## EXECUTIVE SUMMARY

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---

### Introduction and purpose
- Compares debt vulnerabilities in low-income countries (LICs) today with the situation in the mid-1990s that led to the Heavily Indebted Poor Countries (HIPC) Initiative.
- Uses main indicators from the LIC-DSF that IMF and World Bank have been using since 2018, extended historically where possible.
- Examines changes in debt structure and creditor composition since the mid-1990s and implications for debt resolution and creditor coordination.

### State of debt vulnerabilities (key findings)
- About 60 percent of low-income countries are facing high debt vulnerabilities as of end-2022:
  - 12 are in external debt distress.
  - 28 are at high risk of external debt distress.
- Solvency and liquidity indicators remain stronger on average than in the mid-1990s, but risks are significant and rising.
- Median trajectories and stress scenarios:
  - If external debt service-to-revenue ratios continue to increase at the observed median pace of one percentage point per annum, liquidity pressures could reach mid-1990s levels within 7 to 10 years for the median LIC.
  - For LICs currently in distress or at high risk, a 2 percentage point per annum increase would bring similar pressures sooner.
- Aggregate debt and servicing trends:
  - Average total public and publicly guaranteed debt-to-GDP ratio increased by an average of one percentage point per annum between 2010 and 2019, and jumped by 13 percentage points in 2020.
  - Mean debt service ratios (interest plus principal as a share of exports) rose from 7 percent of exports in 2010 to 16 percent of exports in 2021.
  - Median public gross financing need (GFN) was 5.5 percent of GDP for LICs in 2019 and reached 9.3 percent by end-2022, with many countries above 15 percent of GDP.
- Debt structure and creditor composition changes since the mid-1990s:
  - Share of non-Paris Club credit to LICs increased from 8 percent to 20 percent.
  - Private sector debt share rose from 8 percent to 19 percent.
  - Domestic debt as a percent of GDP rose from 8 percent to 24 percent.
  - Eurobonds and syndicated loans from private banks have soared since 2016.
  - Grace periods on new debt have been declining; spreads have increased in level and volatility.
- Repayment profile and near-term pressures:
  - Medium-term external debt service profile is elevated with lumpy repayments due within the next 2 to 5 years.
  - High private debt amortizations are due from 2024 onwards, reflecting the surge in Eurobond issuances during 2013–16.

### Comparison with the pre-HIPC era (mid-1990s)
- On average, LIC debt burdens today are lower and relatively less stressed than on the eve of HIPC:
  - Average debt-to-GDP for LICs at end-1995 was 102 percent versus 65 percent by end-2021.
- Historical (1990-95) averages and medians:
  - Average total PPG debt-to-GDP: 104 percent (1990-95).
  - Average external debt stock as share of exports: 600 percent.
  - Median accumulated arrears (principal and interest): 19 percent of exports.
  - Growth over 1990-95: 1 percent.
- Pre-HIPC versus end-2021 medians (selected exact figures):
  - All LICs — 1994: Total debt as % of GDP 72; External debt as % of GDP 71; External debt as % of exports 318; External debt service as % of exports 10; External debt service as % of revenue 18.
  - All LICs — 2021: Total debt as % of GDP 53; External debt as % of GDP 33; External debt as % of exports 137; External debt service as % of exports 8; External debt service as % of revenue 10.
  - HIPCs — 1994: Total debt as % of GDP 89; External debt as % of GDP 101; External debt as % of exports 466; External debt service as % of exports 16; External debt service as % of revenue 31.
  - HIPCs — 2021: Total debt as % of GDP 53; External debt as % of GDP 29; External debt as % of exports 155; External debt service as % of exports 8; External debt service as % of revenue 16.
  - Today’s high-risk countries — 1994: Total debt as % of GDP 72; External debt as % of GDP 72; External debt as % of exports 366; External debt service as % of exports 11; External debt service as % of revenue 20.
  - Today’s high-risk countries — 2021: Total debt as % of GDP 66; External debt as % of GDP 39; External debt as % of exports 163; External debt service as % of exports 9; External debt service as % of revenue 18.
- End-1994 versus end-2021 external debt ratios:
  - Median PPG external debt-to-GDP: 71 percent (end-1994) vs 33 percent (end-2021).
  - Median PPG external debt-to-exports: 318 percent (end-1994) vs about 137 percent (end-2021).
  - Number of LICs with external debt-to-export ratio above 150 percent: 38 out of 69 (end-1994) vs 25 LICs (about one third) (end-2021).
- External debt service burden:
  - Median LIC external debt service: about 18 percent of revenues and 10 percent of export earnings (on eve of HIPC, 1994).
  - Median LIC external debt service today: about 10 percent of revenues and 8 percent of export earnings (end-2021).
  - For LICs at high risk of, or in, debt distress today: external debt service 18 percent of revenue and 9 percent of export earnings (2021).

### Drivers of debt accumulation — then and now
- Dominant upward drivers: primary deficits and valuation effects from exchange rate depreciations in both periods.
- Sources that reduced debt differ:
  - Pre-HIPC: inflation, privatization flows, and transactions in financial assets were dominant debt reducers; growth and debt relief made limited contributions.
  - Last decade: growth and debt relief were key factors containing debt accumulation.
- Interest-growth differential:
  - Negative interest-growth differentials helped stabilize debt in LICs after the HIPC/MDRI Initiative, especially in the last decade.
  - Recent uptick in inflation and monetary policy normalization globally implies weaker long-run growth and less favorable debt dynamics for LICs going forward.
- Future drivers and risks:
  - LICs can influence the growth-interest differential via growth-enhancing reforms and by avoiding overborrowing from non-concessional sources.
  - Climate-related shocks could become an important driver of debt going forward.

