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Report to Congressional Requesters:

April 2004:

DEVELOPING COUNTRIES:

Achieving Poor Countries' Economic Growth and Debt Relief Targets Faces 
Significant Financing Challenges:

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-405]:

GAO Highlights:

Highlights of GAO-04-405, a report to congressional requesters

Why GAO Did This Study:

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). 

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.

What GAO Found:

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 more than $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 12 percent of this $375 billion, or approximately $52 billion 
over 18 years. 

www.gao.gov/cgi-bin/getrpt?GAO-04-405.

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Joseph A. Christoff at (202) 512-8979, or 
e-mail Christoffj@gao.gov.

[End of section]

Contents:

Letter: 

Results in Brief: 

Background: 

Key Multilateral Development Banks Face Significant Challenges to 
Financing the Existing Initiative: 

Achieving Economic Growth and Debt Relief Targets Requires Substantial 
Financial Assistance: 

Agency Comments and Our Evaluation: 

Appendixes:

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Status of HIPCs and Their Membership in Three Multilateral 
Development Banks: 

Appendix III: Alternative Strategies for Providing Debt Relief to Poor 
Countries: 

Appendix IV: Costs and Impact of Various Strategies for Providing Debt 
Relief: 

Appendix V: How Volatility in Export Earnings Affects the Likelihood 
that Countries Will Achieve Debt Sustainability: 

Appendix VI: Comments from the Department of the Treasury: 

GAO Comments: 

Appendix VII: Comments from The World Bank: 

GAO Comments: 

Appendix VIII: Comments from the African Development Bank: 

GAO Comments: 

Appendix IX: Comments from the Inter-American Development Bank: 

Appendix X: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Acknowledgments: 

Tables: 

Table 1: Financing Challenges Facing Key Multilateral Creditors (U.S. 
dollars in 2003 present value terms): 

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

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

Table 4: Percentage of Loans Switched to Grants to Achieve Debt 
Sustainability: 

Table 5: Countries' Membership in Key Multilateral Development Banks: 

Table 6: Cost and Impact of Three Strategies for Providing Debt Relief 
to 27 Poor Countries (Grants and Loans Fill the Export Shortfall): 

Table 7: Cost and Impact of Switching a Constant Percentage of Loans to 
Grants: 

Table 8: Cost and Impact of Four Options Requested by Congress for 
Increasing Debt Relief to 27 Poor Countries: 

Table 9: Cost and Impact of Strategy 1: Switching the Minimum Percentage 
of Loans to Grants for Each Country to Achieve Debt Sustainability in 
2020: 

Table 10: Cost and Impact of Strategy 2: Paying Debt Service Over 5 
Percent of Government Revenue: 

Table 11: Cost and Impact of Strategy 3: Switching Loans to Grants to 
Maximize Debt Sustainability and Paying Debt Service in Excess of 5 
Percent of Government Revenue: 

Table 12: Likelihood of Achieving Debt Sustainability under Different 
Scenarios in 2020: 

Figures: 

Figure 1: Potential Cost of Topping-up Assistance by Creditor (millions 
of dollars): 

Figure 2: Estimated Cost to Achieve Economic Growth and Debt Relief 
Targets for 27 Countries through 2020 in 2003 Present Value Terms: 

Abbreviations: 

AfDB: African Development Bank:

AfDF: African Development Fund:

DSA: Debt Sustainability Analysis:

FSO: Fund for Special Operations:

HIPC: Heavily Indebted Poor Country:

IBRD: International Bank for Reconstruction and Development:

IDA: International Development Association:

IaDB: Inter-American Development Bank:

IMF: International Monetary Fund:

MDB: Multilateral Development Banks:

Letter April 14, 2004:

The Honorable Michael G. Oxley: 
Chairman: 
The Honorable Barney Frank: 
Ranking Minority Member: 
Committee on Financial Services: 
House of Representatives:

The Honorable Peter T. King: 
Chairman: 
The Honorable Carolyn B. Maloney: 
Ranking Minority Member: 
Subcommittee on Domestic and International Monetary Policy, Trade, and 
Technology: 
Committee on Financial Services: 
House of Representatives:

The Heavily Indebted Poor Countries (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.[Footnote 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.[Footnote 2] 
Although the initiative was launched in 1996, multilateral creditors 
are still having difficulty financing their share of the initiative, 
even with assistance from bilateral 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 
under the initiative.

You asked us to analyze financing issues concerning this initiative as 
well as options for providing additional relief to help countries 
achieve debt targets, including debt sustainability and lower debt 
service burdens. In response, we assessed (1) the multilateral 
development banks' projected funding shortfall for the HIPC Initiative 
and (2) the amount of funding, including development assistance, needed 
to help countries achieve economic growth and debt relief targets.

The three multilateral development banks (MDB) included in our scope 
are the World Bank/International Development Association (IDA), the 
African Development Bank (AfDB)/African Development Fund, and the 
Inter-American Development Bank (IaDB)/Fund for Special Operations 
(FSO). Together 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 International Monetary Fund (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. We projected these countries' debt ratios over an 
18-year period, examining the impact of realistic export growth rates, 
various percentages of grants, and varying amounts of debt service 
assistance. In addition, we analyzed the impact of fluctuations in 
export growth on the likelihood that these countries will achieve debt 
sustainability. We performed our work from June 2003 to February 2004 
in accordance with generally accepted government auditing standards. 
(See app. I for the details of our scope and methodology and app. II 
for the status of each country.):

Results in Brief:

The three key multilateral development banks we analyzed face a funding 
shortfall of $7.8 billion in present value terms, or 54 percent of 
their total commitment, under the existing HIPC Initiative. The World 
Bank and the AfDB have not determined how they would close this gap. 
The World Bank has by far the most significant shortfall--$6 billion. 
Despite significant assistance from donor governments, the African 
Development Bank 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 additional assistance from donors to help them achieve 
their economic growth and debt relief targets by 2020 in present value 
terms. This $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. According to 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 this $375 
billion, or approximately $52 billion over 18 years.

We received written comments on a draft of this report from Treasury, 
World Bank, AfDB, and IaDB. IaDB agreed with our report. The three 
other organizations said that historical export growth rates are not 
good predictors of the future because significant structural changes 
are underway 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.

Background:

The World Bank and IMF have classified 42 countries as heavily indebted 
and poor; three quarters of these are in subSaharan 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.[Footnote 3] 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.

Under the enhanced HIPC Initiative, countries seeking debt relief must 
first carry out economic and social reforms under specified programs. 
At a country's decision point, the World Bank and the IMF assess the 
country's eligibility to receive debt relief under the initiative. At 
the completion point, the World Bank and the IMF assess whether the 
country has continued to implement sound economic policies and is 
eligible to receive full debt relief. To determine the amount of 
assistance that is required for each country to achieve debt 
sustainability, the World Bank and the IMF prepare detailed economic 
analyses called debt sustainability analyses (DSA), which include 
economic projections covering 20 years. To date, 27 poor countries have 
reached their decision points, and 10 of these have reached completion 
points.[Footnote 4] (See app. II for the status of each country.):

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. The United States has already paid $600 
million of this total.

Key Multilateral Development Banks Face Significant Challenges to 
Financing the Existing Initiative:

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: World Bank; (34 countries)[A]; 
Estimated amount of debt relief (billion): IDA 8.8; IBRD 0.7; Total 
9.5; 
Financing identified (billion): IDA 2.8; IBRD 0.7; Total 3.5; 
Estimated: financing gap (billion): IDA 6.0; 
Estimated U.S. share of financing gap: 1.2 billion.

Institution: African Development Bank Group (32 countries)[B]; 
Estimated amount of debt relief (billion): 3.5; 
Financing identified (billion): 2.3; 
Estimated: financing gap (billion): 1.2; 
Estimated U.S. share of financing gap: Between 132 and 348 million.

Institution: Inter-American Development Bank (4 countries)[C]; 
Estimated amount of debt relief (billion): 1.4; 
Financing identified (billion): 0.8; 
Estimated: financing gap (billion): 0.6[D]; 
Estimated U.S. share of financing gap: 300 million.

Total; 
Estimated amount of debt relief (billion): 14.4; 
Financing identified (billion): 6.6; 
Estimated: financing gap (billion): 7.8; 
Estimated U.S. share of financing gap: Between 1.6 and 1.8 billion. 

Source: GAO analysis of World Bank, African Development Bank Group, and 
IaDB 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.

The World Bank's share of the shortfall is $6 billion, which it will 
begin addressing in spring 2004. The AfDB needs to secure at least $1.2 
billion in additional funding. The IaDB expects to finance its $600 
million shortfall by reducing future lending to poor 
countries.[Footnote 5] Bilateral donors may be asked to contribute 
additional funds under the existing initiative; the United States may 
be called on to contribute an additional $1.8 billion.[Footnote 6] 
However, the total projected funding gap of $7.8 billion is understated 
because the World Bank estimate does not include the costs for four 
countries that are eligible for debt relief but for which data are 
unreliable. In addition, the estimates of all three banks do not 
account for any additional relief that may be provided to countries 
because their economies deteriorated since they qualified for debt 
relief.

The World Bank Has An Estimated Financing Gap of $6 Billion:

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. About $8.8 
billion of this debt relief cost is for the highly concessional loans 
made by IDA, which provides financing to the World Bank's poorest 
member countries. The remaining $700 million in debt relief is for 
loans made by the International Bank for Reconstruction and Development 
(IBRD), which provides market-based loans to the World Bank's middle-
income member countries.[Footnote 7] 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.):

To cover this gap, we estimate that IDA's financing needs beginning in 
2006 for 34 HIPCs will be about $584 million on average per year 
through 2020.[Footnote 8] In 2002, donor countries agreed to review the 
financing gap during the IDA-14 replenishment discussions beginning in 
spring 2004.[Footnote 9] 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, which is based on its 
historical replenishment rate of 20 percent to IDA.[Footnote 10]

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.[Footnote 11] Similarly, the U.S.'s potential share 
decreases by the same percentage, from $1.2 billion to about $700 
million.[Footnote 12] However, transferring more of IBRD's net income 
to HIPC debt relief could come at the expense of other IBRD priorities. 
For example, a portion of its net income is retained annually to ensure 
IBRD's financial integrity. IBRD has also provided substantial 
resources to IDA for its new lending, representing about 24 percent of 
its net income over the last 5 years. Moreover, countries that borrow 
from IBRD have also benefited because this net income provides partial 
waivers of the interest and commitment fees IBRD charges on its loans.

AfDB Has a Financing Gap of at Least $1 Billion:

The total cost of debt relief to the AfDB for its 32 member countries 
is estimated at about $3.5 billion (see table 1).[Footnote 13] 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.

Taking into account the total funds the AfDB has identified thus far 
from the HIPC Trust Fund, its internal resources, and its annual cash 
flow projections, AfDB estimates that it would have sufficient funds to 
cover its share of HIPC commitment to its 23 current decision and 
completion point countries up to 2007.[Footnote 14] 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.[Footnote 15]

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. First, assuming that the United States 
contributes at its historical replenishment rate of 11 percent, we 
estimate the U.S. share of AfDB's financing shortfall could be at least 
$132 million.[Footnote 16] However, as of October 2002, the United 
States had contributed or pledged approximately 29 percent of the 
bilateral donors' resources committed to the HIPC Trust Fund. Under 
that contribution rate, the U.S. share of the AfDB's financing 
shortfall would be about $348 million.

IaDB Expects to Finance HIPC Commitments at the Expense of Future 
Lending:

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 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 lending 
resources in its FSO lending program for the years 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 
for the years 2009 through 2013. To eliminate this shortfall, donor 
countries may be asked to provide the necessary funds through a future 
replenishment contribution.[Footnote 17] 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 based 
on the 50-percent rate at which the U.S. historically contributes to 
the FSO.

Financing Shortfall Is Understated:

The $7.8 billion shortfall for the three MDBs is understated for two 
reasons. First, data for four eligible countries are unreliable. 
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. The World Bank and IMF 
estimate that this additional relief could range from $877 million to 
$2.3 billion.

Four Countries' Data Are Unreliable:

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.

Additional Relief at Countries' Completion Points Poses Additional 
Costs to MDBs and Donor Governments:

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.[Footnote 18] Our 
estimate of the likely funding shortfalls confronting the MDBs, 
discussed above, does not account for this potential additional debt 
relief. The World Bank and IMF made a preliminary estimate that this 
additional relief could cost from $877 million to about $2.3 billion, 
depending on whether additional bilateral relief is included or 
excluded from the calculation. (See fig. 1.):

Figure 1: Potential Cost of Topping-up Assistance by Creditor (millions 
of dollars):

[See PDF for image]

Note: The Paris Club is a group of bilateral creditor countries that 
meets to negotiate sovereign debt rescheduling and debt relief. 
Commercial creditors' costs are grouped with other bilaterals and 
account for about 10 percent of this subgroup's costs.

[End of figure]

Furthermore, the topping-up estimate considered only the 27 countries 
that have reached their decision or completion point; the estimate may 
rise as additional countries reach their decision points.

Donor countries currently disagree on whether bilateral debt relief 
provided outside the HIPC framework should be counted as part of the 
debt relief needed for countries to achieve their debt sustainability 
targets. Donors that support including additional bilateral relief in 
topping-up calculations would benefit through lower additional costs. 
For instance, most Paris Club countries would not have additional costs 
for relieving their bilateral debt because they have already pledged 
100-percent debt relief,[Footnote 19] but they could be asked to fund 
the multilateral creditors' debt relief. In contrast, if additional 
bilateral relief were excluded from topping-up calculations, creditors' 
HIPC costs would increase substantially. In this case, Paris Club 
creditors would be faced with higher HIPC bilateral costs, as well as 
potential contributions to cover higher multilateral creditors' costs. 
Donors that support this method intend to provide HIPCs with a cushion 
against external shocks by ensuring that additional bilateral relief 
results in debt ratios below the targets.

