*EPF519 04/19/2002
Text: Congressional Report Bolsters President Bush Debt Proposal
(Partial shift from loans to grants viewed as promising) (1740)

A congressional report indicates that the Bush administration proposal for delivering half of new assistance to some of the world's poorest countries as grants instead of loans would succeed to a large degree.

The General Accounting Office (GAO), the congressional investigative agency, released its report April 19, the first day of the International Monetary Fund (IMF) and World Bank spring meetings in Washington.

The Bush administration proposal, advanced most forcefully by Treasury Secretary Paul O'Neill, has met fierce resistance from the IMF and Bank as well as other donor countries.

Assuming historic export growth rates continue, the GAO study of 10 countries found that six of them would be able to repay their debt for all or most of the next 20 years if half of new multilateral assistance for them came from grants.

It found also that shifting partly to grants would let countries sustain their debt more dependably even than forgiving existing multilateral debt.

"A shift of multilateral loans to grants would lessen poor countries' debt burdens, increasing their ability to repay future debt," the report said.

GAO calculated that the grants approach would reduce World Bank financial resources by about $15,600 million over 40 years, compared with the Bank's own estimate of $100,000 million.

The report suggested that one way the Bank could make up that revenue would be to increase donor contributions 1.6 percent a year.

The entire report is available on the Internet at: http://www.gao.gov/new.items/d02593.pdf


Following is an excerpt from the GAO report:

(Note: In the text "billion" equals 1,000 million.)

(begin text)

April 19, 2002
Letter

The Honorable Jesse Helms
Ranking Minority Member, Committee on Foreign Relations
United States Senate

The Honorable Douglas Bereuter
Chairman, Subcommittee on International Monetary Policy and Trade
Committee on Financial Services
House of Representatives

In July 2001, President Bush proposed that the World Bank and other development banks dramatically increase the distribution of grants to the world's poorest countries, recommending that grants replace up to 50 percent of future lending. This proposal was motivated, in part, by concerns regarding poor countries' long-term debt burdens and the adequacy of recent initiatives to provide debt relief for the world's poorest countries. The president's grants proposal would mean a significant change for multilateral institutions such as the World Bank, which traditionally use low-cost loans to deliver development assistance. The proposal has been controversial, in part due to concerns about the impact of the proposal on the amount of resources that will be available for poor countries. The World Bank estimates that the president's proposal could reduce its resources by about $100 billion over the next 40 years. [1]

Recognizing that previous assistance efforts have not resolved the debt problems of poor countries, you asked us to review the proposal to shift a portion of multilateral institutions' loans to grants. In response, we assessed (1) how the loans-to-grants proposal would affect poor countries' ability to repay their debt, (2) how it would affect the resources available to the World Bank for poor countries, and (3) how our projections for countries' debt sustainability [2] and the financial loss to the World Bank from the grants proposal compare with World Bank and International Monetary Fund (IMF) estimates.

In conducting our analyses, we built on prior work that examined World Bank and IMF 20-year projections on poor countries' debt burdens. The World Bank and the IMF reviewed and provided detailed comments on this earlier analysis. We also used World Bank and IMF analyses that included detailed country-specific economic forecasts and projections of the financial implications of switching from loans to grants. However, we were unable to discuss our new findings with World Bank and IMF officials because the Department of the Treasury did not approve our access to officials of those institutions. [3] Treasury officials denied our requests for access to officials of the multilateral institutions because they were concerned that our engagement would interfere with ongoing negotiations to refinance the World Bank's International Development Agency ....

Results in Brief

A shift of multilateral loans to grants would lessen poor countries' debt burdens, increasing their ability to repay future debt. If grants were to replace 50 percent of future multilateral loans (assuming historical export growth rates), 4 of the 10 countries analyzed would be debt sustainable for 20 years and 2 other countries would be debt sustainable for most of the 20 years. However, the 4 remaining countries analyzed would not become debt sustainable even if grants replace 50 percent of their future multilateral loans. Furthermore, the grants proposal is more effective in promoting debt sustainability than proposals to forgive old multilateral debt.

The total financial loss to the World Bank of a 50-percent shift from loans to grants over the next 40 years would be $15.6 billion in present value terms. The options for making up the foregone revenue from the 50-percent grants proposal are fairly limited. Financing the president's proposal through harder terms on the remaining loans to poor countries would reduce and potentially nullify any improvement to their debt sustainability arising from the 50-percent grants proposal. However, if donor contributions to the World Bank were to increase by 1.6 percent a year, which is less than the projected rate of inflation over the next 40 years, the World Bank could fully finance the 50-percent grants proposal.

