STRATEGIES FOR FINANCING DEVELOPMENT The Newsletter of the HIPC CBP and the FPC CBP

Issue 37, 4th Quarter 2008 HIPC Debt Analysis & Strategy HIPC Ministers: Financial Crisis Must Not Jeopardise MDGs 2 Commonwealth Ministerial Debt Sustainability Forum 4 Honduras Public Debt Policy Updated 5 MEFMI’s Experience of DSAs Using the DSF 6 20 Years of Debt Relief: What Have We Achieved? 7 HIPC Progress and Debt Sustainability Status 8 HIPC Recent and Forthcoming Activities 10 Debt Relief Technical Questions 16

Foreign Private Capital Flows FPC CBP Update: Funding to Be Extended 12 FPC CBP Completes Transfer of Generic Software 13 Analysing Sustainability of Foreign Private Capital 14 HIPC MINISTERS: FINANCIAL CRISIS

he 15th meeting of Finance produce comprehensive analysis Nevertheless, they urged the Ministers of Heavily Indebted of the impact of the crisis on international community to go beyond T Poor Countries (HIPCs) low-income economies. such assistance by: was held in Washington on 10 • Establishing a small fund to relieve October 2008. The meeting Debt Relief and Debt Sustainability debts owed between severely indebted was co-sponsored by the HIPC Multilateral Debt Relief Initiative and low-income countries, which Capacity-Building Programme, Ministers congratulated the international cannot afford to provide debt relief the Commonwealth Secretariat community on implementing the to one another and the Organisation Internationale Multilateral Debt Relief Initiative (MDRI), • Intensifying efforts to convince non-Paris de la Francophonie. and mobilising most of the financing Club governments to participate needed for the relief, but • Convincing a maximum number The meeting was held under the • Urged donors to begin negotiations of creditors not to sell debts to joint chairmanship of H. E. Ali M. immediately on a substantial third parties. Lamine ZEINE, Minister of Finance replenishment of the FSO, as well as • Reinforcing laws in creditor countries and Economy of NIGER; and H.E. to provide higher aid levels for poverty to limit or prohibit such lawsuits. David CAREW, Minister of Finance reduction in Latin America, to that MDRI and Economic Planning of SIERRA funding does not considerably reduce Long-Term Debt Sustainability LEONE. HIPC Ministers made concessional flows in Latin America, Ministers reiterated that they are important recommendations • Indicated that it would be desirable determined to maintain their debt to mitigate the impact of the to extend the MDRI to cover the sustainability by maximising the global financial crisis on their Asian Development Bank, Caribbean concessionality of their new financing, economies, improve debt relief Development Bank and other and its effectiveness in promoting delivery, assure long-term debt sub-regional institutions. development. To this end, they also sustainability, finance the • Urged the international community undertook to implement all the necessary Millennium Development Goals to redesign formulas for allocating legal and institutional reforms, and to (MDGs), and continue to build concessional finance from the adopt debt strategies through their their debt management capacity. Multilateral Development Banks, national parliaments. to take more account of country financing needs for the MDGs. Ministers noted that country increases in Global Financial Crisis risk of unsustainable debt had been due Ministers warned that the global financial HIPC Debt Relief to export and climatic shocks, and to crisis will have a negative impact on Ministers indicated once again that changes in World Bank evaluations of their economies, through many channels, stronger efforts should be made to country policies and institutions, rather including: falls in remittances and private accelerate progress to decision and than any renewed irresponsible borrowing. capital flows; reduced access to and completion points for remaining HIPCs. They therefore urged the international increased costs of bonds, and bank credit As delays appear to be due to problems community to help them to design lines for trade; falls in stock exchanges; maintaining an IMF track record, they comprehensive strategies and provide and reduced returns on reserves invested urged the international community to grant-based financing to protect in OECD bonds. Lower OECD demand link HIPC progress to PRSPs rather them against shocks, as well as to for commodities could also reduce their than PRGFs. They also urged rapid switch to a system for evaluating export earnings, though oil price falls movement from IMF EPCA to PRGF country policies which is more would benefit oil importers. programmes for post-conflict countries. transparent and country-led.

In this context, Ministers undertook to Ministers also noted that there has To help them maintain their debt be even more vigilant in maximising been little progress on increasing sustainability, they urged that there their own national tax receipts (including creditor participation in HIPC, or reducing should be a continuing increase in grants from foreign investors) and savings, lawsuits by rogue creditors and third and concessional loans, especially for in increasing the value added and parties. Ministers welcomed the legal infrastructure and agriculture; and an earnings from their exports, and in using technical assistance provided by improvement in the value-for money all resources mobilised to make maximum the Commonwealth Secretariat, the of aid. They also urged that the IMF contributions to development. At the same proposed support by the AfDB, and the should fix minimum grant elements at time, they urged donors to fulfil their reinforcement of the IDA Commercial Debt 35% except for countries with the most pledges of development financing and Reduction Facility, and urged that these extreme risks of unsustainable debt; urged the Bretton Woods Institutions to initiatives should be fully coordinated. and that the Bretton Woods Institutions

2 MUST NOT JEOPARDISE MDGS

and independent institutions should aid policies to encourage maximum (Continued from page 7) continue to analyse domestic and private alignment by donors, and to holding sector external debt, to set guidelines to donors and creditors accountable for to assess for themselves their debt avoid these types of debt provoking compliance with these policies. They also and economic policies and design the necessary reforms (as also recommended renewed debt crises. emphasised that in order to ensure such in the Accra Agenda for Action), rather mutual accountability they will require than having assessments done by Financing the Millennium Development extensive building of their analytical and external agencies. The key policies Goals monitoring capacity at the national, should be those which will maximize Aid Quantity regional and international levels. growth (and poverty reduction which Ministers expressed disappointment itself enhances growth), rather than that some members of the international Debt Strategy Capacity-Building stabilization and liberalization. community are not delivering on their Ministers undertook to reinforce their promises made in 2005 to increase aid efforts to adopt and implement debt In terms of lending and borrowing, we flows, and urged all G8 and EU members strategies, building on the successful need to look beyond concessionality, to publish 3-year plans to reach their support already provided by the HIPC to the quality and effectiveness of the pledges by 2010, preferably before Debt Strategy and Analysis Capacity- money provided. We also need to avoid the Financing for Development meeting Building Programme. They also undertook providing poor advice and technical in Doha. to implement the necessary legal assistance which urges countries and institutional reinforcements, and to pursue expensive borrowing on international or domestic markets; help Ministers urged the international capacity-building plans, and to continue LICs to analyse and monitor much more community to scale up innovative to provide large amounts of their own closely the sustainability of domestic debt financing mechanisms by widening the funds for such activities. and how it can genuinely develop local International Financing Facility beyond savings and investment, as well as the the IFFIm pilot, and increasing the number Ministers welcomed the continuing sustainability of private sector debt and of countries utilising an airline ticket tax initiatives by the Bretton Woods financial flows; and do much more to to fund development. However, they Institutions on debt strategy issues combat crooks from OECD countries reiterated the need to ensure that such through the Low Income Countries offering fraudulent money, or organizing financing is entirely additional to normal Debt Sustainability Framework (DSF), tax evasion and avoidance. Above all, we funds from national budgets, and allows the initiative to help countries design need to provide adequate concessional countries to provide more than 0.7% of Medium-Term Debt Strategies (MTDS), finance for countries to reach the MDGs their GNI in aid. and the World Bank’s Debt Management without expensive borrowing. Performance Assessment tool (DeMPA). Aid Effectiveness However, they urged the BWIs to work What overall lessons have Ministers reiterated their determination closely with the HIPC CBP partners, we learned? Debt relief has produced a lot of benefit to meet all the aid effectiveness targets given their pre-existing experience in for low-income countries, but this assigned to them under the Paris these areas, as well as guaranteeing a could have been (and could still be) Declaration. They welcomed the modest strong voice for low-income countries achieved less painfully and more advances in terms of time-bound action in the governance and direction of effectively. It remains a priority to prevent commitments made at the Accra High- their initiatives. recurrence of the crisis which provoked Level Forum, while regretting that there the relief in the first place, but if we do had not been more progress on aid Ministers decided to change the name not achieve this, further relief will need to untying, conditionality reduction, of their network to the Low-Income be: virtually immediate, low conditionality, capacity-building and budget support. Countries’ Debt Sustainability Network, offered automatically by creditors based and to expand their membership to on country debt ratios and risks (rather Ministers undertook to play a full part in include all low-income countries with than negotiated); spent on broadly- future international-level discussions on debt sustainability problems. They urged defined development and poverty issues such as conditionality, assessing the Commonwealth Secretariat, OIF and reduction, tracked by national their own national systems, and mutual HIPC CBP partners to hold discussions stakeholders; genuinely involving all creditors; and surrounded by better accountability, and urged that the UN with a view to jointly organising and measures to enhance long-term debt Development Cooperation Forum should financing future meetings. sustainability. Only if we learn these play a strong role. wider lessons can debt relief maximise its contribution to the attainment of At a national level, Ministers committed the MDGs. themselves to formulate and implement