### Data, measurement, and coverage caveats
- Comparisons across periods limited by the absence of a loan-by-loan register; presented comparisons often use nominal (face value) debt rather than present values, which does not account for changes in concessionality.
- CPIA scores needed to retroactively apply the full 2017 LIC-DSF are available only since 2004; full 2017 LIC-DSF cannot be applied to mid-1990s assessments.
- Weaknesses in debt data coverage may mask larger challenges, including incomplete information on government guarantees, debt of state-owned enterprises (SOEs), guarantees to public-private partnerships (PPPs), or collateralized financing.
- Rising domestic debt implications:
  - Domestic debt makes total debt-to-GDP a better solvency indicator than external public debt-to-GDP.
  - Domestic debt is generally more expensive and shorter maturity than foreign debt in economies without financial repression; increasing share of domestic debt can raise debt burden even if total public debt is unchanged or declining.
  - Liquidity risks from domestic debt service are not captured by external debt service indicators used in LIC-DSF; omission may understate total liquidity risk.
- Debt overhang and social spending:
  - Debt service payments are increasingly displacing social spending in LICs since 2012, suggesting re-emergence of debt overhang syndrome.
  - The degree of displacement today is less severe than in the mid-1990s.

### Financing landscape and creditor coordination challenges
- LICs face a more diverse creditor landscape, with new official bilateral and private creditors, new instrument types, and greater reliance on domestic debt—making creditor coordination more challenging than in the 1990s.
- Evolution of financing:
  - Greater reliance on non-concessional debt due to constrained concessional finance and large development/climate needs.
  - Harsher financing terms as frontier LIC asset class risk perceptions deteriorate and global monetary conditions tighten.
- New coordination mechanisms (e.g., G20 Common Framework) have been created but effective implementation has been slower than desired.
- Creditor composition shifts (end-1996 vs end-2021):
  - End-1996: Paris Club = 39 percent; non-Paris Club = 8 percent; private creditors = 8 percent (of total external PPG debt).
  - End-2021: Paris Club = 11 percent; non-Paris Club = 20 percent; private creditor holdings = 19 percent (of total external PPG debt).
- Concentration of creditor holdings:
  - Top-5 creditors in the 1980s/mid-1990s accounted for about 60 percent of total credit to LICs.
  - As of end-2021, top-5 creditors accounted for about 75 percent of total credit to LICs, with four multilateral institutions (ADB, AfDB, IMF, and WB) and China as the top creditors.
  - China is now the largest official bilateral creditor for more than half of LICs.

### Domestic debt, PPPs, and newer instruments
- Domestic debt share:
  - Domestic debt in total debt (on a currency basis) grew from around 19 percent in the mid-1990s to 35 percent by end-2021.
- Rise of PPPs and complex instruments:
  - Total investments in PPPs in LICs rose from US$0.34 billion in 1994 to US$5.87 billion in 2021.
  - Number of PPP projects increased from 11 in 1994 to 26 in 2021.
  - Many PPP projects involve sovereign guarantees; guaranteed, securitized, and collateralized contracts can be harder to assess, manage, and restructure and can transfer contingent liabilities to the sovereign balance sheet if called.

### Non-debt financial inflows and buffers
- Non-debt-creating private financial inflows:
  - During the 1980s/mid-1990s debt crisis, non-debt-creating financial inflows represented about 21 percent of GDP.
  - By end-2020, they accounted for 24 percent of GDP.
- Diaspora remittances:
  - Remittances accounted for 32 percent of private financial inflows in LICs in 1996.
  - As of end-2020, remittances accounted for about 44 percent of private financial inflows.
  - These flows have helped meet FX demand, boost reserves, and stabilize currencies, but could decline with slower global growth, affecting debt and financing conditions.

### Donor fatigue, private-sector lending, and IFI financing constraints
- Median net transfer to LICs from multilateral, bilateral, and other sources was 6 percent of GDP in the 1980s.
- Official sector net financial transfers dropped from 8 percent of GDP in 1980 to less than 2 percent of GDP by end-2021.
- Some LICs are now experiencing net transfers to creditors.
- IFI participation financing:
  - IFI participation in HIPC/MDRI was financed through Trust accounts funded by contributions from participating IFIs, bilateral donors, and investment income on undisbursed resources.
  - Those Trust accounts are depleted. Example: as of end-2019, the Debt Relief Trust Fund administered by IDA had only US$0.2 billion available, estimated to be sufficient to help finance the expected debt relief for the remaining HIPCs.
  - IFI participation in any new debt relief mechanism would require concrete commitments of grants and subsidy contributions from donors to fully fund their participation and preserve IFI business models of self-sustained financing.
- Donor fatigue reduces the appetite for another HIPC-like initiative.

### Fan charts and stochastic simulations of debt outlook
- Fan charts constructed for a synthetic LIC use average historical drivers and draws from a joint normal distribution to simulate debt-to-GDP paths.
- Historical data periods:
  - pre-HIPC period: 1984 to 1993.
  - current period: 2010 to 2019.
- Key simulation findings:
  - The level and amplitude of projected debt evolution for a synthetic LIC is lower and narrower today than in the mid-1990s.
  - Narrower width of the debt fan charts reflects relatively less uncertainty today than in the mid-1990s.
  - The tails of the fan chart suggest that upside risks (second moments) are increasing.
  - If current prevailing adverse economic conditions continue well into the future, the debt profile of LICs will eventually begin to trend consistently upwards and could reach levels comparable to the mid-1990s in the medium to long-term.
  - Distribution of risks is asymmetric: current LIC debt outlook risks are tilted to the downside (debt expected to rise); mid-1990s risks were tilted to the upside (debt expected to decline after 1998) due to prior interventions.

