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. The IaDB expects to finance its $600 million shortfall by  reducing future lending to poor countries. 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. 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. 1.) Achieving Economic Growth and Debt Relief Targets Requires Substantial Financial Assistance

Even if the $7.8 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. 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. 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. 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. 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. 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. 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 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. 2. 6. 2. Comments from the African Development Bank

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

1.
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.