G8 “Debt Deal”

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Debt Relief International, July 2005

G8 “Debt Deal”

The G8 “Debt Deal”, agreed by G8 Finance Ministers on 11th June 2005 and restated at the G8 summit in Gleneagles, has received a great deal of media, NGO and public attention. However while some elements of the “deal” are now close to being finalised, several fundamental issues are still awaiting confirmation and approval by all parties, so that a number of important questions remain unanswered.

I. Eligibility and Coverage

The current G8 “debt deal” only covers International Monetary Fund (IMF), World Bank (IDA) and African Development Bank (AfDB) debt. Other multilateral institutions, most notably the Inter American Development Bank (IADB), the Asian Development Bank (ADB), Caribbean Development Bank (CDB), East African Development Bank (EADB) and the West African Development Bank (BOAD) are not yet included in the initiative while commercial and remaining bilateral debts are also not included in this debt relief initiative. Only debts accrued before a specific cut-off date (preliminarily indicated as being December 2004) are included.

In terms of country eligibility, only countries that have successfully reached their HIPC completion point (CP) will receive stock cancellation. This means 18 post CP countries. As of July 2005 (Benin, Bolivia, Burkina Faso, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania, Uganda and Zambia) will be eligible. Other HIPCs will become eligible once they have reached CP. According to the G8 communiqué the level of country participation will rise to 27 countries in the next 2 years if interim period countries achieve their CP as planned. A final point here is that work is currently underway to consider expanding the list of HIPC countries, to include for example Tajikistan, Eritrea and Haiti.
Countries not classified as HIPCs will not benefit from any debt relief under the current G8 deal. However countries that qualified for the original UK proposal of debt service relief up to 2015 (Armenia, Mongolia, Nepal, Sri Lanka and Vietnam) on the basis of being a non-HIPC with a PRSC, will still receive the UK’s share of their debt service (10%) cancelled. Whether Canada and the Netherlands (which had supported the UK’s original proposal) will follow the UK in doing this is still to be determined.

II. Details for the 3 Multilateral Development Banks

The latest G8 “debt deal” moves beyond previous proposals on debt relief by including IMF debts and by offering permanent debt stock cancellation. As the debt stock is written off for post-CP HIPCs with debts owed to IDA, AfDF and the IMF, the burdensome external debt overhang is lifted and present value and other external debt sustainability measures will fall dramatically.

Post-CP HIPCs receiving this relief will see their gross new disbursements from IDA and AfDF reduced by an amount equivalent to the debt service saved each year, while IMF disbursements should remain unchanged.

II.1 How will this process occur in detail for each institution?

For IDA the debt service payments foregone will be paid into IDA’s general pool of resources and allocated across all 81 IDA countries according to the performance-based allocation system. This means that IDA disbursements to some countries will rise and fall to others (see Table 1). In other words most HIPCs will receive an additional amount of resources to spend on the Millennium Development Goals (MDGs), which is much lower than the debt service cancelled. However non-HIPCs will get a considerable amount of fully additional funds.
For AfDF the system to be adapted is similar. The debt service payments foregone will be paid into AfDF’s general pool and allocated across all AfDF eligible countries according to the AfDF performance-based formula. This may also affect the grant allocation for AfDF countries under ADF-X.
IMF debt stock will be cancelled using the IMF’s own resources, without affecting future disbursements. (see Table 2.) All debt service savings will therefore be additional.

III. Impact and Net Gain to Countries

It is very difficult to pin-point how much countries will gain in monetary terms, as various important factors and variables such as the exact cut-off date are still undetermined. However as an indication, the attached Table 1 provides some detail on the comparative situation for countries pre and post-G8 initiative in relation to IDA.

III 1. Post CP HIPCs – Gross and Net Gains

For IDA the gross and net gain to each post CP HIPC can be worked out using the following formulas and column headings from Table 1.

Gross IDA-14 Allocation prior to Initiative = A

Reduced IDA Allocation = Debt Service Payments = B

Additional IDA Allocation under the Initiative = F

Gross Allocation prior to Initiative = A

Gross Allocation post Initative = A – B + F = H
Gross Gain/Loss under the Initative = H – A = -B + F

Net Allocation prior to Initative = C= A – B

Net Allocation post Initiative = G = A – B + F

Net Gain/Loss under the Initiative = F

III 2 Pre-CP HIPCs – Gross and Net Gains
Using the column headings on Table 1 we can also calculate the gross and net gains to pre-CP HIPCs.
Gross Allocation prior to Initiative = A

Debt Service Payments = B

Additional IDA Allocation under the Initiative = F

Gross Allocation prior to Initiative = A

Gross Allocation post Initative = A + F

Gross Gain under the Initiative = F

Net Allocation prior to Initative = C= A – B

Net Allocation post Initiative = G = A – B + F
Net Gain under the Initiative = F

III.3 Gross and Net Additionality
From the above calculations it is easy to calculate the gross and net additionality of the initative to each HIPC, both post- CP and otherwise. The final two columns in Table 1 (Column I and J) clearly show the winners and losers in terms of net flows and gross disbursements.

