September 20, 2004—Unsustainable debt levels in developing countries are a symptom of a bigger problem of low economic growth, says one of the World Bank's leading debt relief experts.

Vikram Nehru, the World Bank official who heads a major debt relief initiative, says solving the debt crisis confronting many low- income countries will not, on its own, put them on a path to eliminating poverty. Debt relief must be part of a more comprehensive development strategy.

Good governance, building strong institutions and promoting growth remain essential to cutting poverty in developing countries. A major reason that these countries encountered debt problems in the first place was that they have experienced prolonged periods of low economic growth.

Nehru, director of the department that overseas the Heavily Indebted Poor Countries Initiative—which will provide more than $54 billion in debt relief to 27 low-income counties time—says a high debt burden is, in many cases, a symptom of a deeper development problem confronting low-income countries rather than the actual disease.

"It is a development issue—not a debt issue. That is not to say you shouldn't treat the symptom. Sometimes you need to bring down the fever…but the challenge in places like parts of Africa is to produce growth. "

While the importance of tackling the debt problems confronting low-income countries should not be underestimated, Nehru says debate is also needed on the bigger development issues that contributed to these countries having debt problems in the first place.

The debt debate should not shift the focus from key development issues like improving governance, stamping out corruption and enhancing the capacity of public institutions that encourage equity and investment.

• The World Bank and the International Monetary Fund (IMF) are working on a new framework to facilitate debt sustainability in developing countries
• Debt levels continue to rise in developing countries
• The International Development Association replenishment talks will include a discussion on the level of grants that should be allocated to low-income countries in the IDA-14 replenishment

Nehru says larger levels of grants to low-income countries rather than cheap loans will be required to facilitate debt sustainability in these poor countries while meeting the Millennium Development Goals which aim to eliminate poverty in all its forms by 2015.

A joint World Bank-IMF briefing paper to the Development Committee said: "Financing the MDGs will require a substantial increase in resource flows to developing countries.

"Unless these resources are provided on appropriate terms, they could jeopardize debt sustainability in many low-income countries, particularly those where the external debt burden is already high and the economy is vulnerable to exogenous shocks," the paper says.

Several non-governmental organizations have called for 100 percent debt forgiveness for some of the world's poorest countries.

The debt issue needs to be studied in middle-income and well as low-income countries, says Nehru.

He says that while in middle-income countries external debt burden indicators have on average declined, the level of domestic debt has increased "quite substantially." "So the total debt in the public sector has climbed."

The run up of domestic debt in middle-income countries "is something that needs to be studied."

Another looming issue is how to help the 11 countries that were identified for debt relief in the HIPC initiative but failed to meet the conditions outlined under the scheme to be accepted for debt relief.

Nehru says many of these countries have suffered from conflict as well as governance problems and large loan arrears to multilateral development institutions.