Debt Sustainability Framework in Hipcs : A Critical Assessment and Suggested Improvements

This paper presents an assessment of the external debt literature related to the IMF-World Bank HIPC Initiative and proposes to extend the present debt sustainability framework. We argue that a comprehensive debt sustainability analysis requires a fully-fledged government budget constraint, which includes not only the external position, but also public domestic debt and the feedback effects of the choices on deficit financing. We also suggest to consider uncertainty and the risk of default, to carefully evaluate the resource required to finance poverty reduction policies, and to develop a legal framework to deal with private creditors. As a result, debt relief should be tailored on specific country needs and it should be part of a more comprehensive development policy, aimed at reducing poverty, built on the fully-fledged government budget constraint and designed for providing a permanent exit from debt dependence and an incentive to strengthen institutions and policies