finance

Abstract

This paper critically reviews three decades of official creditors’ public debt relief practice from a novel angle, along debt relief’s similarities with aid modalities. We show that debt relief to poor countries is a true ‘chameleon’ which mimics different sorts of development aid, from traditional project aid to multi-year general budget support. The ‘colour’ of this chameleon depends on the embedded conditionality, alignment with recipient country policies and systems and the budgetary resource effect of particular debt relief interventions. We argue that characterising debt relief from an aid modality equivalence perspective is helpful in better understanding its varying performance track record and holds important policy lessons for designing future operations.

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Notes

  1. 1.

    This notwithstanding the fact that early debt restructuring and relief efforts by creditors had no developmental orientation (but primarily aimed at avoiding developing country default) and in spite of the arguments advanced by the OECD and other organisations that debt relief should, de jure, not be considered ‘core’ development aid (see, for example, Gurría and Manning 2007; Benn et al. 2010).

  2. 2.

    In engaging with the debate around scaling up aid to Africa, Collier (2006) compares different forms of aid, including debt relief (next to technical assistance, projects and BoP support), to oil and other resource rents received by African governments. Our analysis is complementary to his, in the sense that we attempt to tease out the similarities between debt relief and other forms of aid. Unlike Collier, however, we do not conceptualise debt relief as a uniform category.

  3. 3.

    In the last few years, the practice of some donors (even those that were initially leading proponents of the new aid agenda and its emphasis on budget support) shows a tendency towards stricter earmarking and control of aid (see for example, Independent Commission for Aid Impact 2012). One reason may be the dire fiscal situation these donors find themselves in today, increasing the need to better demonstrate what has been achieved with tax payers’ money (and inducing a shift towards aid instruments that yield more easily identifiable results).

  4. 4.

    In fact, the OECD’s Development Assistance Committee (DAC) aid accounting rules leave the door open for such substitution. In some instances, donors have been allowed to bring in the full nominal value of debt relief as Official Development Assistance (ODA), the main benchmark for donor generosity used by the DAC. To avoid double counting, for relief on debt titles previously qualified as ODA, only the interest component of the debt forgiven may be recorded as new ODA. However, since principal repayments on concessional loans are recorded as negative ODA in DAC statistics, debt relief also cancels these future negative entries, leading to higher net ODA over time. For more on the complex matter of aid accounting and its applications to debt relief we refer to Renard and Cassimon (2001). It should be noted that, at the moment of writing, the ODA concept and aid accounting rules were being thoroughly revised by the DAC.

  5. 5.

    Independently from whether or not debt relief is additional to overall aid budgets, donors may decide to reallocate their traditional aid between more-indebted and less-indebted countries because of debt relief, which could have important distributional consequences (Gunter et al. 2008).

  6. 6.

    Non-concessional, non-ODA loans (such as officially guaranteed export credits) were rescheduled at market-determined interest rates, whereas for ODA loans typically concessional interest rates (at least) as favourable as the original rates on these loans were used. Technically speaking, rescheduling at market interest rates yields no genuine debt relief, not in nominal terms and not in PV terms. Some individual Paris Club creditors complemented ad hoc agreements on non-ODA debt with forgiving all or part of their ODA loans to low-income countries (Gamarra et al. 2009).

  7. 7.

    The menu also included a third (‘commercial’ or no-debt reduction) option whereby the debt claims would be spread out over a longer (25-year) repayment period, but at a market interest rate. The three-option menu was a comprise solution to proposals made by France, the UK and the US, respectively (Daseking and Powell 1999).

  8. 8.

    In 1990 the UK had made a bolder, more progressive proposal for a new debt restructuring approach, including, among other elements, a 67% PV debt reduction. These so-called ‘Trinidad terms’ were not withheld by the Paris Club at the time, but would serve as an inspiration for later rescheduling terms (Daseking and Powell 1999).

  9. 9.

    Again, this is not to say that these deals were of no benefit to the debtor countries in question. As highlighted before, avoiding (or postponing) formal default by short-term rescheduling may have eliminated important negative externalities.

  10. 10.

    A full list of Paris Club deals is available from http://www.clubdeparis.org.

  11. 11.

    Evidently, as Paris Club consolidation agreements were conditional on having an active IMF programme, so were the debt swaps conducted under such agreements (albeit only indirectly).

  12. 12.

    The cash flow effect of swaps could even be negative in some years, to the extent that the required (local currency) counterpart funds exceeded the debt service cancelled.

  13. 13.

    In more recent years there have been many other Brady-like commercial bond exchanges (see Das et al. 2012 for an overview).

  14. 14.

    From this point onwards, international debt relief got on two distinct tracks: one for HIPCs, which would be broadened and deepened in the subsequent years, and one for non-HIPCs, which would largely be a continuation of pre-1996 practices. We will focus our attention to the first track.

  15. 15.

    In April 1997 eligibility for the HIPC Initiative was broadened to countries with a PV debt-to-fiscal revenue ratio of 280% or more (Gautam 2003). For a critical review of the analytical and empirical underpinnings of the HIPC debt sustainability targets, see Hjertholm (2003).

  16. 16.

    Multilateral institutions have been partly reimbursed by their member (creditor) countries for the debt service forgone. Other financing of multilateral debt relief has come from proceeds of the revaluation of gold (IMF) and profits of lending to middle-income countries (World Bank) (Cosio-Pascal 2008).

  17. 17.

    In 2007 the Inter-American Development Bank settled on providing MDRI-like debt relief to the five Latin-American HIPCs. Also the EU decided to top up its HIPC commitments with extra debt relief on the European Development Fund’s Special Loans, but only for eligible least-developed countries.

  18. 18.

    There are few cases where the Evian approach principles have been applied explicitly (Cosio-Pascal 2008). In the large-scale Paris Club debt treatments of Iraq (2004) and Nigeria (2005), for example, political considerations seem to have played a much more prominent role.

  19. 19.

    Dijkstra herself uses the term ‘efficiency’ for what we indicate with ‘effectiveness at output level’. Because in the evaluation literature ‘efficiency’ generally refers to achieving certain goals with the lowest possible use of resources, we think it is somewhat of a misnomer in this context.

  20. 20.

    To our knowledge, there are no noteworthy comprehensive empirical studies dealing with pre-1990 debt relief. Both limited data availability and the fact that debt relief did not feature as a priority issue on the international agenda at that time could explain this.

  21. 21.

    The similarities between debt relief and GBS are recognised as such, explicitly, by the OECD (see Lister and Carter 2007) and, more implicitly, by the World Bank when it defines budget support as ‘[d]onor instruments… that support the implementation of a country’s medium-term poverty reduction strategy and consist of regular (annual) disbursements of untied resources to the budget’ (Koeberle and Stavreski 2006, p. 6). But, to our knowledge, debt relief-GBS parallels have not been explored in greater detail in the literature so far.

  22. 22.

    Similarly, it seems odd that NGOs have strongly advocated these sorts of debt relief, while at the same time many of them are reluctant to embrace the use of GBS.

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Cassimon, D., Essers, D. (2017). A Chameleon Called Debt Relief: Aid Modality Equivalence of Official Debt Relief to Poor Countries. In: Biekpe, N., Cassimon, D., Mullineux, A. (eds) Development Finance. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-54166-2_6

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