Using the lower cost methodology and limiting the analysis to the 
countries that have qualified but have yet to receive final debt 
relief,[Footnote 20] the World Bank and the IMF project that at their 
completion points seven countries would exceed the debt-to-export ratio 
calculated at their decision points.[Footnote 21] In addition, if the 
lower cost methodology were to consider countries that have already 
reached their completion points and received topping up, the total 
estimate would increase to about $877 million. The World Bank's share 
would be $459 million, and the AfDB's share would be $127 million. (See 
fig. 1.):

If the additional bilateral relief is excluded from the topping up 
calculation, as some donor countries advocate, the amount of additional 
debt relief increases from $877 million to $2.3 billion, including the 
cost for countries that have already reached their completion 
points.[Footnote 22] Under this methodology, the cost to the World Bank 
and AfDB for topping-up would approximately double.[Footnote 23] (See 
fig. 1.) Depending on the method used to calculate topping up, 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.[Footnote 24]

Achieving Economic Growth and Debt Relief Targets Requires Substantial 
Financial Assistance:

Even if the $7.4 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. 2). If the United States decides 
to help fund the $375 billion, we estimate it would cost approximately 
$52 billion over 18 years.

Figure 2: Estimated Cost to Achieve Economic Growth and Debt Relief 
Targets for 27 Countries through 2020 in 2003 Present Value Terms:

[See PDF for image]

[End of figure]

Countries Projected to Receive Development Assistance through 2020:

According to our analysis of World Bank and IMF projections, bilateral 
donors and multilateral creditors are expected to provide $153 billion 
in development assistance to 27 HIPCs from 2003 to 2020. These 
estimates assume that the countries will follow their World Bank and 
IMF development programs, including undertaking recommended reforms and 
achieving economic growth rates consistent with reducing poverty and 
maintaining long-term debt sustainability.[Footnote 25] 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.

Countries Face a Substantial Financial Shortfall in Export Earnings:

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 if their exports grow at an average of 7.7 
percent each year, they receive debt relief under the HIPC Initiative, 
and donors provide their expected assistance. However, as we have 
previously reported, the projected export growth rates are overly 
optimistic.[Footnote 26] We estimate that export earnings are more 
likely to grow at the historical annual average of 3.1 percent--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.[Footnote 
27]

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

Benin; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/IMF growth rate: 80.6; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 150.9; 
Export growth rates (percentage): World Bank/IMF (projected): 8.3; 
Export growth rates (percentage): Historical (1981-2000): 5.1; 
Export earnings shortfall (billions of dollars): $3.7.

Bolivia; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/ IMF growth rate: 122.5; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 225.7; 
Export growth rates (percentage): World Bank/IMF (projected): 7.6; 
Export growth rates (percentage): Historical (1981-2000): 4.0; 
Export earnings shortfall (billions of dollars): $13.6.

Burkina Faso; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/IMF growth rate: 118.3; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 477.9; 
Export growth rates (percentage): World Bank/IMF (projected): 9.0; 
Export growth rates (percentage): Historical (1981-2000): 1.4; 
Export earnings shortfall (billions of dollars): $4.4.

Cameroon; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/ IMF growth rate: 71.1; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 228.5; 
Export growth rates (percentage): World Bank/IMF (projected): 6.3; 
Export growth rates (percentage): Historical (1981-2000): -0.1; 
Export earnings shortfall (billions of dollars): $29.7.

Chad; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/IMF growth rate: 119.5; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 137.0; 
Export growth rates (percentage): World Bank/IMF (projected): 11.9; 
Export growth rates (percentage): Historical (1981-2000): 7.9; 
Export earnings shortfall (billions of dollars): $8.2.

DRC; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/IMF growth rate: 90.6; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 625.9; 
Export growth rates (percentage): World Bank/IMF (projected): 9.4; 
Export growth rates (percentage): Historical (1981-2000): -3.2; 
Export earnings shortfall (billions of dollars): $21.8.

Ethiopia; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/ IMF growth rate: 75.5; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 199.0; 
Export growth rates (percentage): World Bank/IMF (projected): 8.0; 
Export growth rates (percentage): Historical (1981-2000): 2.9; 
Export earnings shortfall (billions of dollars): $11.7.

The Gambia; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/IMF growth rate: 83.2; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 75.9; 
Export growth rates (percentage): World Bank/IMF (projected): 6.3; 
Export growth rates (percentage): Historical (1981-2000): 7.5; 
Export earnings shortfall (billions of dollars): $0.0.

Ghana; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/IMF growth rate: 94.5; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 81.1; 
Export growth rates (percentage): World Bank/IMF (projected): 6.6; 
Export growth rates (percentage): Historical (1981-2000): 8.0; 
Export earnings shortfall (billions of dollars): $0.0.

Guinea; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/ IMF growth rate: 90.3; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 217.2; 
Export growth rates (percentage): World Bank/IMF (projected): 6.6; 
Export growth rates (percentage): Historical (1981-2000): 1.7; 
Export earnings shortfall (billions of dollars): $8.7.

Guinea-Bissau; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/IMF growth rate: 120.1; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 153.7; 
Export growth rates (percentage): World Bank/IMF (projected): 8.8; 
Export growth rates (percentage): Historical (1981-2000): 7.8; 
Export earnings shortfall (billions of dollars): $0.4.

Guyana; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/ IMF growth rate: 49.8; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 48.7; 
Export growth rates (percentage): World Bank/IMF (projected): 3.7; 
Export growth rates (percentage): Historical (1981-2000): 4.2; 
Export earnings shortfall (billions of dollars): $0.0.

Honduras; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/ IMF growth rate: 31.3; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 46.0; 
Export growth rates (percentage): World Bank/IMF (projected): 9.4; 
Export growth rates (percentage): Historical (1981-2000): 7.2; 
Export earnings shortfall (billions of dollars): $24.2.

Madagascar; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/IMF growth rate: 79.0; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 111.0; 
Export growth rates (percentage): World Bank/IMF (projected): 7.7; 
Export growth rates (percentage): Historical (1981-2000): 6.0; 
Export earnings shortfall (billions of dollars): $5.9.

Malawi; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/ IMF growth rate: 121.6; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 132.5; 
Export growth rates (percentage): World Bank/IMF (projected): 4.8; 
Export growth rates (percentage): Historical (1981-2000): 4.3; 
Export earnings shortfall (billions of dollars): $0.4.

Mali; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/IMF growth rate: 139.7; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 119.0; 
Export growth rates (percentage): World Bank/IMF (projected): 6.3; 
Export growth rates (percentage): Historical (1981-2000): 6.9; 
Export earnings shortfall (billions of dollars): $0.0.

Mauritania; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/IMF growth rate: 82.9; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 236.1; 
Export growth rates (percentage): World Bank/IMF (projected): 6.3; 
Export growth rates (percentage): Historical (1981-2000): 1.3; 
Export earnings shortfall (billions of dollars): $3.9.

Mozambique; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/IMF growth rate: 40.6; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 79.7; 
Export growth rates (percentage): World Bank/IMF (projected): 10.3; 
Export growth rates (percentage): Historical (1981-2000): 5.2; 
Export earnings shortfall (billions of dollars): $21.1.

Nicaragua; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/IMF growth rate: 59.6; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 94.3; 
Export growth rates (percentage): World Bank/IMF (projected): 8.0; 
Export growth rates (percentage): Historical (1981-2000): 5.7; 
Export earnings shortfall (billions of dollars): $6.9.

Niger; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/IMF growth rate: 137.5; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 643.2; 
Export growth rates (percentage): World Bank/IMF (projected): 7.0; 
Export growth rates (percentage): Historical (1981-2000): -1.6; 
Export earnings shortfall (billions of dollars): $3.8.

Rwanda; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/ IMF growth rate: 131.6; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 1,403.7; 
Export growth rates (percentage): World Bank/IMF (projected): 10.7; 
Export growth rates (percentage): Historical (1981-2000): -3.6; 
Export earnings shortfall (billions of dollars): $4.2.

São Tomé and Príncipe; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/IMF growth rate: 144.0; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 946.3; 
Export growth rates (percentage): World Bank/IMF (projected): 7.4; 
Export growth rates (percentage): Historical (1981-2000): -4.2; 
Export earnings shortfall (billions of dollars): $0.4.

Senegal; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/ IMF growth rate: 56.9; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 98.7; 
Export growth rates (percentage): World Bank/IMF (projected): 6.0; 
Export growth rates (percentage): Historical (1981-2000): 3.0; 
Export earnings shortfall (billions of dollars): $11.2.

Sierra Leone; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/IMF growth rate: 104.3; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 831.8; 
Export growth rates (percentage): World Bank/IMF (projected): 9.1; 
Export growth rates (percentage): Historical (1981-2000): -3.4; 
Export earnings shortfall (billions of dollars): $2.9.

Tanzania; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/ IMF growth rate: 117.1; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 149.2; 
Export growth rates (percentage): World Bank/IMF (projected): 7.0; 
Export growth rates (percentage): Historical (1981-2000): 6.2; 
Export earnings shortfall (billions of dollars): $5.3.

Uganda; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/ IMF growth rate: 104.3; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 263.8; 
Export growth rates (percentage): World Bank/IMF (projected): 9.5; 
Export growth rates (percentage): Historical (1981-2000): 4.3; 
Export earnings shortfall (billions of dollars): $9.6.

Zambia; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/ IMF growth rate: 100.7; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 270.3; 
Export growth rates (percentage): World Bank/IMF (projected): 6.6; 
Export growth rates (percentage): Historical (1981-2000): 0.6; 
Export earnings shortfall (billions of dollars): $12.3.

Average; 
Debt-to-export ratios in 2020 (percentage): Under 
World Bank/ IMF growth rate: 95.1; 
Debt-to-export ratios in 2020 (percentage): Under 
historical growth rate[A]: 298.0; 
Export growth rates (percentage): World Bank/IMF (projected): 7.7; 
Export growth rates (percentage): Historical (1981-2000): 3.1; 
Export earnings shortfall (billions of dollars); 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.

[End of table]

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.[Footnote 28]

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. For 
countries to achieve the economic growth rates consistent with their 
development goals, donors would need to fund the $215 billion 
shortfall. Without this additional assistance, countries would grow 
slower, resulting in reduced imports, lower gross domestic product 
(GDP), and lower government revenue. These conditions could undermine 
progress toward poverty reduction and other goals.

Additional Assistance Will Lead to Debt Sustainability in Most 
Countries:

Even if donors make up the export earnings shortfall, more than half of 
the 27 countries will experience unsustainable debt levels.[Footnote 
29] We estimate that these countries will require $8.5 to $19.8 billion 
more to achieve debt sustainability and debt service goals.[Footnote 
30] In considering strategies for future debt relief, we examined (1) 
switching various percentages of multilateral loans to grants and (2) 
paying each country's debt service-to-fiscal revenue ratio in excess of 
5 percent of government revenue. A country's debt service-to-fiscal 
revenue ratio more closely links the country's debt burden to the 
ability of the public sector to generate income. Many HIPC countries 
are suffering public health crises, most notably HIV/AIDS, which could 
put an additional burden on government revenue.

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 sustainability,[Footnote 
31] (2) paying debt service in excess of 5 percent of government 
revenue, and (3) combining strategies (1) and (2).[Footnote 32] We 
chose these strategies because they maximize the number of countries 
achieving debt sustainability while minimizing costs to 
donors.[Footnote 33] We found that, with this debt relief, as many as 
25 countries could become debt sustainable[Footnote 34] and all 
countries 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:

1. Strategy: Switch the minimum percentage of loans to grants for each 
country to achieve debt sustainability; 
Cost of debt relief (billions of dollars): $8.5; 
Number of countries achieving debt sustainability in 2020: 25; 
Number of countries paying 5 percent or less of revenue in debt service 
every year: 2003-2020: 2.

2. Strategy: Pay debt service in excess of 5 percent of government 
revenue; 
Cost of debt relief (billions of dollars): $12.6; 
Number of countries achieving debt sustainability in 2020: 12; 
Number of countries paying 5 percent or less of revenue in debt service 
every year: 2003-2020: 27.

3. Strategy: Switch the minimum percentage of loans to grants and then 
pay debt service in excess of 5 percent of revenue; 
Cost of debt relief (billions of dollars): $19.8; 
Number of countries achieving debt sustainability in 2020: 25; 
Number of countries paying 5 percent or less of revenue in debt service 
every year: 2003-2020: 27. 

Source: GAO analysis of World Bank and IMF data.

[End of table]

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.[Footnote 35] The average percentage of 
loans switched to grants for all countries under this strategy would be 
33.5 percent.[Footnote 36] 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 (see table 4). 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.

Table 4: Percentage of Loans Switched to Grants to Achieve Debt 
SustainabilityA:

Country: Benin; 
Loans switched to grants (percentage): 1.7.

Country: Bolivia; 
Loans switched to grants (percentage): 32.7.

Country: Burkina Faso; 
Loans switched to grants (percentage): 86.9.

Country: Cameroon; 
Loans switched to grants (percentage): 42.7.

Country: Chad; 
Loans switched to grants (percentage): 0.0.

Country: Congo (Dem. Rep.); 
Loans switched to grants (percentage): 89.0.

Country: Ethiopia; 
Loans switched to grants (percentage): 42.4.

Country: The Gambia; 
Loans switched to grants (percentage): 0.0.

Country: Ghana; 
Loans switched to grants (percentage): 0.0.

Country: Guinea; 
Loans switched to grants (percentage): 39.5.

Country: Guinea-Bissau; 
Loans switched to grants (percentage): 3.3.

Country: Guyana; 
Loans switched to grants (percentage): 0.0.

Country: Honduras; 
Loans switched to grants (percentage): 0.0.

Country: Madagascar; 
Loans switched to grants (percentage): 0.0.

Country: Malawi; 
Loans switched to grants (percentage): 0.0.

Country: Mali; 
Loans switched to grants (percentage): 0.0.

Country: Mauritania; 
Loans switched to grants (percentage): 57.3.

Country: Mozambique; 
Loans switched to grants (percentage): 0.0.

Country: Nicaragua; 
Loans switched to grants (percentage): 0.0.

Country: Niger[B]; 
Loans switched to grants (percentage): 100.0.

Country: Rwanda[B]; 
Loans switched to grants (percentage): 100.0.

Country: São Tomé and Príncipe; 
Loans switched to grants (percentage): 95.9.

Country: Senegal; 
Loans switched to grants (percentage): 0.0.

Country: Sierra Leone; 
Loans switched to grants (percentage): 93.6.

Country: Tanzania; 
Loans switched to grants (percentage): 0.0.

Country: Uganda; 
Loans switched to grants (percentage): 57.1.

Country: Zambia; 
Loans switched to grants (percentage): 61.3.

Average; 
Loans switched to grants (percentage): 33.5.

Source: GAO analysis of World Bank and IMF data.

