Testimony 

Before the Subcommittee on Domestic 

and International Monetary Policy, Trade, 

and Technology, Committee on Financial 

Services, House of Representatives

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 2:30 p.m. EDT 

Tuesday, April 20, 2004 DEVELOPING COUNTRIES

Challenges in Financing 

Poor Countries’ Economic 

Growth and Debt Relief 

Targets 

Statement of Mr. Thomas Melito 

Acting Director 

International Affairs and Trade 

GAO-04-688T 
www.gao.gov/cgi-bin/getrpt?GAO-04-688T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Thomas Melito 

at (202) 512-9601, or e-mail 

Melitot@gao.gov. 

Highlights of GAO-04-688T, a testimony 

before the Subcommittee on Domestic 

and International Monetary Policy, Trade, 

and Technology, Committee on Financial 

Services, House of Representatives 

April 20, 2004

DEVELOPING COUNTRIES 

Challenges in Financing Poor Countries' 

Economic Growth and Debt Relief 

Targets 

The three key multilateral development banks we analyzed face a funding

shortfall of $7.8 billion in 2003 present value terms, or 54 percent of their 

total commitment, under the existing HIPC Initiative. The World Bank 

has the most significant shortfall-–$6 billion. The African Development 

Bank has a gap of about $1.2 billion. Neither has determined how it 

would close this gap. The Inter-American Development Bank is fully 

funding its HIPC obligation by reducing its future lending resources to 

poor countries by $600 million beginning in 2009. We estimate that the 

cost to the United States, based on its rate of contribution to these banks, 

could be an additional $1.8 billion. However, the total estimated funding 

gap is understated because (1) the World Bank does not include costs for 

four countries for which data are unreliable and (2) all three banks do 

not include estimates for additional relief that may be required because 

countries’ economies deteriorated after they qualified for debt relief. 

Even if the $7.8 billion gap is fully financed, we estimate that the 27 

countries that have qualified for debt relief may need an additional $375 

billion to help them achieve their economic growth and debt relief 

targets by 2020. This $375 billion consists of $153 billion in expected 

development assistance, $215 billion to cover lower export earnings, and 

at least $8 billion in debt relief. Most countries are likely to experience 

higher debt burdens and lower export earnings than the World Bank and 

IMF project, leading to an estimated $215 billion shortfall over 18 years. 

To reach debt targets, we estimate that countries will need between $8 

billion and $20 billion, depending on the strategy chosen. Under these 

strategies, multilateral creditors switch a portion of their loans to grants 

and/or donors pay countries’ debt service that exceeds 5 percent of 

government revenue. Based on its historical share of donor assistance, 

the United States may be called upon to contribute about 14 percent of 

this $375 billion, or approximately $52 billion over 18 years. 

_________________________________________________________________ 

Estimated Cost to Achieve Economic Growth and Debt Relief Targets for 27 Countries 

through 2020 in 2003 Present Value Terms 

The Heavily Indebted Poor 

Countries (HIPC) Initiative, 

established in 1996, is a bilateral 

and multilateral effort to provide 

debt relief to poor countries to help 

them achieve economic growth and 

debt sustainability. Multilateral 

creditors are having difficulty 

financing their share of the 

initiative, even with assistance 

from donors. Under the existing 

initiative, many countries are 

unlikely to achieve their debt relief 

targets, primarily because their 

export earnings are likely to be 

significantly less than projected by 

the World Bank and International 

Monetary Fund (IMF). 

In a recently issued report, GAO 

assessed (1) the projected 

multilateral development banks’ 

funding shortfall for the existing 

initiative and (2) the amount of 

funding, including development 

assistance, needed to help 

countries achieve economic growth 

and debt relief targets. 

______________________________ 

The Treasury, World Bank, and 

African Development Bank 

commented that historical export 

growth rates are not good 

predictors of the future because 

significant structural changes are 

under way in many countries that 

could lead to greater growth. We 

consider these historical rates to be 

a more realistic gauge of future 

growth because of these countries’ 

reliance on highly volatile primary 

commodities and other 

vulnerabilities such as HIV/AIDS. 
Page 1 GAO-04-688T Debt Relief 

Mr. Chairman and Members of the Committee: 

I am pleased to be here today to discuss the funding of the existing Heavily 

Indebted Poor Countries (HIPC) Initiative and the amount of further 

assistance needed to help countries achieve economic growth and debt 

targets. 

