1. ESSAY 3 ECONOMIC
DEVELOPMENT IN AFRICA
Debt relief Initiatives
Diane Pia Marie Amancic
634791
Word count: 2497
i) Explain the context, design and evolution of the various
initiatives regarding external debt in Sub-Saharan Africa, i.e. the
HIPCinitiative and the MDRI; ii) Discuss theeffectiveness of these
initiatives (in particular, given the characteristics of Sub-Saharan
African economies, do these initiatives address the issueof
growth as well as that of debt in a long-term perspective?), using
the example of one Sub-Saharan African country.

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External debt – in particular public debt – is of systematic occurrence in most
developed and developing countries in the world and has been at the forefront of research in
economics and development fields since the 1980s because of its impact on various
macroeconomics indicators. The definition of external debt has different focuses which
changed over time as the the global financial environment evolved, though today, there
seems to be a consensus that the retained definition classifies external debt as all debt issued
under foreign law, but not necessarily owned to non-residents of the debtor. In addition, the
focus for low-income countries in SSA is Public and Publicly Guaranteed debt (PPG), though
this does not include finance from the private sector through the public sector. In accordance
with resolutions taken by multilateral organizations to reach MDGs by 2015, International and
Regional Financial Institutions – mainly the IMF, WB and ADB – launched two debt relief
programs from 1996, to provide debt relief and low-interest loans to Heavily Indebted Poor
Countries. The aims of the debt relief programs included debt relief, debt sustainability and
poverty reduction in the aim to trigger sustainable growth. However, positive outcomes of
debt relief programs were short-lived, and were quickly replaced by the typical pattern of
unsustained, fluctuating growth vulnerable to external shocks of commodity prices of the
international market. This is particularly true for oil-exporting and mineral-exporting
countries. Poverty also kept rising, as seen in Niger, leading IFIs to provide aid in recent years.
This essay will argue that debt relief initiatives partly contributed to a regain in growth on the
short-term, though on the long-term, because these initiatives did not address structural
constraints, there was no positive impact on growth and poverty, resulting in a risein external
debt. Firstly, the essay will assess the characteristics and evolution of HIPC and MDRI
initiatives, in the context of Sub-Saharan African economies. It will then use the case study of

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Niger to exemplify the mixed outcomes of the debt relief initiatives and the negative
correlation in the long-term between these initiatives, growth and poverty.
1. A) Context of implementation
The first debt relief initiative was the HIPC, specially created to relief debt and provide loans
to Heavily Indebted Poor Countries, launched in 1996. It was originally implemented as a
means to reduce the accumulation of multilateral debt and end the bilateral debt-
rescheduling patterns occurring since the 1980s due to the incapacity of most SSA countries
to service debt (Hussain & Gunter, 2005). The presence of a “debt overhang” had made
prospects for debt sustainability impossible without external financial assistance as over 80%
of PPG total debt in SSA was “official” by the late 1990s, a result of Terms of Trade and
commodity prices shocks and mixed results of Structural Adjustment Programs. The
implementation of IFIs debt relief initiatives was of paramount importance as most of the
external debt of African countries was owed to official creditors of the same IFIs, a pattern
which has taken a different turn today as African states increasingly owe to private firms,
partly due to the rise of Chinese engagement in African economies. At the start of the debt
relief initiative, there was evidence that external borrowing to service debt could trigger
economic growth when sustainable and spent productively (Muhanji & Ojah, 2011), with
positive outcomes noted in East Asia and Latin America. However, three factors are
understood to have undermined the expected outcomes of debt relief initiatives in SSA: (1)
the structural constraints of African economies – reduced export base, landlockedness, weak
institutions, lack of infrastructure and unfit management capacity among others; (2) the
vulnerability of African economies to external shocks of Terms of Trade and commodity prices
and (3) the failure of IFIs to define what constitutes a sustainable debt for each specific HIPC

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in which the initiative was implemented e.g. “country-specific risks” (ibid.; Battaile,
Hernández & Norambuena, 2015). Even though debt relief initiatives were implemented in a
favorable global environment and as commodity prices enjoyed a high, the “one-size-fits-all”
nature of these programs – similar to that of SAPs – could not result in a positive correlation
between debt relief initiatives and growth on the long-term (Nwachukwu, 2008).
b) Design and expected outcomes
HIPC are a grouping of poor countries that was first defined in the 1990s as “having
excessive levels of external debt” (Fonchamnyo, 2009: 323). The debt relief program is
designed as a voluntary provision of debt relief and financial assistance “by all creditors”
(multilateral, bilateral or commercial debt) (ibid.,), said debt being already owed to the same
major financial players. To be eligible for assistance, a country must (1) be unable to contain
its external debt and have it defined as “unsustainable” – when an export-based economy
shows a NPV to export ratio above 150%; (2) the country should be eligible for “highly
concessionalassistance” fromthe World Bank and (3) show a good record regarding spending
along with a 3-year record of macroeconomic stability and policy reforms (Isar, 2012). The
issue with these criteria is that contrary to the aim of the HIPC program to end the
rescheduling debt and systematic borrowing patterns, SSA countries which are being offered
debt relief without addressing structural constraints ultimately reproduce the same pattern
of borrowing and debt relief on the long-term as no factors impacting growth or debt
sustainability were addressed accordingly. Furthermore, the implementation of the debt
relief program has been criticized to be long because bureaucratic (Isar, 2012: 114): for
instance, it was agreed in 2000 that Niger would get debt reduction, though it was effective
in 2006. The burden of external debt throughout these years undermines the distribution of

