External debt sustainability and domestic debt in Heavily Indebted Poor Countries

Presbitero, Andrea F. and Arnone, Marco (2006): External debt sustainability and domestic debt in Heavily Indebted Poor Countries.

Abstract

In this paper we stress the limits of the current debt sustainability framework used in the IMF-WB HIPC Initiative and the necessity to include domestic public debt into the analysis. The standard sustainability analysis does not take into account the fully-fledged budget constraint and the feedback effects of the fiscal and monetary adjustment required by multilateral programs. The switch from foreign to domestic borrowing, and rising domestic real interest rates are likely to undermine the overall sustainability and the success of debt relief programs. This work focuses on the evaluation of public debt sustainability in a simple accounting framework. We use data on external public debt (multilateral and bilateral) and on domestic public debt to underline how the inclusion of domestic debt into the analysis undermines the sustainability target.

• Item Type: MPRA Paper
• Institution: Economic Growth: Institutional and Social Dynamics. Working Papers Series
• Language: English
• Keywords: HIPC; Domestic debt; Debt sustainability; Debt Relief
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O19 - International Linkages to Development ; Role of International Organizations; H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt ; Debt Management ; Sovereign Debt; F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems

References

Abbas, S. M. Ali, 2005, “Public debt sustainability and growth in Sub-Saharan Africa (post-HIPC): The role of domestic debt”, GDN Project on Macroeconomics of Low Income Countries, February 2005.

Agenor, Pierre-Richard, 2005, The Economics of Adjustment and Growth. (Harvard University Press, Cambridge).

Arnone, Marco, 2004, “Paesi Poveri, Passi Avanti sul Debito Estero”, Vita e Pensiero, 6/04, p. 60-64, Milan.

Arnone, Marco, and Piero Ugolini, 2005, Primary Dealers in Government Securities, International Monetary Fund, Special Issue.

Arnone, Marco, and Andrea F. Presbitero, 2005, “Sostenibilità e Riduzione del Debito Estero per i Paesi Poveri”, Working Paper No. 27, Catholic University of Milan (Piacenza), February 2005.

Arnone, Marco, Luca Bandiera, and Andrea F. Presbitero, 2006, “External Debt Sustainability: An Extended Framework for HIPCs?”, manuscript, submitted for publication, February 2006.

Beaugrand, Philippe, Boileau Loko, and Monfort Mlachila, 2002, “The choice between External and Domestic debt in Financing budget Deficits: The Case of Central and West African Countries”, IMF Working Paper, No. 02/79, May 2002.

Burnside, Craig, (edit.), 2005, Fiscal Sustainability in Theory and Practice: A Handbook. (Washington, DC: The World Bank Publications).

Christensen, Jakob, 2004, “Domestic Debt Markets in Sub-Saharan Africa”, IMF Working Paper, No. 04/46.

Cuddington, John T., 1997, “Analysing the Sustainability of Fiscal Deficits in Developing Countries”, Working Paper No. 97-01, Georgetown University, Economic Department.

Del Valle, Clemente, and Piero Ugolini, 2003, “The Development of Domestic Markets for Government Bonds”, in Litan et al., 2003, The Future of Capital Markets in Developing Countries.

Dikhanov, Yuri, 2004, “Historical Present Value of Debt in Developing Economies: 1980-2002”, manuscript, The World Bank.

Easterly, William, 2001, The Elusive Quest for Growth: Economists Adventures and Misadventure in the Tropics, (Cambridge, Mass: The MIT Press).

Friedman, Milton, 1948, “A monetary and fiscal framework for economic stability”, American Economic Review, Vol. 38, pp. 245-264.

IMF, 1998, “Costa Rica: Recent Economic Development”, Country report, No. 98/45, June 2004.

----------, 2002, “Nicaragua: Selected Issues and Statistical Appendix”, Country report, No. 02/269, December 2002.

----------, 2003a, “Ghana: Selected Issues”, Country report, No. 03/134, May 2005.

----------, 2003b, World Economic Outlook – Public Debt in Emerging Markets, International Monetary Fund, Washington, DC, September 2003.

----------, 2004a, “Zambia: Selected Issues and Statistical Appendix”, Country report, No. 04/160, July 2004.

----------, 2004b, “Tanzania: Selected Issues and Statistical Appendix”, Country report, No. 04/284, September 2004.

----------, 2004c, “Costa Rica: 2004 Article IV Consultation--Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Costa Rica”, Country report, No. 04/284, September 2004.

----------, 2004d, “Malawi: Selected Issues and Statistical Appendix”, Country report, No. 04/390, December 2004.

----------, 2005a, “Arab Republic of Egypt: Selected Issues”, Country report, No. 05/179, June 2005.

----------, 2005b, “Indonesia: Selected Issues”, Country report, No. 05/327, September 2005.

----------, 2006, “The Managing Director’s report on Implementing the Fund’s Medium Term Strategy”, IMF, Washington, DC, April 5, 2006.

IMF and World Bank, 2001, Developing Government Bond Markets: A Handbook, Washington DC, May 2001.

----------2005, “Operational Framework for Debt Sustainability Assessments in Low-Income Countries – Further Considerations”, Washington DC, March 2005.

Kraay, Aart, and Vikram Nehru, 2004, “When Is External Debt Sustainable?” World Bank Policy Research Working Paper, No. 3200.

Litan, Robert E., Michael Pomerlano and V. Sundararajan, (edit.), 2003, The Future of Capital Markets in Developing Countries, Brookings Institution Press, Washington DC, 2003.