[A] This assumes countries receive grants to fund their export 
shortfall.

[B] Niger and Rwanda do not achieve debt sustainability, even with 100-
percent grants.

[End of table]

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 5-percent debt service-to-revenue goal 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 the projection 
period. However, similar to the debt-service strategy above, this 
strategy dissociates borrowing from repayment and could encourage 
irresponsible borrowing policies.

Potential U.S. Costs Are Significant:

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 billon 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.

Volatility in Export Earnings Likely to Further Increase the Cost of 
Achieving Debt Sustainability:

The export earnings of HIPC countries experience large year-to-year 
fluctuations due to their heavy reliance on primary commodities, 
weather extremes, natural disasters, and other factors.[Footnote 37] 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. See appendix VI 
for a detailed discussion of the impact of fluctuations in export 
earnings on debt sustainability.

Agency Comments and Our Evaluation:

We received written comments on a draft of this report from the 
Department of the Treasury, the World Bank, AfDB, and IaDB. These 
comments and our evaluation of them are reprinted in appendixes VI, 
VII, VIII, and IX. The organizations also provided technical comments 
that we discussed with relevant officials and have included in this 
report where appropriate.

The Treasury stated that the report leaves the impression that very 
large amounts of money will be needed in the future; the HIPC Trust 
Fund has a financing gap; and the HIPC Initiative was never intended to 
ensure an exit from unsustainable debt burdens. We agree that the 
challenge of achieving high economic growth rates, while maintaining 
debt sustainability, will likely require a substantial commitment of 
resources from the donors beyond what the World Bank and IMF project. 
Our report refers to financing challenges over the life of the 
initiative, not specifically to the HIPC Trust Fund at this point in 
time. Under the current pay-as-you-go approach, we did not identify a 
gap in the HIPC Trust Fund. However, as Treasury recognized in its 
letter, there are several factors that are likely to result in the need 
for additional resources in the future. Our report provides estimates 
of those and other emerging costs. Numerous official World Bank and IMF 
documents, as recent as 2003, affirm that a permanent, lasting, or 
durable exit from unsustainable debt remains a central objective of the 
HIPC Initiative. While the Treasury may have retreated from this 
objective, the World Bank and IMF have not.

The World Bank disagreed with the assumption that deviations from 
projected debt profiles would be offset only through additional debt 
relief or compensatory financing, and not through other forms of 
adjustments. We disagree with this characterization. The report 
explicitly states that donors have the option of not financing the 
export shortfalls, however, this will reduce the funds available for 
poverty reduction and hamper countries' economic growth. The World Bank 
concurred with our finding that long-term projections of export growth 
rates need to be more realistic and the report's emphasis on pursuing a 
sustainable development finance strategy for countries that have 
received debt relief.

AfDB said that our estimate of the financing shortfall for the 23 
countries that have already qualified for debt relief is overstated. We 
disagree with this assessment. We consider our estimate to be more 
accurate because it accounts for the actual amount of resources the 
AfDB has identified to contribute to the initiative and converts the 
estimate into 2003 dollars. The AfDB also said that our finding that 
countries are likely to need considerable assistance in the future to 
meet their debt relief and economic growth targets is likely to be 
correct.

All three institutions said that our use of historical export growth 
rates are not good predictors of the future because significant 
structural changes are underway 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.

IaDB agreed with our report.

As agreed with your office, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies of this report 
to the Honorable John Snow, Secretary of the Treasury, and to 
appropriate congressional committees. We are also sending copies to the 
World Bank, AfDB, IaDB, and IMF. Copies will be made available to 
others upon request and at no charge on the GAO Web site at 
[Hyperlink, http://www.gao.gov.].

If you or your staff have any questions regarding this report, please 
contact me on (202) 512-8979. Other GAO contacts and staff are 
acknowledged in appendix X.

Signed by: 

Joseph A. Christoff, Director: 
International Affairs and Trade:

[End of section]

Appendixes: 

Appendix I: Objectives, Scope, and Methodology:

The Chairman and Ranking Member of the House Financial Services 
Committee and the Chairman and Ranking Member of the Subcommittee on 
Domestic and International Monetary Policy, Trade, and Technology of 
the House Financial Services Committee asked us to conduct a review of 
the Heavily Indebted Poor Countries (HIPC) Initiative. In response, we 
assessed (1) the multilateral development banks' 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. The scope of our work 
involved three key multilateral development banks (MDB)--the World 
Bank/International Development Association (IDA), African Development 
Bank (AfDB)/African Development Fund (AfDF), and the Inter-American 
Development Bank (IaDB)/Fund for Special Operations (FSO), as well as 
the 42 potentially eligible HIPCs.[Footnote 38] (See app. II for the 
status of the 42 countries potentially eligible for HIPC and their 
membership in the MDBs.):

Methodology for Assessing the Financing Shortfall of the Existing 
Initiative:

To determine the MDBs' financing shortfall in present value terms, we 
analyzed each bank's cost and the total funding each institution has 
identified. This analysis covered 34 countries for the World Bank, 32 
for the AfDB, and 4 for the IaDB. To determine the amount of debt 
relief each bank has committed to under the initiative, we reviewed 
documents prepared by the World Bank, AfDB, IaDB, and the International 
Monetary Fund (IMF).[Footnote 39] To determine the amount of internal 
and external resources available for each bank, we reviewed their 
implementation status reports and financial statements. This 
information included the amount of money that each MDB has already 
received or expects to receive from the HIPC Trust Fund. We also 
determined the amount of funds each bank currently has and expects to 
receive annually to calculate the present value of these commitments. 
This analysis also enabled us to determine the magnitude and timing of 
financing shortfalls for the three banks. To determine the amount of 
financing the U.S. government may be asked to pay for the MDBs' 
financing shortfall, we obtained and reviewed information from U.S. 
Treasury officials regarding the U.S.'s historical rates of 
replenishment for each MDB, as well as the amount of funds the U.S. 
government has provided and plans to provide to each bank through the 
HIPC Trust Fund. We discussed our analysis with officials from the 
three banks and the U.S. Treasury.

Methodology for Assessing the Amount of Funding Needed to Achieve 
Targets:

General Approach:

We analyzed World Bank and IMF staff projections contained within the 
debt sustainability analyses (DSA) to assess the impact of historical 
export growth rates[Footnote 40] on countries' debt burdens and the 
funding needed to achieve economic growth and debt relief targets for 
the 27 countries that have reached their decision or completion 
points.[Footnote 41] According to our analysis of the DSAs, the World 
Bank and IMF project these countries will receive $153 billion in 
development assistance through 2020. Our analysis builds on prior work 
that examined the HIPC Initiative, including the World Bank and IMF 
DSAs.[Footnote 42] The DSAs contain 20-year economic projections for 
each country's exports, national income, government revenue, debt 
stock, debt service, and other economic variables. Most countries' DSAs 
also provide projections of expected future loans, grants, and balance 
of payment gaps. These projections provided us with the basis for 
creating a database to assess the impact of changing key assumptions 
such as export growth rates, percentage of multilateral assistance in 
the form of grants, and debt service assistance payments on countries' 
debt targets.

While the countries' DSAs are publicly available, data inconsistencies 
among countries, gaps in information, and missing variables presented 
challenges in constructing a database for our analyses. Since few DSAs 
provided annual data for the entire 20-year projection period, and 
several DSAs were missing key economic variables,[Footnote 43] we used 
a variety of methodologies and statistical techniques to interpolate 
these missing data and compute missing variables. Consistent with the 
World Bank and IMF estimates, our analysis used the December 2002 
Commercial Interest Reference Rate (CIRR) for the Special Drawing 
Rights (SDR).[Footnote 44] We reviewed the underlying methodology of 
the DSAs, vetted key assumptions, and discussed country-specific 
questions with IMF staff. We supplemented our analysis with additional 
information from IMF, World Bank, AfDB, and IaDB officials.: 

Assessing the Impact of Lower Export Growth:

To illustrate the impact of lower export growth on the cost to donors 
and on countries' debt burdens, we substituted each country's DSA 
export growth rate with its historical growth rate. The difference 
between the export earnings projected in the DSA and the export 
earnings projected using the historical rates is defined as the export 
earnings shortfall. In order to keep countries on their projected gross 
domestic product growth paths, we assume that donors will need to make 
up this shortfall. The present value of this shortfall for these 27 
countries is $215 billion. We also analyzed how the form of financing 
the shortfall impacts countries' debt burdens. If the shortfall is made 
up by grants only, each country's debt remains the same. However, the 
countries' debt-to-export ratios will increase due to lower export 
earnings. If the shortfall is made up by a mix of grants and 
loans,[Footnote 45] countries' debt will increase. To determine the 
countries' new debt burden, we calculated the debt service and the net 
present value of the debt from these new loans.

Assessing 40 Strategies for Increasing Debt Relief:

To determine the amount of funding needed to achieve debt relief 
targets under projected and historical growth rates, we analyzed 40 
different strategies for providing debt relief. These strategies 
included financing the export earnings shortfalls with grants only or a 
combination of loans and grants, switching the minimal percentage of 
loans to grants for each country to achieve debt targets, switching a 
constant percentage of loans to grants for all countries, and paying 
debt service in excess of 5 percent of government revenue. For each of 
these strategies, we calculated the potential costs to donors to help 
countries achieve the debt targets. These costs include foregone MDB 
loan receipts from switching baseline DSA loans to grants and the debt 
service assistance needed to achieve the 5 percent debt service-to-
revenue target. Finally, we compared the results of the various 
strategies, highlighting those strategies that maximized the number of 
countries achieving debt targets while minimizing costs to donors.

Assessing the Impact of Export Volatility:

To assess how export volatility would affect the likelihood of 
achieving debt sustainability we used a Monte Carlo process that 
randomly drew 18,000 export growth rates (for each of 1,000 runs, 18 
simultaneous draws, one for each year) from a distribution that 
reflects the historic growth volatility of each country. The 
distribution was based on the annual export growth rates from 1981 to 
2000 for each country. In our Monte Carlo process, the 18 growth 
intervals of each country were assigned an equal probability of 
reoccurrence in the future. Projected export levels were then 
extrapolated with the growth rates randomly drawn from the country's 
export growth distribution. To ensure that positive and negative growth 
rates were treated the same (or with equal weight) we incorporated 
growth rates into our model in a multiplicative fashion rather than in 
an additive form. The probability of achieving debt sustainability in 
2020 was determined by the percentage of outcomes in 2020 with a debt-
to-export ratio below 150 percent.

Methodology for Assessing Data Reliability:

We used three key variables--debt stock, historical rates of export 
growth, and MDBs funding sources--to assess both objectives. To assess 
the reliability of the debt stock data, we (1) discussed the data with 
the IMF and (2) reviewed their accounting process to determine 
outstanding country debt. Every alleged debt is vetted by both the 
country and the creditor and then independently reviewed by the IMF and 
the World Bank on behalf of the Paris Club. As we found this process to 
be rigorous, we determined that the debt stock data are sufficiently 
reliable for the purposes of our engagement. To assess the reliability 
of the historical rates of export growth, we reviewed the IMF and World 
Bank's published documentation and records from our prior work that 
utilized these data. While these data have a number of limitations due 
to differences in data collection procedures in the 27 countries we 
reviewed, they are (1) used by the IMF to determine debt relief; (2) 
widely used by other acknowledged experts in this area; and (3) the 
only source of available data. Therefore, we determined that they are 
sufficiently reliable to use for examining the impact of debt relief on 
countries' debt sustainability. To assess the reliability of the 
internal and external funding sources of the three MDBs, we (1) 
reviewed their debt relief financing plans; (2) reviewed the audited 
financial statements of the HIPC Trust Fund; and (3) corroborated the 
funding sources through interviews with knowledgeable MDB staff in 
budget, accounting, and finance. We determined the funding sources were 
sufficiently reliable for the purposes of this review.

We performed our work from June 2003 to February 2004 in accordance 
with generally accepted government auditing standards.

[End of section]

Appendix II: Status of HIPCs and Their Membership in Three Multilateral 
Development Banks:

Forty-two countries are potentially eligible to receive debt relief 
under the existing enhanced HIPC Initiative. Since the enhanced 
initiative was launched in 1999, 10 countries have reached their 
completion points, meaning that the World Bank and IMF have determined 
that the countries have completed HIPC and are eligible to receive full 
debt relief. Seventeen are currently at their decision points, meaning 
the World Bank and IMF have determined they are eligible to receive 
debt relief under the initiative (see table 5).

Table 5: Countries' Membership in Key Multilateral Development Banks:

Completion point countries (10):

Benin; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Bolivia; 
World Bank/IDA: Yes; 
AfDB: No; 
IaDB: Yes.

Burkina Faso; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Guyana; 
World Bank/IDA: Yes; 
AfDB: No; 
IaDB: Yes.

Mali; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Mauritania; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Mozambique; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Nicaragua; 
World Bank/IDA: Yes; 
AfDB: No; 
IaDB: Yes.

Tanzania; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Uganda; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Decision point countries (17): 

Cameroon; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Chad; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Congo (Dem. Rep.); 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Ethiopia; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

The Gambia; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Ghana; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Guinea; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Guinea-Bissau; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Honduras; 
World Bank/IDA: Yes; 
AfDB: No; 
IaDB: Yes.

Madagascar; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Malawi; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Niger; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Rwanda; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

São Tomé and Príncipe; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Senegal; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Sierra Leone; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Countries still to be considered (11): 

Burundi; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Central African Republic; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Comoros; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Congo (Rep. of); 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Cote d'Ivoire; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Lao People's Democratic Republic; 
World Bank/IDA: Yes; 
AfDB: No; 
IaDB: No.

Liberia; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Myanmar; 
World Bank/IDA: Yes; 
AfDB: No; 
IaDB: No.

Somalia; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Sudan; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Togo; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Potentially debt-sustainable countries (4): 

Angola; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Kenya; 
World Bank/IDA: Yes; 
AfDB: Yes; 
IaDB: No.

Vietnam; 
World Bank/IDA: Yes; 
AfDB: No; 
IaDB: No.

Yemen, Republic of; 
World Bank/IDA: Yes; 
AfDB: No; 
IaDB: No.

Total; 
World Bank/IDA: 42; 
AfDB: 34; 
IaDB: 4. 

Source: IMF and International Development Association.