### IFI funding for past debt relief (Box 1 — key figures)
- Total cost of implementing the HIPC/MDRI Initiative in end-2017 present value terms: $120 billion as at end FY-2019.
- Cost of HIPC alone: $76.2 billion, shared between:
  - multilateral creditors: $33.7 billion
  - Paris Club creditors: $27.7 billion
  - other official creditors: $9.9 billion
  - commercial creditors: $4.8 billion
- Cost for MDRI: $44 billion in end-2017 PV terms, exclusively covered by the four participating multilateral creditors (IMF, WB, AfDB, IaDB).
- Cost of HIPC/MDRI to participating IFIs (in billions of U.S. dollars, PV Terms as of end-2017):
  - IDA: HIPC Total 14.7; MDRI Total 29.9; Total Cost 44.6
  - IMF: HIPC Total 6.5; MDRI Total 3.7; Total Cost 10.2
  - AfDB: HIPC Total 5.5; MDRI Total 6.5; Total Cost 12
  - IaDB: HIPC Total 1.7; MDRI Total 4; Total Cost 5.7
  - Others: HIPC Total 5.3; MDRI Total 0; Total Cost 5.3
  - Total Cost to IFIs: HIPC Total 33.7; MDRI Total 44.1; Total Cost 77.8
- Resources in the Debt Relief Trust Fund administered by IDA were depleted as at FY-2019 audited accounts, with only $221 million left—just enough to cover the cost for the three remaining HIPC countries.

### Policy implications and recommendations
- Lowering debt burdens before risks become systemic should be a priority.
- Immediate action required to avert a systemic crisis that remains some way off:
  - Promptly address debt vulnerabilities through policy reform and external financial support focused on generating vigorous, sustainable, and inclusive growth and on improving debt sustainability.
  - Countries in debt distress or whose debt becomes unsustainable should not delay a needed restructuring to restore debt sustainability.
  - Timely, efficient, and predictable restructuring processes must be available.
  - The international community should step up efforts to improve debt restructuring processes, including strengthening the G20 Common Framework to ensure debt relief is delivered in a timely and efficient manner where needed.
- Considerations on broad-based debt relief:
  - Broad debt relief initiatives would be more challenging today than in the 1990s, would require significant donor contributions (including compensating IFI participation costs), and could affect the capacity to scale up concessional finance.
  - Scaling up IFI concessional financing to LICs would be a more efficient channel for donor resources to support LICs in durably "growing" out of high debt burdens.
- Debt management priorities:
  - Avoid overborrowing from non-concessional sources to help maintain favorable real interest–growth differentials.
  - Aim for debt portfolios where real interest on debt remains below potential growth through prudent borrowing choices and growth-enhancing reforms.
- Analytical priorities:
  - Country-level sustainability analysis should focus on present values and/or debt and debt service projections, especially given rising domestic debt and changing creditor structures.
  - Improve debt data coverage (including loan-by-loan registers, guarantees, SOE and PPP exposures, and domestic debt service) to better capture solvency and liquidity risks.

### Conclusion
- Main conclusion: despite high risks, debt vulnerabilities in LICs today remain substantially less alarming than in the mid-1990s.
- About a third of low-income countries benefit from HIPC; about sixty percent of low-income countries are stressed—12 are in external debt distress and 28 are at high risk of external debt distress.
- Observed weaknesses of solvency and liquidity indicators are less severe today than on the eve of the HIPC Initiative in the mid-1990s.
- Debt vulnerabilities could reach comparable levels in the medium- to long-term if current trends persist.
- Recent debt treatment activity:
  - At least seven LICs have recently undergone or are currently undergoing debt treatments; all previously benefited from the HIPC Initiative.
  - Countries named in context of treatments: Chad (treatment now completed), Ethiopia, Ghana, and Zambia (undertaking debt treatment under the Common Framework); Somalia and Sudan (undertaking treatment under the HIPC Initiative); Malawi (undertaking treatment directly with its creditors).
- For countries at high risk of debt distress: firmly implement policies aimed at maintaining or restoring debt sustainability.
- For countries in debt distress or whose debt becomes unsustainable: early consideration of debt treatment to restore debt sustainability and early engagement with creditors are paramount.
- Mobilizing donor resources for IFI participation in debt relief is complex given competing development and climate finance needs; scaling up concessional financing to LICs is presented as a more efficient channel for donor resources.

*Source: IMF WORKING PAPERS — Are We Heading for HIPC 2.0? (selected excerpts).*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Introduction and purpose
- Compares debt vulnerabilities in low-income countries (LICs) today with the situation in the mid-1990s that led to the Heavily Indebted Poor Countries (HIPC) Initiative.
- Uses main indicators from the LIC-DSF that IMF and World Bank have been using since 2018, extended historically where possible.
- Examines changes in debt structure and creditor composition since the mid-1990s and implications for debt resolution and creditor coordination.

