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Will Debt Relief Make a Difference? Impact and Expectations of the Multilateral Debt Relief Initiative - Working Paper 88

5/26/06
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The Multilateral Debt Relief Initiative (MDRI), the latest phase of debt reduction for poor countries from the World Bank, the IMF, and the African Development Bank, will come close to full debt reduction for at least nineteen (and perhaps as many as forty) qualifying countries. Debt relief proponents see it as a momentous leap forward in the battle against global poverty. However, this working paper by CGD research fellow Todd Moss argues that the actual gains will be modest and elusive.

This is not because the initiative is a mere accounting trick, but rather that the debt service obligations being relieved are relatively insignificant. For example, in 2004 the average African country in the program paid $19 million in debt service to the World Bank, but received ten times that amount in new Bank credit and more than fifty times as much in total aid. The structure of the MDRI also means that any debt service savings are netted out of future credit. Perhaps more importantly than the limited cash-flow effect, finances are rarely the binding constraint on poverty reduction. This is not to say that the MDRI is futile. Indeed, the impact could be considerable over the long-term, especially on the ability of creditors to be more selective in the future. But most of the impact of the MDRI will be long term and difficult to measure. As such, expectations of the effect on indebted countries and development indicators should be kept modest and time horizons long.