3 COMMONWEALTH MINISTERIAL DEBT SUSTAINABILITY FORUM

he Commonwealth Ministerial best possible relief terms and litigation adjusting the PBA formulas of Debt Sustainability Forum experiences to be presented at the IDA and the Regional Development T (CMDSF) held its 14th meeting April 2009 CMDSF to assist countries Banks; on 6 October 2008 in St Lucia, prior in their negotiations. ii. starting and concluding negotiations to the 2008 Commonwealth Finance urgently on a replenishment of the Ministers Meeting. Cameroon, the Role and Membership IADB FSO. Gambia, Guyana, Ghana, Malawi, • agreed that CMDSF discussions should iii. holding donors to their promises to Mozambique, Sierra Leone, United continue to stress debt sustainability meet their 0.7% GNI commitment, Republic of Tanzania, Uganda, and the ability to utilise borrowing by advocating that donors establish and Zambia attended, as well as productively to achieve the MDGs, which or stick to clear timetables. representatives from Kenya, Australia will mean aligning debt sustainability 2. Lobbying for increased creditor and the United Kingdom, and of DRI, analysis with MDG scenarios, delivering participation in debt relief, by: MEFMI and WAIFEM. This meeting donor commitments on aid quantity i. changing laws in creditor countries was chaired by Ashni Singh, Minister and effectiveness, and maximum to restrict prospects for litigation of Finance, Guyana. concessionality in other finance to by creditors; achieve the MDGs without compromising ii. G8 members launching top level debt sustainability. diplomatic initiatives to convince In view of the close and growing cooperation • reviewed various options for extending non-Paris Club bilateral creditors between the CMDSF and the HIPC CBP CMDSF membership to other to participate; Ministerial Network, the newsletter is Commonwealth countries, taking into iii. donors providing assistance to presenting the main substantive conclusions account the income level and debt clear HIPC to HIPC debt; and of the meeting, which were that Ministers: sustainability of Commonwealth states. iv. all Commonwealth creditors They agreed that the membership should providing full relief and commit not to Resource Mobilisation consist of the 12 existing members of the sell on their claims to other creditors. • reviewed other developments since CMDSF, as well as IDA-Only Countries with their April meeting and noted the donor Unsustainable Debt (Lesotho, Solomon Co-operation with recommitment to aid increases at the Islands, and Tonga). Other countries with Non-Commonwealth HIPCs Hokkaido Summit and through the EU. unsustainable debt would be invited to • agreed that there should be continuing They reiterated the urgent need for participate if they express an interest in collaboration with the Organisation delivery on these commitments. doing so. Internationale de la Francophonie (OIF), • noted progress with the IMF ESF review, and participation and contribution of and repeated their call for greater flexibility Future Work Programme Ministers from non-Commonwealth HIPCs in its design and application, especially • agreed on the following action papers to in the substantive CMDSF meetings in in relation to expanded access and less be discussed at the April 2009 meeting: Spring each year. They noted that both onerous conditionality. 1. debt strategy capacity building needs groups shared common concerns and • reiterated the need for timely and how to fulfill them sustainably; therefore could share experiences and, commencement and conclusion of 2. enhanced actions and information by combining forces, strengthen advocacy negotiations for the replenishment of exchange on creditor participation in the international forums, by exploring the Fund for Special Operations within or litigation; the possibility of a joint meeting in the Inter-American Development Bank. 3. diversifying concessional and Spring 2009. non-concessional financing sources; • supported participation by special invitation HIPC Issues 4. how the international community can of representatives of Commonwealth and • remained concerned that there had been better assist in mitigating shocks, other donors, international and regional no change in the number of countries notably those from climate change, institutions, civil society, parliamentarians reaching HIPC completion and decision high oil and food prices, and the and capacity building institutions. points, and hardly any progress on current global financial crisis; and issues of non-Paris Club participation 5. best practices in ensuring fiscal in the HIPC Initiative, or on creditor sustainability of total (including litigation; as well as that under the domestic) public debt. Debt Sustainability Framework (DSF), • identified two priority advocacy issues a significant number of post-Completion to take forward over the next six months: Point countries will continue to remain in 1. Ensuring that debt relief provides a moderate or high risk of debt distress. additional concessional resources to • agreed on several actions to be taken finance the MDGs, and does not come to enhance information exchange on at the expense of new concessional debt relief negotiations under HIPC flows, by including the preparation of more i. allocating concessional resources on detailed information for HIPCs on the basis of MDG-related needs, as creditor participation, well as performance, in particular by

4 HONDURAS PUBLIC DEBT POLICY UPDATED

s a result of the debt relief provided by HIPC and MDRI Ainitiatives, as well as rapid economic growth in recent years, Honduras’ external debt burden has fallen dramatically, from 62% of GDP in 2000 to only 17% in 2007. This new situation has been accompanied by progress on public debt management, including publication for the first time in 2008 by the Honduran government of a three-year “Public Debt Policy”. This sets out the channels and conditions for government financing through the international and domestic markets, placing particular stress on moving towards alternative sources of capital market financing, while keeping debt sustainability as a fundamental goal.

In this context, the Honduran government pessimistic global prospects (especially the government’s priority sectors, but there asked CEMLA to help conduct a workshop to for the USA) as a result of the financial is a need to increase budget and sector update the National Debt and New Financing crisis, because approximately 80% of support, based on the government’s own Strategy, from 22 to 29 September, in the Honduras’ exports go to the US. results-oriented framework for expenditures framework of the HIPC CBP. The participants to increase ownership and alignment. were 29 technical officials from various public Main Conclusions and Recommendations sector institutions, aiming to build the capacity 1. Honduras’ public external debt will stay Capacity Assessment of the national technical team and revise and sustainable and well below the LIC-DSF Honduras’ self-assessment of debt update the National Debt Policy and Strategy. thresholds established by the BWIs for management capacity, using the methodology countries with “strong” policies. Total public of phase 4 of the HIPC CBP, found that its DSA Scenarios debt stays low and stable and, in spite of average score was 3.84, among the HIPCs The sustainability analysis was based on a slight upward trend over the medium-to- with the highest capacity. Nevertheless, the two scenarios: long-term, its sustainability indicators stay assessment underlines some future challenges: well below those for external public debt, • Baseline: macroeconomically, this showing clear sustainability for total • Improved coordination at political and continues current policies (in accord with public debt. technical levels. the IMF standby), which will produce GDP • Execution of links between debt and growth of 4.3-4.8%, and a consolidated 2. In terms of risks, the maturity periods of financial management softwares public sector fiscal deficit of around 1% of external financing are almost entirely (95%) • Inter-institutional coordination to agree GDP, while keeping anti-poverty expenditure over 15 years, even over the medium-term. common criteria for classifying expenditures at 7% of GDP. The external debt scenario The interest rate structure of the portfolio as “poverty-reducing”. includes only the relief signed by 31 is also low-risk, because more than 90% • Strengthening national budget and public December 2007, while that for domestic is fixed –interest and only 9.4% floating. investment systems. debt includes budget gap-filling as well as No significant change is foreseen over time • Extending risk analysis to the whole refinancing of expected maturities. New in maturity periods or interest structure. economy, especially the non-central external financing includes disbursements government public sector, to conduct a on signed agreements, as well as loans 3. The alternative scenario produces comprehensive portfolio risks analysis. being negotiated (notably through the ALBA deterioration in the debt sustainability • Training new personnel in debt and Petrocaribe initiatives with Venezuela), indicators, due to the high central management and analysis. as well as an assumption that Honduras government deficit and less favourable will lose access to concessional financing global macroeconomic context. Next Steps over the medium-term – with the average Nevertheless, the indicators stay Following the event, the report on the grant element falling from 35% to 11%, sustainable, largely due to recent debt workshop and the proposal for Public Debt and a fall in grants. relief, economic growth and prudent Policy Guidelines were sent to the relevant fiscal management. government authorities, so that the executive • Pessimistic: the alternative scenario can approve the Public Debt Policy for assumes a negative shock to the main 4. In analysing new financing policy, Honduras 2009-2012. macroeconomic variables, based on more identified that most donors are supporting