### State of debt vulnerabilities (key findings)
- About 60 percent of low-income countries are facing high debt vulnerabilities as of end-2022:
  - 12 are in external debt distress.
  - 28 are at high risk of external debt distress.
- Solvency and liquidity indicators remain stronger on average than in the mid-1990s, but risks are significant and rising.
- Median trajectories and stress scenarios:
  - If external debt service-to-revenue ratios continue to increase at the observed median pace of one percentage point per annum, liquidity pressures could reach mid-1990s levels within 7 to 10 years for the median LIC.
  - For LICs currently in distress or at high risk, a 2 percentage point per annum increase would bring similar pressures sooner.
- Aggregate debt and servicing trends:
  - Average total public and publicly guaranteed debt-to-GDP ratio increased by an average of one percentage point per annum between 2010 and 2019, and jumped by 13 percentage points in 2020.
  - Mean debt service ratios (interest plus principal as a share of exports) rose from 7 percent of exports in 2010 to 16 percent of exports in 2021.
  - Median public gross financing need (GFN) was 5.5 percent of GDP for LICs in 2019 and reached 9.3 percent by end-2022, with many countries above 15 percent of GDP.
- Debt structure and creditor composition changes since the mid-1990s:
  - Share of non-Paris Club credit to LICs increased from 8 percent to 20 percent.
  - Private sector debt share rose from 8 percent to 19 percent.
  - Domestic debt as a percent of GDP rose from 8 percent to 24 percent.
  - Eurobonds and syndicated loans from private banks have soared since 2016.
  - Grace periods on new debt have been declining; spreads have increased in level and volatility.
- Repayment profile and near-term pressures:
  - Medium-term external debt service profile is elevated with lumpy repayments due within the next 2 to 5 years.
  - High private debt amortizations are due from 2024 onwards, reflecting the surge in Eurobond issuances during 2013–16.

### Comparison with the pre-HIPC era (mid-1990s)
- On average, LIC debt burdens today are lower and relatively less stressed than on the eve of HIPC:
  - Average debt-to-GDP for LICs at end-1995 was 102 percent versus 65 percent by end-2021.
- External arrears accumulation was widespread in the 1990s but has remained subdued following HIPC/MDRI treatment.
- Nevertheless, absent policy action and reforms, debt vulnerabilities could reach levels comparable to the mid-1990s over the medium to long term given current trends.

### Financing landscape and creditor coordination challenges
- LICs now face a more diverse creditor landscape, with new official bilateral and private creditors, new instrument types, and greater reliance on domestic debt—making creditor coordination more challenging than in the 1990s.
- The evolution of financing:
  - Greater reliance on non-concessional debt due to constrained concessional finance and large development/climate needs.
  - Harsher financing terms as frontier LIC asset class risk perceptions deteriorate and global monetary conditions tighten.
- New coordination mechanisms (e.g., G20 Common Framework) have been created but effective implementation has been slower than desired.

### Policy implications and recommendations
- Lowering debt burdens before risks become systemic should be a priority.
- Immediate action required to avert a systemic crisis that remains some way off:
  - Promptly address debt vulnerabilities through policy reform and external financial support focused on generating vigorous, sustainable, and inclusive growth and on improving debt sustainability.
  - Countries in debt distress or whose debt becomes unsustainable should not delay a needed restructuring to restore debt sustainability.
  - Timely, efficient, and predictable restructuring processes must be available.
  - The international community should step up efforts to improve debt restructuring processes, including strengthening the G20 Common Framework to ensure debt relief is delivered in a timely and efficient manner where needed.
- Considerations on broad-based debt relief:
  - Broad debt relief initiatives would be more challenging today than in the 1990s, would require significant donor contributions (including compensating IFI participation costs), and could affect the capacity to scale up concessional finance.
  - Scaling up IFI concessional financing to LICs would be a more efficient channel for donor resources to support LICs in durably "growing" out of high debt burdens.

### Conclusion
- High risks notwithstanding, a systemic LIC debt crisis comparable to the mid-1990s is not inevitable today, but current trends could produce similar outcomes in the medium to long term without prompt policy action, reforms, and improvements in debt restructuring and creditor coordination mechanisms.

*Source: IMF WORKING PAPERS — Are We Heading for HIPC 2.0? Executive Summary.*

### 9. The  eve  of  the  HIPC  Initiative  was  characterized  by  heightened  debt  vulnerabilities,  large

### 9. The eve of the HIPC Initiative was characterized by heightened debt vulnerabilities, large

### Overview
- The period 1990-95 featured extreme debt vulnerabilities in low-income countries (LICs): average total public and publicly guaranteed (PPG) debt-to-GDP was 104 percent in 1990-95, the average external debt stock was six times the size of exports (600 percent), median accumulated arrears (principal and interest) reached 19 percent of exports, and growth averaged 1 percent over 1990-95.
- The contemporary situation shares similarities: public debt vulnerabilities have been rising rapidly since the last decade, LICs face multiple exogenous shocks (e.g., the COVID-19 shock and the commodities price shock due to Russia’s war in Ukraine), and growth has slowed.

### Debt Burden Indicators—Then and Now
- Pre-HIPC assessment focused primarily on PV of debt-to-exports and debt service-to-exports ratios; the HIPC Initiative added PV of debt-to-revenues as a key indicator.
- In 2005 the LIC-DSF was introduced; after the 2017 LIC-DSF review, indicative thresholds were linked to policy and institutions quality and to domestic and global environment (growth, remittances, reserves) to determine debt-carrying capacity.
- LIC-DSF assessment as of December 2022:
  - About 60 percent of LICs are assessed as having a high risk of debt distress or “in debt distress”: 12 countries (17 percent) are in debt distress and 28 countries (41 percent) are at high risk of debt distress.
- Historical comparison using pre-HIPC methodology (mid-1990s):
  - 53 percent of low-income countries with DSA assessments were rated as “unsustainable” or “possibly stressed” on the eve of HIPC.