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public revenues which are used to service debt rather than towards public services or the
industry. In addition, the obligation to submit a macroeconomic policy reform implies that
the indebted country has to follow the policy recommendations of the IMF – market
deregulation and privatization among others – the same policies that have proven inefficient
after the Structural Adjustment Programs. Therefore, it quickly appeared that the standard
HIPC initiative would not be sufficient to relieve debt to an acceptable extent in the most
indebted countries, therefore leading to the creation of the MDRI framework – or HIPC II –
which would offer “100% debt cancellation” from the three main multilateral institutions
(Nwachukwu, 2008: 171).
c) Evolution due to insufficient outcomes of HIPC
Based on a G7 proposal, the proposition to modify the HIPC initiative aimed at addressing
procedure and outcome issues originating from the lengthy, incomplete nature of the HIPC.
The HIPC II-MDRI – which is still in use today – has three main goals: (1) to ensure debt
sustainability – that is, that external debt service does not undermine export incomes –
supposedly implying the end of debt rescheduling and debt forgiveness (2) to ensure a long-
term GDP growth rate with the removal of the “debt overhang” and (3) reduce the poverty
rate as a result of a reduction of cash spent in servicing debt that can then be allocated to
public spending, in addition to developing a PRSP paper. These new objectives come with
several issues, both regarding the eligibility criteria and their expected outcomes. Firstly, the
criteria used is ambiguous, for a country could be heavily indebted though not poor in the
IMF sense, particularly oil-exporting countries i.e. Nigeria and Equatorial Guinea (Isar, 2012).
This inconsistency comes from a “narrowly defined criterion of debt sustainability,
particularly regarding debt-to-export and debt-to-revenue ratios” (ibid., 114). Secondly, the

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use of debt relief as a mechanism to enforce liberalization policies is risky in an export-based
economy like most countries in SSA, which depend on the export of a few non-fuel
commodities: in addition to the fact that these policies had proven inefficient after SAPs,
subsidies for certain fertilizers are considered a “breach of the criteria set under the free
market mechanism” (ibid.) and therefore undermines the production of crops that drive the
economy. Also, the slowness of the whole debt relief process constitutes another issue, with
countries having to wait several years from reaching the completion point to the distribution
of the funds (ibid.). Most importantly, the main issue with the HIPC-II initiatives is that it
ignores exogenous factors like Terms of Trade, weather or price shocks, to which African
economies are especially vulnerable. Hence, without addressing structural constraints –
starting with the improvement of tax collection mechanisms – it is unlikely that most African
states will be able to sustain their debt, and increase their public spending (Cassimon et al.,
2015).
2. A) HIPC-MDRI impact on growth and poverty in Niger
At the time of implementation of the HIPC debt relief framework, there was an idea that
external borrowing would entail economic growth, though it has been demonstrated
(Herndon, Ash & Pollin, 2014) that even for Heavily Indebted Poor Countries, the correlation
between high external debt and decline in GDP growth is negative. Again, it is not debt or
borrowing that undermines growth, but the structural constraints of a poor country’s
economy. However, the correlation between external debt and a decrease in public spending
and fiscal revenues is positive, hence why debt relief appears to trigger growth for a short
period of time after completion, before structural constraints overwhelm the effects of debt
relief (Hussain&Gunter, 2005) and force countries to borrow againand be dependent on aid.