GAO's projections on poor countries' future debt sustainability and the financial loss to the World Bank of the 50-percent grants proposal differ substantially from World Bank and IMF projections. First, the World Bank and IMF project that all 10 countries will attain debt sustainability under the current debt relief initiative by assuming that the countries' future export growth rates will greatly exceed those achieved in the past. However, high export growth rates are unlikely because these countries rely on primary commodities, such as coffee and cotton, for a significant proportion of their export revenue; since 1995, the prices of these commodities have moved in a downward trend. In addition, HIV/AIDS is expected to reduce the overall productivity of these countries.

Second, GAO characterizes the financial loss of the 50-percent grants proposal differently than the World Bank. While the World Bank estimates that the financial loss from the proposal would reach $100 billion in nominal dollars over 40 years, its methodology assumes that the value of a dollar received today is worth the same as a dollar received 40 years from now. However, after including the expected impact of inflation and the investment income that could accrue over time, GAO estimates the financial loss of the grants proposal to the World Bank is only $15.6 billion in present value terms.

GAO provided a copy of the draft report to the Department of the Treasury for review and comment. Treasury agreed with the report's findings.

Background

The World Bank and the IMF have classified 42 countries as heavily indebted and poor; three quarters of these are in sub-Saharan Africa. Most of these countries receive substantial amounts of development assistance from governments, multilateral organizations, and nongovernmental organizations. During the 1970s and 1980s, many low-income countries sharply increased their external borrowing, mostly from other governments or multilateral institutions. During this period, the price of primary commodities tended to be high, contributing to optimistic export growth projections on the part of developing countries, which encouraged them to overborrow. By the end of 1997, the total external debt of these 42 countries had a face value of more than $200 billion. Much of this debt was not being repaid or was repaid only with the support of donors.

In 1996, creditors agreed to create the Heavily Indebted Poor Countries (HIPC) initiative to address concerns that some poor countries would have debt burdens greater than their ability to pay, despite debt relief from bilateral creditors. [4] In 1999, in response to concerns about the continuing vulnerability of these countries, the World Bank and the IMF agreed to enhance the HIPC initiative, which more than doubled the estimated amount of debt relief to over $28 billion for 32 countries. Under the enhanced HIPC initiative, countries seeking debt relief must first carry out economic and social reforms under specified programs, at which point their eligibility is assessed at what is called the "decision point." The World Bank and IMF then determine what assistance is required to achieve the country's debt sustainability. The World Bank and IMF prepare detailed economic analyses for this purpose, including economic projections covering 20 years. To date, 27 poor countries have reached their decision points.

In June 2000, GAO reported that, although the enhanced HIPC initiative will provide significant debt relief to recipient countries, the initiative alone is not likely to provide recipients with lasting relief from their debt problems unless they achieve strong, sustained economic growth. [5] GAO's analysis indicated that World Bank and IMF assumptions about the growth of countries' export earnings may be optimistic for a variety of reasons, and failure to achieve the projected levels of growth could lead to recurring difficulties in repaying debt.

[1] The World Bank reports in Grants in IDA13, Summarizing the Options (March 2002) that the 50-percent grants proposal would result in $59 billion in lost repayments over 40 years. This $59 billion loss in debt repayments would result in an additional $41 billion loss in investment income to the World Bank.

[2] The World Bank and International Monetary Fund consider a country to be "debt sustainable" if the ratio of a country's debt (in present value terms) to the value of its exports is 150 percent or less, which they believe allows countries to make their future debt payments on time and without further debt relief.

[3] The articles of agreement for the World Bank and the IMF require the United States to deal with these organizations only through the Department of the Treasury.

[4] Efforts to relieve the debt burdens of poor countries have concentrated on the external debt of these countries. Thus, debt sustainability is defined in terms of repaying debt owed to external creditors, with export earnings considered an important source of revenue for repaying this debt.

[5] See United States General Accounting Office, Developing Countries: Debt Relief Initiative for Poor Countries Faces Challenges, GAO/ NSIAD-00-161 (Washington, D.C.: June 29, 2000).

(end text)

(Distributed by the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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