COMPARATIVE FISCAL RESPONSE EFFECTS OF DEBT RELIEF: AN APPLICATION TO AFRICAN HIPCS

Abstract

AbstractAs part of the efforts of the international donor community to scale up aid to Africa, substantial debt relief has been granted in recent years through the Heavily Indebted Poor Countries (HIPC) Initiative and its successor, the Multilateral Debt Relief Initiative. This paper tries to assess, for a sample of 24 African countries that have at least reached decision point status in the HIPC Initiative, to what extent this debt relief has created fiscal space in recipient country budgets, and what, on average, the actual fiscal response effects have been, relative to other types of aid. Inspired by the fiscal response literature, we model public finance behaviour as a system of structural equations and estimate the reduced form parameters in a Vector Autoregressive framework. In general, we are unable to find evidence that debt relief might provoke no or even perverse fiscal responses. On average, debt relief affects public finance behaviour in a desired way, with effects being most similar to those of its most direct substitute, programme grants.