### Key Statistics and Comparisons (exact figures preserved)
- Historical (1990-95) averages and medians:
  - Average total PPG debt-to-GDP: 104 percent (1990-95).
  - Average external debt stock as share of exports: 600 percent (six times exports).
  - Median accumulated arrears (principal and interest): 19 percent of exports.
  - Growth over 1990-95: 1 percent.
- Pre-HIPC versus end-2021 medians (Table 3 / text):
  - All LICs — 1994: Total debt as % of GDP 72; External debt as % of GDP 71; External debt as % of exports 318; External debt service as % of exports 10; External debt service as % of revenue 18.
  - All LICs — 2021: Total debt as % of GDP 53; External debt as % of GDP 33; External debt as % of exports 137; External debt service as % of exports 8; External debt service as % of revenue 10.
  - HIPCs — 1994: Total debt as % of GDP 89; External debt as % of GDP 101; External debt as % of exports 466; External debt service as % of exports 16; External debt service as % of revenue 31.
  - HIPCs — 2021: Total debt as % of GDP 53; External debt as % of GDP 29; External debt as % of exports 155; External debt service as % of exports 8; External debt service as % of revenue 16.
  - Today’s high-risk countries — 1994: Total debt as % of GDP 72; External debt as % of GDP 72; External debt as % of exports 366; External debt service as % of exports 11; External debt service as % of revenue 20.
  - Today’s high-risk countries — 2021: Total debt as % of GDP 66; External debt as % of GDP 39; External debt as % of exports 163; External debt service as % of exports 9; External debt service as % of revenue 18.
- End-1994 versus end-2021 external debt ratios:
  - Median PPG external debt-to-GDP: 71 percent (end-1994) vs 33 percent (end-2021).
  - Median PPG external debt-to-exports: 318 percent (end-1994) vs about 137 percent (end-2021).
  - Number of LICs with external debt-to-export ratio above 150 percent: 38 out of 69 (end-1994) vs 25 LICs (about one third) (end-2021).
- External debt service burden:
  - Median LIC external debt service: about 18 percent of revenues and 10 percent of export earnings (on eve of HIPC, 1994).
  - Median LIC external debt service today: about 10 percent of revenues and 8 percent of export earnings (end-2021).
  - For LICs at high risk of, or in, debt distress today: external debt service 18 percent of revenue and 9 percent of export earnings (2021).

### Drivers of Debt Accumulation — Then and Now
- Primary deficits and valuation effects from exchange rate depreciations are the dominant upward drivers of debt accumulation both in the pre-HIPC era and today.
- Sources that reduced debt differ across periods:
  - Pre-HIPC: inflation, privatization flows, and transactions in financial assets were dominant debt reducers; growth and debt relief made limited contributions.
  - Last decade: growth and debt relief were key factors containing debt accumulation.
- Interest-growth differential:
  - Negative interest-growth differentials helped stabilize debt in LICs after the HIPC/MDRI Initiative, especially in the last decade.
  - Recent uptick in inflation and monetary policy normalization globally implies weaker long-run growth and less favorable debt dynamics for LICs going forward.
- Future drivers and risks:
  - LICs can influence the growth-interest differential via growth-enhancing reforms and by avoiding overborrowing from non-concessional sources.
  - Climate-related shocks could become an important driver of debt going forward.

### Risks, Caveats, and Implications
- Data and measurement caveats:
  - Comparisons across periods are limited by the absence of a loan-by-loan register; presented comparisons often use nominal (face value) debt rather than present values, which does not account for changes in concessionality.
  - CPIA scores needed to retroactively apply the full 2017 LIC-DSF are available only since 2004, so full 2017 LIC-DSF cannot be applied to mid-1990s assessments.
- Coverage and composition issues:
  - Weaknesses in debt data coverage (complex and diverse instruments) may mask larger challenges, including incomplete information on government guarantees, debt of state-owned enterprises (SOEs), guarantees to public-private partnerships, or collateralized financing.
  - Shift in creditor structure: while official debt has become more concessional, many LICs borrow more from external and domestic private sources, which typically involve higher interest rates.
  - Domestic debt share has risen as a share of total debt, affecting solvency and liquidity interpretations:
    - Rising domestic debt makes total debt-to-GDP a better solvency indicator than external public debt-to-GDP.
    - Domestic debt is generally more expensive and shorter maturity than foreign debt in economies without financial repression; an increasing share of domestic debt can raise debt burden even if total public debt is unchanged or declining.
    - Liquidity risks from domestic debt service are not captured by external debt service indicators used in LIC-DSF; omission may understate total liquidity risk.
- Debt overhang and social spending:
  - Debt service payments are increasingly displacing social spending in LICs since 2012, suggesting re-emergence of debt overhang syndrome.
  - However, the degree of displacement (debt overhang) today is less severe than in the mid-1990s.

### Policy Implications and Recommendations (as indicated in the text)
- Debt relief remains important: Given the high level of debt risks and global uncertainty, debt relief will likely remain important to reduce debt burdens in LICs in the future and to free up resources for education, health, and infrastructure.
- Debt management priorities:
  - Avoid overborrowing from non-concessional sources to help maintain favorable real interest–growth differentials.
  - Aim for debt portfolios where real interest on debt remains below potential growth through prudent borrowing choices and growth-enhancing reforms.
- Analytical priorities:
  - Country-level sustainability analysis should focus on present values and/or debt and debt service projections, especially given rising domestic debt and changing creditor structures.
  - Improve debt data coverage (including loan-by-loan registers, guarantees, SOE and PPP exposures, and domestic debt service) to better capture solvency and liquidity risks.