5 MEFMI’S EXPERIENCE OF DSAs USING THE DSF

strategies, than to designing 20-year analysing the relative costs and benefits of multiple scenarios to test debt issuing bonds on international or domestic sustainability. This is not a sustainable capital markets (including prospects for situation and the countries have been international bond issuance given the current urged to develop skills of staff in global financial crisis, and the capacity of uring the last two years, MEFMI macroeconomic forecasting. the domestic financial and private sector to has been working closely with 2. debt databases. In spite of intensive absorb domestic bonds). Dthe Bretton Woods Institutions, preparations focussed on data issues, DRI and country authorities to increase the workshops have found continuing Another key concern about the DSF is that its country capacity to use the BWIs Low problems with debt database systems stress tests do not measure adequately the Income Country Debt Sustainability forecasting debt stock and service with shocks and risks to which MEFMI LICs are Framework (LIC-DSF) tools. This has accuracy. Improvements will require the exposed. In particular, the DSF stress tests included a regional workshop on the regular maintenance and validation of are only applied once over 20 years, whereas DSF for its member states, as well as databases, training in how to download MEFMI LICs have been subject to repeated intensive training in using the tools debt data to the DSF, and construction of shocks (each of which has medium-term in national workshops. This article automatic links between CS-DRMS/DMFAS impacts) over a 20-year period. A good summarises the lessons learned, and the DSF. In cases where databases example is droughts, which have reduced with a particular focus on two recent have not been fully updated for the effects output and exports regularly in Southern national workshops, in Tanzania and of HIPC/MDRI debt relief, use of Debt Pro© African countries, and necessitated additional Uganda, as well as the way forward. is necessary to simulate such effects. food imports, with medium-term effects lasting It focuses on two issues – inputs 3. financing strategies. The CBP tools three years, and frequency varying between and outputs. for designing new external and domestic 2 and 5 years. For the DSF to be relevant to borrowing strategies, and forecasting country decisionmaking, it will be essential their impact on external and domestic to assume shocks which depict real country debt data, have recently been updated experiences. In the DSF there is a sheet that 1. Data Input (see newsletter 26) and were in both cases provides flexibility to incorporate country The main conclusion of work on inputs is that used effectively to design and simulate circumstances, and the TfT planned for April the DSF needs to be complemented by other strategies. However, staff will continue 2009 will focus on use of this sheet. tools which allow countries to forecast their to need training in the knowledge and financing strategies and macroeconomic skills to run these tools as well as the Future Plans prospects, and produce debt data projections, DSF template. MEFMI member states remain committed to because the DSF tool does not construct building capacity to design and implement forecasts. In turn this implies the need for 2. Outputs national debt strategies, as has been shown excellent tools to conduct forecasting, and The second main set of conclusions revolves by their cofinancing of recent national events for comprehensive training at the national around the DSF’s usefulness in helping up to 80% of total cost. As a result, MEFMI level. During both workshops, officials spent countries to design borrowing strategies. intends to accelerate its efforts at full transfer 5 days using HIPC CBP tools and national In both cases, DSF-based analysis revealed of the LIC-DSF to its member states. The next macroeconomic models to prepare forecasts, that, debts remained sustainable according to steps will be: as well as downloading data from CS-DRMS DSF thresholds over the long-term regardless • Attachments in February 2009 to work and DMFAS debt recording systems, and of the borrowing scenario chosen, even with with DRI in developing a manual for training validating these data, before inserting data the most extreme foreseeable borrowing trainers on the DSF. into the DSF template. A comprehensive terms. On the other hand, different borrowing • A regional DSF Training of Trainers DSF training should, therefore, start with scenarios resulted in very heavy future debt Workshop to be held jointly with WAIFEM, training on other tools which will produce service requirements, as well as dramatic the IMF/World Bank and DRI in Abuja in realistic forecasts, before work on the DSF changes in likely risks. This raises the question April 2009. In line with the lessons learned template begins. of whether a debt sustainability analysis is above, this workshop will begin with a week adequate for gauging the likely difficulties of intensive training of trainers in how to In more detail the practical implications for that countries may face with their public debt. prepare forecasts using other tools, for input MEFMI capacity-building programmes are: Both workshops concluded that the DSF tool into the DSF; and will focus above all on 1. macroeconomic forecasts. In several is good for establishing basic sustainability financing issues and country-relevant MEFMI member states (including Uganda ratios, but additional analysis of fiscal and macroeconomic scenarios. and Tanzania), very few officials have balance of payments implications is necessary expert knowledge of the tools used by before any decisions can be taken on their country to design macroeconomic financing strategies. It is also vital to assess forecasts. They are also more used to the practicalities of accessing different types using the tools to prepare three- or five- of financing, and tailoring such analysis to key year forecasts related to IMF financial issues currently facing the country, which is programming or national development why both workshops spent much time

6 20 YEARS OF DEBT RELIEF: WHAT HAVE WE ACHIEVED?

he World Bank organized a • Beyond this, all detailed macroeconomic In terms of the narrower challenge of conference on 30-31 October in or structural targets, and especially micro- creditor participation in the HIPC Initiative: T Washington, on Debt Relief and managing conditions should be avoided. • Donors could fund the cancellation of Beyond (see http://www1.worldbank. debts owed among severely indebted LICs org/economicpolicy/debtconf08/DebtC Should relief be spent on • More systematic legal assistance could onferencehome.asp). Debt Relief poverty reduction? be provided to avoid or defend lawsuits International gave a presentation Yes, but (according to the AfDB study already • All creditors could make commitments looking at what 20 years of debt relief mentioned), poverty reduction should be: not to sell on debt – extending beyond the have achieved, and lessons for the • Broadly defined – covering a wider welcome Paris Club and EU commitments future. The presentation was of course range of MDGs (not just health and to other governments and commercial based on the many inputs from HIPC education, but water, social protection, • G8 heads of state could act bilaterally to Ministers and debt managers received the environment, food security, housing) convince governments, especially those over the course of 18 years of work by and national development goals especially over which they have leverage in current DRI on low-income country debt relief. growth-promoting expenditures (such bilateral discussions (Algeria, Iraq, Libya) It asked seven questions: as power and transport infrastructure, • They could also reinforce laws in creditor agriculture, technology). countries to prevent lawsuits (this is feasible • With priorities defined by the country, without any negative impact on commercial Is debt relief effective aid? not micro-managed by donors law, but political will is lacking) Debt relief has proven to be highly effective • Focussing on improved public service • HIPCs and LICs can exchange information aid. In the format in which it has been recently delivery to citizens – not just on increasing on best terms received, to push creditors delivered (as genuinely additional relief for the amount of spending to give such terms to all debtors. country budgets, eg through the MDRI), • Accompanied by increased and highly it respects the Paris Declaration and Accra effective aid (such as budget support) – Is debt relief the answer to Agenda for Action principles more even than because by itself its scale is too small to sustainable debt? budget support, because it: disburses rapidly make much impact on poverty reduction. Obviously not, but it is a vital step because it: and predictably; is untied; is aligned with reduces the fiscal burden, encouraging public national development strategies; the resulting Should we invest more to track relief investment; reduces the debt overhang, spending uses country systems; it has fewer and its results? encouraging private investment and growth; (though still too many) transaction costs than Micro-managed tracking of the impact of widens access to private sector financing; and negotiating new aid programmes and projects; debt relief should be avoided. Much more allows higher spending on growth and poverty and above all, as shown in a forthcoming resources should be invested in tracking the reduction which reinforces longer-term debt study DRI has conducted with the African channels and impact of wider expenditures – sustainability. The international community Development Bank, it achieves strong but not in reporting to donors and creditors should therefore be encouraging access to MDG results. (for which heavy obligations already exist). relief, by making it more automatic, provided Instead donors should focus on supporting for more countries, and before they reach What conditions should be put on relief? tracking and assessment of expenditures crisis or default. It has been agreed for many years by most by domestic accountability structures – international analysts that conditionality does such as parliament, auditor-generals, civil However, other measures are needed. not work. The view of HIPCs would be that society, by building their capacity to hold Recent BWI analysis has found that the only conditions should be: government accountable, which can have continuing unsustainability risks for HIPCs • Design and 1-year implementation of a fundamental positive effects on the impact post-relief are due largely to potential strategy for growth and poverty reduction of debt relief and wider expenditures on exogenous shocks (which are now (broadly defined to go beyond the social MDG progress. materializing in the global economic sectors) – perhaps a preliminary strategy downturn) and falls in policy quality, rather for initial relief, and a more final strategy How can we enhance than “irresponsible borrowing”. This implies for definitive stock cancellation; creditor participation? that, in addition to avoiding “irresponsible • Commitment demonstrated by government Creditor participation has come a long way lending and borrowing”, we need to put to growth and macroeconomic stability in the last 20 years – it is easy to forget that more stress on overcoming countries’ eg single-digit inflation, demonstrated by a 20 years ago relief by multilateral creditors structural economic weaknesses and 6-month track record and agreement to a was regarded as impossible! However, the improved economic and debt management. future growth and macroeconomic stability international community could do much more, programme. This should involve rapid especially extending debt relief to a much In terms of protecting countries against movement of countries from emergency wider group of low- and middle-income shocks, countries need to design (and donors assistance to normal programmes, so that countries where it could be a useful tool to fund) comprehensive anti-shock strategies they do not get “stuck” in a “post-conflict” to help attain the MDGs. This could be and contingency funds, and the international classification, delaying relief for many years. creditor-led, to enhance developing country community to provide much more substantial • Respect for basic international norms on creditworthiness, and would be a highly and rapid financing facilities to support these. human rights, gender, the environment efficient means of funding the MDGs. To improve policy quality, countries need and democratic government (Continued on page 3)

