ABSTRACT

This chapter explains the debt relief that could work as a subsidy to lenders offering non-concessional loans, creating a free-riding problem among creditors, which, as acknowledged by the multilateral institutions, undermines the efforts made to achieve long-term debt sustainability. Until the Initiative and Multilateral Debt Relief Initiative (MDRI) debt write-off, the stock of external debt followed an U-shaped path, meaning that different round of debt relief where not able to achieve debt sustainability. The chapter describes the assessment of debt sustainability under alternative scenarios: if multiple shocks and their interactions are not considered, the debt projections might be based on unrealistic assumptions and miss key macroeconomic elements, as the current financial crisis has shown. It explores the economic approach to debt sustainability, the World Bank (WB)- International Monetary Fund (IMF) analysis that should explicitly calculate the amount of resources to be re-directed to specific sectoral targets, spur economic growth and reduce poverty after debt relief.