Gross Additionality = New Gross IDA Allocation/

Previous Gross IDA Allocation

Gross Additionality = K = H / A

Net additionality = New net IDA Flow / Previous net IDA Flow

Net Additionality = J = G / C

In gross terms post CP HIPCs apart from Ethiopia, will lose anything between 30% for Bolivia and less than 1% for Rwanda with an average of more than 10%. Other HIPCs will benefit from a 2.6% increase in gross IDA flows.

The average level of net additionality for IDA for all HIPCs is roughly 2.5%, with post decision point HIPCs gaining slightly more on average than post CP or pre decision point countries. Countries gaining the most in net terms from this initative in relation to IDA are Comoros and Guinea (7.3% and 5.3% respectively), while those gaining least in net terms include Ethiopia, Rwanda, Tanzania and Madagascar (roughly 2.7%.)
A further consideration worth highlighting is that when new countries become eligible for this additional debt cancellation, on reaching their CP, the overall gain for all HIPCs will increase due to the increase in the amount of available funds to be distributed across all HIPCs.

Box 1: Example – Benin

a) IDA
Prior to the G8 initative Benin, a post-CP country was receiving an IDA allocation of US$271 million and paying US$37million back to IDA in debt service payments over 3 years. With the introduction of this new debt cancellation initiative, Benin will no longer need to pay its debt service payments to IDA (as it is a post-CP country) but will see its IDA allocation reduced by the equivalent amount (US$37million.)
This new IDA allocation (US$234million) will then be supplemented by the additional IDA funds, distributed according the performance based allocation (PBA) system. The PBA system allocates 0.8% of the total IDA pool to Benin. Therefore, of the total new funding for debt service cancellation during IDA 14 (US$851million), 0.8% ( or US$7million) will be allocated to Benin.
Benin will therefore receive US$241million in net IDA flows, instead of US$234 million before the G8 initative. However gross disbursements will be reduced from an original US$271 million to US$241 million after the initiative.
In terms of the above equations, the results for Benin and IDA are as follows:

  1. Gross Gain

Gross Gain/Loss = Gross IDA Allocation before Initiative – Gross IDA Allocation after Initiative

A – (A - B + D) = B – F
271 – (271 – 37 +7) = - 37 + 7 = - 30
Therefore the gross loss for Benin is US$ 30 million.

  1. Net Gain

Net Gain/Loss = Net IDA Allocation before Initiative – Net IDA Allocation after Initiative

(A - B) – (A - B) + F = F
(271 – 37) – (271 –37) + 7 =7
Therefore the net gain for Benin is US$ 7 million.

  1. Gross Additionality

Gross Additionality = New Gross IDA Flows / Original Gross IDA Flows

241 / 271 = -11%

  1. Net Additionality

Net Additionality = New Net IDA Flows / Original Net IDA Flows

241 / 234 = 3%

Box 1: Example – Benin (cont.)

b) AfDF
Benin will no longer need to pay its debt service to the AfDF. The resultant redistribution of additional resources will occur along similar lines to the performance based allocation system

c) IMF
Debt service owed to the IMF will no longer need to be paid saving Benin roughly US$ 7 million annually over the next 3 years

IV. Outstanding Issues

  • G8 donors constitute less than 100% of IDA and AfDF shareholders. This deal will therefore have to be agreed at the annual meetings of the IMF and WB, by September 2005 to ensure all shareholding bilateral donors participate in this initative and therefore full 100% debt cancellation becomes a reality.

  • How the MDBs will account for this debt cancellation is also still unclear i.e. whether this will be accounted for as a one-off write-off or as annual debt service forgiven.

  • As debt stocks for countries that have reached CP are cancelled, it is still ambiguous how their future IDA grant-allocation will be affected (For more information on the IDA grant-allocation system please see “Debt Relief Technical Questions” in the HIPC-CBP Newsletter 23, 2nd Quarter 2005). Based on the current traffic-light system, the debt stock cancellation may result in current red light post-CP HIPCs (due to receive 100% grants) shifting to a green light (where they will receive 100% loans). There are serious implications for longer-term debt sustainability considerations and the BWIs/ AfDF are therefore considering this impact closely.

  • A further concern is the disbursement of the additional resources generated. Where IDA disbursements to countries fall, it is not clear how the IDA portfolio in each country will be changed and whether IDA projects/ programmes will instead need to be funded from HIPC’s own budget resources. (i.e. the savings of IDA debt service). It would be preferable for them to be treated as budget support, to improve aid quality.

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