The HIPC Initiative is a joint bilateral and multilateral effort to provide 

debt relief to up to 42 poor countries to help them achieve long-term 

economic growth and debt sustainability.1

 The current cost for the 

initiative is projected at about $41 billion in present value terms, funded 

almost equally between bilateral and multilateral creditors.2

 Although the 

initiative was launched in 1996, multilateral creditors are still having 

difficulty financing their share of the initiative, even with assistance from 

donors. GAO and others have reported that the existing initiative is 

unlikely to provide sufficient debt relief to achieve long-term debt 

sustainability, primarily because export earnings are likely to be 

significantly less than projected by the World Bank and the International 

Monetary Fund (IMF). 

My remarks will focus on two key areas, as discussed in our recently 

released report:3

 (1) the multilateral development banks’ (MDB) projected 

funding shortfall for the existing HIPC Initiative and (2) the amount of 

funding, including development assistance, needed to help countries 

achieve economic growth and debt relief targets. I will highlight the key 

financing challenges in these two areas. 

 1

Under the HIPC Initiative a country is considered to be “debt sustainable” if, in most cases, 

the ratio of a country’s debt (in present value terms) to the value of its exports is at or 

below the150-percent threshold, which is believed to contribute to countries’ ability to 

make their future debt payments on time and without further debt relief. 

2

All figures in this statement are stated in 2003 present value terms, unless otherwise noted. 

The present value of debt is a measure that takes into account the concessional, or below 

market, terms that underlie most of these countries’ loans. The present value is defined as 

the sum of all future debt-service obligations (interest and principal) on existing debt, 

discounted at the market interest rate. The nominal value of the debt is greater than the 

present value. The cost estimate is for 34 countries, because 4 countries are not likely to 

need relief under the initiative and data for 4 other countries are considered unreliable. 

3

U.S. General Accounting Office, Developing Countries: Achieving Poor Countries’ 

Economic Growth and Debt Relief Targets Faces Significant Financing Challenges, 

GAO-04-405 (Washington, D.C.: Apr. 14, 2004). 
Page 2 GAO-04-688T Debt Relief 

Our analysis of the funding shortfall focused on the three key MDBs—the 

World Bank/International Development Association (IDA), the African 

Development Bank (AfDB)/African Development Fund (AfDF), and the 

Inter-American Development Bank (IaDB)/Fund for Special Operations 

(FSO)—because they account for about 70 percent of multilateral 

creditors’ debt relief costs. To determine the amount and timing of funding 

shortfalls, we analyzed the banks’ total and annual cost estimates and 

funding sources for 34 countries. To determine the amount of funding 

needed to achieve economic growth and debt relief targets, we analyzed 

World Bank and IMF projections through 2020 for the 27 countries that 

have qualified for debt relief thus far, focusing on estimates of key 

economic variables including debt stock, debt service, donor assistance, 

government revenue, and exports. In addition, we analyzed the impact of 

fluctuations in export growth on the likelihood of these countries 

achieving debt sustainability. We performed our work from June 2003 to 

February 2004 in accordance with generally accepted government auditing 

standards. 

The three key MDBs we analyzed face a funding shortfall of $7.8 billion in 

present value terms, or 54 percent of their total commitment, under the 

debt relief initiative. The World Bank and the AfDB have not determined 

how they would close this gap. The World Bank has the most significant 

shortfall—$6 billion. Despite significant assistance from donor 

governments, the AfDB has a financing gap of about $1.2 billion. The IaDB 

is fully funding its HIPC obligation by reducing its future lending resources 

to poor countries by $600 million beginning in 2009. Based on the rates at 

which the United States contributes to these three multilateral 

development banks, we estimate that the United States could be asked to 

contribute an additional $1.8 billion to close the known financing shortfall 

for debt relief. However, the total estimated funding gap is understated 

because the World Bank does not include costs for four countries that are 

eligible for debt relief but for which data are unreliable. In addition, all 

three banks do not include estimates for additional relief that may be 

provided due to deterioration in the countries’ economic circumstances 

since they qualified for debt relief under the existing initiative. The World 

Bank and the IMF project that this additional relief could cost from $877 

million to $2.3 billion. 

Even if donors fully fund the current initiative, we estimate that the 27 

countries that have qualified for debt relief may need more than $375 

billion, in present value terms, in additional assistance from donors to help 

them achieve their economic growth and debt relief targets by 2020. This 

Summary 
Page 3 GAO-04-688T Debt Relief 

$375 billion consists of $153 billion in expected development assistance, 

$215 billion in assistance to cover lower export earnings, and at least $8 

billion in relief to reach debt targets. Based on our analysis of World Bank 

and IMF projections, these countries will need $153 billion to help them 

achieve their economic growth projections and debt sustainability. 

However, we consider that amount to be an underestimate because it 

assumes that countries will achieve overly optimistic export growth rates. 

