Never borrow money you cannot pay back: there is nothing like free lunch

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Editor's Reflection: Chartered Institute of Development Finance

Development Finance Agenda, 2023, vol. 8, issue 3, 3

Abstract: The HIPC program was initiated by the IMF and World Bank in 1996 to ensure that poor countries don’t have to continue to be burdened with unmanageable external debts. To ensure that the initiative was speeded up to meet the United Nations’ Sustainable Development Goals (SDGs), participating countries received 100% debt relief on loans owed to the World Bank, IMF and other partner institutions. The key conditions for qualifying countries were as follows: (a) countries must adopt key poverty reduction strategies which were developed by the World Bank and IMF (b) beneficiary countries had to, successfully. implement key reforms at the beginning of the process and (c) beneficiaries had to put in place proper and benchmarked governance practices in line with international best practices. HIPC was a noble idea but, in reality, the initiative was fundamentally flawed in two key area. It allowed beneficiary countries to, subconsciously, adopt the insurance principle of “moral hazard. In a nutshell beneficiary country, after debt cancellation, continued to ramp up borrowing, from the same institutions which provided the debt cancellation in the first place. The unvoiced believe was that the World Bank, IMF and other lending bodies will, in the future, institute other debt cancellations strategies- that is the moral hazard syndrome. The other flaw was that there was no stringent monitoring and evaluation of the three main key conditions outlined above. The result was that, countries which applied to be considered for the HIPC debt release did everything, at the beginning, to meet the initial requirements but reverted to their old ways of unplanned borrowing and spending after the debt has been cancelled.

Date: 2023
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