*IMF Working Paper chapter: selected content from “Are We Heading for HIPC 2.0?”*

### 21. Fan charts are constructed to show the spectrum of the possible evolution of the debt outlook

### 21. Fan charts are constructed to show the spectrum of the possible evolution of the debt outlook for LICs over the medium term

### Fan chart construction and methodology
- Fan charts are based on the impact on the debt-to-GDP ratio of simulating a large number of shocks to relevant macrofiscal variables of a synthetic LIC.
- The synthetic LIC is constructed by taking the average values of the historical drivers of debt dynamics for all LICs.
- The fan charts use:
  - average historical data for the synthetic LIC to simulate sample means and variance-covariance matrices that define the joint normal distribution of the macrofiscal drivers of debt evolution;
  - draws from the joint distribution for each variable to generate shocks that are added to the baseline projections (based on Oct 2022 WEO vintage) and fed into the debt dynamics equation to calculate a distribution of projected debt paths.
- Historical data used for the comparison periods:
  - pre-HIPC period: 1984 to 1993;
  - current period: 2010 to 2019.

### Key findings from the fan-chart simulations
- The level and amplitude of the projected debt evolution for a synthetic LIC is lower and narrower today than in the mid-1990s.
  - Narrower width of the debt fan charts reflects relatively less uncertainty in the debt outlook for LICs today than in the mid-1990s (Figure 10).
- The tails of the fan chart suggest that upside risks (second moments) are increasing.
- If current prevailing adverse economic conditions (on growth, primary balance, interest rates, and exchange rates) continue well into the future (including the residual scarring effects of the COVID-19 shock), the debt profile of LICs will eventually begin to trend consistently upwards and could eventually reach levels comparable to the situation in the mid-1990s that triggered the HIPC Initiative in the medium to long-term.
- The distribution of risks is asymmetric:
  - For the current LIC debt outlook, risks are tilted to the downside (with the debt ratio expected to rise), indicating a higher likelihood of shocks that drive debt upwards (above the median) materializing.
  - In the mid-1990s, risks were tilted to the upside (with debt expected to decline after 1998) due to the effects of prior interventions (especially the Naples terms).

### Observations on creditor response and historical comparison
- Creditor response then versus now:
  - 1980s/1990s: first-stage rescheduling by Paris Club creditors; when insufficient, a second-stage intervention provided deep debt relief through the HIPC Initiative.
  - Today: a two-stage initial response—NPV-neutral debt relief through the DSSI followed by the G20 Common Framework when more far-reaching concessions were needed.
- Notable differences between HIPC/MDRI and the current Common Framework:
  - HIPC/MDRI involved pre-negotiated treatment for all countries, while the Common Framework involves debt relief tailored to specific country circumstances.
  - HIPC/MDRI involved debt relief from participating multilateral institutions with donor compensation; the current approach emphasizes grants and long-term concessional finance by multilateral institutions.
  - Both mechanisms include private sector participation on comparable terms.

### Transformed financing landscape for LICs — creditor composition and concentration
- Creditor composition shifts (comparison end-1996 vs end-2021):
  - End-1996: Paris Club (PC) creditors = 39 percent; non-Paris Club (NPC) creditors = 8 percent; private creditors = 8 percent (of total external PPG debt).
  - End-2021: PC creditors = 11 percent; NPC creditors = 20 percent; private creditor holdings = 19 percent (of total external PPG debt).
- Growth in commercial creditors:
  - Share of commercial debt in total LIC debt increased from 8 percent in 1996 to 19 percent by end-2021.
- Concentration of creditor holdings:
  - Top-5 creditors to LICs in the 1980s/mid-1990s accounted for about 60 percent of total credit to LICs.
  - As of end-2021, top-5 creditors accounted for about 75 percent of total credit to LICs, with four multilateral institutions (ADB, AfDB, IMF, and WB) and China as the top creditors.
  - For official bilateral creditors, China and India entered the top-5 by end-2021; China is now the largest official bilateral creditor for more than half of LICs.
- Implications:
  - Increased share of commercial and non-Paris Club creditors complicates debt restructuring.
  - Private creditor participation mechanisms depend largely on the IMF’s lending into arrears (LIA) policy; private sector litigation remains a concern.

### Domestic debt, PPPs, and newer instruments
- Domestic debt share:
  - Domestic debt in total debt (on a currency basis) grew from around 19 percent in the mid-1990s to 35 percent by end-2021.
  - Increased domestic debt raises issues for restructuring due to systemic linkages with financial stability and its typically non-concessional nature.
- Rise of complex debt instruments and PPPs:
  - Total investments in PPPs in LICs rose from US$0.34 billion in 1994 to US$5.87 billion in 2021 (about a 17-fold increase).
  - Number of PPP projects increased from 11 in 1994 to 26 in 2021.
  - Many PPP projects involve sovereign guarantees; guaranteed, securitized, and collateralized contracts can be harder to assess, manage, and restructure and can transfer contingent liabilities to the sovereign balance sheet if called.

### Non-debt financial inflows and buffers
- Non-debt-creating private financial inflows:
  - During the 1980s/mid-1990s debt crisis, non-debt-creating financial inflows represented about 21 percent of GDP.
  - By end-2020, they accounted for 24 percent of GDP.
- Diaspora remittances:
  - Remittances accounted for 32 percent of private financial inflows in LICs in 1996.
  - As of end-2020, remittances accounted for about 44 percent of private financial inflows.
  - These flows have helped meet FX demand, boost reserves, and stabilize currencies, but could decline with slower global growth, affecting debt and financing conditions.