Under lower, more realistic historical export growth rates, 23 of the 27 

countries are likely to experience higher debt burdens and lower export 

earnings, leading to an estimated $215 billion shortfall over 18 years. In 

addition, we estimate that countries will need between $8 billion and $20 

billion in debt relief to achieve their debt targets, depending on the 

strategy chosen. Under these strategies, multilateral creditors switch a 

portion of their loans to grants and/or donors pay countries’ debt service 

that exceeds 5 percent of government revenue. Based on its historical 

share of bilateral and multilateral assistance, the United States may be 

asked to contribute about 14 percent of the $375 billion in additional 

assistance, or approximately $52 billion over 18 years. 

The World Bank and IMF have classified 42 countries as heavily indebted 

and poor; three quarters of these are in Africa. In 1996, creditors agreed to 

create the 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. 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 by more than doubling the estimated 

amount of debt relief and increasing the number of potentially eligible 

countries. A major goal of the HIPC Initiative is to provide recipient 

countries with a permanent exit from unsustainable debt burdens. To date, 

27 poor countries have reached their decision points, and 11 of these have 

reached their completion points.4

 In 1996, to help multilateral creditors 

meet the cost of the HIPC Initiative, the World Bank established a HIPC 

Trust Fund with contributions from member governments and some 

multilateral creditors. The HIPC Trust Fund has received about $3.4 billion 

(nominal) in bilateral pledges and contributions, including $750 million in 

pledges from the U.S. government. 

 4

The 11th country, Niger, reached its completion point just prior to the publication of our 

full report. Eligibility for the HIPC Initiative is scheduled to expire at the end of calendar 

year 2004. However, previous sunset dates have been extended. 

Background 
Page 4 GAO-04-688T Debt Relief 

The World Bank, AfDB, and IaDB face a combined financing shortfall of 

$7.8 billion in present value terms under the existing HIPC Initiative (see 

table 1). 

Table 1: Financing Challenges Facing Key Multilateral Creditors (U.S. dollars in 

2003 present value terms) 

Institution 

Estimated 

amount of 

debt relief 

(billions)

Financing

identified

(billions)

Estimated 

financing 

gap 

(billions) 

Estimated 

U.S. share of 

financing gap 

World Bank 

(34 countries)a

IDA 8.8

IBRD 0.7

Total 9.5

IDA 2.8

IBRD 0.7

Total 3.5

IDA 6.0 1.2 billion 

African 

Development Bank 

Group (32 

countries)b

3.5 2.3 1.2 Between 132 and 348 

million 

Inter-American 

Development Bank 

(4 countries)c

1.4 0.8 0.6d

 300 million 

Total 14.4 6.6 7.8 Between 1.6 and 1.8 

billion 

Source: GAO analysis of World Bank, African Development Bank Group, and Inter-American Development Bank data. 

Notes: 

IDA = International Development Association 

IBRD = International Bank for Reconstruction and Development 

a

Of the 42 countries potentially eligible for debt relief, 4 countries are not likely to need relief under the 

initiative. Of the remaining 38 countries, the World Bank does not include estimates for 4 countries 

whose data it considers unreliable. 

b

Of the 42 countries potentially eligible for debt relief, 34 countries are members of the AfDB. Of these 

34 countries, 2 countries are not likely to need relief under the initiative. 

c

Of the 42 countries potentially eligible for debt relief, only 4 countries are members of the IaDB. 

d

The IaDB’s estimated financing includes a reduction in future lending resources in the Fund for 

Special Operations, its concessional lending arm. 

Key Multilateral 

Development Banks 

Face Significant 

Challenges to 

Financing the 

Existing Initiative 
Page 5 GAO-04-688T Debt Relief 

Financing the enhanced HIPC Initiative remains a major challenge for the 

World Bank. The total cost of the enhanced HIPC Initiative to the World 

Bank for 34 countries is estimated at $9.5 billion. As of June 30, 2003, the 

World Bank had identified $3.5 billion in financing, resulting in a gap of 

about $6 billion (see table 1). Donor countries will be reviewing the 

financing gap during the IDA-14 replenishment discussions beginning in 

spring 2004.5

 If donor countries close the financing gap through future 

replenishments, we estimate that the U.S. government could be asked to 

contribute $1.2 billion,6

 which is based on its historical replenishment rate 

of 20 percent to IDA.7

Over 70 percent of the funds IDA has identified thus far come from 

transfers of IBRD’s net income to IDA. Although IBRD has not committed 

any of its net income for HIPC debt relief beyond 2005, we estimate that 

the financing gap of $6 billion could be reduced to about $3.5 billion, or by 

about 42 percent, if the net income transfers from the IBRD continue.8

Similarly, the U.S.’s potential share decreases by the same percentage, 

from $1.2 billion to about $700 million.9

 However, transferring more of 

IBRD’s net income to HIPC debt relief could come at the expense of other 

IBRD priorities. 

