Abstract
<p>Borrowers of international financial institutions (IFIs) have both interest and conditionality to deal with. Using data from the World Governance Indicators (WGI), we investigated the influence of conditionality on borrowers. By applying a (RED) dynamic panel regression method, we found compelling evidence, which supports our intuition that conditionality increases the debt burden of borrowing countries. However, this was not the case for all the indebted countries. Heavily indebted poor countries (HIPC) had some of their external commitments reduced when they agreed to implement some sets of conditionality. In light of these findings, we posit that the advocated structural reforms which is used, as a justification for prescribing conditionality does not materialize as planned. It however, erodes the capacity of borrower countries toward their debt servicing obligations. A direct consequence is their (RED) incessant need for external development assistance. Results of the study also proved robust.</p>
Highlights
Introduction and MotivationEvidence has shown that it is relatively less difficult to acquire external assistance than paying back
Voice of accountability conditionality had a positive relationship with debt for the whole sample and the group of countries that were not qualified for the heavily indebted poor countries (HIPC) program-we referred to them as the Non-Heavily indebted poor countries (HIPC) subsample
Holding multi party election is one of the policies that have to be implemented by a country that has Voice of accountability conditionality (VAC) as a prescribed conditionality
Summary
Evidence has shown that it is relatively less difficult to acquire external assistance than paying back. In order not to make out loans that are doomed from the outset, creditors first started issuing directives that list some extra obligations to make repayments a certainty With time, these obligations were christened into conditionality warranting economic reforms in assisted countries. Countries have inherited debts (Krugman, 1988) and have structural issues that go with it These countries periodically seek assistance to finance new programs and projects, and to take care of their old debt servicing obligations. Fafchamps (1996) made mention of a trap: “where the debt overhang persist, debt rescheduling takes place periodically, and conditionality continues indefinitely.” This is what our study sets out to investigate empirically.
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