7 This table has been revised to include HIPCs’ rankings according to the BWI’s IRAI (formerly CPIA) indicator of policy performance and institutional strength and debt distress, incorporating the new DSF-based DSAs and used as the basis for countries’ IDA.

HIPC II Dates PRSP Dates HIPC Initiative Countries Decision Completion Interim Final Creditor IRAI ranking of Latest risk of Participation policies and debt distress 2 institutions 1

Afghanistan 7/07 end-2009 1/06 June 2008 87% Weak High Angola no longer eligible 2005 … NA Weak Moderate Benin 7/00 3/03 7/00 3/03 99% Medium Moderate Bolivia 2/00 6/01 2/00 6/01 95% Medium Low Burkina Faso 7/00 4/02 5/00 7/00 76% Medium High Burundi 8/05 early 2009 1/04 9/06 84% Weak In debt distress Cameroon 10/00 05/06 10/00 7/03 98% Medium Low Central African Rep. 09/07 mid-2009 1/01 6/07 68% Weak In debt distress Chad 5/01 end 2009 7/00 7/03 93% Weak High Comoros end 2009 … 05/06 Q1 2009 NA Weak In debt distress Congo, Dem. Rep. of 7/03 2009 6/02 7/06 93% Weak In debt distress Congo, Rep. of 03/06 2010 12/04 Apr-08 60% Weak High Côte d’Ivoire end 2008 … 3/02 Q4 2008 NA Weak In debt distress Ethiopia 11/01 4/04 3/01 9/02 92% Medium Moderate Gambia 12/00 Dec-07 12/00 7/02 81% Weak High NOVEMBER 2008 Ghana 2/02 7/04 8/00 4/03 90% Strong Moderate Guinea 12/00 end 2008 12/00 3/07 85% Weak In debt distress Guinea-Bissau 12/00 mid-2009 12/00 11/06 81% Weak In debt distress Guyana 11/00 12/03 11/00 9/02 81% Medium Moderate Haiti 10/06 mid-2009 11/06 delayed 96% Weak High Honduras 7/00 4/05 7/00 10/01 93% Strong Low Kenya no longer eligible 8/00 2/04 NA Medium Low Laos PDR no current timetable 4/01 12/04 NA Weak High Liberia 03/08 2010 1/07 03/08 NA Weak In debt distress SUSTAINABILITY STATUS SUSTAINABILITY Madagascar 12/00 10/04 12/00 11/03 91% Medium Low Malawi 12/00 09/06 12/00 8/02 97% Medium Moderate Mali 9/00 3/03 9/00 3/03 85% Medium Low

HIPC PROGRESS AND DEBT Mauritania 2/00 6/02 NA 1/01 90% Weak Moderate Mozambique 4/00 9/01 4/00 9/01 88% Medium Low Myanmar no current timetable no PRSP process NA Weak High Nicaragua 12/00 1/04 12/00 9/01 87% Strong Moderate Niger 12/00 4/04 12/00 2/02 86% Medium Moderate Rwanda 12/00 4/05 12/00 8/02 95% Medium High São Tomé & Príncipe 12/00 3/07 4/00 8/05 85% Weak High Senegal 6/00 4/04 6/00 12/02 81% Medium Low Sierra Leone 3/02 12/06 9/01 7/05 87% Weak Moderate Somalia no current timetable no PRSP process NA Weak High Sudan no current timetable 2007 ….. NA Weak In debt distress Tanzania 4/00 11/01 3/00 12/00 90% Strong Low Togo 11/08 end 2010 03/08 Mid 2009 90% Weak In debt distress Uganda 2/00 5/00 NA 5/00 96% Strong Low Vietnam no longer eligible 4/01 6/02 NA Strong Low Yemen 6/00 … 2/01 8/02 NA Medium Moderate Zambia 12/00 4/05 7/00 5/02 97% Medium Low Potential HIPCs Eritrea no current timetable 6/03 …. NA Weak na Kyrgyz Republic decided not to apply for HIPC … 02/03 NA Medium High Nepal no current timetable 11/03 NA Medium High

Sources: 1 World Bank IDA Resource Allocation Index (IRAI), formerly Country Policy and Institutional Assessment (CPIA), which is HIPC Governments, used to assess countries’ institutional strength and policy performance (Strong ≥3.75, medium 3.25-3.75, weak ≤3.25). IMF and World Bank 2 This is based on latest DSA done jointly by BWI 3 Blend and gap countries are not eligible for IDA grants. 8 IDA-15 grant Key Debt Relief and New Financing Issues allocation for FY09

100% Progress on completion point triggers has been mixed 0% 3 Reclassified as a ‘gap’ country, no longer eligible for IDA grants 50% Debt committee established and strategy approval due 0% 3 Sustainability vulnerable to gas price & production; significant growth of domestic debt 50% Strategy approved. High PV/exports ratio due to lower than expected exports 100% Strategy updated. IDA, ADB, Paris Club providing interim relief and promise of relief from EU 0% Strategy drafted. Facing several lawsuits 100% IMF interim relief. Arrears to IFAD and OPEC to be dealt with as part of HIPC 100% Poor PRGF performance delays CP. SMP discussions started 100% Resolution of political crisis. EPCA programme under discussion 100% Progress on completion point triggers has been mixed 100% Mixed progress on CP triggers. Lawsuits settled in favour of creditors 100% DP awaiting new PRGF being concluded 50% Government concluded DSA. Still to conclude with some non-Paris Club creditors 100% High post-MDRI debt due to multilateral and non-Paris Club borrowings 0% MTDS draft prepared. US$750m 10-year bond at 8.5% issued on international markets 100% Interim relief resumed end-2007 with new PRGF 100% Only IDA & AfDB providing interim relief. Lobbying donor community to advance CP 50% Government strategy drafted. High vulnerability of fiscal sustainability 100% Political and hurricane shocks have delayed PRSP and donor conference 0% 3 Strong debt strategy. Guatemala & Mexico refuse to provide relief; agreements with Costa Rica & commercial banks pending; Argentinian Enterprise lawsuit na DSA shows ratios under HIPC thresholds. PC Houston terms relief 100% Despite eligibility, government does not wish to participate in HIPC 100% Strategy approved. Exceptional funding to clear arrears accounting for 96% of $4.7bn debt 0% Cancellation of Abu Dhabi and PRC debt to be finalised 50% Debt and aid strategies approved. Kuwait relief to be negotiated 0% Draft strategy. Difficulties with non-PC creditors 50% Debt strategy approved. Unsustainable due to lack of relief from Arab creditors 0% Debt strategy being finalised. Agreements with China, Kuwait and South Africa 100% No WB lending since 1987 50% Strong debt strategy & borrowing ceiling. Successful comercial debt buy back. Non-PC relief & lawsuits remain challenges 50% No agreement with non-Paris Club creditors. Taiwan won lawsuit 100% Debt strategy ceilings on new borrowings since 2006. Policy document being finalised 100% Approved debt strategy. Sustainability vulnerable to delays in oil production 0% DSA supporting budget since 2005. Benefited from non-PC creditors relief 50% Strategy drafted. Lawsuits for US$26 m settled 100% Accumulating large arrears to creditors. No IMF arrangements since 1987 100% IMF urged to minimise non-concessional borrowings. Need to clear arrears 0% Debt strategy annually updated. Relief from Algeria, Angola, Iran and Zambia to be negotiated 100% Qualifies with PV/revenue=309%, following arrears clearance 0% Strategy and ceiling on new borrowings, some nonconcessional borrowing for infrastructure 0% Debt ceiling for public debt/GDP of 50% by 2010 50% Ratios under HIPC thresholds so Paris Club Naples stock treatment 0% Donegal lawsuit has resulted in payment to be made