 5

Replenishment refers to periodic contributions by member countries that are agreed upon 

by the institution’s board of governors to fund concessional lending operations over a 

specified period of time, normally every 3 years. IDA’s next replenishment (the 14th) is 

expected to take effect in July 2005. 

6

Factors such as changes in the foreign exchange value of the U.S. dollar could 

substantially alter total costs. 

7

According to IDA’s Articles of Agreement, the Association shall review the adequacy of its 

resources and authorize an increase in members’ subscriptions. All decisions to increase 

members’ subscriptions are made by a two-thirds majority of the total voting power. No 

member is obligated to subscribe; however, not participating in an increase may affect a 

country’s voting power and influence in the Association. 

8

For this analysis, we assumed that IBRD’s net income transfers continue until 2021 at the 

maximum rate of $240 million per year beginning in 2006 and decline thereafter to cover all 

remaining scheduled HIPC relief though 2035. 

9

While the U.S. government is not legally obligated to help close the HIPC financing 

shortfall of the MDBs, the United States may have an implicit fiscal exposure, which is an 

implied commitment embedded in the government’s current policies or in the public’s 

expectations about the role of the government. See U.S. General Accounting Office, Fiscal 

Exposures: Improving the Budgetary Focus on Long-Term Costs and Uncertainties, 

GAO-03-213 (Washington, D.C.: Jan. 24, 2003) for a discussion of implicit exposures. 

The World Bank Has An 

Estimated Financing Gap 

of $6 Billion 
Page 6 GAO-04-688T Debt Relief 

The total cost of the enhanced HIPC Initiative to the AfDB for its 32 

member countries is estimated at about $3.5 billion (see table 1).10 As of 

September 2003, the AfDB has identified financing of approximately $2.3 

billion, including $2 billion from the HIPC Trust Fund and about $300 

million from its own resources. Thus, AfDB is faced with a financing 

shortfall of about $1.2 billion in present value terms. We estimate that 

AfDB will need about $400 million to cover its shortfall for its 23 eligible 

countries, as well as about $800 million for its 9 potentially eligible 

countries.11 In addition, we estimate that the U.S. share of the AfDB’s 

financing shortfall is between $132 and $348 million, depending on the 

method used to close the $1.2 billion shortfall. 

The IaDB expects to provide about $1.4 billion for HIPC debt relief to four 

countries—Bolivia, Guyana, Honduras, and Nicaragua. Most of the relief is 

for debt owed to the Fund for Special Operations (FSO), the concessional 

lending arm of the IaDB that provides financing to the bank’s poorer 

members. As of January 2004, the IaDB has identified financing for the full 

$1.4 billion, about $200 million from donor contributions through the HIPC 

Trust Fund and $1.2 billion through its own resources. Although the IaDB 

is able to cover its full participation in the HIPC Initiative, the institution 

faces about a $600 million reduction in the lending resources of its FSO 

lending program from 2009 through 2019 as a direct consequence of 

providing HIPC debt relief. According to IaDB officials, the FSO will not 

have enough money to lend from 2009 through 2013. To eliminate this 

shortfall, donor countries may be asked to provide the necessary funds 

through a future replenishment contribution.12 Assuming that donor 

countries agree to close the financing gap, we estimate that the U.S. 

government could be asked to contribute about $300 million so that the 

FSO can continue lending to poor countries after 2008. This estimate is 

 10Most of the debt of these countries is owed to the AfDF, the concessional lending arm of 

the bank. 

11According to the AfDB, the $800 million is likely to be an underestimate, given that most 

of the nine remaining countries are post-conflict countries that will require high levels of 

debt relief when the international community determines that they are ready to become 

eligible for HIPC debt relief. 

12According to the IaDB’s Articles of Agreement, the FSO shall be increased through 

additional contributions by a three-fourths majority of the total voting power of the 

member countries when the Board of Governors considers it advisable. No member, 

however, is obligated to contribute any part of such increase, although not contributing 

may affect a country’s voting power and influence in the Bank. 

AfDB Has a Financing Gap 

of at Least $1 Billion 

IaDB Expects to Finance 

HIPC Commitments at the 

Expense of Future Lending 
Page 7 GAO-04-688T Debt Relief 

based on the 50-percent rate at which the United States historically 

contributes to the FSO. 

