Making Debt Relief Conditionality Pro-Poor

Abstract

Debt relief is a form of aid, and one that is becoming increasingly important for poor developing countries. From the perspective of donors, funds allocated to debt relief are attributed to the aid budget. From the perspective of developing countries, debt relief reduces debt servicing costs. As with aid, it represents an increase in funds available to government. Furthermore, as with aid, eligibility for debt relief is conditional on implementing specified economic policy reforms. The literature on aid conditionality should therefore be informative regarding the appropriate form of conditionality for debt relief. Furthermore, debt relief is intended to have a poverty-reducing effect. Although relief in itself will not affect poverty, the way in which the government funds that are freed through relief are used can reduce poverty. In other words, and this is the argument of the chapter, it is the funds associated with debt relief that can reduce poverty (if allocated to pro-poor expenditures). The flaw in current debt relief conditionality is that the conditions relate to policies (that should be pro-poor) rather than to the use of these funds, which are released only after the conditions have been met. We argue that pro-poor expenditures can and should be disbursed independently of, and if necessary prior to, full compliance with policy conditions.

This chapter was originally prepared for the WIDER Development Conference on Debt Relief, Helsinki, 17–18 August 2001; useful comments were received from Maureen Were and participants. The research is part of a project on ‘Poverty Leverage of Aid’ funded by DFID (grant R7617). The views expressed here are those of the author alone.