Demystifying Debt Relief: What Contributions Has Hipc Made To Governments’ Social Sector Expenditure In Sub-Saharan Africa?

In 1996, the developed countries as well as the multilateral institutions agreed to a programme of debt cancellation for poor countries that had unsustainable debt levels. This facility was named the Highly Indebted Poor Countries Initiative (HIPC) and had the initial aim of helping countries reach sustainable levels of external debt at which they would be able to make debt service payments. This facility was further enhanced in 1999 making several changes and most importantly it established the link between debt relief and poverty reduction. It was assumed that debt relief would free resources needed for poverty reduction expenditure with particular emphasis on social sector expenditures in recipient countries. This paper empirically assesses the extent to which debt relief has freed up financial resources and whether these freed up resources have translated into increased social sector expenditure taking Government health expenditure as an indicator. It uses a panel of 22 Sub-Saharan African countries. The paper finds that debt relief was not as substantial as reported in the IMF and World Bank reports simply because debt relief is calculated on expected debt service payments but the investigation reveals that many of the countries in the sample had high default rates. We however find that government health expenditure increased but not as considerably as would be expected with the reported amounts of debt relief. We however cannot rule out the several important aspects that would affect health care expenditure as well as the differences in government spending priorities that would undermine the overall effect of debt relief on Government health expenditure.