The $7.8 billion shortfall for the three MDBs is understated for two 

reasons. First, the estimated financing shortfall for two institutions—IDA 

and the AfDB—is understated because the data for four likely recipient 

countries—Laos, Liberia, Somalia, and Sudan—are unreliable. The World 

Bank considers existing estimates of the countries’ total debt and 

outstanding arrears to be incomplete, subject to significant change, and it 

is uncertain when the countries will reach their decision points. Similarly, 

the estimated costs of debt relief for three of AfDB’s countries—Liberia, 

Somalia, and Sudan—are likely understated due to data reliability 

concerns. 

Second, the financing shortfall does not include any additional relief that 

may be provided to countries because their economies deteriorated since 

they originally qualified for debt relief. Under the enhanced HIPC 

Initiative, creditors and donors could provide countries with additional 

debt relief above the amounts agreed to at their decision points, referred 

to as “topping up.” This relief could be provided when external factors, 

such as movements in currency exchange rates or declines in commodity 

prices, cause countries’ economies to deteriorate, thereby affecting their 

ability to achieve debt sustainability. The World Bank and IMF project that 

seven to nine countries may be eligible for additional debt relief, and their 

preliminary estimates range from $877 million to about $2.3 billion, 

depending on whether additional bilateral relief is included or excluded 

from the calculation.13 The additional cost to the U.S. government could 

range from $106 million to $207 million for assistance to the World Bank 

and AfDB, based on the U.S. historical replenishment rates to these 

banks.14 Furthermore, the topping-up estimate considered only the 27 

 13Declines in discount rates and the U.S. dollar exchange rate since these preliminary cost 

estimates were calculated could further increase total costs. The World Bank and IMF 

estimate that the cost in the baseline scenario could rise to between $1.5 billion and $3.4 

billion, using lower exchange and discount rates prevailing as of June 30, 2003 (endDecember 2002 for those countries likely to reach completion point in 2003). 

14Using updated exchange and discount rates, the estimated additional cost to the U.S. 

government could range from $179 million to $316 million for assistance to the World Bank 

and AfDB. 

Financing Shortfall Is 

Understated 
Page 8 GAO-04-688T Debt Relief 

countries that have reached their decision or completion point; the 

estimate may rise as additional countries reach their decision points.15

Even if the $7.8 billion shortfall is fully financed, we estimate that, if 

exports grow slower than the World Bank and IMF project, the 27 

countries that have qualified for debt relief may need more than $375 

billion in additional assistance to help them achieve their economic 

growth and debt relief targets through 2020. This $375 billion consists of 

$153 billion in expected development assistance, $215 billion in assistance 

to fund shortfalls from lower export earnings, and at least $8 billion for 

debt relief (see fig. 1). If the United States decides to help fund the $375 

billion, we estimate it would cost approximately $52 billion over 18 years. 

Figure 1. Estimated Cost to Achieve Economic Growth and Debt Relief Targets for 

27 Countries through 2020 in 2003 Present Value Terms 

According to our analysis of World Bank and IMF projections, the 

expected level of development assistance for the 27 countries is $153 

billion through 2020. This estimate assumes that the countries will follow 

their World Bank and IMF development programs, including undertaking 

recommended reforms. It also assumes that countries achieve economic 

 15When IDA performed the analysis, 19 countries were between the decision and 

completion points, and 8 had reached their completion points for a total of 27 countries. 

Currently, 11 countries have reached their decision points, and 16 are between decision 

and completion points. 

Achieving Economic 

Growth and Debt 

Relief Targets 

Requires Substantial 

Financial Assistance 

Countries Projected to 

Receive Development 

Assistance through 2020 
Page 9 GAO-04-688T Debt Relief 

growth rates consistent with reducing poverty and maintaining long-term 

debt sustainability.16 These conditions will help countries meet their 

development objectives, including the Millennium Development Goals that 

world leaders committed to in 2000. These goals include reducing poverty, 

hunger, illiteracy, gender inequality, child and maternal mortality, disease, 

and environmental degradation. Another goal calls on rich countries to 

build stronger partnerships for development and to relieve debt, increase 

aid, and give poor countries fair access to their markets and technology. 

We estimate that 23 of the 27 HIPC countries will earn about $215 billion 

less from their exports than the World Bank and IMF project. The World 

Bank and IMF project that all 27 HIPC countries will become debt 

sustainable by 2020 because their exports are expected to grow at an 

average of 7.7 percent per year. However, as we have previously reported, 

the projected export growth rates are overly optimistic.17 We estimate that 

export earnings are more likely to grow at the historical annual average of 

3.1 percent per year—less than half the rate the World Bank and IMF 

project. Under lower, historical export growth rates, countries are likely to 

have lower export earnings and unsustainable debt levels (see table 2). We 

estimate the total amount of the potential export earnings shortfall over 

the 2003 to 2020 projection period to be $215 billion.18

 16Debt sustainability under the current HIPC standard is defined as a present value external 

debt stock-to-export ratio less than or equal to 150 percent. The World Bank and IMF 

established a different debt sustainability indicator for countries with very open 

economies. Because these countries have a large export base compared with other 

measures of debt servicing capacity, the fiscal criterion of present value debt-to-fiscal 

revenues (250 percent) is considered a more appropriate debt sustainability measure. The 

four countries that qualify under this criterion are Ghana, Guyana, Honduras, and Senegal. 