[End of table]

[End of section]

Appendix III: Alternative Strategies for Providing Debt Relief to Poor 
Countries:

We analyzed 40 strategies for providing debt relief to poor countries. 
We highlighted three of these strategies in this report because we 
found they were the most cost effective. This appendix discusses some 
of the other strategies we analyzed and shows why they are less cost 
effective. These strategies included using a combination of 
multilateral loans and bilateral grants to fill the export shortfall 
and switching a constant percentage of loans to grants for all 
countries. In each case, donors face a series of costs, including $153 
billion in expected development assistance, $215 billion to cover lower 
export earnings, and between $0 and $29.1 billion in debt relief.

Using a Combination of Loans and Grants to Fill the Export Shortfall:

If donors choose to fill the $215 billion export shortfall with a 
combination of loans and grants, rather than grants alone, we found 
that countries will need $15.3 billion to $27.8 billion to achieve debt 
sustainability and debt-service goals (see table 6). If donors provide 
grants alone, we estimate that 12 of 27 countries would achieve debt 
sustainability, while only 6 would achieve sustainability if donors 
used a combination of loans and grants. We also found that the optimal 
percentage of loans switched to grants necessary for each country to 
achieve debt sustainability increases from 33.5 percent when grants 
fill the shortfall to 55.6 percent when loans and grants fill the 
shortfall, thus increasing the cost to donors. Providing grants alone 
is more cost effective because it avoids the build up of debt, 
improving countries' likelihood of achieving debt sustainability and 
reducing the need for more debt relief in the future. The range in 
total cost of debt relief reflects the variation in additional costs, 
from $8.5 billion to $27.8 billion, in addition to the $153 billion in 
expected baseline development assistance donors provide and the $215 
billion needed to cover the shortfall in countries' export earnings.

Table 6: Cost and Impact of Three Strategies for Providing Debt Relief 
to 27 Poor Countries (Grants and Loans Fill the Export Shortfall):

Strategy: Switch the minimum percentage of loans to grants for each 
country to achieve debt sustainability; 
Cost of debt relief (billions of dollars): $15.3; 
Number of countries achieving debt sustainability in 2020: 25; 
Number of countries paying 5 percent or less of revenue in debt service 
every year: 2003-2020: 2.

Strategy: Pay debt service in excess of 5 percent of government 
revenue; 
Cost of debt relief (billions of dollars): $19.5; 
Number of countries achieving debt sustainability in 2020: 6; 
Number of countries paying 5 percent or less of revenue in debt service 
every year: 2003- 2020: 27.

Strategy: Switch the minimum percentage of loans to grants and then pay 
debt service in excess of 5 percent of revenue; 
Cost of debt relief (billions of dollars): $27.8; 
Number of countries achieving debt sustainability in 2020: 25; 
Number of countries paying 5 percent or less of revenue in debt service 
every year: 2003-2020: 27. 

Source: GAO analysis of World Bank and IMF data.

[End of table]

Switching a Constant Percentage of Loans to Grants for All Countries:

The strategies we examined in this report determined the minimum 
percentage of grants necessary for each country to achieve debt 
sustainability and resulted in a different percentage of grants for 
each country. While the provision of a consistent percentage of grants 
to each country may be the most equitable, we found that it would not 
be as cost effective as tailoring the percentage of grants to each 
country since some countries would not receive enough grants to achieve 
debt sustainability, while others would receive more than was required. 
For example, we estimate that switching 50 percent of new loans to 
grants would result in seven fewer countries achieving debt 
sustainability than would providing the minimum percentage of grants. 
Switching 50 percent of new loans to grants would cost over $6 billion 
more (see table 7). These options, therefore, are not the most cost-
effective means of maximizing debt sustainability.

Table 7: Cost and Impact of Switching a Constant Percentage of Loans to 
Grants:

Strategy: Switch 0 percent of loans to grants; 
Cost of debt relief (billions of dollars): $0.0; 
Number of countries achieving debt sustain-ability in 2020: 12; 
Number of countries paying 5 percent or less of revenue in debt 
service (2003-2020): 2.

Strategy: Switch 20 percent of loans to grants; 
Cost of debt relief (billions of dollars): $5.8; 
Number of countries achieving debt sustain-ability in 2020: 14; 
Number of countries paying 5 percent or less of revenue in debt 
service (2003-2020): 2.

Strategy: Switch 50 percent of loans to grants; 
Cost of debt relief (billions of dollars): $14.6; 
Number of countries achieving debt sustain-ability in 2020: 18; 
Number of countries paying 5 percent or less of revenue in debt 
service (2003-2020): 2.

Strategy: Switch 100 percent of loans to grants; 
Cost of debt relief (billions of dollars): $29.1; 
Number of countries achieving debt sustain-ability in 2020: 25; 
Number of countries paying 5 percent or less of revenue in debt 
service (2003-2020): 2.

Strategy: Switch the minimum percentage of loans to grants for each 
country to achieve debt sustainability; 
Cost of debt relief (billions of dollars): $8.5; 
Number of countries achieving debt sustain-ability in 2020: 25; 
Number of countries paying 5 percent or less of revenue in debt 
service (2003-2020): 2. 

Source: GAO analysis of World Bank and IMF data.

[End of table]

In addition to the strategies mentioned in the report, you asked us to 
analyze the cost and impact of four specific options for increasing 
debt relief to poor countries. These options included switching 20 or 
50 percent of loans to grants and reducing each country's debt-service 
burden to 5 or 10 percent of revenue. With 20-percent grants, we 
estimate that 14 countries would achieve debt sustainability, while 18 
would do so with 50-percent grants (see table 8). In each option, all 
countries would also reach the 5-or 10-percent debt service goal, as 
specified. The cost of these options ranges from $7.6 billion to $24.5 
billion, in addition to assistance to fund the export shortfall. 
Consistent with the previous analysis, these options resulted in higher 
costs and/or fewer countries achieving debt sustainability.

Table 8: Cost and Impact of Four Options Requested by Congress for 
Increasing Debt Relief to 27 Poor Countries:

Options: Switch 20 percent of new loans to grants and reduce debt 
service to 5 percent of government revenue; 
Cost of debt relief (billions of dollars): $17.3; 
Number of countries reaching debt sustainability in 2020: 14; 
Number of countries achieving debt service goal: 27.

Options: Switch 20 percent of new loans to grants and reduce debt 
service to 10 percent of government revenue; 
Cost of debt relief (billions of dollars): $7.6; 
Number of countries reaching debt sustainability in 2020: 14; 
Number of countries achieving debt service goal: 27.

Options: Switch 50 percent of new loans to grants and reduce debt 
service to 5 percent of government revenue; 
Cost of debt relief (billions of dollars): $24.5; 
Number of countries reaching debt sustainability in 2020: 18; 
Number of countries achieving debt service goal: 27.

Options: Switch 50 percent of new loans to grants and reduce debt 
service to 10 percent of government revenue; 
Cost of debt relief (billions of dollars): $16.0; 
Number of countries reaching debt sustainability in 2020: 18; 
Number of countries achieving debt service goal: 27. 

Source: GAO analysis of World Bank and IMF data.

[End of table]

[End of section]

Appendix IV: Costs and Impact of Various Strategies for Providing Debt 
Relief:

As described earlier in this report, we focused our analysis on three 
specific strategies for providing debt relief. The cost of these three 
strategies varies by country, as does their impact. Tables 10 to 12 
below summarize these results.

Table 9: Cost and Impact of Strategy 1: Switching the Minimum 
Percentage of Loans to Grants for Each Country to Achieve Debt 
Sustainability in 2020:

Country: Benin; 
Future loans switched to grants (percentage): 1.7%; 
Cost of debt relief (millions of dollars): $8.8; 
Total cost, including export shortfall (millions of dollars): 
$3,712.3; 
NPV debt-to-exports in 2020 (percentage): 150.0%; 
Average debt service-to-revenue, 2003- 2020 (percentage): 4.7%. 

Country: Bolivia; 
Future loans switched to grants (percentage): 32.7%; 
Cost of debt relief (millions of dollars): $830.3; 
Total cost, including export shortfall (millions of dollars): 
$14,422; 
NPV debt-to-exports in 2020 (percentage): 150.0%; 
Average debt service-to-revenue, 2003-2020 (percentage): 9.4%. 

Country: Burkina Faso; 
Future loans switched to grants (percentage): 86.9%; 
Cost of debt relief (millions of dollars): $615.5; 
Total cost, including export shortfall (millions of dollars): 
$5,065.4; 
NPV debt-to- exports in 2020 (percentage): 150.0%; 
Average debt service-to-revenue, 2003-2020 (percentage): 5.3%. 

Country: Cameroon; 
Future loans switched to grants (percentage): 42.7%; 
Cost of debt relief (millions of dollars): $1,196.4; 
Total cost, including export shortfall (millions of dollars): 
$30,936.4; 
NPV debt- to-exports in 2020 (percentage): 150.0%; 
Average debt service-to- revenue, 2003-2020 (percentage): 6.3%. 

Country: Chad; 
Future loans switched to grants (percentage): 0.0%; 
Cost of debt relief (millions of dollars): $0.0; 
Total cost, including export shortfall (millions of dollars): 
$8,236.7; 
NPV debt-to-exports in 2020 (percentage): 137.0%; 
Average debt service-to-revenue, 2003-2020 (percentage): 8.1%. 

Country: DRC; 
Future loans switched to grants (percentage): 89.0%; 
Cost of debt relief (millions of dollars): $1,755.3; 
Total cost, including export shortfall (millions of dollars): 
$23,539.5; 
NPV debt-to-exports in 2020 (percentage): 150.0%; 
Average debt service-to-revenue, 2003-2020 (percentage): 12.6%. 

Country: Ethiopia; 
Future loans switched to grants (percentage): 42.4%; 
Cost of debt relief (millions of dollars): $436.6; 
Total cost, including export shortfall (millions of dollars): 
$12,133.7; 
NPV debt-to-exports in 2020 (percentage): 150.0%; 
Average debt service-to-revenue, 2003-2020 (percentage): 2.3%. 

Country: The Gambia; 
Future loans switched to grants (percentage): 0.0%; 
Cost of debt relief (millions of dollars): $0.0; 
Total cost, including export shortfall (millions of dollars): 
$0.0; 
NPV debt-to-exports in 2020 (percentage): 75.9%; 
Average debt service-to-revenue, 2003-2020 (percentage): 11.8%. 

Country: Ghana; 
Future loans switched to grants (percentage): 0.0%; 
Cost of debt relief (millions of dollars): $0.0; 
Total cost, including export shortfall (millions of dollars): 
$46.8; 
NPV debt-to-exports in 2020 (percentage): 81.1%; 
Average debt service-to-revenue, 2003-2020 (percentage): 10.8%. 

Country: Guinea; 
Future loans switched to grants (percentage): 39.5%; 
Cost of debt relief (millions of dollars): $456.0; 
Total cost, including export shortfall (millions of dollars): 
$9,123.6; 
NPV debt-to-exports in 2020 (percentage): 150.0%; 
Average debt service-to-revenue, 2003-2020 (percentage): 7.1%. 

Country: Guinea-Bissau; 
Future loans switched to grants (percentage): 3.3%; 
Cost of debt relief (millions of dollars): $6.0; 
Total cost, including export shortfall (millions of dollars): 
$433.8; 
NPV debt-to- exports in 2020 (percentage): 150.0%; 
Average debt service-to-revenue, 2003-2020 (percentage): 8.5%. 

Country: Guyana; 
Future loans switched to grants (percentage): 0.0%; 
Cost of debt relief (millions of dollars): $0.0; 
Total cost, including export shortfall (millions of dollars): 
$30.6; 
NPV debt-to-exports in 2020 (percentage): 48.7%; 
Average debt service-to-revenue, 2003-2020 (percentage): 9.5%. 

Country: Honduras; 
Future loans switched to grants (percentage): 0.0%; 
Cost of debt relief (millions of dollars): $0.0; 
Total cost, including export shortfall (millions of dollars): 
$24,241.3; 
NPV debt-to-exports in 2020 (percentage): 41.3%; 
Average debt service-to-revenue, 2003-2020 (percentage): 8.5%. 

Country: Madagascar; 
Future loans switched to grants (percentage): 0.0%; 
Cost of debt relief (millions of dollars): $0.0; 
Total cost, including export shortfall (millions of dollars): 
$5,889.4; 
NPV debt-to-exports in 2020 (percentage): 111.0%; 
Average debt service-to-revenue, 2003-2020 (percentage): 6.2%. 

Country: Malawi; 
Future loans switched to grants (percentage): 0.0%; 
Cost of debt relief (millions of dollars): $0.0; 
Total cost, including export shortfall (millions of dollars): 
$444.4; 
NPV debt-to-exports in 2020 (percentage): 132.5%; 
Average debt service-to-revenue, 2003-2020 (percentage): 4.1%. 

Country: Mali; 
Future loans switched to grants (percentage): 0.0%; 
Cost of debt relief (millions of dollars): $0.0; 
Total cost, including export shortfall (millions of dollars): 
$0.0; 
NPV debt-to-exports in 2020 (percentage): 119.0%; 
Average debt service-to-revenue, 2003-2020 (percentage): 7.5%. 

Country: Mauritania; 
Future loans switched to grants (percentage): 57.3%; 
Cost of debt relief (millions of dollars): $222.2; 
Total cost, including export shortfall (millions of dollars): 
$4,099.7; 
NPV debt-to- exports in 2020 (percentage): 150.0%; 
Average debt service-to-revenue, 2003-2020 (percentage): 8.3%. 

Country: Mozambique; 
Future loans switched to grants (percentage): 0.0%; 
Cost of debt relief (millions of dollars): $0.0; 
Total cost, including export shortfall (millions of dollars): 
$21,131.8; 
NPV debt-to-exports in 2020 (percentage): 79.7%; 
Average debt service-to-revenue, 2003-2020 (percentage): 7.5%. 

Country: Nicaragua; 
Future loans switched to grants (percentage): 0.0%; 
Cost of debt relief (millions of dollars): $0.0; 
Total cost, including export shortfall (millions of dollars): 
$6,914.7; 
NPV debt-to-exports in 2020 (percentage): 94.3%; 
Average debt service-to-revenue, 2003-2020 (percentage): 7.7%. 

