Towards HIPC 2.0? Lessons from Past Debt Relief Initiatives for Addressing Current Debt Problems

Abstract

When the COVID-19 pandemic added to already elevated debt vulnerabilities in low-income countries, the G20 launched the Debt Service Suspension Initiative (DSSI) and the Common Framework for Debt Treatments beyond the DSSI, which have provided limited relief so far. For several countries, deeper and more wide-ranging debt treatments will likely be needed to secure future debt sustainability. This paper looks at the Heavily Indebted Poor Countries (HIPC) initiative, the largest and most comprehensive debt relief effort for low-income countries to date, as a potential reference point for the 2020s. While the HIPC initiative appears to have been a qualified success, its replication in the current context would be infeasible and undesirable. Creditor base heterogeneity justifies a more flexible, differentiated approach to debt restructuring. Yet, the HIPC experience holds valuable lessons. “Delay and replay” tendencies should be avoided. Involving commercial creditors is a real challenge, requiring carrots and sticks. And imposing extra conditionality on debt relief proceeds could be helpful but should not be overdone. Even if the Common Framework is unlikely to suffice in case of a systemic debt crisis, its inter-creditor dialogue could perhaps serve as the basis for a more inclusive advisory body or forum for debt restructuring.

Debtor (Non-)Participation in Sovereign Debt Relief: A Real Option Approach

“…To our knowledge, we are the first to apply the insights from real option theory to sovereign debt relief, building on our earlier work (Essers and Cassimon, 2022). That notwithstanding, the literature on sovereign debt restructurings has studied related issues of negotiation duration and delays (see Graf von Luckner et al, 2021, for an overview).…”

“…Conversely, Brautigam and Huang (2023) put the total deferred amount higher, at USD 13.1 billion, due to their inclusion of USD 4.1 billion savings for Angola from voluntary debt reprofiling by the China Development Bank and ICBC. 7 This sets the Common Framework apart from the standardised Heavily Indebted Poor Countries (HIPC) initiative where the participation of eligible debtor countries was assumed, and only a few countries decided to opt out (Essers and Cassimon, 2022).…”

“…37 Lazard (2022) believes it is the official creditor committee, formed on an ad hoc basis for each country case, which will set the rules and perform the assessment. 38 A simple NPV formula would still allow for a menu of debt restructuring options (including various combinations of reduced principal payments, lowered interests, and maturity extensions) from which official and private creditors with heterogenous preferences could choose (Essers and Cassimon, 2022). metric, depending on the nature of debt problems: an NPV measure using a fixed 5% discount rate when debt is unsustainable, and a proportional contribution to the financing envelope in case of a temporary liquidity constraint.…”

“…The main MDBs as well as the IMF did participate in debt relief under the HIPC Initiative and MDRI, but were largely compensated for the costs by their shareholders, i.e. bilateral creditors and donors(Essers and Cassimon, 2022;Chuku et al, 2023). As a dominant bilateral creditor, China would benefit substantially from any dilution of the share of debt relief costs directly borne by bilateral creditors in case the MDBs would participate, while the country's underweighted share (relative to its GDP) in the capital of these institutions would limit the extra indirect costs linked to compensation(De Marchi, 2022).…”

Negative effects of high public debt on health systems facing pandemic crisis: Lessons from COVID-19 in Europe to prepare for future emergencies

“…In particular, countries with high public debt levels apply economic policies based on fiscal austerity measures, including spending cuts or tax increases, which could negatively impact the funding for healthcare systems [50] – [52] . In fact, high levels of public debt have negative effects on economic systems [53] and can decrease a government's ability to respond to emergencies and social problems [54] , [55] . Studies show that high levels of public debt can reduce government expenditure in the health and education sector [56] , [57] .…”