17U.S. General Accounting Office, Developing Countries: Status of the Heavily Indebted 

Poor Countries Debt Relief Initiative, GAO/NSIAD-98-229 (Washington, D.C.: Sept. 30, 

1998); Developing Countries: Debt Relief Initiative for Poor Countries Faces Challenges, 

GAO/NSIAD-00-161 (Washington, D.C.: June 29, 2000); Developing Countries: Switching 

Some Multilateral Loans to Grants Lessens Poor Country Debt Burdens, GAO-02-593

(Washington, D.C.: Apr. 19, 2002); and Developing Countries: Challenges Confronting Debt 

Relief and IMF Lending to Poor Countries, GAO-01-745T (Washington, D.C.: May 15, 

2001). 

18If future export growth rates exceed historical levels, the projected export earnings 

shortfall would be lower. We estimate that for every percentage point increase (decrease) 

in export growth rates from the historical average, the export earnings shortfall would 

decrease (increase) by about $35 billion. 

Countries Face a 

Substantial Financial 

Shortfall in Export 

Earnings 
Page 10 GAO-04-688T Debt Relief 

Table 2: World Bank/IMF and Historical Export Growth Rates, Debt-to-Export Ratios, and Export Earnings Shortfall 

Debt-to-export ratios in 2020 

(percentage) Export growth rates (percentage) 

 Under World 

Bank/IMF growth 

rate 

Under historical 

growth ratea

World Bank/IMF 

(projected)

Historical 

 (1981-2000) 

Export earnings 

shortfall (billions of 

dollars)

Benin 80.6 150.9 8.3 5.1 3.7 

Bolivia 122.5 225.7 7.6 4.0 13.6 

Burkina Faso 118.3 477.9 9.0 1.4 4.4 

Cameroon 71.1 228.5 6.3 -0.1 29.7 

Chad 119.5 137.0 11.9 7.9 8.2 

DRC 90.6 625.9 9.4 -3.2 21.8 

Ethiopia 75.5 199.0 8.0 2.9 11.7 

The Gambia 83.2 75.9 6.3 7.5 0.0

Ghana 94.5 81.1 6.6 8.0 0.0 

Guinea 90.3 217.2 6.6 1.7 8.7 

Guinea-Bissau 120.1 153.7 8.8 7.8 0.4 

Guyana 49.8 48.7 3.7 4.2 0.0 

Honduras 31.3 46.0 9.4 7.2 24.2 

Madagascar 79.0 111.0 7.7 6.0 5.9 

Malawi 121.6 132.5 4.8 4.3 0.4 

Mali 139.7 119.0 6.3 6.9 0.0 

Mauritania 82.9 236.1 6.3 1.3 3.9 

Mozambique 40.6 79.7 10.3 5.2 21.1 

Nicaragua 59.6 94.3 8.0 5.7 6.9 

Niger 137.5 643.2 7.0 -1.6 3.8 

Rwanda 131.6 1,403.7 10.7 -3.6 4.2 

São Tomé and 

Príncipe 

144.0 946.3 7.4 -4.2 0.4 

Senegal 56.9 98.7 6.0 3.0 11.2 

Sierra Leone 104.3 831.8 9.1 -3.4 2.9 

Tanzania 117.1 149.2 7.0 6.2 5.3 

Uganda 104.3 263.8 9.5 4.3 9.6 

Zambia 100.7 270.3 6.6 0.6 12.3 

Average 95.1 298.0 7.7 3.1 Total 214.5 

Source: GAO analysis of IMF and World Bank debt sustainability analyses. 

a

This analysis assumes countries incur no further debt as a result of their export earnings shortfall. 

