The Heavily Indebted Poor Countries (HIPC) debt initiative: an OED review

This review focuses on the design and implementation of the HIPC Initiative. The purpose is to assess the prospect of the Initiative achieving its intended immediate objectives - reducing debt to sustainable levels and creating the fiscal space for increased spending for poverty reduction - and the potential for contributing toward its underlying development goals - sustainable economic growth and poverty reduction.If the anticipated debt relief is delivered, the Initiative will likely succeed in its original goal to reduce the external debt burden of several of the poorest countries and give them a “fresh start.” But to simultaneously achieve all three objectives—specifically to free up resources for increased social expenditures—the Initiative would have to transfer additional real resources to the countries. It was assumed in setting the objectives for the Initiative that such additional resources would not be necessary and thus the Initiative faces the risk of promising outcomes (related to its multiple objectives) that it cannot deliver by itself.The review makes four recommendations addressing the strategic issues facing the Initiative:The first is to clarify and communicate the purpose and objectives of the Initiative, and to ensure that its design is consistent with these objectives.The second recommendation is to make explicit the methodology and economic models underlying the debt projections used in the debt sustainability analyses, and to make the economic forecasts more realistic to assess better the prospects and risks facing individual countries.Third, the Initiative should maintain the standards for HIPCs’ policy performance to ensure that the risks to achieving and maintaining the Initiative’s objectives are minimized. And when flexibility is desirable, there should be a clear and transparent rationale for relaxing the criteria.Finally, the review recommends a greater focus on pro-poor growth to provide a better balance among development priorities relative to the current emphasis on social expenditures.