Working Paper 75 - External Shocks and the HIPC Initiative: Impacts on Growth and Poverty in Africa

After providing a brief background on recent developments of terms of trade shocks anddebt relief initiatives, the paper uses a simple macroeconomic model to estimate theimpact of debt relief and terms of trade shocks on growth and poverty in Africancountries. For the 18 Heavily Indebted Poor Countries (HIPCs) that reached the enhancedHIPC decision point by end-December 2000, the basic quantitative findings are asfollows:· HIPC debt relief has boosted economic growth in these countries by an average of2.9 percent per annum (everything else remaining the same).· The computed result of this increase in growth is a reduction in poverty by anaverage of 2.2 percent per annum.· However, recent deteriorations in the terms of trade might have counter-balancedthese positive effects by lowering growth by an average of 2.0 percent per annumand by increasing poverty by an average of 1.3 percent per annum.· Clearly, much of the positive impact emanating from the HIPC Initiative has beeneroded due to recent deteriorations in the terms of trade. The HIPC-inducedgrowth and poverty reduction have been reduced each to an average of 0.9 percentper annum.The paper also estimates the net effect on growth and poverty of the recently agreed 100percent multilateral debt relief. This is predicted to boost economic growth by an averageof 5 percent per annum and reduce poverty by about 5.3 percent per annum for the groupof all African HIPCs. The paper concludes that 100 percent debt relief is crucial forAfrica, but that more aid and policies need to be focused on a long-term developmentstrategy that fosters the necessary structural transformation.