GAO-03-215R Debt Relief Enhancement Act

United States General Accounting Office

Washington, DC 20548

October 11, 2002

The Honorable Joseph R. Biden

United States Senate

The Honorable Rick Santorum

United States Senate

Subject: Benefits and Costs of the Debt Relief Enhancement Act of 2002

Despite years of effort to provide debt relief to the world’s poorest countries, these

countries’ debt problems still have not been resolved. In response to this situation,

you and other Members of Congress introduced Senate Bill 2210, the Debt Relief

Enhancement Act of 2002, to reduce these countries’ debt service payments to

manageable levels. The act proposes that no qualified country1 pay more than 10

percent of its revenue on external debt service or no more than 5 percent if the

country suffers a public health crisis. You asked us to evaluate the financial

implications of the Debt Relief Enhancement Act and compare the act with other

debt relief proposals. We provided your staff and other interested parties a formal

briefing on our findings on September 26, 2002. The briefing discussed prior debt

relief efforts and their limitations, provided information on additional Paris Club debt

relief, and compared three proposals to increase debt relief. A copy of our briefing is

attached.

In summary, we found that the Debt Relief Enhancement Act would immediately

lower the debt service of countries that qualify for relief. It would cost about $2.7

billion (present value) for 26 countries over the next 3 years and have no effect on

long-term debt sustainability. If applied over a 20-year period, the act’s provisions

would address the long-term debt sustainability of these countries. However, the

cost of the proposal would grow to between $7 billion and $12 billion (present value)

for those 26 countries. An alternative debt relief proposal, promoted by the Bush

administration, is to convert up to 50 percent of future multilateral concessional

loans to grants.2

 This proposal does not address the short-term debt service

 1

Qualified countries are those that are eligible to receive debt relief under the Heavily Indebted Poor

Countries Initiative. Countries are eligible if existing means are not enough to make debt levels

sustainable and creditors are willing to finance the additional relief. In making this determination, the

World Bank decides whether (in most cases) the ratio of a country’s debt (in present value terms) to

the value of its exports is more than 150 percent.

2

See U.S. General Accounting Office, Developing Countries: Switching Some Multilateral Loans to

Grants Lessens Poor Country Debt Burdens, GAO-02-593 (Washington, D.C.: Apr. 19, 2002).
2 GAO-03-215R Debt Relief Enhancement Act

obligations of these countries. However, it substantially improves their prospects of

achieving long-term debt sustainability. We estimate that the cost of implementing

this proposal by the World Bank would be about $9.7 billion (present value) over 40

years and would lower the debt burdens of all 65 countries that are eligible to borrow

only from the World Bank’s concessional resources.

In reviewing the cost of the Debt Relief Enhancement Act, we focused on the 26

countries in the Heavily Indebted Poor Countries Initiative that have qualified for

debt relief as of July 2002. The primary data for our analysis were the World Bank’s

and the International Monetary Fund’s (IMF) country-specific economic forecasts

and debt service projections for these 26 countries. Specifically, we compared the

annual debt service that the countries would pay if the act’s provisions were

implemented with their projected debt service if the act were not implemented. We

conducted this analysis for two time periods: the 3 years covered by the act and the

20 years covering the repayment period of more than 80 percent of the countries’

existing debt stock. The cost of converting 50 percent of multilateral loans to grants

was based on our prior analysis of that proposal, which calculated a 40-year cost

horizon for the countries that are eligible to borrow concessional resources from the

World Bank. The 40-year cost horizon is consistent with the time period covered by

the World Bank’s analysis.

We performed our work from August 2002 through September 2002 in accordance

with generally accepted government auditing standards.

- - - - -

We are sending copies of this report to appropriate congressional committees and to

the Honorable Paul O’Neill, Secretary of the Treasury. We are also sending copies to

the World Bank and the IMF. Copies will be made available to others on request. In

addition, this report will be available at no charge on our Web site at

http://www.gao.gov.

If you or your staff have questions about this report, please contact me at (202) 512-

8979. Thomas Melito, Anthony Moran, Bruce Kutnick, R.G. Steinman, Ming Chen,

Stephanie Robinson, and Janey Cohen made key contributions to this report.

Sincerely yours,

Joseph A. Christoff

Director, International Affairs and Trade

Enclosure
Page 3 GAO-03-215R Debt Relief Enhancement Act

1

The Financial Challenge of Debt

Relief

Briefing for Senate Staff

September 26, 2002
Page 4 GAO-03-215R Debt Relief Enhancement Act

2

Overview

• Background on Debt Relief

• Limitations of the Enhanced HIPC Initiative

• Additional Paris Club Debt Relief

• Proposals to Further Enhance Debt Relief

• Summary
Page 5 GAO-03-215R Debt Relief Enhancement Act

3

Background:

The Scope of the Debt Problem

• 42 countries identified as heavily indebted and poor, 3⁄4 of which are

in sub-Saharan Africa

• In 1998, the debt service-to-revenue burden for 26 of these HIPC

countries averaged 27 percent

• In 2002, the debt service-to-revenue burden for these 26 countries

averaged 14 percent

• HIPC countries will still need large amounts of development

assistance following debt relief, including substantial loans from

multilaterals
Page 6 GAO-03-215R Debt Relief Enhancement Act

4

Background:

What Has Been Done to Address the Debt Problem?