Under this assumption, 12 countries are projected to be sustainable: Chad, The Gambia, Ghana, 

Guyana, Honduras, Madagascar, Malawi, Mali, Mozambique, Nicaragua, Senegal, and Tanzania. 
Page 11 GAO-04-688T Debt Relief 

High export growth rates are unlikely because HIPC countries rely heavily 

on primary commodities such as coffee, cotton, and copper for much of 

their export revenue. Historically, the prices of these commodities have 

fluctuated, often downward, resulting in lower export earnings and 

worsening debt indicators. A 2003 World Bank report found that the World 

Bank/IMF growth assumptions had been overly optimistic and 

recommended more realistic economic forecasts when assessing debt 

sustainability.19

Since HIPC countries are assumed to follow their World Bank and IMF 

reform programs, any export shortfalls are considered to be caused by 

factors outside their control such as weather and natural disasters, lack of 

access to foreign markets, or declining commodity prices. Although failure 

to follow the reform program could result in the reduction or suspension 

of development assistance, export shortfalls due to outside factors would 

not be expected to have this result. Therefore, if countries are to achieve 

economic growth rates consistent with their development goals, donors 

would need to fund the $215 billion shortfall. Without this additional 

assistance, countries would grow more slowly, resulting in reduced 

imports, lower gross domestic product (GDP), and lower government 

revenue. These conditions could undermine progress toward poverty 

reduction and other goals. 

Even if donors make up the export earnings shortfall, more than half of 

the 27 countries will experience unsustainable debt levels.20 We estimate 

that these countries will require $8.5 to $19.8 billion more to achieve debt 

sustainability and debt-service goals.21 After examining 40 strategies for 

providing debt relief, we narrowed our analysis to three specific strategies: 

(1) switching the minimum percentage of loans to grants for future 

multilateral development assistance for each country to achieve debt 

 19World Bank, Operation Evaluations Department, The Heavily Indebted Poor Countries 

Debt Initiative, An OED Review, February 20, 2003. 

20Under historical export growth rates, countries experience unsustainable debt levels. 

These debt levels can be reduced regardless of whether donors address the export earnings 

shortfall. However, if donors do not fund the export earnings shortfall, countries will likely 

experience significant reductions in economic growth. 

21This estimate assumes that donors fund the $215 billion export shortfall with grants only, 

as grants avoid the build up of new debt. 

Additional Assistance Will 

Lead to Debt Sustainability 

in Most Countries 
Page 12 GAO-04-688T Debt Relief 

sustainability,22 (2) paying debt service in excess of 5 percent of 

government revenue, and (3) combining strategies (1) and (2). We chose 

these strategies because they maximize the number of countries achieving 

debt sustainability while minimizing costs to donors.23 We found that, with 

this debt relief, as many as 25 countries could become debt sustainable24

and all countries would achieve a debt service-to-revenue ratio below 5 

percent over the entire 18-year projection period (see table 3). 

Table 3: Cost and Impact of Three Strategies for Providing Debt Relief to 27 Poor Countries 

 Strategy 

Cost of debt relief 

(billions of dollars)

Number of countries 

achieving debt 

sustainability in 2020 

Number of countries paying 

5 percent or less of revenue 

in debt service every year 

2003-2020

1. Switch the minimum percentage of loans to 

grants for each country to achieve debt 

sustainability 

$8.5 25 2

2. Pay debt service in excess of 5 percent of 

government revenue 

$12.6 12 27

3. Switch the minimum percentage of loans to 

grants and then pay debt service in excess of 

5 percent of revenue 

$19.8 25 27

Source: GAO analysis of World Bank and IMF data. 

In the first strategy, multilateral creditors switch the minimum percentage 

of loans to grants for each country to achieve debt sustainability in 2020. 

We estimate that the additional cost of this strategy would be $8.5 billion.25

The average percentage of loans switched to grants for all countries under 

 22Of the $153 billion in expected future development assistance, $75 billion is comprised of 

loans from the multilateral development banks. This strategy would switch the minimum 

amount of these loans to grants to achieve debt sustainability. Because these loans would 

raise a country’s debt to an unsustainable level under historical growth rates, we consider 

switching them to grants to be the equivalent of debt relief. 

23Our analysis assumes that under historical export growth rates, countries will have 

difficulty repaying their future debt burdens. As such, we did not take into account any 

reduction in future costs to bilateral donors that could arise if HIPCs were able to repay 

their multilateral loans. 

24Niger and Rwanda do not achieve debt sustainability, even with 100-percent grants, 

because their historical export growth rates are negative and their existing debt levels are 

high. 

25This cost represents loan receipts from 2003 to 2060 that are forgone after switching a 

percentage of new loans to grants. 
Page 13 GAO-04-688T Debt Relief 

this strategy would be 33.5 percent.26 Twelve countries are projected to be 

debt sustainable with no further assistance. In addition, 13 countries 

would achieve sustainability by switching between 2 percent (Benin) and 

96 percent (São Tomé and Príncipe) of new loans to grants. A total of 25 

countries could be debt sustainable by 2020, although only 2 countries 

would achieve the 5-percent debt service-to-revenue target over the entire 

period. 

