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Is debt sustainable in the post-HIPC era? A literature review

Research reports

Written by Shakira Mustapha, Annalisa Prizzon

To date, the HIPC Initiative and MDRI are nearly completed with the IMF and World Bank closing the scheme to new entrants in 2011. These initiatives were intended to provide HIPCs with the opportunity for a fresh start, however the question of whether the benefits from debt relief can be preserved has become preeminent. The issue of long-term debt sustainability is critical, especially as debt relief is generally designed as a onetime intervention to minimise moral hazard issues (i.e. irresponsible lending and/or borrowing due to the expectations of regular bail-outs). 

This repprt (i) reviews the most recent literature (since 2006) analysing external and public debt dynamics for countries that have completed the HIPC initiative and MDRI, (ii) maps past trends and projections of debt ratios for HIPC and MDRI countries – both concessional and non-concessional when applicable – analysing how much debt is being accumulated, and (iii) discusses major threatsa to debt sustainability in he coming years.

A key message emerging from the literature review is that while debt burdens of post-completion point countries have declined dramatically and macroeconomic fundamentals improved for most post-completion point HIPCs, structural vulnerabilities and potentially new threats may undermine the long-term debt sustainability of newly accumulated debt in some economies.

Shakira Mustapha and Annalisa Prizon