100% Potentially qualify with PV/exports of 362% 100% Debt ratios at end-2006 are below HIPC thresholds 50% Potentially qualify with PV/exports of 201%. Authorities undecided about HIPC participation

Dates for HIPC decision and completion points and PRSPs are those of final BWI Boards’ approval. Most governments have published PRSPs several months before BWI approval.

9 HIPC CBP RECENT AND

Advocacy and Liaison Governance Inter-Africa, to maximise ownership of the strategy and prepare a national sensitisation 15th HIPC- CBP Ministerial Meeting 20th Steering Committee Looks Beyond campaign on debt issues for October 2008. 10th October Phase 4 The workshop designed strategies for debt This took place in Washington with the co- The HIPC CBP’s 20th Steering Committee reduction and for financing Burundi’s future sponsorship of the OIF and Commonwealth Meeting took place in Dar es Salaam during development without compromising debt Secretariat, and focussed on the global 3-5 November, hosted by the Government sustainability. Based on continued very weak financial crisis. of Tanzania and MEFMI. It focussed on two export performance, the workshop estimated See article on pages 2 and 3 sets of issues: progress towards meeting that Burundi would need additional “topping the targets set by donors for phase 4, and up” at completion point of US$89.9 million, prospects for sustainability of the HIPC CBP’s with a common reduction factor of 37.2%. As a result of HIPC and MDRI debt relief, Commonwealth Ministerial Debt achievements beyond phase 4. anti-poverty expenditure would rise from Sustainability Forum Meeting On the first set of issues, the SCM agreed that 3.6 to 17.7 times debt service expenditure in As part of the wider preparation for these the programme was largely on track to meet its 2009. Burundi would also need to mobilise meetings, DRI and MEFMI made inputs at phase 4 targets, indicating that the HIPC CBP virtually exclusively grants to keep its debt this meeting in St Lucia on 6 October. will have achieved a massive increase in HIPC sustainable thereafter, requiring it to diversify its See article on page 4 debt strategy and analysis capacity during its development partners to increase grant flows, 11 years of existence. In addition, as attested as well as to design strong mechanisms to by an independent monitor, regional protect it against exogenous shocks, given its Cooperation with the Bretton organizations have developed capacity to lead very fragile export, GDP and revenue bases. Woods Institutions the provision of capacity-building support, The participants also prepared a plan for All of the CBP implementing partners have including pools of experts and trained staff, building debt and aid management capacity. been invited to be implementing partners, thereby achieving most of the CBP aims for and members of the Technical Advisory Group, decentralisation of programme execution. Honduras National Workshop for the World Bank Debt Management Facility Nevertheless, there have been delays in 22-29 September (DeMF), which was preliminarily launched at implementation in some regions and countries, See article page 5 the World Bank Conference, Debt Relief and raising the question of whether ROs can Beyond, in Washington on October 30-31, absorb donor funds fast enough. and launched formally at the FfD meetings Tanzania National Workshop in Doha in November. This will involve Beyond phase 4, the HIPC CBP donors made 10-21 November participating with the World Bank in joint clear that they continue to be committed to See also article page 6 assessment meetings on country debt support the building of country capacity on management capacity, and providing technical debt strategy and analysis, by providing This workshop was part of the HIPC CBP’s advice (together with the Commonwealth substantial funding for independent country-led intensive assistance programme for Tanzania Secretariat and UNCTAD debt management work. Demonstrating the success of the CBP conducted at the request of the Tanzanian programmes) on the priorities and execution in decentralising its leadership, this will in future authorities. Tanzania being a post-MDRI of these assessments and any resulting reform be led by regional organisations, who will country, the focus of the Government’s aid plans. Four low-income countries will also be receive the funding from donors. HIPCs and debt policy is on resource mobilization included in the advisory group, one from each indicated strong commitment to debt strategy to finance infrastructural development and of the regions of the CBP. Precise funding and capacity-building and urged donors to continue achieving effectiveness of development cooperation agreements will be finalised during to fund independent support for debt strategy financing and ensuring effective domestic debt the first quarter of 2009. Three of the CBP via regional organisations. This will require three management. In addition, the Government donors (Austria, Canada and Switzerland) elements of sustainability: aims to maintain long-term debt sustainability, in a post-MDRI context, by updating the are among the funding donors of the DeMF, • sustainable country capacity, for which national debt strategy document. allowing for close liaison between the World the main challenges are staff turnover and post-MDRI debt sustainability; Bank’s work through the DeMF and the • sustainable capacity by regional organisations The workshop also provided comprehensive continuing post-HIPC CBP programmes of to provide capacity-building support, and training to government officials in the analysis the regional organisations. • maintenance of a multi-regional network of of debt strategy using CBP tools and the independent providers of services to HIPCs DSF, to ensure maintenance of a sustainable In addition, the CBP partners have continued and other LICs, with regional organisations team capable of updating debt strategy to participate in DeMPA missions, organise joint leading this provision. analysis regularly, with minimal external DSF regional workshops with the IMF and technical assistance for the foreseeable future. World Bank, and participate in Medium-Term National Workshops During the workshop Tanzania used 6 local Debt Strategy missions, as well as providing experts to lead in the various tasks. MEFMI considerable technical input on the design and Burundi provided 2 members of staff and one graduate implementation of the DeMPA, DSF and MTDS Bujumbura, 8-19 September fellow from Malawi, and DRI 1 expert to tools – and ensuring that CBP methodologies facilitate the workshop. The government of provide the inputs necessary for successful This was the second national workshop on Tanzania co-financed a large proportion of country use of the BWI tools. They are also debt and new financing strategy – the first the workshop cost. beginning joint work on preparing Training for having resulted in an approved strategy in Trainers workshops for combining the CBP and 2006. As well as government agencies, Prior to the workshop there were intensive DSF methodologies (see future work below). civil society participated through the NGO meetings in preparation by the country DSA