Country: Niger; 
Future loans switched to grants (percentage): 100.0%; 
Cost of debt relief (millions of dollars): $544.3; 
Total cost, including export shortfall (millions of dollars): 
$4,314.9; 
NPV debt-to-exports in 2020 (percentage): 179.1%; 
Average debt service-to-revenue, 2003-2020 (percentage): 3.3%. 

Country: Rwanda; 
Future loans switched to grants (percentage): 100.0%; 
Cost of debt relief (millions of dollars): $392.0; 
Total cost, including export shortfall (millions of dollars): 
$4,640.2; 
NPV debt-to-exports in 2020 (percentage): 516.4%; 
Average debt service-to-revenue, 2003-2020 (percentage): 2.1%. 

Country: São Tomé and Príncipe; 
Future loans switched to grants (percentage): 95.9%; 
Cost of debt relief (millions of dollars): $43.9; 
Total cost, including export shortfall (millions of dollars): 
$397.1; 
NPV debt-to-exports in 2020 (percentage): 150.0%; 
Average debt service- to-revenue, 2003-2020 (percentage): 5.6%. 

Country: Senegal; 
Future loans switched to grants (percentage): 0.0%; 
Cost of debt relief (millions of dollars): $0.0; 
Total cost, including export shortfall (millions of dollars): 
$11,177.6; 
NPV debt-to-exports in 2020 (percentage): 98.7%; 
Average debt service-to-revenue, 2003-2020 (percentage): 7.9%. 

Country: Sierra Leone; 
Future loans switched to grants (percentage): 93.6%; 
Cost of debt relief (millions of dollars): $244.1; 
Total cost, including export shortfall (millions of dollars): 
$3,149.1; 
NPV debt-to- exports in 2020 (percentage): 150.0%; 
Average debt service-to-revenue, 2003-2020 (percentage): 6.5%. 

Country: Tanzania; 
Future loans switched to grants (percentage): 0.0%; 
Cost of debt relief (millions of dollars): $0.0; 
Total cost, including export shortfall (millions of dollars): 
$5,295.5; 
NPV debt-to-exports in 2020 (percentage): 149.2%; 
Average debt service-to-revenue, 2003-2020 (percentage): 5.2%. 

Country: Uganda; 
Future loans switched to grants (percentage): 57.1%; 
Cost of debt relief (millions of dollars): $872.2; 
Total cost, including export shortfall (millions of dollars): 
$10,473.6; 
NPV debt-to-exports in 2020 (percentage): 150.0%; 
Average debt service-to-revenue, 2003-2020 (percentage): 5.5%. 

Country: Zambia; 
Future loans switched to grants (percentage): 61.3%; 
Cost of debt relief (millions of dollars): $839.1; 
Total cost, including export shortfall (millions of dollars): 
$13,138.0; 
NPV debt-to-exports in 2020 (percentage): 150.0%; 
Average debt service-to-revenue, 2003-2020 (percentage): 8.2%. 

Country: Average/Total; 
Future loans switched to grants (percentage): 33.5%; 
Cost of debt relief (millions of dollars): $8,462.7; 
Total cost, including export shortfall (millions of dollars): 
$222,988.0; 
NPV debt- to-exports in 2020 (percentage): 141.3%; 
Average debt service-to- revenue, 2003-2020 (percentage): 7.1%. 

[End of table]

Source: GAO analysis of World Bank and IMF data.

Table 10: Cost and Impact of Strategy 2: Paying Debt Service Over 5 
Percent of Government Revenue:

Country: Benin; 
Cost of debt relief (millions of dollars): $10.5; 
Total cost, including export shortfall (millions of dollars): 
$3,714.0; 
NPV debt-to-exports in 2020 (percentage): 150.9%; 
Average debt service-to- revenue, 2003-2020 (percentage): 4.6%.

Country: Bolivia; 
Cost of debt relief (millions of dollars): $2,507.1; 
Total cost, including export shortfall (millions of dollars): 
$16,098.8; 
NPV debt-to-exports in 2020 (percentage): 225.7%; 
Average debt service- to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Burkina Faso; 
Cost of debt relief (millions of dollars): $172.2; 
Total cost, including export shortfall (millions of dollars): 
$4,622.1; 
NPV debt-to-exports in 2020 (percentage): 477.9%; 
Average debt service-to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Cameroon; 
Cost of debt relief (millions of dollars): $818.4; 
Total cost, including export shortfall (millions of dollars): 
$30,558.3; 
NPV debt-to-exports in 2020 (percentage): 228.5%; 
Average debt service- to-revenue, 2003-2020 (percentage): 4.9%. 

Country: Chad; 
Cost of debt relief (millions of dollars): $182.6; 
Total cost, including export shortfall (millions of dollars): 
$8,419.3; 
NPV debt-to-exports in 2020 (percentage): 137.0%; 
Average debt service-to- revenue, 2003-2020 (percentage): 5.0%. 

Country: DRC; 
Cost of debt relief (millions of dollars): $1,268.0; 
Total cost, including export shortfall (millions of dollars): 
$23,052.2; 
NPV debt-to-exports in 2020 (percentage): 625.9%; 
Average debt service-to- revenue, 2003-2020 (percentage): 5.0%. 

Country: Ethiopia; 
Cost of debt relief (millions of dollars): $0.0; 
Total cost, including export shortfall (millions of dollars): 
$11,697.2; 
NPV debt-to-exports in 2020 (percentage): 199.0%; 
Average debt service- to-revenue, 2003-2020 (percentage): 2.5%. 

Country: The Gambia; 
Cost of debt relief (millions of dollars): $125.8; 
Total cost, including export shortfall (millions of dollars): 
$125.8; 
NPV debt-to-exports in 2020 (percentage): 75.9%; 
Average debt service- to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Ghana; 
Cost of debt relief (millions of dollars): $1,622.4; 
Total cost, including export shortfall (millions of dollars): 
$1,669.1; 
NPV debt-to-exports in 2020 (percentage): 81.1%; 
Average debt service- to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Guinea; 
Cost of debt relief (millions of dollars): $337.3; 
Total cost, including export shortfall (millions of dollars): 
$9,004.9; 
NPV debt-to-exports in 2020 (percentage): 217.2%; 
Average debt service- to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Guinea-Bissau; 
Cost of debt relief (millions of dollars): $55.5; 
Total cost, including export shortfall (millions of dollars): 
$483.3; 
NPV debt-to-exports in 2020 (percentage): 153.7%; 
Average debt service-to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Guyana; 
Cost of debt relief (millions of dollars): $247.8; 
Total cost, including export shortfall (millions of dollars): 
$278.4; 
NPV debt-to-exports in 2020 (percentage): 48.7%; 
Average debt service- to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Honduras; 
Cost of debt relief (millions of dollars): $1,735.7; 
Total cost, including export shortfall (millions of dollars): 
$25,977.0; 
NPV debt-to-exports in 2020 (percentage): 46.0%; 
Average debt service- to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Madagascar; 
Cost of debt relief (millions of dollars): $213.7; 
Total cost, including export shortfall (millions of dollars): 
$6,103.2; 
NPV debt-to-exports in 2020 (percentage): 111.0%; 
Average debt service- to-revenue, 2003-2020 (percentage): 4.9%. 

Country: Malawi; 
Cost of debt relief (millions of dollars): $11.6; 
Total cost, including export shortfall (millions of dollars): 
$456.0; 
NPV debt-to-exports in 2020 (percentage): 132.5%; 
Average debt service-to- revenue, 2003-2020 (percentage): 4.0%. 

Country: Mali; 
Cost of debt relief (millions of dollars): $394.7; 
Total cost, including export shortfall (millions of dollars): 
$394.7; 
NPV debt-to-exports in 2020 (percentage): 119.0%; 
Average debt service-to- revenue, 2003-2020 (percentage): 5.0%. 

Country: Mauritania; 
Cost of debt relief (millions of dollars): $241.2; 
Total cost, including export shortfall (millions of dollars): 
$4,118.7; 
NPV debt-to-exports in 2020 (percentage): 236.1%; 
Average debt service- to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Mozambique; 
Cost of debt relief (millions of dollars): $348.1; 
Total cost, including export shortfall (millions of dollars): 
$21,479.9; 
NPV debt-to-exports in 2020 (percentage): 79.7%; 
Average debt service- to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Nicaragua; 
Cost of debt relief (millions of dollars): $474.5; 
Total cost, including export shortfall (millions of dollars): 
$7,389.2; 
NPV debt-to-exports in 2020 (percentage): 94.3%; 
Average debt service- to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Niger; 
Cost of debt relief (millions of dollars): $52.8; 
Total cost, including export shortfall (millions of dollars): 
$3,823.4; 
NPV debt-to-exports in 2020 (percentage): 643.2%; 
Average debt service-to- revenue, 2003-2020 (percentage): 4.5%. 

Country: Rwanda; 
Cost of debt relief (millions of dollars): $0.0; 
Total cost, including export shortfall (millions of dollars): 
$4,248.2; 
NPV debt-to-exports in 2020 (percentage): 1,403.7%; 
Average debt service-to- revenue, 2003-2020 (percentage): 3.6%. 

Country: São Tomé and Príncipe; 
Cost of debt relief (millions of dollars): $14.5; 
Total cost, including export shortfall (millions of dollars): 
$367.6; 
NPV debt-to-exports in 2020 (percentage): 946.3%; 
Average debt service-to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Senegal; 
Cost of debt relief (millions of dollars): $623.9; 
Total cost, including export shortfall (millions of dollars): 
$11,801.5; 
NPV debt-to-exports in 2020 (percentage): 98.7%; 
Average debt service- to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Sierra Leone; 
Cost of debt relief (millions of dollars): $117.4; 
Total cost, including export shortfall (millions of dollars): 
$3,022.4; 
NPV debt-to-exports in 2020 (percentage): 831.8%; 
Average debt service-to-revenue, 2003-2020 (percentage): 4.9%. 

Country: Tanzania; 
Cost of debt relief (millions of dollars): $164.0; 
Total cost, including export shortfall (millions of dollars): 
$5,459.6; 
NPV debt-to-exports in 2020 (percentage): 149.2%; 
Average debt service- to-revenue, 2003-2020 (percentage): 4.6%. 

Country: Uganda; 
Cost of debt relief (millions of dollars): $228.1; 
Total cost, including export shortfall (millions of dollars): 
$9,829.4; 
NPV debt-to-exports in 2020 (percentage): 263.8%; 
Average debt service- to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Zambia; 
Cost of debt relief (millions of dollars): $616.4; 
Total cost, including export shortfall (millions of dollars): 
$12,915.3; 
NPV debt-to-exports in 2020 (percentage): 270.3%; 
Average debt service- to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Average/Total; 
Cost of debt relief (millions of dollars): $12,584.1; 
Total cost, including export shortfall (millions of dollars): 
$227,109.4; 
NPV debt-to-exports in 2020 (percentage): 298.0%; 
Average debt service-to-revenue, 2003-2020 (percentage): 4.8%. 

[End of table]

Source: GAO analysis of World Bank and IMF data%. 

Table 11: Cost and Impact of Strategy 3: Switching Loans to Grants to 
Maximize Debt Sustainability and Paying Debt Service in Excess of 5 
Percent of Government Revenue:

Country: Benin; 
Cost of debt relief (millions of dollars): $19.0; 
Total cost, including export shortfall (millions of dollars): 
$3,722.5; 
NPV debt-to-exports in 2020 (percentage): 150.0%; 
Average debt service-to- revenue, 2003-2020 (percentage): 4.6%. 

Country: Bolivia; 
Cost of debt relief (millions of dollars): $3,125.5; 
Total cost, including export shortfall (millions of dollars): 
$16,717.2; 
NPV debt-to-exports in 2020 (percentage): 150.0%; 
Average debt service- to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Burkina Faso; 
Cost of debt relief (millions of dollars): $658.2; 
Total cost, including export shortfall (millions of dollars): 
$5,108.1; 
NPV debt-to-exports in 2020 (percentage): 150.0%; 
Average debt service-to-revenue, 2003-2020 (percentage): 4.8%. 

Country: Cameroon; 
Cost of debt relief (millions of dollars): $1,905.6; 
Total cost, including export shortfall (millions of dollars): 
$31,645.5; 
NPV debt-to-exports in 2020 (percentage): 150.0%; 
Average debt service- to-revenue, 2003-2020 (percentage): 4.7%. 

Country: Chad; 
Cost of debt relief (millions of dollars): $182.6; 
Total cost, including export shortfall (millions of dollars): 
$8,419.3; 
NPV debt-to-exports in 2020 (percentage): 137.0%; 
Average debt service-to- revenue, 2003-2020 (percentage): 5.0%. 

Country: DRC; 
Cost of debt relief (millions of dollars): $2,622.3; 
Total cost, including export shortfall (millions of dollars): 
$24,406.5; 
NPV debt-to-exports in 2020 (percentage): 150.0%; 
Average debt service-to- revenue, 2003-2020 (percentage): 4.8%. 

Country: Ethiopia; 
Cost of debt relief (millions of dollars): $436.6; 
Total cost, including export shortfall (millions of dollars): 
$12,133.7; 
NPV debt-to-exports in 2020 (percentage): 150.0%; 
Average debt service- to-revenue, 2003-2020 (percentage): 2.3%. 

Country: The Gambia; 
Cost of debt relief (millions of dollars): $125.8; 
Total cost, including export shortfall (millions of dollars): 
$125.8; 
NPV debt-to-exports in 2020 (percentage): 75.9%; 
Average debt service- to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Ghana; 
Cost of debt relief (millions of dollars): $1,622.4; 
Total cost, including export shortfall (millions of dollars): 
$1,669.1; 
NPV debt-to-exports in 2020 (percentage): 81.1%; 
Average debt service- to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Guinea; 
Cost of debt relief (millions of dollars): $725.6; 
Total cost, including export shortfall (millions of dollars): 
$9,393.2; 
NPV debt-to-exports in 2020 (percentage): 150.0%; 
Average debt service- to-revenue, 2003-2020 (percentage): 4.8%. 