The second strategy is aimed at reducing each country’s debt-service 

burden. Under this strategy, donors would provide assistance to cover 

annual debt service above 5 percent of government revenue. We estimate 

that this strategy would cost an additional $12.6 billion to achieve the goal 

of 5-percent debt service to revenue for all countries throughout the 

projection period. Under this strategy, no additional countries become 

debt sustainable other than the 12 that are already projected to be debt 

sustainable with no further assistance. While this strategy would free 

significant resources for poverty reduction expenditures, it could provide 

an incentive for countries to pursue irresponsible borrowing policies. By 

guaranteeing that no country would have to pay more than 5 percent of its 

revenue in debt service, this strategy would separate the amount of a 

country’s borrowing from the amount of its debt repayment. Consequently, 

it could encourage countries to borrow more than they are normally able 

to repay, increasing the cost to donors and reducing the resources 

available for other countries. 

The third strategy combines strategies 1 and 2 to achieve both debt 

sustainability and a lower debt-service burden. Under this strategy, 

multilateral creditors would first switch the minimum percentage of loans 

to grants to achieve debt sustainability, and then donors would pay debt 

service in excess of 5 percent of government revenue. We estimate that 

this strategy would cost an additional $19.8 billion, including $8.5 billion 

for switching loans to grants, and $11.3 billion for reducing debt service to 

5 percent of revenue. Under this strategy, 25 countries would achieve debt 

sustainability in 2020—that is, 13 countries in addition to the 12 that are 

projected to be debt sustainable with no further assistance. All 27 

countries would reach the 5-percent debt-service goal for the duration of 

 26The percentage of loans switched to grants necessary to achieve debt sustainability varies 

by country and results in different costs and impacts for each country. For a breakdown of 

costs and impact by country, see U.S. General Accounting Office, Developing Countries: 

Achieving Poor Countries’ Economic Growth and Debt Relief Targets Faces Significant 

Financing Challenges, GAO-04-405 (Washington, D.C.: Apr. 14, 2004). 
Page 14 GAO-04-688T Debt Relief 

the projection period. However, similar to the debt-service strategy above, 

this strategy dissociates borrowing from repayment and could encourage 

irresponsible borrowing policies. 

If the United States decides to help fund the $375 billion, we estimate that 

it could cost approximately $52 billion over 18 years, both in bilateral 

grants and in contributions to multilateral development banks. This 

amount consists of $24 billion, which represents the U.S. share of the $153 

billion in expected development assistance projected by the World Bank 

and IMF, as well as approximately $28 billion for the increased assistance 

to the 27 countries. Historically, the United States has been the largest 

contributor to the World Bank and IaDB, and the second largest 

contributor to the AfDB, providing between 11 and 50 percent of their 

funding. The U.S. share of bilateral assistance to the 27 countries we 

examined has historically been about 12 percent. 

We also analyzed the impact of fluctuations in export growth on the 

likelihood of these countries achieving debt sustainability. The export 

earnings of HIPC countries experience large year-to-year fluctuations due 

to their heavy reliance on primary commodities, as well as weather 

extremes, natural disasters, and other factors.27 We found that the higher a 

country’s export volatility, the lower its likelihood of achieving debt 

sustainability. For example, Honduras has low export volatility, resulting 

in little impact on its debt sustainability. In contrast, Rwanda has very high 

export volatility, which greatly lowers its probability of achieving debt 

sustainability. Since volatility in export earnings reduces countries’ 

likelihood of achieving debt sustainability, it is also likely to further 

increase donors’ cost as countries may require an even greater than 

expected level of debt relief to achieve debt sustainability. 

Mr. Chairman and Members of the Committee, this concludes my prepared 

statement. I will be happy to answer any questions you may have. 

 27While the previous analysis assumed constant export growth rates, consistent with the 

projections of the World Bank and IMF, the export earnings of HIPC countries are in fact 

highly volatile. 

Volatility in Export Earnings 

Likely to Further Increase the 

Cost of Achieving Debt 

Sustainability 
Page 15 GAO-04-688T Debt Relief 

For additional information about this testimony, please contact Thomas 

Melito, Acting Director, International Affairs and Trade, at (202) 512-9601 

or Cheryl Goodman, Assistant Director, International Affairs and Trade, at 

(202) 512-6571. Other individuals who made key contributions to this 

testimony included Bruce Kutnick, Barbara Shields, R.G. Steinman, Ming 

Chen, Robert Ball, and Lynn Cothern. 

Contacts and 

Acknowledgments 

(320272) 
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