### Donor fatigue, private-sector lending vigor, and IFI financing constraints
- Donor fatigue and net transfers:
  - Median net transfer to LICs from multilateral, bilateral, and other sources was 6 percent of GDP in the 1980s.
  - Official sector net financial transfers dropped from 8 percent of GDP in 1980 to less than 2 percent of GDP by end-2021.
  - Some LICs are now experiencing net transfers to creditors.
  - Growing donor fatigue reduces the appetite for another HIPC-like initiative.
- IFI participation financing:
  - IFI participation in HIPC/MDRI was financed through Trust accounts funded by contributions from participating IFIs, bilateral donors, and investment income on undisbursed resources.
  - Those Trust accounts are depleted. Example: as of end-2019, the Debt Relief Trust Fund administered by IDA had only US$0.2 billion available, estimated to be sufficient to help finance the expected debt relief for the remaining HIPCs.
  - IFI participation in any new debt relief mechanism would require concrete commitments of grants and subsidy contributions from donors to fully fund their participation and preserve IFI business models of self-sustained financing.

*Source: IMF WORKING PAPERS, Are We Heading for HIPC 2.0?*

### 33. Competing demands to mobilize concessional resources for the huge climate and development

### 33. Competing demands to mobilize concessional resources for the huge climate and development needs in LICs make traditional approaches to finance IFI participation more challenging, and possibly self-defeating today.

### Competing demands and limits of traditional financing for IFI participation
- Traditional approaches—seeking bilateral subsidy injections, using investment income from gold sales, or other operational income transfers—to finance IFI participation in debt relief are confronted with competing global demands.
- Competing global issues include financing the Sustainable Development Goals, the 2009 Copenhagen commitment to North/South climate finance, and the 2015 Paris Agreement on Climate.
- Funding debt relief by IFIs would imply crowding-out resources that could otherwise be extended to IFIs to scale up concessional lending to LICs, using their leverage capacity.
- IFI debt relief would only contribute marginally to solving debt challenges in LICs since the NPV of IFI debt is low compared to other sources of debt.
- New injections to IFIs could instead be channeled toward:
  - increasing their capital base; or
  - funding subsidy accounts (for example, the IMF PRGT);
  - with the objective of scaling up concessional financing provided by these same IFIs to LICs.

### Box 1 — IFI Funding for HIPC/MDRI Debt Relief (key figures)
- Total cost of implementing the HIPC/MDRI Initiative in end-2017 present value terms: $120 billion as at end FY-2019.
- Cost of HIPC alone: $76.2 billion, shared between:
  - multilateral creditors: $33.7 billion
  - Paris Club creditors: $27.7 billion
  - other official creditors: $9.9 billion
  - commercial creditors: $4.8 billion
- Cost for MDRI: $44 billion in end-2017 PV terms, exclusively covered by the four participating multilateral creditors (IMF, WB, AfDB, IaDB).
- IMF’s share of MDRI financing mechanisms included bilateral donor contributions, off-market gold sales, and proceeds from investment income deposited in the Trust accounts.
- Resources in the Debt Relief Trust Fund administered by IDA were depleted as at FY-2019 audited accounts, with only $221 million left—just enough to cover the cost for the three remaining HIPC countries.

Cost of HIPC/MDRI to participating IFIs (in billions of U.S. dollars, PV Terms as of end-2017)
- IDA: HIPC Total 14.7; MDRI Total 29.9; Total Cost 44.6
- IMF: HIPC Total 6.5; MDRI Total 3.7; Total Cost 10.2
- AfDB: HIPC Total 5.5; MDRI Total 6.5; Total Cost 12
- IaDB: HIPC Total 1.7; MDRI Total 4; Total Cost 5.7
- Others: HIPC Total 5.3; MDRI Total 0; Total Cost 5.3
- Total Cost to IFIs: HIPC Total 33.7; MDRI Total 44.1; Total Cost 77.8

### Conclusion — assessment of current LIC debt vulnerabilities and policy implications
- Purpose of paper: comparative assessment of debt vulnerabilities in LICs today versus mid-1990s situation that led to HIPC; address whether LICs face similar challenges, whether a second-generation HIPC-type initiative is required, and what can be done to prevent a systemic debt crisis.
- Main conclusion: despite high risks, debt vulnerabilities in LICs today remain substantially less alarming than in the mid-1990s.
- Key statistics and status:
  - About a third of low-income countries benefit from HIPC.
  - About sixty percent of low-income countries are stressed—12 are in external debt distress and 28 are at high risk of external debt distress.
- Observed evolution and risks:
  - Related weaknesses of solvency and liquidity indicators are less severe today than on the eve of the HIPC Initiative in the mid-1990s.
  - Debt vulnerabilities could reach comparable levels in the medium- to long-term if current trends persist.
- Recent debt treatment activity:
  - At least seven LICs have recently undergone or are currently undergoing debt treatments; all previously benefited from the HIPC Initiative.
  - Countries named in context of treatments: Chad (treatment now completed), Ethiopia, Ghana, and Zambia (undertaking debt treatment under the Common Framework); Somalia and Sudan (undertaking treatment under the HIPC Initiative); Malawi (undertaking treatment directly with its creditors).
- Implementation and coordination challenges:
  - The transformed financing landscape includes new key players—non-Paris club creditors, private creditors, domestic debt holders—and more complex debt instruments, creating coordination challenges absent in the mid-1990s.
  - For countries at high risk of debt distress: firmly implement policies aimed at maintaining or restoring debt sustainability (as recommended in IMF surveillance and IMF-supported programs).
  - For countries in debt distress or whose debt becomes unsustainable: early consideration of debt treatment to restore debt sustainability and early engagement with creditors are paramount.
  - The international community should step up efforts to improve restructuring processes, including the G20 Common Framework, to ensure debt relief is delivered in a timely and efficient manner where needed.
- Policy recommendation on mobilizing donor resources:
  - The huge development and climate financing needs in LICs imply mobilizing donor financing for IFI participation in today’s debt relief mechanisms may be complex and counterproductive given critical finance needs.
  - Scaling up concessional financing to LICs is presented as a more efficient way to channel donor resources and support LICs to durably “grow” out of high debt burdens.

