On the feasibility and desirability of GDP-indexed concessional lending

I consider schemes that gear service on concessional debt to changes in countries’ real GDP growth. The schemes operate by accelerating and retarding concessional debt repayments. In the case of lower than expected economic growth, borrowing countries will be exempt, partially or fully, from the debt service due. In periods with higher growth, total debt service to the lender will increase. However, as we do not want a poor country to be punished in the form of taxation for achieving economic growth, it would only repay the original sum of debt service due. The difference is paid to the lender by a New Trust Fund, similar to the HIPC Trust Fund. I analyze the effectiveness of the schemes using historic simulations of debt service to IDA, the concessional window of the World Bank, for a set of seven highly indebted African countries. Results show that modifications of this sort appear feasible and increase the flexibility of low income primary producing countries without significant disruptions to the lender finances. The variability of the free foreign exchange relative to the country’s GDP is reduced by an average of 3.7%. Because of the significant offsetting between periods of positive and negative economic growth the simulated flows to the lender average roughly 95% of the actual historical flows. The cost to the New Trust Fund over a period of 18 years is less than the IDA assistance provided through the HIPC Trust Fund to these countries over the past 5 years.