Debt relief and the current account: An analysis of the HIPC initiative

Sebastian Edwards investigates the connection between debt relief and current account susceptibility. The particular case he analyses is the IMF and World Bank's initiative to provide debt relief to a group of highly indebted poor countries. He assesses the impact of the implementation of the initiative on current account balance and public debt sustainability as well as on the real exchange rates of the beneficiary countries. He applies his model to the case of Nicaragua, which has experienced large current account deficits. Edwards finds that the aim of the initiative to lead these countries to macroeconomic sustainability will not be automatic. It will require reforms that accelerate output growth. Success would depend on the availability of concessional grants during the time of implementing the reforms and a favourable future path of grants and donations. He finds that Nicaragua will need high growth, a steady flow of concessional assistance and a massive real exchange rate devaluation. Edwards acknowledges that Corden's work on debt relief and current account sustainability has influenced his own work in this area.