What to do after the clean slate? Post-relief public debt sustainability and management

Major international public debt relief initiatives for low-income countries are nearing their end. This report reflects on the legacy of such initiatives and casts some light on the future. First, we summarise the literature on the evolution and effects of past debt relief efforts. We find that grand, concerted initiatives like HIPC and MDRI have been necessary interventions to render low-income countries’ debt stocks and service sustainable again, although their impact on governance, investment, pro-poor spending, and ultimately, growth and poverty reduction remains difficult to gauge. Based on the latest IMF’s DSAs, the immediate prospects for debt sustainability in former HIPCs seem moderately positive, albeit with a few exceptions. In the second part of the report we document a number of post-relief trends in development financing and (planned) initiatives deemed to be of importance for debt sustainability and management over the medium- to longer-term. Among the evolutions that require close monitoring are the growing importance of loans in overall ODA, the crossing of World Bank’s IDA eligibility thresholds by fast-growing former HIPCs, the aid-cum-investment packages of emerging donors, and ex-HIPCs’ recently acquired access to international and domestic capital markets. We argue that, above all, countries themselves will need to better manage the key drivers of public debt dynamics, through prudent fiscal, monetary and exchange rate policies and growth-enhancing strategies. Donors should continue to assist countries by improving the DSA/DSF framework and extending current activities aimed at building local debt management capacity. Lastly, we compare ‘market-based’ and ‘statutory’ approaches to future restructuring of non-concessional public debt, i.e., adaptations to the contractual clauses of international bonds vs. a full-fledged multilateral legal framework. Whereas the first approach has already achieved some successes, it has limited scope and does not address problems beyond collective action failures. Conversely, the second approach is more comprehensive but faces many hurdles, not the least of which is opposition from the main financial centres.