10 FORTHCOMING ACTIVITIES

team. The Tanzanian authorities indicated cooperation with regional partners and the the need for the workshop to focus on the World Bank. DRI is also conducting studies on: possibility of issuing sovereign bonds on either • the fiscal sustainability of debt (together Future Activities the international bond market or the domestic with CEMLA); capital market, to finance infrastructure • information-sharing on debt relief and During the next six months, programmes. The results revealed that, thought new financing, and country debt strategy the HIPC CBP will implement the country would remain sustainable in the capacity-building needs (together with the the following activities: long-run under all scenarios, there would be a CBP partners and the Commonwealth • Regional Workshops: heavy cost on the budget for issuing the bond Secretariat); and CEMLA DSF/DEMPA Regional Training on either market, as well as concern as to • diversifying financing sources for national for Trainers Workshop; MEFMI and whether the domestic market could absorb a development, with particular focus on WAIFEM Regional DeMPA Training for large bond. non-OECD donors and market-based Trainers Workshops; MEFMI/WAIFEM financing sources. Institutional/Follow-up Missions Joint Regional Debt Strategy and DSF Training for Trainers workshop; PALOP Distance Learning Programme Regional Workshop; Pôle Dette Debt Follow-Up Missions to Congo Strategy and DSF Training for Trainers 14-22 September Most of the second Phase 4 intake of 40 Workshop, Domestic Debt Regional Niger students continues to be on track with Workshop, as well as meetings of 22 September-1st October their studies, with only a few being behind Togo mainly because of heavy work commitments. the Regional Ad Hoc Committees 20-29 October The participating countries are Burundi, on a Regulation on Public Cash Cameroon, CAR, Cote d’Ivoire, Ethiopia, Flow Management, and Generic The main objective of these missions was Ghana, Malawi, Nicaragua, Rwanda, Sierra Procedures Manuals; to strengthen the capacities of the national Leone, Tanzania, Togo, Uganda and Zambia. • National Workshops: structures responsible for coordinating The residential workshop to graduate the first Guinea; Guyana; Mozambique; debt policy with macroeconomic policy. Phase 4 intake of students in the Pôle Dette Nicaragua (domestic debt); Each mission trained the national team region is taking place in December 2008 in Sao Tomé e Principe; Sierra Leone. members in basic debt management concepts, Senegal. The residential workshop for as well as the key stages of the design of Lusophone countries will be in the first • Subnational Workshops: coherent national macroeconomic forecasts quarter 2008. Bolivia and long-term national financing strategies. • Institutional/Follow-up Missions: Attachments Cameroon & Guinea Benin; Burkina Faso; Cameroon; CAR; Chad; Comoros; Congo; DEMPA Assessment Two Pôle Dette staff members have been on Côte d’Ivoire;Guinea; Guinea Bissau; Missions attachment to work on external debt strategy Guyana; Haiti; Honduras; Liberia; 4-13 August and 29 September-7 October issues with DRI consultant Michel Vaugeois in Washington. Malawi; Mali; Mozambique; Niger; These missions were conducted in the context Togo; and Zambia. of Pole-Dette’s cooperation with the World HIPC Website • Sensitisation Seminars: Bank, in order to maximise coordination Guinea; Guyana; Honduras; Malawi; between the World Bank’s assessments of New debt strategy analysis sections Mozambique; Nicaragua; Rwanda. country capacity and the national capacity- have been added to HIPC CBP website building plans designed by the country (www.hipc-cbp.org). On the public site there • Attachments: authorities and Pôle-Dette. are new Debt Strategy Analysis (DSA) pages MEFMI and Pole Dette attachments which provide information on the HIPC CBP to DRI to develop training manuals for Rwanda approach to conducting debt strategy analysis, the DSF TfT Workshop; Pôle-Dette 6-7 November as well as links to the recent IMF and World Fellows attachments on new financing, Bank initiatives such as the Low-Income domestic debt and external debt. MEFMI conducted a mission to Rwanda to Country Debt Sustainability Framework • Distance Learning Programme: review progress towards the adoption of a (LIC-DSF) and Medium-term Debt Strategy Lusophone Residential School, national Debt Policy Document. It was agreed (MTDS). that MEFMI and DRI would jointly conduct a continuation of the work of the second wave of students, and mission in mid-2009 to finalise the adoption of On the private members’ only site, there the debt policy through technical work and a is a new webpage which provide more revision of materials for post-phase 4. sensitisation seminar for policymakers. detailed information on using the standardised • Information products: DSF for conducting strategy analysis, Newsletters 37 and 38, 3 listserves Methodology, Distance including CBP prepared documents linking on latest debt management Learning and Attachments the HIPC CBP methodology with the DSF. developments, and publications on As discussed in the MEFMI article on page 6, best Practices in Debt Management Methodology it remains essential to use the CBP domestic Institutions, and Fiscal Sustainability and external new financing templates, as well of Debt. Work is beginning on the design of training for as Debt Pro©, in order to prepare accurate trainers manuals for the LIC-DSF, led by DRI in inputs for the DSF.

11 FPC CBP UPDATE: FUNDING TO BE EXTENDED

he excellent news emerging for Cycle 2 and OAT for Cycle 3 in Q4 regional system (PCMS), which remains from the 9th Steering • Ghana (Cycle 2) is making strong on track for delivery in Q1 2009 T Committee Meeting of the FPC progress with a small sample survey, and Information products CBP, is that the Swiss government is is planning a larger survey to begin in Q1 • Newsletter 36 is now posted on the prepared to extend its funding for the • Malawi (Cycle3) has finalised its results public website and available for download monitoring and analysis of Foreign and is preparing to launch the next (visit www.fpc-cbp.org and link to Private Capital, as conducted under cycle in Q1 2009 “Newsletter”). In this issue, the FPC the FPC CBP. However, in future this • Mali (Cycle 1) achieved a 70% response reports on the developments and funding will be mobilised and run via rate and is processing data with a plan implications of BPM6, optimistic investors regional organisations, owned and to hold a FUM in Q1 2009 in Malawi focusing FDI on manufacturing, led by their member states, who • Nicaragua (Cycle 2) hosted a follow up and on Tanzania’s mining sector leading will subcontract DFI to help with mission to review data and analysis, FDI. For subscription enquiries, contact technical support. This extension and prepare for the proposed next cycle [email protected] of Swiss support reflects the • Niger is preparing for its OAT in Q1 2009 • Briefing #21 will be sent out in Q1 2009. assessment that the programme is • Senegal has reached a 75% response • Website: the 9th Steering Committee even more relevant at a time of rate and is scheduling a FUM in report is available for download. global financial crisis when such January 09 Log onto the members’ website at flows are likely to be even more • Tanzania (Cycle 4) hosted a follow up www.fpc-cbp.org.uk and link to volatile (see article on pages 2 and 3), mission on the Mainland and in Zanzibar ‘Steering Committee’. and could also result in the extension to review data, analysis, analytical of FPC CBP-type support to a wider report and institutional arrangements Governance range of middle-income countries • Togo received a Demand Assessment MEFMI with the Bank of Tanzania with which the Swiss government mission in December hosted the 9th Steering Committee has partnerships. It is hoped that • Uganda (Cycle 7) is finalizing its Meeting in Dar es Salaam on 6th a wider range of donors will also current survey, and preparing towards November. All implementing partners realise the valuable support the FPC disseminating results were represented, as well as country CBP work has been providing, and • Zambia (Cycle 2) has attained response representatives from Cameroon, Mali, provide funding for the same aim. of over 80% and is finalising editing, Nicaragua, and Tanzania, who presented data entry and checking ready for valuable lessons and experiences. dissemination of preliminary results Seco and MEFMI co-chaired the sessions. in Q1 2009. The proceedings covered regional and In the meantime, the 3rd phase of the country progress; methodology, software, FPC CBP has continued as follows: Methodology and liaison and information products; governance • The FPC CBP prepared enhanced and liaison; financing; and agreement on Country progress methodology in FPC sustainability a work programme to the end of Phase 3. Countries have progressed as follows: analysis (see article on pages 14 and 15) The main action points agreed were: • Benin held its Opening Awareness • MEFMI hosted a regional workshop • The need to submit future quarterly and Training Workshop (OAT) in October at Ngurdoto, Tanzania, on 3-14 reports in February and May, continuing and is planning a Follow Up Mission November, covering diverse aspects in particular reports from participating (FUM) in Q1 2009 of monitoring and analysis, attended countries on their progress and • Congo and Gabon are preparing their by 8 member states local financing; first OAT Workshops for Q1 2009 • Parts of the NTF Manual and the Software • Acceleration of methodology • Bolivia (Cycle 3) is designing terms of User Manual are being translated into development, and preparation of an reference for a follow up mission to Portuguese for the benefit of Guinea analytical publication in which all review time series early in 2009 Bissau which will launch the programme participating countries will be included • Botswana (Cycle 1) is finalizing in Q1 • An overall review by Seco of all three methodology to launch in Q1 2oo9 • The FPC CBP is continuing to track phases of the CBP • Burkina Faso‘s response rate has developments with new methodology and • The circulation of proposals for reached 60% and a FUM is planned codes and standards of the IMF, OECD, continued support in response to for Q1 2009 and UNCTAD, and discuss with these the impact of the financial crisis on • Cameroon has completed its survey organisations and participating countries low and middle income countries and will receive a FUM in Q1 2009 the implications for their implementation. • CAR, Chad, Cote d’Ivoire, Equatorial Guinea and Guinea-Bissau will launch Software the programme with their first Demand • The FPC CBP finalized and disseminated Assessment Missions in Q1 2009 Version 2 of the generic software. See the • The Gambia (Cycle 3) held a combined article on page 13 for further information Closing Dissemination Workshop (CDW) • MEFMI is making progress with its

