Developing Countries:

Switching Some Multilateral Loans to Grants Lessens Poor Country Debt Burdens

GAO-02-593: Published: Apr 19, 2002. Publicly Released: Apr 19, 2002.

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Joseph A. Christoff
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Last year the United States proposed that the World Bank and other development banks distribute more grants to the world's poorest countries to help ease their long-term debt burdens. The United States recommended that grants replace up to half of all future lending. The proposal has been controversial because of its potential impact on the resources available to poor countries. The World Bank estimates that the proposal could reduce its resources by $100 billion during the next 40 years. A shift of multilateral loans to grants would reduce poor countries' debt burdens and increase their ability to repay future debt. The total financial loss to the World Bank of a 50-percent shift from loans to grants during the next 40 years would be $15.6 billion in present value terms. Financing the proposal through harder terms on the remaining loans to poor countries would reduce and potentially nullify any improvement to their debt sustainability arising from the 50-percent grants proposal. However, if donor contributions to the World Bank were to increase by 1.6 percent a year, which is less than the projected rate of inflation during the next 40 years, the World Bank could fully finance the 50-percent grants. GAO's projections on poor countries' future debt sustainability and the financial loss to the World Bank of the 50-percent grants proposal differ substantially from World Bank and International Monetary Fund (IMF) projections. First, the World Bank and IMF project that all 10 countries will attain debt sustainability under the current debt relief initiative by assuming that the countries' future export growth rates will greatly exceed those achieved in the past. However, high export growth rates are unlikely because these countries rely on primary commodities, such as coffee and cotton, for a significant proportion of their export revenue and the prices of these commodities have trended downward. In addition, AIDS is expected to reduce the overall productivity of these countries. Second, the World Bank' methodology assumes that the value of a dollar received today will maintain the same value 40 years from now. However, after including the expected impact of inflation and the investment income that could accrue over time, GAO estimates the financial loss of the grants proposal to the World Bank is only $15.6 billion in present value terms.

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