Debt Relief: The Development and Poverty Impact

Abstract

No development issue has quite captured the public imagination in the same way as debt relief. The juxtaposition of the billions of dollars owed and the grinding poverty of the countries concerned deliver an easy campaigning slogan and a seemingly straightforward policy recommendation: cancel the debt. But at the same time debt is also a complex issue, evident in measuring the stream of principal and interest payments over time (the net present value — NPV — of debt with, in turn, its assumptions about discount rates), the arcane language of ‘decision points’ and ’completion points’, the vexed question of what we mean by ‘debt sustainability (and the assorted ratios of debt-to-exports, debt-to-GDP, and debt-to-revenue), not to mention the interconnections with Poverty Reduction Strategy Papers (PRSPs) and the Millennium Development Goals (MDGs). Successive debt relief initiatives from the 1980s onwards with, since the mid-1990s, the heavily indebted poor countries (HIPC) initiative (later ’enhanced’) and now the Multilateral Debt Relief Initiative (MDRI) have steadily become more generous — but just how generous remains a matter of dispute. And not all indebted poor countries are HIPCs, and not all poor countries have large debts. The issue of horizontal equity across countries as well as the problem of moral hazard therefore arise.