Country: Guinea-Bissau; 
Cost of debt relief (millions of dollars): $60.1; 
Total cost, including export shortfall (millions of dollars): 
$487.9; 
NPV debt-to-exports in 2020 (percentage): 150.0%; 
Average debt service-to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Guyana; 
Cost of debt relief (millions of dollars): $247.8; 
Total cost, including export shortfall (millions of dollars): 
$278.4; 
NPV debt-to-exports in 2020 (percentage): 48.7%; 
Average debt service- to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Honduras; 
Cost of debt relief (millions of dollars): $1,735.7; 
Total cost, including export shortfall (millions of dollars): 
$25,977.0; 
NPV debt-to-exports in 2020 (percentage): 41.3%; 
Average debt service- to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Madagascar; 
Cost of debt relief (millions of dollars): $213.7; 
Total cost, including export shortfall (millions of dollars): 
$6,103.2; 
NPV debt-to-exports in 2020 (percentage): 111.0%; 
Average debt service- to-revenue, 2003-2020 (percentage): 4.9%. 

Country: Malawi; 
Cost of debt relief (millions of dollars): $11.6; 
Total cost, including export shortfall (millions of dollars): 
$456.0; 
NPV debt-to-exports in 2020 (percentage): 132.5%; 
Average debt service-to- revenue, 2003-2020 (percentage): 4.0%. 

Country: Mali; 
Cost of debt relief (millions of dollars): $394.7; 
Total cost, including export shortfall (millions of dollars): 
$394.7; 
NPV debt-to-exports in 2020 (percentage): 119.0%; 
Average debt service-to- revenue, 2003-2020 (percentage): 5.0%. 

Country: Mauritania; 
Cost of debt relief (millions of dollars): $393.7; 
Total cost, including export shortfall (millions of dollars): 
$4,271.2; 
NPV debt-to-exports in 2020 (percentage): 150.0%; 
Average debt service- to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Mozambique; 
Cost of debt relief (millions of dollars): $348.1; 
Total cost, including export shortfall (millions of dollars): 
$21,479.9; 
NPV debt-to-exports in 2020 (percentage): 79.7%; 
Average debt service- to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Nicaragua; 
Cost of debt relief (millions of dollars): $474.5; 
Total cost, including export shortfall (millions of dollars): 
$7,389.2; 
NPV debt-to-exports in 2020 (percentage): 94.3%; 
Average debt service- to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Niger; 
Cost of debt relief (millions of dollars): $576.7; 
Total cost, including export shortfall (millions of dollars): 
$4,347.3; 
NPV debt-to-exports in 2020 (percentage): 179.1%; 
Average debt service-to- revenue, 2003-2020 (percentage): 2.6%. 

Country: Rwanda; 
Cost of debt relief (millions of dollars): $392.0; 
Total cost, including export shortfall (millions of dollars): 
$4,640.2; 
NPV debt-to-exports in 2020 (percentage): 516.4%; 
Average debt service- to-revenue, 2003-2020 (percentage): 2.1%. 

Country: São Tomé and Príncipe; 
Cost of debt relief (millions of dollars): $49.7; 
Total cost, including export shortfall (millions of dollars): 
$402.8; 
NPV debt-to-exports in 2020 (percentage): 150.0%; 
Average debt service-to-revenue, 2003-2020 (percentage): 3.7%. 

Country: Senegal; 
Cost of debt relief (millions of dollars): $623.9; 
Total cost, including export shortfall (millions of dollars): 
$11,801.5; 
NPV debt-to-exports in 2020 (percentage): 98.7%; 
Average debt service- to-revenue, 2003-2020 (percentage): 5.0%. 

Country: Sierra Leone; 
Cost of debt relief (millions of dollars): $326.3; 
Total cost, including export shortfall (millions of dollars): 
$3,231.3; 
NPV debt-to-exports in 2020 (percentage): 150.0%; 
Average debt service-to-revenue, 2003-2020 (percentage): 3.6%. 

Country: Tanzania; 
Cost of debt relief (millions of dollars): $164.0; 
Total cost, including export shortfall (millions of dollars): 
$5,459.6; 
NPV debt-to-exports in 2020 (percentage): 149.2%; 
Average debt service- to-revenue, 2003-2020 (percentage): 4.6%. 

Country: Uganda; 
Cost of debt relief (millions of dollars): $1,031.2; 
Total cost, including export shortfall (millions of dollars): 
$10,632.5; 
NPV debt-to-exports in 2020 (percentage): 150.0%; 
Average debt service- to-revenue, 2003-2020 (percentage): 4.5%. 

Country: Zambia; 
Cost of debt relief (millions of dollars): $1,331.8; 
Total cost, including export shortfall (millions of dollars): 
$13,630.7; 
NPV debt-to-exports in 2020 (percentage): 150.0%; 
Average debt service- to-revenue, 2003-2020 (percentage): 4.5%. 

Country: Average/Total; 
Cost of debt relief (millions of dollars): $19,798.9; 
Total cost, including export shortfall (millions of dollars): 
$234.324.2; 
NPV debt-to-exports in 2020 (percentage): 141.3%; 
Average debt service-to-revenue, 2003-2020 (percentage): 4.5%.

Source: GAO analysis of World Bank and IMF data.

[End of table]

[End of section]

Appendix V: How Volatility in Export Earnings Affects the Likelihood 
that Countries Will Achieve Debt Sustainability:

While the analysis in this report 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. The export 
earnings of these countries experience large year-to-year fluctuations 
due to their heavy reliance on primary commodities, weather extremes, 
natural disasters, and other factors. We found that higher export 
volatility, along with lower average growth rates, lowers a country's 
likelihood of achieving debt sustainability. For example, under the 
World Bank and IMF export growth assumptions, which are usually higher 
than historical growth rates, all 27 HIPC countries are projected to be 
debt sustainable in 2020. However, we found that negative shocks tend 
to have greater impact on debt sustainability than positive shocks. 
After factoring in the impact of export growth volatility, we found 
that countries will not consistently achieve debt sustainability, with 
the average likelihood of achieving sustainability at 84 percent, 
despite the assumption of high export growth.[Footnote 46] We estimate 
that 10 countries have less than an 80-percent likelihood of achieving 
debt sustainability due to export volatility, with Rwanda having the 
lowest probability at 57 percent (see table 13). Countries with low 
export volatility, such as Honduras, tend to have a high likelihood of 
achieving debt sustainability under the high World Bank and IMF growth 
rates.

Table 12: Likelihood of Achieving Debt Sustainability under Different 
Scenarios in 2020:

Country: Benin; 
Probability using: World Bank/IMF growth rates (percentage): 89.3; 
Probability using historical growth rates (percentage): 42.3.

Country: Bolivia; 
Probability using: World Bank/IMF growth rates (percentage): 75.7; 
Probability using historical growth rates (percentage): 11.0.

Country: Burkina Faso; 
Probability using: World Bank/IMF growth rates (percentage): 76.0; 
Probability using historical growth rates (percentage): 1.7.

Country: Cameroon; 
Probability using: World Bank/IMF growth rates (percentage): 95.9; 
Probability using historical growth rates (percentage): 63.2.

Country: Chad; 
Probability using: World Bank/IMF growth rates (percentage): 62.3; 
Probability using historical growth rates (percentage): 51.3.

Country: Congo (Dem. Rep.); 
Probability using: World Bank/IMF growth rates (percentage): 84.4; 
Probability using historical growth rates (percentage): 1.5.

Country: Ethiopia; 
Probability using: World Bank/IMF growth rates (percentage): 93.1; 
Probability using historical growth rates (percentage): 37.3.

Country: Ghana; 
Probability using: World Bank/IMF growth rates (percentage): 89.4; 
Probability using historical growth rates (percentage): 81.0.

Country: Guinea; 
Probability using: World Bank/IMF growth rates (percentage): 97.2; 
Probability using historical growth rates (percentage): 37.6.

Country: Guinea-Bissau; 
Probability using: World Bank/IMF growth rates (percentage): 70.0; 
Probability using historical growth rates (percentage): 65.1.

Country: Guyana; 
Probability using: World Bank/IMF growth rates (percentage): 97.7; 
Probability using historical growth rates (percentage): 93.2.

Country: Honduras; 
Probability using: World Bank/IMF growth rates (percentage): 99.5; 
Probability using historical growth rates (percentage): 98.7.

Country: Madagascar; 
Probability using: World Bank/IMF growth rates (percentage): 99.0; 
Probability using historical growth rates (percentage): 86.7.

Country: Malawi; 
Probability using: World Bank/IMF growth rates (percentage): 72.3; 
Probability using historical growth rates (percentage): 44.0.

Country: Mali; 
Probability using: World Bank/IMF growth rates (percentage): 75.4; 
Probability using historical growth rates (percentage): 59.9.

Country: Mauritania; 
Probability using: World Bank/IMF growth rates (percentage): 98.3; 
Probability using historical growth rates (percentage): 25.3.

Country: Mozambique; 
Probability using: World Bank/IMF growth rates (percentage): 97.8; 
Probability using historical growth rates (percentage): 77.3.

Country: Nicaragua; 
Probability using: World Bank/IMF growth rates (percentage): 95.7; 
Probability using historical growth rates (percentage): 72.3.

Country: Niger; 
Probability using: World Bank/IMF growth rates (percentage): 65.9; 
Probability using historical growth rates (percentage): 2.7.

Country: Rwanda; 
Probability using: World Bank/IMF growth rates (percentage): 57.3; 
Probability using historical growth rates (percentage): 10.0.

Country: São Tomé and Príncipe; 
Probability using: World Bank/IMF growth rates (percentage): 66.5; 
Probability using historical growth rates (percentage): 12.4.

Country: Senegal; 
Probability using: World Bank/IMF growth rates (percentage): 98.7; 
Probability using historical growth rates (percentage): 78.9.

Country: Sierra Leone; 
Probability using: World Bank/IMF growth rates (percentage): 81.3; 
Probability using historical growth rates (percentage): 1.5.

Country: Tanzania; 
Probability using: World Bank/IMF growth rates (percentage): 83.2; 
Probability using historical growth rates (percentage): 35.9.

Country: The Gambia; 
Probability using: World Bank/IMF growth rates (percentage): 91.7; 
Probability using historical growth rates (percentage): 94.2.

Country: Uganda; 
Probability using: World Bank/IMF growth rates (percentage): 67.4; 
Probability using historical growth rates (percentage): 28.3.

Country: Zambia; 
Probability using: World Bank/IMF growth rates (percentage): 85.3; 
Probability using historical growth rates (percentage): 5.4.

Country: Average; 
Probability using: World Bank/IMF growth rates (percentage): 83.9; 
Probability using historical growth rates (percentage): 45.1. 

Source: GAO analysis of World Bank and IMF data.

Note: For this analysis, we assumed that grants alone are used to cover 
the balance of payments shortfall.

[End of table]

Under historical export growth rates, which are usually lower than 
assumed in the World Bank and IMF projection, volatility reduces these 
countries' likelihood of achieving debt sustainability even further. On 
average, we estimate that the likelihood of achieving debt 
sustainability is only 45 percent for the 27 HIPC countries, under 
historical export growth rates. Five countries, all of which had on 
average negative historic growth, are estimated to have less than a 10-
percent likelihood of achieving debt sustainability.[Footnote 47] Since 
volatility in export earnings reduces countries' likelihood of 
achieving debt sustainability, it is also likely to further increase 
donors' cost, as countries will require an even greater than expected 
level of debt relief to achieve debt sustainability.

[End of section]

Appendix VI: Comments from the Department of the Treasury:

DEPARTMENT OF THE TREASURY 
WASHINGTON, D.C. 20220:

APR 2 2004:

Mr. Joseph A. Christoff:

Director, International Affairs and Trade 
U.S. General Accounting Office:

441 G Street, N.W. 
Washington, D.C. 20548:

Dear Mr. Christoff:

Thank you for giving us the opportunity to comment on your recent 
report related to international debt issues, developing country 
economic growth, and international financial institutions and bilateral 
donors' participation in these issues. While acknowledging the analysis 
that has gone into producing this report, we find many aspects that 
concern us. In our view, the report brings too little clarity to a very 
complex topic. It tends to be aggressive and sensationalistic in its 
claims. It leaves the impression to a reader that very large amounts of 
money, substantially above previously projected costs, will be required 
to be paid in substantial part by American taxpayers in future years.

Multilateral Development Bank Financing of the Enhanced HIPC 
Initiative:

We believe the report should have clearly reported the existence of 
international agreements for the financing of the Enhanced HIPC 
Initiative as it relates to the concessional loan windows of the 
Multilateral Development Banks (MDBs): the International Development 
Association of the World Bank (IDA), the Fund for Special Operations of 
the Inter-American Development Bank (FSO) and the African Development 
Fund of the African Development Bank (AFDF). In these areas and as 
related to the much smaller MDB hard loan debts of HIPC countries, 
international financing frameworks have been agreed for some time and 
basically are being followed. To date it is fair to say that the 
contributions have been coming in largely consistent with commitments 
donors made and at a rate that for the most part has not slowed HIPC 
program action due to lack of international financing.

The report also fails to explain that there is a regular international 
process for review and discussion of financing for the HIPC program. 
These discussions have mostly taken place alongside IDA Deputies 
meetings over the past several years and often have been based on 
regular IDA Trustee papers analyzing the financial status of the HIPC 
Trust Fund. The analysis looks at any gaps that may exist from two 
sources: (1) What donors promised and what they have actually provided; 
and (2) What additional resources are needed due to new decisions 
related to the HIPC program or due to various cost increases. The 
financing gap analysis in October 2002 showed the need for an 
additional $650 million for the HIPC Trust Fund. Donors subsequently 
made further pledges including an additional pledge of $150 million 
from the United States. There has been no indication since that time of 
any further financing gap in the HIPC Trust Fund.

Of course, there are factors that have and could in the future result 
in a need for additional resources for the HIPC Trust Fund: (1) 
adjustments in cost estimates for existing countries caused by delays 
in the timing of "Decision Points"; also, adjustments necessary over 
time because HIPC Trust Fund pledges are made in nominal terms but 
costs are measured in NPV terms; (2) additional countries: Sudan, 
Liberia, and Somalia, while technically eligible for HIPC, were not 
included in the original financing framework because it was not 
expected they would be able to take advantage of the program; (3) 
topping up: there is a possibility of "topping up", additional debt 
reduction provided at "Completion Point", under the HIPC framework if a 
country has encountered exceptional exogenous shocks that cause a 
fundamental change in economic circumstances. There will be continuing 
reviews of the status of HIPC Trust Fund financing, but since October, 
2002 there have been no calls for additional donor pledges.

In the context of this report, we have discussed the stated additional 
HIPC costs related to the AFDB. At this time, we remain unconvinced 
that these AFDB related cost projections are accurate.

