Analytical History of Heavily Indebted Poor Country (HIPC) Debt Sustainability Targets

This paper traces the origins of World Bank indicators of debt-distress and their employment as HIPC sustainability targets. These targets are interpreted as ‘switching values’, below which countries are (on average) expected to avoid debt service problems, but as such, they do not take into account that countries encounter debt service problems for a variety of reasons and at different levels of debt. It is likely that the ‘true’ switching value of the debt to export ratio of several HIPCs lies below the lower bound of the present target range. Regarding the ‘fiscal window’, the lack of analytical basis for a 280 percent target for the debt to revenue ratio is noted, and the consistency problems raised by the added ‘openness-tax’ condition are discussed. Moreover, the implications for economic performance of the pursuit for a sustainable debt position remain a concern. It seems uncertain whether the development needs of HIPC countries can be accommodated within sustainable debt paths, as envisioned. The paper concludes that the sustainability targets, as presently applied, are not well supported in analytical terms. The rationale for adopting an average target range for the debt indicators involved remains weak, and the adoption of country-specific targets is suggested as a way to tailor debt relief more accurately to country needs. ∗Assistant Research Professor, Development Economics Research Group (DERG), Institute of Economics, University of Copenhagen, Studiestraede 6, DK-1455 Copenhagen K, Denmark (email: [email protected]). This is a revised and expanded version of a paper prepared for the joint World Bank/Nordic Working Seminar: Review of the HIPC Initiative, Oslo, 4 March, 1999. Comments from workshop participants are appreciated, as are suggestions and comments on an earlier draft by Jens Kovsted and Henrik Hansen. The usual caveats apply.