Debt Sustainability in HIPCs in a New Age of Choice

This paper evaluates the achievements of the Heavily Indebted Poor Countries (HIPC) initiative and Multilateral Debt Relief Initiative (MDRI). It reflects on the extent to which new debt-creating development finance flows may jeopardize debt sustainability and assesses the results so far. The paper discusses the trends in external debt ratios since the early 2000s and identifies the risks and opportunities for debt sustainability in HIPC/MDRI countries. It finds that the HIPC initiative and MDRI both have been effective in achieving  their goals and objectives. Debt ratios have declined in many of the HIPCs and are much lower than in advanced countries. The paper also provides recommendations for better debt management to borrowing countries, sovereign leaders, and international bodies managing part of the debt agenda. Key recommendations provided in the paper include:

• Foster transparency of contract negotiations, debt management, and public expenditure;
• Continue improving debt management and coordination and consider developing a development finance strategy;
• Account for risks associated with contingent liabilities;
• Develop a debt work-out mechanism;
• Continue strengthening macroeconomic fundamentals and achieving export diversification;
• Undertake more analytical work to provide greater insight into the implications of the new sources of development finance for debt sustainability.