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Debt Relief and the Current Account: An Analysis of the HIPC Initiative

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Author Info
Sebastian Edwards (University of California, Los Angeles and National Bureau of Economic Research)

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Abstract

In this paper I develop a model to investigate the connection between debt relief and current account sustainability. This model can be used as a key input in assessing whether a HIPC country's real exchange rate is 'overvalued,' and will thus need to go through devaluation. The working of the model is illustrated for the case of Nicaragua, a country that in 2002 had one of the highest external debt to GDP ratios: almost 300 per cent. Nicaragua is the second poorest country in the Western Hemisphere (after Haiti), and for the last decade has relied very heavily on foreign assistance and aid. Moreover, in the last few years Nicaragua has run extremely large current account deficits in excess of 37 per cent of GDP during 1997-2001 largely financed by grants, donations and migrant remittances. Copyright © Blackwell Publishing Ltd 2003.

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Publisher Info
Article provided by Blackwell Publishing in its journal The World Economy.

Volume (Year): 26 (2003)
Issue (Month): 4 (04)
Pages: 513-531
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Handle: RePEc:bla:worlde:v:26:y:2003:i:4:p:513-531

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  1. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops," NBER Working Papers 10276, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Sebastian Edwards, 2005. "Is the U.S. Current Account Deficit Sustainable? And If Not, How Costly is Adjustment Likely To Be?," NBER Working Papers 11541, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Alexandra Tabova, 2005. "On the feasibility and desirability of GDP-indexed concessional lending," Department of Economics Working Papers 0509, Department of Economics, University of Trento, Italia. [Downloadable!]
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This page was last updated on 2009-11-22.

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