Objectives of the Enhanced HIPC Initiative:

This report, similar to the prior GAO report on HIPC, continues to 
assert that the Enhanced HIPC Initiative was intended to ensure an 
"exit" from unsustainable debt burdens. We again disagree. 
Fundamentally, the Enhanced HIPC Initiative was aimed at eliminating 
the extraordinary debt overhangs of the poorest most debt burdened 
countries and at the HIPC decision point achieving a debt to export 
ratio of 150 percent for those countries. The Initiative did not 
contain elements aimed at controlling lending or over-lending to these 
countries. It did not contain elements capable of ensuring economic or 
export growth, and it did not contain elements to ensure that a 150 
percent debt to exports ratio for individual countries would be 
maintained into the future. The Enhanced HIPC Initiative policy 
structure has three primarily elements: (1) deep debt reduction applied 
to both multilateral and bilateral sources, (2) new money to sustain 
resource transfer levels, and (3) economic and governance policy 
reform. While enthusiastic supporters of the program may well have 
claimed that it was intended to achieve "debt sustainability", and 
while that goal is admirable, the program itself was created as a one 
time event to address the accumulation of unsustainable debt overhangs 
by the poorest countries. Achieving the aspiration of "debt 
sustainability" for developing poor countries requires productive 
investment, economic growth, continuing significant economic and 
governance reforms and disciplined lending and borrowing, a combination 
of elements far beyond those contained in the Enhanced HIPC Initiative.

Projections of Future Development Assistance:

The report contains various cost projections largely unrelated to the 
Enhanced HIPC Initiative as it exists today, but rather related to 
possible increases in the need for official development assistance in 
the future. The goal of achieving and particularly of maintaining "debt 
sustainability", however it is defined, like most other development 
goals, fundamentally is the responsibility of the developing countries. 
There exists no international agreement on maintaining this goal nor on 
how such costs would be paid.

We acknowledge the valuable work GAO did in a prior report to point out 
overly optimistic export growth projections of the IMF and World Bank 
staffs. It should be noted however that a recent World Bank/IMF paper 
compares anticipated export growth and actual export growth for HIPC 
countries between their decision and completion points. The finding is 
that, while overall the projections were optimistic, almost half the 
countries have exceeded their original export projections.

We would caution that the very large numbers in this report are a 
confusing speculative mix of long-term estimates of the "cost" of 
achieving debt reduction and providing increases to official 
development assistance in order to achieve projected economic growth 
rates and maintain a debt to export ratio of 150 percent for HIPC 
countries. Making long-term projections is a highly uncertain business 
and results are volatile to basic assumptions. We remain unconvinced 
that utilization of an export growth average for the past twenty years 
is the best way to project future export growth, albeit it is a 
conservative base that has the effect of significantly increasing 
estimated resource needs.

In closing, we believe that this report continues to build the 
substantial analytic base supporting the United States pursuit of 
substantial increases in grant financing in MDB development funds for 
the poorest developing countries. Grant programs, if adopted at 
sufficient levels, would provide a stronger basis for economic growth 
and would avoid the significant risk of a future and largely MDB-
focused debt crisis among the poorest developing countries.

We appreciate the GAO's contributions to the deliberations on how to 
assist countries in achieving long-term economic growth and debt 
sustainability, and we look forward to continuing to collaborate 
together.

Sincerely,

Signed by: 

William E. Schuerch:

Deputy Assistant Secretary for Debt Policy and Trade Finance: 

The following are GAO's comments on the Department of the Treasury 
letter, dated April 2, 2004.

GAO Comments:

1. Treasury said the report leaves the impression that very large 
amounts of money, substantially above previously projected costs, will 
be required to be paid in substantial part by American taxpayers in 
future years. We agree that the challenge of achieving high economic 
growth rates, while maintaining debt sustainability, will likely 
require a substantial commitment of resources from the donors, 
including the United States, beyond what is currently projected by the 
World Bank and IMF.

2. Treasury said the report should have clearly reported the existence 
of international agreements for financing HIPC as they relate to the 
multilateral development banks and that contributions have thus far 
largely met commitments. We recognized throughout the report the donor 
community's commitment to financing HIPC. However, under the agreed 
upon pay-as-you-go financing arrangement, funding has not been 
identified for large emerging financing shortfalls. We consider it to 
be fiscally prudent to estimate the full magnitude of the donor's 
financial commitment.

3. Treasury said there has been no indication since October 2002 of any 
further financing gap in the HIPC Trust Fund. Our report refers to 
financing challenges over the life of the initiative, not specifically 
to the HIPC Trust Fund at this point in time, as reflected by the 
donor's pay-as-you-go approach. Under the current pay-as-you-go 
approach, we did not identify a gap in the HIPC Trust Fund. However, as 
Treasury recognizes in its letter, there are several factors that are 
likely to result in the need for additional resources in the future. 
Our report provides estimates of those and other emerging additional 
costs.

4. Treasury said it is not convinced that our cost estimates for the 
AfDB are correct. We consider our estimate to be more accurate because 
it accounts for the actual amount of resources the AfDB has identified 
to contribute to the initiative and converts the estimate into 2003 
dollars. For example, although the AfDB expects to provide $662 million 
(nominal) as it share of the HIPC Initiative it has only identified 
$370 million (nominal) thus far.

5. Treasury disagrees with the assertion that the enhanced HIPC 
Initiative was intended to ensure an exit from unsustainable debt 
burdens. We disagree. Numerous official World Bank and IMF documents as 
recent as 2003 affirm that a permanent, lasting, or durable exit from 
unsustainable debt remains a central objective of the HIPC 
Initiative.[Footnote 48] While the Treasury may have retreated from 
this objective, the World Bank and IMF have not.

6. Treasury also said achieving the aspiration of debt sustainability 
for poor countries requires a combination of elements. The report 
states that our estimates assume that the countries will follow their 
World Bank and IMF development programs, including undertaking 
recommended reforms and achieving economic growth rates consistent with 
reducing poverty and maintaining long-term debt sustainability:

7. The Treasury said the report contains various cost projections 
largely unrelated to the current Enhanced HIPC Initiative. We disagree. 
At least 95 percent of our cost projections directly pertain to 
achieving the goals of the initiative--helping countries achieve 
economic growth and maintain long-term debt sustainability. The 
remaining amount is our estimate of the cost of achieving a second debt 
target--a debt service-to-government revenue of less than 5 percent--
requested by the committee.

8. Treasury said that a recent World Bank/IMF study demonstrates that, 
while overall the projections were optimistic, almost half the 
countries have exceeded their original export projections. We do not 
believe that strong short-term (2 to 3 years) export growth necessarily 
constitutes a long-term trend. HIPC countries have historically 
experienced great volatility in their export earnings. It is not 
uncommon to see substantial increases in their export earnings for a 
few years followed by substantial declines. Although some countries 
have experienced high growth in recent years, sustaining that growth 
over 20 years or more is a difficult challenge.

9. Treasury said that it remains unconvinced that using an export 
growth average for the past 20 years is the best way to project future 
export growth. As noted in our previous reports, World Bank/IMF 
projected export growth rates have been optimistic--overall, more than 
double historical rates. We consider historical export growth rates to 
be more realistic, given these countries' reliance on highly volatile 
commodities and other vulnerabilities. For example, the increasing 
prevalence of HIV/AIDS in many poor countries will likely have 
substantial negative effects on a broad range of economic variables, 
including export growth.

[End of section]

Appendix VII: Comments from The World Bank:

The World Bank 
Washington, D.C. 20433 U.S.A.

SHENGMAN ZHANG 
Managing Director:

March 31, 2004:

Mr. Joseph Christoff 
Director 
International Affairs and Trade 
U.S. General Accounting Office 
Washington, DC 20548:

Dear Mr. Christoff:

Thank you for the opportunity to comment on the General Accounting 
Office's draft report, "Developing Countries-Achieving Poor Countries' 
Economic Growth and Debt Relief Targets Faces Significant Financing 
Challenges" (GAO-04-405, April 2004).

The draft report rightly reminds us of the challenges of channeling 
adequate resources to the Heavily Indebted Poor Countries (HIPCs), 
including the assistance committed under the HIPC Initiative, in 
support of their long-term development strategy and efforts toward 
meeting the Millennium Development Goals (MDGs) by 2015. As you know, 
during the development and adoption of the enhanced HIPC Initiative in 
1999, the World Bank's Management and shareholders held extensive 
discussions on the financing of the Bank's cost of HIPC debt relief. 
The conclusion of these discussions was to adopt a pay-as-you-go 
approach to ensure prompt delivery of debt relief. Subsequently, the 
financing of IDA's debt relief costs on IBRD debt was included in the 
overall IDA13 replenishment resources. Also, during the IDA13 
replenishment IDA donors agreed to address the financing of IDA's HIPC 
debt relief costs during the IDA14 replenishment.

We take to heart the report's recommendation that long-term projections 
on export growth rates made by the Bank and the Fund need to be more 
realistic. Indeed, the Bank's independent Operations Evaluations 
Department produced a review of the HIPC Initiative last year that made 
the same recommendation. Staff have adopted this recommendation, 
including by systematically providing a low-case scenario based on 
historical growth trends and country-specific risk scenarios to stress 
test the long-term projections. Nevertheless we would like to emphasize 
that economic projections over a 20-year period contain a high degree 
of uncertainty, not only around economic conditions that may prevail 
over that period but also around policy changes that may occur in 
developed and developing countries.

We also support the GAO report's emphasis on the need for HIPCs to 
strive for sustainable development financing strategies even after they 
reach their completion 
points under the HIPC Initiative. In this vein, the Bank and Fund 
staffs are working with their low-income member countries, including 
the HIPCs, and the international community to develop strategies that 
would contribute toward achieving debt sustainability while in pursuit 
of the MDGs (IDA and IMF, Debt Sustainability in Low-Income Countries-
Proposal for an Operational Framework and Policy Implications, February 
3, 2004).

Debt relief has never been considered or presented as a panacea that 
would alone overcome the towering challenge of long-term development 
and poverty reduction in HIPCs. We therefore do not agree with the 
report's implicit assumption that any 
deviation from a projected debt profile would be offset only by 
additional debt relief or compensatory financing. Other elements of an 
effective development strategy have to be in place, including a stable 
and growth-friendly macroeconomic environment, good governance and 
institutional capacity, and widespread participation including the poor 
in the design and implementation of poverty reduction strategies. These 
can be reinforced by concurrent changes in the policies of developed 
countries, particularly in their effort to increase aid flows in a more 
predictable manner and to create greater market access for low-income 
countries to benefit from increased exports.

While we agree with the GAO report's finding that significantly more 
resources will be needed to help countries achieve the MDGs, we would 
like to clarify that the HIPC Initiative has never specified nor 
committed to "debt relief targets" in 2020. We find the hypothetical 
exercise contained in the report interesting, but also believe that 
GAO's methodology to assess the financing needs of WPCs can be improved 
to recognize the very important efforts made by these countries 
themselves. In particular, GAO needs to re-examine its key assumption 
that holds constant countries' policies even during periods of 
exogenous shocks. Furthermore, GAO makes an arbitrary assumption that 
historical growth rates are a good guide to future performance, even 
though significant structural and policy changes are taking place in 
HIPCs through ongoing reforms. In fact, studies of recent HIPC 
graduates provide encouraging evidence that growth has accelerated in 
recent years.

Again, let me thank you for the opportunity to comment on this draft 
report on the challenges we face together in meeting the debt relief 
costs at the multilateral development banks and in securing adequate 
long-term financing in support of the MDGs in the world's poorest, most 
heavily indebted countries.

Sincerely yours,

Signed by: 

Shengman Zhang: 

The following are GAO's comments on the World Bank letter, dated March 
31, 2004.

GAO Comments:

1. The World Bank disagreed with the assumption that any deviation from 
a projected debt profile would be offset only by additional debt relief 
or compensatory financing. We disagree with the Bank's characterization 
of the report. The report explicitly states that donors have the option 
of not financing the export shortfalls; however, this will hamper 
countries' economic growth and reduce the funds available for poverty 
reduction. We assume, consistent with World Bank and IMF projections, 
that countries are following their reform and development programs. 
Hence we assumed that the other key elements of an effective 
development strategy are in place.

2. The World Bank said that the HIPC Initiative has never committed to 
debt relief targets in 2020. While we agree with this technical 
distinction, we note that debt sustainability analyses project all HIPC 
countries to have net present value debt-to-export ratios at or below 
150 percent in 2020. Therefore, we chose 2020 because it represented 
the final year in World Bank and IMF projections.

3. The World Bank said that our methodology to assess the financing 
needs of HIPCs can be improved to recognize the very important efforts 
made by these countries themselves. As the report states, our analysis 
assumes that government revenue and GDP will grow at the optimistic 
rates projected by the World Bank and IMF because countries are 
expected to be undertaking recommended structural and policy reforms.

4. The World Bank said that we make an arbitrary assumption that 
historical growth rates are a good guide to future performance. As 
noted in our previous reports, World Bank/IMF projected export growth 
rates have been optimistic--overall, more than double historical rates. 
We consider historical export growth rates to be more realistic, given 
these countries' reliance on highly volatile commodities and other 
vulnerabilities. While policy reforms may improve export growth, other 
factors may hinder growth. For example, the increasing prevalence of 
HIV/AIDS in many poor countries will likely have substantial negative 
effects on a broad range of economic variables, including export 
growth. 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.

[End of section]

Appendix VIII: Comments from the African Development Bank:

AFRICAN DEVELOPMENT BANK GROUP:

13 RUE DU GHANA:

ANGLE AV. HEDI NOUIRA ET PIERRE DE COUBERTIN 
B.P. 323 - 1012 TUNIS BELVEDERE:

TUNISIE:

Telephone: (216) 71 352 246 
Fax: (216) 71 352 577 
Web Site: www.afdb.org:

REF: PRST/LTR/2004/04/001 

DATE: 2nd April, 2004:

PRESIDENT:

Mr. John W. Snow 
Secretary Of The Treasury 
Department Of The Treasury 
1500 Pennsylvania Avenue, N.W. Room 3419:
Washington D.C. 20220 U.S.A:

Dear Mr. Snow,

I am writing in response to the GAO request for our comments on its 
recent draft of its study on debt relief, entitled, "Developing 
Countries: Achieving Poor Countries' Debt Relief Targets Faces 
Significant Financing Challenges." Our comments relate to two issues 
raised by the GAO Report: (1) Financing Gap for the Debt Relief of the 
African Development Bank Group (AfDB), and (2) Achieving Debt 
Sustainability in the Medium to Long Term.