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For instance, in Niger – a country defined as LIC and fragile – the MDRI debt relief was
completed in 2006, though there immediately was adramatic increase in external debt stocks
(see Fig. 1), demonstrating that the issue of debt as whole has to be understood as linked to
the structural constraints underpinning a fluctuating growth vulnerable to exogenous shocks
(see Fig. 2).
Regarding poverty reduction, there is apositive correlation between debt serviceand poverty
in HIPC countries (ibid., 14), while there is also a positive correlation between debt relief and
poverty reduction, with varying results depending on how the country has made use of the
debt relief. In Niger, after the completion of HIPC debt relief, poverty rate showed a 0.3%
annual reduction, which makes Niger one of the four countries that benefitted the least in
terms of poverty from the debt relief initiatives (ibid., 16). After completion of the full MDRI
debt relief, which reduced Niger’s debt-to-GDP ratio from 52% in 2005 to 14% in 2006, in
addition to a “highly concessional loan” of at least 50% grant component, the ratio went from
22.1% in 2011 to 39.7% in 2014 (ADB, 2015), showing the failure of HIPC-MDRI to address
debt sustainability or growth and limit external borrowing or aid dependency on the
medium/long-term (see Fig. 1 & 3).
b) Structural constraints: Niger
Niger is a poor, landlocked country mostly made of desert land, with an economy
depending largely on subsistence agriculture, which employs 90% of the labour force, mining
and more recently some oil extraction. Niger is also the country with the highest fertility rate
in the world, with an average of 6-7 children per woman, and one of the lowest GDP per capita
in the world. Widespread poverty represents a burden on development and the economy, as
63% of the population lived under the poverty line in 1993 (IMF, 2000) and struggled to have

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access to food and sanitation. In addition to its landlockedness, which is an important
structural constraint to an export-based economy, Niger faces ‘typical’ structural constraints
such as weak institutions, poor infrastructure, and a vulnerable export-based economy
depending on the trade of a handful of fuel and non-fuel commodities e.g. livestock, cotton,
uranium, oiland groundnuts. The country runs largelyon aidflows, and after two coups d’état
in 1996 and 1999, IFIs provided HIPC-I and the Nigerien government closely followed policy
recommendations of market deregulation and privatization. After reaching the Completion
Point, Niger was eligible to benefit from 100% debt relief, and the MDRI program was
completed in 2006, bringing its debt-to-GDP ratio to its lowest in a decade. However, it
appears that the debt relief initiatives did not have a positive impact on growth and poverty,
as growth kept on fluctuating along with commodity prices (Fig. 2) and the poverty headcount
ratio at national poverty line was 48.9% as of 2011. As external debt was relieved, aid flows
increased to peak in 2012 at $900 million (see Fig. 3), surpassing the total debt relief amount
of about $700 million (ADB, 2004), and external debt stocks immediately witnessed an
increase (Fig. 1). Overall, as structural constraints were not addressed and that the expected
results of the debt relief initiatives were not delivered because of criteria issues, it is likely
that Niger will require external borrowing again in a close future and that the burden of
poverty on development will not be addressed because of insufficient public spending.
Concluding remarks
This essay has demonstrated that the IFIs’ attempts to limit external debt and end the
pattern of debt rescheduling resulted in rather mixed results because of narrow definitions
of the criteria to be eligible for debt relief (indebted but not necessarily poor) and the failure
to attempt to address structural constraints which are the true factors undermining sustained

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growth in SSA. The original objectives of helping LICs in SSA to reach the MDGs, by hoping to
reduce poverty and trigger growth through debt relief could not result in a long-term and
sustainedgrowth because of the lengthy process of implementing debt relief, the subsequent
decrease in public spending in the concerned country, unfit criterion definitions and most
importantly structural constraints left unaddressed. In Niger, after the debt relief was
completed in 2006, the world financial crisis hit in 2008 and probably worsened the mixed
outcomes of HIPC-MDRI; as figures show, growth is characterized by incessant fluctuations,
and in the following years after debt relief Niger saw its external debt and aid skyrocket. It
seems then that the IFIs attempt to address external debt did not put an end to the debt
rescheduling pattern, or had a positive long-term impact on growth and poverty, due to the
failure to address structural constraints, a mistake that already had been made with SAPs.

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Figure 1.: External debt stocks (total)
Source: Google Public Data, 2016
Figure 1. shows the external debt stocks pattern for Niger for the years 1970-2015. Debt
stocks are showed to have been increasing sharply since the implementation of Structural
Adjustment Programs from 1982, somewhat stagnating during the coup d’état years 1996-
1999. After a sharp rise in 2001 following post-conflict financial assistance, external debt
stocks dramatically dropped followed HIPC-MDRI debt relief initiatives, which were
completed in 2006. Due to pre-existing structural constraints that were left unaddressed,
external debt stocks doubled in only 4 years, and then exponentially increased again,
surpassing the value pre-debt relief initiatives in 2000. Overall, this shows that unless
structural constraints are addressed, debt relief initiatives provide an only too-short break
from the vicious cycle of borrowing and unsustainable debt.

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Figure 2.: GDP Growth rate
Source: Google Public Data, 2016
Figure 3.: Aid flows in current US dollars
Source: Google Public Data, 2016

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