12 FPC CBP COMPLETES TRANSFER OF GENERIC SOFTWARE

eeting its objectives for phase The system is intended to store aggregate A few countries have developed their own 3, the FPC CBP completed the data relating to IIP/BOP, investor perception, systems, to align more closely with national Mtransfer of its generic software and corporate social responsibility. It therefore or institutional programming priorities, using to countries with the dissemination complements rather than duplicating the systems such as Oracle©. The most advanced of Version 2 in September 2008. loan-by-loan debt recording systems of the countries have redesigned national systems, Henceforth, FPC support will be limited Commonwealth Secretariat (CS-DRMS) building on useful functions contained in the to minor enhancements, based on and UNCTAD (DMFAS). generic software. The table below summarises country demand. current country status. The system is designed and maintained by Eveleigh Information Solutions (UK), System Countries The generic software is developed in MS in consultation with Programme Implementing Benin, Botswana, Burkina Faso, Access©, to ensure that it can be adapted Partners and participating countries. All the Cameroon, Central African Republic, to country needs very easily, using existing above items are available via the EIS website CBP Chad, Congo, Cote d’Ivoire, Equatorial Generic users Guinea, Gabon, Gambia, Ghana, Guinea programming skills in the countries. It is freely (http://www.evinsol.co.uk/software/dfi), Bissau, Malawi, Mali, Niger, Senegal, available to all countries, and is especially as described in the table below. Togo, Trinidad and Tobago, Zambia useful to those that do not have (or are still developing) a suitable national system. EIS Website Page Features National systems Bolivia, Nicaragua, Tanzania, Uganda From this page users and designers may: The software is made up of three • Download software v2.0 In addition, one of the FPC CBP implementing Homepage • Link to the User Manual page modules: Administration, Input and Output. • Link to the Technical Manual page partners, MEFMI, has decided to develop its The administration module allows the user • Link to Information about Updates pages own regional software, known as the PCMS, to create new surveys or edit existing surveys. which is intended to be completed by March Users may download the entire It is fully flexible, should a country need to User Manual manual in one zip file, or individual 2009, for the benefit of all countries in the revise its questionnaire, or use the software chapters as required MEFMI region. for an entirely new or different questionnaire. Designers may: The input module permits data storage, Technical Manual • Download the entire manual in one zip checking, the creation of summary reports for Designers file, or individual chapters as required • Download the development database about each return, viewing and clearing problems, and exporting a list of respondents Information This page tracks the changes to Excel. The output module is About Updates made in various versions designed to check and reconcile the data, and produce reports for analysis.

The software is accompanied by two manuals: • User Manual: this is the basis of training and transfer to software users, containing all the instructions necessary to use the software for entering and analysing data. • Technical Manual for Designers: this contains a description of the programming techniques used to create the software, and an explanation of how those techniques have been implemented to create the current version. An unlocked software for designers is also freely available, containing the programming code needed to effect any further developments using the Technical Manual.

13 ANALYSING SUSTAINABILITY OF

he FPC CBP has helped All of these aspects can be disaggregated Rates of return also vary by recipient country participating countries to analyse by type of finance or supplier institution, and sector. Construction routinely achieves T their balance of payments beneficiary sector or region, and source returns of 50%, agriculture and finance (BOP) and international investment country. It is also vital to analyse the factors 20%, and manufacturing 15%. Surprisingly, position (IIP), and the composition of which influence the sustainability of FPC, commerce, accommodation and tourism their foreign private capital by type again in disaggregated classifications. seem to be less profitable (at only around of financing, supplier institution, 5%). However, country authorities have major beneficiary sector and region, and Most of the information needed can come doubts about low returns for two reasons: source country. It has also helped from the FPC CBP questionnaires. However, a) enterprises in these sectors are noted countries to look at the factors which to ensure it is available, questionnaires need for under-reporting profits to avoid taxes; and influence FPC trends, including investor to look at investor intentions, and factors b) these sectors are most used for money- intentions and perceptions, and policy influencing current and future investment. laundering purposes, implying that some measures taken by the recipient For comprehensive analysis of PSED investors are not concerned with profit-making countries. As a result, it has made sustainability it will be important to have and are dragging down sectoral averages. a major contribution to helping responses on a loan-by-loan basis. Data countries formulate policies which quality also becomes even more fundamental In terms of debt financing, multinational will encourage more sustainable – without valid data on reinvested earnings, enterprises with access to international capital flows. dividends, and interest payments (all of which markets have managed to borrow at low are often completed unreliably by enterprises) interest rates – around 2-3% above sustainability analysis is unlikely to produce international commercial rates for the reliable results. borrowing currency. However, international However, the FPC CBP was established rates have been extremely volatile, cutting because developing countries were subject In addition to data, countries need two further costs to 4-5% in 2001-02, but raising them to dramatic volatility of unsustainable foreign inputs: training in how to analyse volatility, to 8-9% in 2007. During the global financial private capital, causing major negative effects including through econometric techniques crisis, LIBOR which forms the basis for most on their national development. Especially given such as standard deviations; and international corporate borrowing has fluctuated wildly. the current global financial crisis, it is essential analysis on the causes and scale of volatility, The crisis has also cut MNE credit lines and that the CBP helps countries to analyse especially international market conditions. increased spreads expect for the most whether FPC is sustainable. This article creditworthy enterprises. In part this has provides guidelines for how to conduct such 2) Rates of Return been linked to the fall in commodity prices analysis, as well as some preliminary results. As shown in Figure 1, according to FPC CBP which has reduced access to export analysis, FPC in low-income countries has prefinancing loans. 1) Definition and Information Needed typically demanded very high rates of return, Sustainability analysis is a more detailed averaging 15% a year but more than 20% Profit and dividend returns on equity FDI are examination of investors’ recent, current in the Gambia and Malawi. Of these profits, generally much higher than those on debt, and potential future behaviour. It is based on 72% are not reinvested. As a result, more with annual rates of return in most sectors underlying analysis of FPC composition and than 10% of invested capital is repatriated (and therefore also their present value) the factors which influence these trends, and each year. However, these returns vary exceeding even the combined principal and therefore focusses on those areas where basic dramatically with national or international interest payments (and therefore PV) of debts. analysis indicates that FPC is likely to be less economic developments, sectoral trends, The FPC CBP has not yet been able to collect sustainable. It can be undertaken in 4 ways: or policies of individual enterprises. During comprehensive data on returns on portfolio • Rates of return and profit, defined as: periods of international, national, sectoral or investments, but fund managers demand grace and maturity periods, interest rates enterprise crisis, they can exceed 100% of annual rates of return well above 10%. and present value of loans; profit and capital in one year. dividend levels (and repatriations) and 3) Volatility implicit rate of return from FDI; and dividend Another means of assessing FPC sustainability and price gains on portfolio investment; would be to project forward possible ranges • Volatility of flows, measured by: Figure 1: FDI profitability (%) the volatility of historical time series; investors’ declared future intentions; 25% and the execution rate of investments. 20% • Net flows and transfers, defined as: inflows of capital minus outflows of capital 15% (flows) and interest/dividends (transfers), 10% • Vulnerability of the economy, assessing various key ratios which compare FPC 5% Profits Remitted to major economic aggregates of the 0% Profits from FDI recipient country GambiaGhanaGuyana Malawi Tanzania Uganda Zambia

