For more than two decades, the majority of countries in the African continent have experienced repeated episodes of rising external debt and debt service. The rising debt burden was blamed for the lack of progress on the economic and social fronts. Declining living standards prompted many in the developed world to call for measures to ease debt burden for poor developing countries including cancelation of their external debt. Out of this the HIPC’s initiative came into existence in 1996.

The paper models the effects of HIPC’s initiative on economic performance. The argument is made that for debt initiative to succeed debt reduction must go hand in hand with reforms. The model shows that reforms are needed to reduce “rent-seeking” behavior of countries covered by debt reduction programs. The model is tested using panel data consisting of 60 countries, 40 of which are classified as HIPC’s over the period 1980-2005.