*Source: IMF Working Paper — Are We Heading for HIPC 2.0? (excerpt: section 33, Box 1, Conclusion, Annex I and Annex II material as supplied).*

### References

### References

### IMF Working Papers and IMF-authored pieces
- Badia, M., J. G. Arbelaez, and Y. Xiang, 2021, “Debt Dynamics in Emerging and Developing Economies: Is R-G a red Herring?” IMF Working Paper No. WP/21/229 (Washington: International Monetary Fund).
- Boote, A. and Thugge, K., 1997, “Debt Relief for Low-Income Countries and the HIPC Initiative,” IMF Working Paper No. WP/97/24 (Washington: International Monetary Fund).
- Brooks R., M. Cortes, F. Fornasari, B. Ketchekmen, Y. Metzgen, R. Powell, S. Rizavi, D. Ross, and K. Ross, 1998, “External Debt Histories of Ten Low-Income Developing Countries: Lessons from Their Experience,” IMF Working Paper No. WP/98/72 (Washington: International Monetary Fund).
- Beaumont, C. and Hakura, D., 2021, The Common Framework: Utilizing its Flexibility to Support Developing Countries’ Recovery. Special Series on COVID-19 (SPR, June 24, 2021) (Washington: International Monetary Fund).
- Chabert, G., Cerisola, M., and Hakura, D., 2022, Restructuring Debt of Poorer Nations Requires More efficient Coordination. IMF Blog, April 7, 2022 (Washington: International Monetary Fund).
- International Monetary Fund, 1996, “Analytical Aspects of the Debt Problems of Heavily Indebted Poor Countries” IMF Policy Paper SM/96/23, (Washington).
- International Monetary Fund, 1997, “Debt Relief for Low -Income Countries: The HIPC Initiative”. IMF Pamphlet Series No. (51), 1997, (Washington).
- International Monetary Fund, 2003, “Debt Sustainability in Low-Income Countries—Towards a Forward-Looking Strategy, IMF Policy Paper, (Washington).
- International Monetary Fund, 2017, “Review of the Debt Sustainability Framework in Low-Income Countries: Proposed Reforms.” IMF Policy Paper, (Washington).
- International Monetary Fund, 2019a, “2018-19 Review of Facilities for Low-Income Countries---Reform Proposals: Review of The Financing Of The Fund’s Concessional assistance And Debt Relief To Low-Income Member Countries.” IMF Policy Paper, (Washington).
- International Monetary Fund, 2019b, “Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI)—Statistical Update, IMF Policy Paper, (Washington).
- International Monetary Fund, 2020, “The Evolution of Public Debt Vulnerabilities in Lower Income Economies.” IMF Policy Paper, (Washington).
- International Monetary Fund, 2022a, “Macroeconomic Developments and Prospects in Low-Income Countries—2022” IMF Policy Paper, (Washington).
- International Monetary Fund, 2022b, “World Economic Outlook Update, July 2022: Gloomy and More Uncertain” (Washington).
- International Monetary Fund, 2022c, “Review of the Fund’s Sovereign Arrears Policies and Perimeter” IMF Policy Paper, (Washington).

### Journal articles, books, and chapters
- Chuku, C., and Yenice, Y. 2022, Eurobonds, Debt Sustainability and Macroeconomic Performance in Africa: Synthetic Control Experiments. International Economics, 172, 368-388
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- Elbadawi, I. A., B. J. Ndulu, and N. Ndung’u, 1997, "Debt Overhang and Economic Growth in Sub-Saharan Africa." IMF and World Bank conference on external financing for low-income countries, 49-76. (Washington: International Monetary Fund).
- Gautam, M., 2003, “Debt Relief for the Poorest: An OED Review of the HIPC Initiative.” (Washington: The World Bank).
- Green, J., 1992, “External Debt Problem of Sub-Saharan Africa.” Analytical Issues in Debt, eds Jacob Frenkel, Michael Dooley and Peter Wickham. (Washington: International Monetary Fund).
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- Schumacher, J., Trebesch, C., & Enderlein, H., 2015, “What Explains Sovereign Debt Litigation? The Journal of Law and Economics, 58(3), 585-623.
- Beaumont, C. and Hakura, D., 2021, The Common Framework: Utilizing its Flexibility to Support Developing Countries’ Recovery. Special Series on COVID-19 (SPR, June 24, 2021) (Washington: International Monetary Fund).

### World Bank and other institutional reports
- World Bank, 2003, Debt Relief for the Poorest: an OED Review of the HIPC Initiative, The World Bank, Washington.
- World Bank, 2022, “Global Economic Prospects, January 2022—Chapter 2 Resolving High Debt After the Pandemic: Lessons from Past Episodes of debt Relief” (Washington: The World Bank).

*Content derived from the References section of wpiea2023079-print-pdf - References.*

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_Source: https://www.imf.org/-/media/files/publications/wp/2023/english/wpiea2023079-print-pdf.pdf_