14 FOREIGN PRIVATE CAPITAL

of volatility. The FPC programme has not yet non-equity FDI (especially-intra-company OECD portfolio investments in developing generated sufficient data time series to judge loans) and loans from unrelated sources can country equity and T-bill markets, and cut volatility using formal econometric tests such also dry up rapidly in global, national, sectoral the returns on developing country assets as standard deviations – and in any case this or enterprise crisis. As a result, in difficult years held in OECD countries. might not tell us much about future prospects both debt (Ghana) and equity (Zambia) have given that historical trends may bear little caused net outflows. It also requires medium-to-long term relation to future prospects. Some have forecasting of FPC trends using different suggested that comparing investment 5) Macroeconomic Vulnerability scenarios. An example of this would be to approvals and actual flows could help The overall vulnerability of the economy set the baseline scenario as being based on (for example providing early warning of falls is best measured by ratios such as: recent FDI growth levels but assuming high in flows by examining trends in approvals), • private sector debt/commercial bank returns so that flows turn negative fairly soon; but these can provide only a very rough proxy. foreign exchange reserves an optimistic scenario whereby an economic • national debt (public + private)/total boom keeps flows positive for a longer period; The FPC CBP also gathers data on investor foreign exchange reserves and a pessimistic scenario whereby shocks intentions – to increase, maintain or cut flows. • national (public + private) debt (standard deviations in flows, higher rates of However, to provide more useful information, service/exports or reserves return, or cuts in trade lines and FDI) hit the questionnaires should in future ask what • short-term or trade credit ratios economy. Similarly, it requires formal risk percentage of increase or reduction they compared to reserves analysis based on variations in interest rates, intend in the coming year or 3-year period. exchange rates or commodity prices, time However, given the high returns and volatility series analysis of volatility and analysis of 4) Net Flows and Transfers on equity, it is also prudent to think about portfolio flows, and non-traditional flows and The FPC CBP has already produced results non-debt ratios such as stocks of private contingent liabilities such as public-private in terms of net flows and transfers. These can sector foreign assets/liabilities; and private partnerships, hedging and pension liabilities, be looked at in several ways – overall on total sector foreign liabilities/reserves or private as well as analysis of the relative costs and FPC (whether from non-residents or residents), sector flows/exports or reserves. It is also vital risks of local compared to external financing. disaggregated into inward FPC from non- to test ratios excluding large offshore projects residents (ie foreign liabilities), or outward FPC whose earnings do not pass through the 7) Policy Implications from residents (ie foreign assets), and national banking system, and to disaggregate The high rates of return on FPC show their disaggregated by type of flow. ratios by sector, source country and even potential for major negative effects on the enterprise, in order to identify possible economy in times of crisis, and therefore Overall, the picture is shown in Figure 2, micro-economic sources of vulnerability. the close attention governments must pay where high levels of capital outflows (averaging to analyzing FPC sustainability, in order to 59% of inflows) and enhanced volatility of 6) Explaining and Projecting Sustainability take rapid policy measures to stabilize flows, FPC during crisis periods make all flows much Assessing what is likely to happen to FPC or to adapt to changes in market conditions. less stable and more volatile. Figure 2 also in future requires analysis of the factors They also underline the need to design and shows two snapshots of extreme volatility influencing sustainability, using the investor implement a national strategy for mobilizing where problems with gold price hedging perceptions data from the FPC surveys; as development financing (going beyond public and bunching of debt maturities by Ashanti well as analysis of trends in international and sector financing). Finally, they underline the Goldfields in Ghana, and a decision by Anglo- regional markets (including sectoral and need for greater timeliness in data collection American to withdraw its equity investment in individual enterprise developments) and their (through quarterly sample surveys) and Zambia, destabilized each economy. impact on the national economy. For example, more forward-looking questions in surveys, the current financial crisis has increased to provide an early warning of potential By type of flow, Figure 3 shows that equity the cost of, and reduced access to loans FPC volatility. FDI can frequently fail to provide net inflows (and to FDI to the extent that it is financed because high repatriation/dividends require by borrowing), reduced suppliers credits high new inflows to offset them. However, (in line with commodity price falls), reduced

Figure 2: FPC inflows/outflows (% of GDP) Figure 3: Net debt and equity flows (% of GDP)

12 12 10 10 8 8 6 4 6 2 GambiaGhanaGuyana Malawi Tanzania Uganda Zambia 4 GambiaGhanaGuyana Malawi Tanzania Uganda Zambia 0 2 -2 0 -4 -6 -2 -8 Inflows Outflows -4 Debt Equity

15 DEBT RELIEF TECHNICAL QUESTIONS

What Are The Main Features Of The New BWI’s Debt Sustainability Framework (DSF) Template?

The Bretton Woods institutions (BWIs) have and the output sheets for analysing (balance of payments for external debt recently updated their Debt Sustainability external and fiscal debt sustainability, analysis and budget for fiscal analysis). Framework (DSF) templates for low income • Instructions sheet to provide a brief The Stress test sheets summarises the countries, merging the separate analysis of synopsis of how to use the template key ratio results of stress tests and external and fiscal sustainability into one new • Two input sheets, Data_input and Inp- standard alternative scenarios. more user-friendly template. This new template Outp_debt. The Data_input sheet is for • Output charts, Panel Chart, summarising retains the key elements of the original DSF recording historical data and 20-year the external and fiscal debt ratios in chart templates whereby the analysis is based on projections of external public and private format, and the underlying data for the 20-year macroeconomic projections, in US debt and domestic debt and the main charts, Chart Data. The charts illustrate dollars and using a common 5% discount macroeconomic aggregates of the balance the DSA results of the baseline, alternative rate to compute present value. The alternative of payments, budget and real economy. scenarios assuming historical averages, scenarios and standardised stress tests The historical data and projections cells are and the most extreme stress test. remain unchanged. However, the new colour coded so data entry is only required • Series of worksheets that transform the template also provides two customised in yellow cells. The Inp-Outp_debt sheet input data into the output data, which scenarios to facilitate analysis of country- projects debt service of the existing debt can be accessed via the Navigator. specific macroeconomic or commodity price stock and disbursements of new public • Customised Scenario sheets for external assumptions. The new template is available on sector external loans. The new template and fiscal debt sustainability analysis, www.imf.org/external/pubs/ft/dsa/lic.aspx enables the user to enter detailed debt accessed via the Navigator. For external and www.worldbank.org/Home > Topics > service and new disbursement projections debt, this enables the user to enter country- Economic Policy and ... > Debt for country specific key creditors (two specific assumptions for export or import Sustainability > Debt Sustainability each of multilateral, Paris Club bilateral, commodity price shocks, changes in private Framework for Low-Income Countries. non-Paris club bilateral and commercial). or official transfers, FDI, real GDP growth The user can also now select to do all or inflation. There are separate instructions, The new Excel template consists of the data entry and analysis in terms of millions, at the top of the sheet, on how to use it. following worksheets: rather than billions. • Language sheet to allow the user to run • Four output sheets, a Table baseline and The new template is a large 6.7MB workbook the template in English, French, Portuguese Stress test sheet for external and fiscal and requires a computer with 504 MB memory or Spanish. sustainability analysis. The two Table to work properly. It also requires an Excel • Navigator sheet, to direct the user directly to Baseline sheets set out the baseline Macro security setting of medium to run the the input sheets for entering assumptions projections of the main debt ratios and worksheet Macros. the key underlying macro variables

How can the HIPC CBP DSA methodology be used to prepare the debt inputs for DSF?

As the DSF template is a framework for for interim HIPC countries, only interim Resources pages of the members’ transforming macro and debt inputs into relief, and for pre-decision point countries section of www.hipc-cbp.org. outputs for sustainability analysis, all macro only traditional relief. As the DSF template and debt projection inputs need to be cannot simulate debt relief, all such • For private sector external debt, the DSF produced outside the template. On the assumptions must be implemented requires projections of stock, interest and macro side, this means that 20-year macro outside the template. The required debt amortisation payments, which must be projections have to be prepared using the service projections can best be produced produced outside DSF. There is no facility national macro economic model or financial using Debt-Pro© or a country’s debt for recording any private sector debt arrears, programming framework. On the debt and new recording system (CS-DRMS or if they exist. financing side, the data inputs required are: DMFAS). The next release of CS-DRMS • For domestic debt, DSF requires that the and DMFAS softwares will include user enter projections of domestic debt • For public sector external debt in facilities to produce DSF inputs in the stock, interest and amortisation payments Inp-Outp_debt: appropriate format. for short-term and medium to long-term 1. Debt service projections of the current 2. 20-year disbursements of new external debt, in millions or billions of US dollars. external public debt, in millions or billions public sector borrowings for key creditors As these data projections cannot be of US dollars, for all years until current and creditor category, in millions or generated within DSF, the HIPC CBP outstanding loans are fully repaid. billions of dollars. As the DSF cannot Domestic Debt template has been updated Depending on the HIPC status, debt generate new disbursement forecasts, to prepare disbursement projections for service projections for the baseline the HIPC CBP External Assistance entry to DSF using Copy/Paste from Excel. scenario need to take into account HIPC Template has been revised to prepare The updated template is available on the and MDDI relief – for completion point disbursement projections for entry to Technical Resources pages of the members’ countries this is full HIPC and MDRI relief, DSF using Copy/Paste from Excel. only section of www.hipc-cbp.org. The template is available on the Technical

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