• Bilateral Debt Forgiveness

• Despite efforts of bilateral and commercial creditors to reduce

debt of poor countries, total debt owed to external creditors

increased by about $100 billion between mid-80s and mid-90s

• HIPC Initiative

• Coordinated effort among bilateral and multilateral creditors

provided over $7 billion in debt relief through a 2-stage process

• Enhanced HIPC Initiative

• Intends to provide an additional $29 billion in deeper, broader,

faster debt relief with central focus on reducing poverty in

HIPC countries
Page 7 GAO-03-215R Debt Relief Enhancement Act

5

Limitations of the Enhanced HIPC Initiative

• Enhanced HIPC is not fully funded

• GAO estimates the World Bank’s unfunded liability at $4.4 billion (present value) for assistance under the

Enhanced HIPC Initiative

• Enhanced HIPC assumes overly optimistic growth

rates

• Projects future export growth rates will be approximately double historical rates

• Recent World Bank analysis acknowledges lower actual growth rates for both exports and government revenue

• Recent “topping up” infusions due to lower growth
Page 8 GAO-03-215R Debt Relief Enhancement Act

6

Additional Paris Club Debt Relief

• Bilateral donors have agreed to provide about $5 billion

in additional debt relief, beyond their commitments to

finance the HIPC initiative

• Most bilateral donors are providing 100 percent

forgiveness on concessional and pre-debt relief

nonconcessional loans

• This will increase the proportion of total debt held by

multilateral institutions, thereby potentially increasing

the cost of additional debt relief to the United States
Page 9 GAO-03-215R Debt Relief Enhancement Act

7

Comparison of Proposals to Further

Enhance Debt Relief

Biden/Santorum 100 percent 

multilateral 

forgiveness 

Switching 50-

percent loans to 

grants 

Impact time frame 2003-05 Near term MediumLong-term 

Effect on debt 

service 

Lowers immediately Lowers immediately No impact until 

second decade 

Effect on longterm debt 

sustainability 

No effect if for only 

3 years 

Delays, but does not 

preclude future debt 

sustainability problems 

Probability for 

debt sustainability 

improved 

Cost profile Short run Short run Gradual/long run 

$2.7 billion for 26 

countries (3 years) 

Total cost 

(NPV) 

$7-12 billion for 26 

countries (20 years)

$14 billion for 26 

countries 

$9.7 billion for 65 

IDA-only 

countries 
Page 10 GAO-03-215R Debt Relief Enhancement Act

8

The Biden-Santorum Bill

• Uses debt service as criteria; proposes that no qualified country pay more

than 10 percent of its revenue on external debt service; 5 percent if the

country suffers a public health crisis

• Proposal would be costly during its 3-year window

• 20 of 26 HIPCs are likely to fall in 5 percent category because of

health crises in those countries

• Cost of proposal over 3 years is about $3.4 billion before additional

Paris Club debt relief and about $2.7 billion after, in addition to

existing HIPC funding requirements

• Applying the Bill’s criteria over a 20-year horizon escalates the cost

• Cost would range from $7-12 billion for 26 countries depending on

how the proposal is implemented and future country growth rates
Page 11 GAO-03-215R Debt Relief Enhancement Act

9

Present Value Cost of Biden-Santorum Bill

(26 countries)

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

After Enhanced HIPC Debt

Relief

After additional Paris Club

Debt Relief

Millions of dollars

Bilateral

Multilateral

$3,410

$2,750
Page 12 GAO-03-215R Debt Relief Enhancement Act

10

Sharing the Burden: Cost of Biden-Santorum

Bill by Type of Creditor* (26 countries)

Present Value Cost of Biden-Santorum 

Bill by Creditor Type, 2003-2022 

(lower estimate)

$4,660 

million 

(U.S. share 

is approx. 

$930 

million)

$2,465

million

Multilateral

Bilateral

*After additional Paris Club debt relief

Total $2,750 million

Total $7,125 million

Present Value Cost of Biden-Santorum Bill 

by Creditor Type, 2003-2005 

$1,800 million

(U.S. share 

approx. $360 

million)

$950 million

Multilateral

Bilateral
Page 13 GAO-03-215R Debt Relief Enhancement Act

11

Multilateral Debt Forgiveness

• NGOs and others have recommended that multilateral organizations

forgive 100 percent of old debts owed by poor countries, as many bilateral

creditors have done

• Cost would be about $14 billion for 26 HIPCs

• Significantly reduces current multilateral resources available for new

lending; bilateral donors, including U.S., may be expected to fund shortfall

• Long-term debt sustainability concerns remain as countries accumulate

substantial new debt after forgiveness, with debt burdens once again

becoming unsustainable
Page 14 GAO-03-215R Debt Relief Enhancement Act

12

Loans-to-Grants Proposal

• Medium- to long-term approach to debt sustainability

• President’s proposal was to replace 50 percent of future multilateral loans

with grants

• 18-21 percent grants for World Bank (IDA) ultimately agreed upon

• GAO estimates the cost of 20 percent grants at $3.9 billion in present

value 2002 dollars

• Increased grants improves debt sustainability by lowering future debt-toexport ratios from what they would otherwise be, but does not address

short-term debt service burden

• Promotes long-term debt sustainability better than 100 percent forgiveness

of old multilateral debt
Page 15 GAO-03-215R Debt Relief Enhancement Act

(320150)

13

Summary

• Current debt relief efforts are insufficient to provide longterm debt sustainability

• Immediate efforts to increase debt relief result in substantial

short-term budget costs, and don’t address long-term problem

• U.S. share of costs likely to be significant, given the growing proportion of total debt belonging to multilaterals

• Long-term debt relief efforts easier to finance, but do not

address short-term debt service burden