With respect to the first issue, GAO estimates that the AfDB faces a 
financing gap of around $400 million for the 23 countries that have 
qualified and $800 million for the remaining nine countries - most of 
which are post-conflict countries. GAO's estimate for AfDB of its total 
financing gap thus stands at $1.2 billion. The GAO Report also states 
"Neither (the World Bank or the ADB) has determined how it would close 
the gap." 

With respect to the 23 African countries that have qualified to date, 
AfDB's current estimate of its costs for debt relief, including for the 
Democratic Republic of Congo, is $2.56 billion in present value terms. 
From the information provided to us by the HIPC Trust Fund regarding 
donor contributions and including the projected Bank contributions, the 
resources mobilized by the Bank Group as of the end of 2003 is $2.43 
billion. The current shortfall is thus in the order $130 million, 
although this may increase due to differences inevitably created by net 
present value estimates for the debt, the timing of donor 
contributions, and the returns on the funds once received. Moreover, 
this estimate does not take into account any 'topping up' of debt 
relief that may be required when the 15 African countries that have 
only achieved their decision point reach their completion points. As 
the GAO study indicates this could vary between $127 to $254 million 
for the AfDB depending on the approach to be taken by the donor 
community with respect to calculating topping up requirements.

With respect to the resources required for the remaining 9 countries, 
the GAO report is correct when it states that the financing of the 
AfDB's HIPC contribution has yet to be determined. In this regard, it 
is important to emphasize, first, that the actual amounts involved are 
not precise. The $800 million quoted by the GAO is likely to be an 
underestimate given that most of these countries in the remaining group 
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.

More broadly, with respect to the financing of AfDB HIPC costs, I wish 
to bring to your kind attention the two important agreements that the 
donor community had reached. First, at the June 2000 meeting of ADF 
donors, State Participants pledged to finance the Bank's HIPC costs and 
agreed that the maximum the Bank Group could mobilize from its own 
resources was $370 million. Second, donor countries essentially adopted 
a pay-as-you-go approach, making part of the debt relief costs of the 
AfDB available at the decision point and the remaining amount at the 
completion point.

In the light of these agreements, we expect additional debt relief 
financing for the AfDB Group to be covered by donor contributions. In 
this connection, it is evident that the US government would undoubtedly 
be asked to make additional contributions to cover future AfDB HIPC 
costs. I 
wish to emphasize that unless it reaches agreement with its donors on 
financing, the AfDB cannot, on its own, decide to provide debt relief 
to the remaining countries.

Turning to the issue of long-term debt sustainability, as the GAO study 
clearly points out, this would depend on the growth performance of HIPC 
countries, the growth of their exports, and the degree to which these 
countries succeed in diversifying their exports. The record to date is 
indeed not very encouraging. As the need to `top up' debt relief at the 
completion point has shown, projections on growth and export 
performance have proved to be too optimistic. And recent adverse terms 
of trade and volatility in commodity prices have also made it difficult 
for countries to achieve the HIPC debt targets.

The GAO conclusion that these countries are likely to need considerable 
assistance in the future to meet the debt sustainability targets - and 
as important their economic growth and social development targets - is 
therefore likely to be correct. There can, however, be some 
differences of views on the actual amounts that will be involved.

The use of historical data to project export performance, as the GAO 
study does, would imply limited progress in the future. While African 
countries in general have yet to raise their growth rates to desirable 
levels and as many have yet to diversify their export base, caution on 
this score is warranted. Nonetheless, it is also important to note that 
some HIPC countries, such as Mozambique, are making important strides 
in terms of sustaining higher growth rates and diversifying their 
exports. Other African countries are also beginning to boost their 
exports to the US in the context of the AGOA initiative.

In the light of these developments, a closer look at the recent 
performance of individual cases may provide a more accurate basis for 
projecting future ODA needs. It would also indicate some of the other 
policy measures that the US government could consider in other critical 
areas such as trade to help African countries accelerate their growth 
rates and diversify their exports.

I trust that you will find these comments useful.

Sincerely yours,

Signed by: 

Omar Kabbaj: 

The following are GAO's comments on the African Development Bank 
letter, dated April 2, 2004.

GAO Comments:

1. The AfDB said its current shortfall for the 23 African countries 
that have qualified to date is $130 million. We consider our estimate 
of about $400 million to be more accurate because it accounts for the 
actual amount of resources the AfDB has identified to contribute to the 
initiative and converts the estimate into 2003 dollars. For example, 
although the AfDB expects to provide $662 million (nominal) as it share 
of the HIPC Initiative, it has only identified $370 million (nominal) 
thus far.

2. The AfDB said the use of historical export data would imply limited 
progress in the future. As noted in our previous reports, World Bank/
IMF projected export growth rates have been optimistic--overall, more 
than double historical rates. We consider historical export growth 
rates to be more realistic, given these countries' reliance on highly 
volatile commodities and other vulnerabilities. For example, the 
increasing prevalence of HIV/AIDS in many poor countries will likely 
have substantial negative effects on a broad range of economic 
variables, including export growth.

[End of section]

Appendix IX: Comments from the Inter-American Development Bank:

INTER-AMERICAN DEVELOPMENT BANK 
WASHINGTON D. C. 20577:

PRESIDENT:

April 5, 2004:

Mr. Joseph A. Christoff Director:

International Affairs and Trade 
General Accounting office:

441 G Street, NW, Room 4767 
Washington, D.C. 20548:

Dear Mr.Christoff:

Thank you for giving us an opportunity to comment on the draft report 
titled "Developing Countries: Achieving Poor Countries' Economic Growth 
and Debt Relief Targets Faces Significant Financing Challenges".

Attached, please find our comments, which we understand will be 
reflected in the final report.

Yours sincerely,

Signed by: 

Dennis Flannery
for Enrique V. Iglesias, President:

Encl.

Comments from the Inter-American Development Bank:

The IDB generally agrees with the report prepared by GAO, which 
accurately reflects the Bank's participation in the HIPC Initiative.

The IDB is providing debt relief to four countries: Bolivia, Guyana, 
Honduras and Nicaragua. Of these countries, three have already reached 
completion without significant completion point DSA or topping-up 
adjustments; therefore, the fully financed framework of debt relief 
remains unchanged.

As indicated in the report, the IDB estimates there could be a shortage 
of resources available for lending in the FSO in future years. The 
current Governors' mandate established a lending program for 2000-2008, 
which the Bank expects to be able to achieve. IDB Management is 
reviewing its lending capacity in the FSO for 2009 and thereafter to 
determine what actions may be required for the FSO to continue 
providing concessional loans to the Bank's poorest borrowing member 
countries. 

[End of section]

Appendix X: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Thomas Melito (202) 512-9601 Cheryl Goodman (202) 512-6571:

Acknowledgments:

In addition to the individuals named above, Bruce Kutnick, Barbara 
Shields, R.G. Steinman, Ming Chen, Rob Ball, and Lynn Cothern made key 
contributions to this report.

(320196):

FOOTNOTES

[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 report 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 the data for 4 other countries 
are considered unreliable.

[3] 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.

[4] Eligibility for the HIPC Initiative is scheduled to expire at the 
end of calendar year 2004. However, previous sunset dates have been 
extended.

[5] The multilateral development banks' financing gap takes into 
consideration pledges from the HIPC Trust Fund. The HIPC Trust Fund was 
created to help multilateral creditors meet their share of debt relief 
cost. The Fund includes money pledged/contributed by member governments 
and some multilateral creditors. 

[6] Factors such as changes in the foreign exchange value of the U.S. 
dollar could substantially alter total costs. 

[7] The IBRD does not expect to write off this debt. The IBRD expects 
the financing for debt relief on IBRD loans to come from HIPC Trust 
Fund resources and through new credits from IDA to certain affected 
countries. These HIPC Trust Fund resources and IDA credits are to be 
funded by resources other than transfers from IBRD's net income. 

[8] This is a nominal dollar estimate. 

[9] 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.

[10] 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.

[11] 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 through 2035.

[12] 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.: January 24, 2003) for a 
discussion of implicit exposures. 

[13] Most of the debt of these countries is owed to the African 
Development Fund, the concessional lending arm of the bank. 

[14] AfDB's annual cash flow projection covers the period 2000 through 
2038. 

[15] According 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.

[16] According to AfDB's Articles of Agreement, the authorized capital 
stock of the AfDB may be increased when the Board of Governors deems it 
advisable. The decision of the board is adopted by a two-thirds 
majority of the total number of governors, representing not less than 
three-quarters of the total voting power of the members. No member is 
obligated to subscribe to any part of a capital stock increase, but not 
participating in an increase could affect a country's voting power and 
influence in AfDB.

[17] According to the IaDB's Articles of Agreement, the FSO shall be 
increased through additional contributions by the members when the 
Board of Governors considers it advisable by a three-fourths majority 
of the total voting power of the member countries. No member, however, 
is obligated to contribute any part of such increase, though not 
contributing may affect a country's voting power and influence in the 
Bank. 

[18] The current HIPC framework allows for topping up of relief only in 
exceptional cases where a country's debt ratios have worsened as a 
result of exogenous shocks, leading to a fundamental change in its 
economic circumstances. 

[19] Under the first methodology, the current bilateral cost is 
associated with Russia and non-Paris Club bilateral and commercial 
creditors, which did not provide additional bilateral assistance above 
the enhanced HIPC agreement.

[20] When 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, 10 countries have 
reached their decision points, and 17 are between decision and 
completion points.

[21] The seven countries are Chad, Ethiopia, Malawi, Niger, Rwanda, The 
Gambia, and São Tomé and Príncipe.

[22] This figure includes $149 million for Burkina Faso and Benin under 
methodology I and $326 million for Benin, Burkina Faso, and Mauritania 
under methodology II. Burkina Faso has already received topping up of 
$129 million, and the IMF and World Bank boards decided in March 2003 
that Benin did not qualify for topping up at its completion point. 
According to the World Bank and IMF, the estimates for these countries 
are provided for information purposes and do not necessarily imply that 
methodology II would be applied retroactively.

[23] Declines in discount rates and the U.S. dollar exchange rate since 
these preliminary cost estimates were calculated could increase total 
costs. The World Bank and IMF estimate that the cost in the baseline 
scenario could rise to about $1.5 billion under methodology I and about 
$3.4 billion under methodology II, using lower exchange and discount 
rates prevailing as of June 30, 2003 (end-December 2002 for those 
countries likely to reach completion point in 2003). For example, 
methodology I estimates of topping up costs for Ethiopia increased from 
$334 million to $618 million, and from $71 million to $103 million for 
Niger.

[24] Using 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.

[25] Debt 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.

[26] U.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); U.S. General Accounting 
Office, Developing Countries: Debt Relief Initiative for Poor Countries 
Faces Challenges, GAO/NSIAD-00-161 (Washington, D.C.: June 29, 2000); 
U.S. General Accounting Office, Developing Countries: Switching Some 
Multilateral Loans to Grants Lessens Poor Country Debt Burdens, GAO-02-
593 (Washington, D.C.: April 19, 2002); and U.S. General Accounting 
Office, Developing Countries: Challenges Confronting Debt Relief and 
IMF Lending to Poor Countries, GAO-01-745T (Washington, D.C.: May 15, 
2001).

[27] If 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.

[28] World Bank, Operation Evaluations Department, The Heavily Indebted 
Poor Countries Debt Initiative, An OED Review, February 20, 2003.

[29] Under historical export growth rates, more than half of the 
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.

[30] This estimate assumes that donors fund the $215 billion export 
shortfall with grants only, as grants avoid the build up of new debt. 

[31] Of 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 to debt 
relief.

[32] See appendix IV for a more detailed discussion of the different 
strategies examined.

[33] Our 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.

[34] Niger 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.

[35] This cost represents loan receipts from 2003-2060 that are forgone 
after switching a percentage of new loans to grants.

[36] The 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 appendix IV.

[37] While 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.

[38] Yemen, Angola, Kenya, and Vietnam are not included in our analysis 
because they are not expected to qualify for the HIPC Initiative. The 
World Bank and IMF expect the countries' debt level to be sustainable 
after they receive traditional debt relief. 

[39] Heavily Indebted Poor Countries Initiative - Status of 
Implementation, IMF and World Bank, (Washington, D.C.: September 12, 
2003); from AfDB-List of Countries Approved by the African Development 
Bank Group's Boards Under the Enhanced HIPC Initiative; from IaDB-
Enhanced HIPC Debt Relief Profile for Bolivia, Honduras, Guyana, and 
Nicaragua.

[40] For most countries, historical export growth rates are lower than 
the DSA projections. 

[41] While 42 countries are potentially eligible for assistance under 
the HIPC Initiative, only 27 countries thus far have qualified for debt 
relief.

[42] See U.S. General Accounting Office, Debt Relief Initiative for 
Poor Countries Faces Challenges, GAO/NSIAD-00-161 (Washington, D.C.: 
June 29, 2000) and Switching Some Multilateral Loans to Grants Lessens 
Poor Country Debt Burdens, GAO-02-593 (Washington, D.C.: April 19, 
2002).

[43] Key economic variables such as IMF purchases, loan disbursements, 
grants, or additional finance were not provided or could be deduced 
only by making reasonable assumptions. For example, while most 
countries' DSAs contained a balance of payments table indicating 
official grants and loans, Mauritania had no balance of payments table 
and Rwanda's did not have official grant and loan information.

[44] The SDR is a unit of account of the IMF. It is comprised of a 
weighted average of the values of four currencies: the U.S. dollar, 
yen, euros, and pound sterling.

[45] We assume the same loans-to-grants ratio as indicated in each 
country's DSA.

[46] To build in volatility in export projection, we used software that 
randomly drew 18,000 export growth rates (for each 1,000 runs, 18 
simultaneous draws, one for each year) from a distribution that 
reflects the historic growth volatility of each country. A detailed 
description of our methodology is contained in appendix I. 

[47] The five countries are Burkina Faso, Democratic Republic of Congo, 
Niger, Sierra Leone, and Zambia. Historic growth is calculated using 
the geometric mean of the annual growth rates.

[48] See for example, Debt Relief for the Poorest: An OED Review of the 
HIPC Initiative, World Bank, (Washington, D.C.: February 24, 2003).

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