Effect of Debt Overhang on the Development of Heavily Indebted Poor Countries: Debt Laffer Curve Analysis

This study explores that whether the debt financing or debt forgiving would be suitable for the Highly Indebted Poor Countries (HIPCs).Debt Laffer curve theory has been tested in 21 HIPCs by applying price equation of debt, maximized value of debt and price elasticity approach over the period of 1980 to 2016.The maximized value of debt criterion implies that Chad is not eligible for the debt write-off strategy in comparison with the rest of the countries.By applying price elasticity approach, it is observed that only Burkina Faso, Cameroon, Chad, and Republic of Congo are eligible for debt financing while the remaining countries should adopt debt write-off facility.The crux of the study is that overall debt forgiveness is suitable for the HIPCs.Moreover, it is also in the favor of both the creditor countries and various international financial institutions such as World Bank and IMF and HIPCs itself.The study suggests that the creditors should continue to financing along with improving structural policies and institutions of the HIPCs.