Amar Bhattacharya, Geske Dijkstra, Martin Gilman, Florence

Kuteesa, Matthew Martin, Mothae Maruping, Wayne Mitchell

and Rosetti Nayenga

HIPC Debt

Relief

Myths and Reality

Edited by

Jan Joost Teunissen and

Age Akkerman

FONDAD

41979-HIPC omslag 27-04-2004 15:29 Pagina 1

HIPC Debt Relief: Myths and Reality

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina i

Forum on Debt and Development (

FONDAD

)

F

ONDAD

is an independent policy research centre and forum for

international discussion established in the Netherlands. Supported

by a worldwide network of experts, it provides policy-oriented

research on a range of North-South problems, with particular

emphasis on international financial issues. Through research,

seminars and publications, F

ONDAD

aims to provide factual

background information and practical strategies for policymakers

and other interested groups in industrial, developing and transition

countries.

Director: Jan Joost Teunissen

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina ii

HIPC Debt Relief

Myths and Reality

Edited by

Jan Joost Teunissen and

Age Akkerman

FONDAD

The Hague

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina iii

ISBN: 90-74208-23-1

Copyright: Forum on Debt and Development (

FONDAD

), 2004.

Permission must be obtained from

FONDAD

prior to any further reprints,

republication, photocopying, or other use of this work.

Additional copies may be ordered from

FONDAD

at

Noordeinde 107 A, 2514 GE The Hague, the Netherlands

Tel: 31-70-3653820 Fax: 31-70-3463939 E-Mail: a.bulnes@fondad.org

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina iv

Contents

Acknowledgements

vii

Notes on the Contributors

viii

Abbreviations

xi

Glossary

xiii

1 Introduction

Jan Joost Teunissen

Lessons from the 1980s Debt Saga

1

The Long Way to the HIPC Initiative

4

Criticisms of the HIPC Initiative

6

What Needs to Be Done.

8

The Future of HIPC Debt Relief

9

2 Assessing the HIPC Initiative: The Key HIPC Debates

Matthew Martin

Key HIPC Myths and Realities

11

Does It Provide Debt Sustainability.

12

Does It Make All Creditors Share the Burden.

19

Does It Protect Against Exogenous Shocks.

22

Does It Supply Additional Finance for

Development.

26

Does It Fund the Millennium Development Goals. 28

Will HIPC Conditionality Accelerate the MDGs. 31

Is Debt Relief Preferable to Other Financing.

35

What Could HIPC Achieve.

38

3 HIPC Debt Relief and Poverty Reduction Strategies:

Uganda’s Experience

Florence N. Kuteesa and Rosetti N. Nayenga

Debt Relief Before and After HIPC

48

Poverty Reduction

50

HIPC and Debt Sustainability

52

Challenges for the Future

56

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina v

4 Lessons from Eastern and Southern Africa

Mothae Maruping

The HIPC Initiative and Other Debt Initiatives

in Africa

58

Broader National and International Development

66

Building Capacity for Debt Management

69

Conclusion

70

5 Achievements to Date and Challenges Ahead: A View from

the IMF

Wayne Mitchell and Martin Gilman

Key Features of the HIPC Initiative

74

Progress in Implementation

78

Implementation Update

78

Impact on Debt Stocks, Debt Service and Poverty

Reducing Expenditures

80

Creditor Participation

84

Challenges Ahead for the HIPC Initiative

87

Debt Sustainability in HIPCs

89

Review of Debt Sustainability

89

Maintaining Debt Sustainability Beyond HIPC 92

6 From Debt Relief to Achieving the Millennium

Development Goals

Amar Bhattacharya

What the HIPC Initiative Can and Cannot Yield

98

Achieving the MDGs

102

Conclusion

106

7 Debt Relief from a Donor Perspective: The Case of the

Netherlands

Geske Dijkstra

The Role of Donors in Perpetuating Debt Problems 111

The Lack of Additionality

115

The Financing of Debt Relief in the Netherlands 118

Adverse Effects of Conditionality

123

Conclusion

129

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina vi

vii

Acknowledgements

T

his book is yet another result from the Global Financial

Governance Initiative (GFGI), which brings together Northern

and Southern perspectives on key international financial issues. In

this project, FONDAD is responsible for the working group Crisis

Prevention and Response, jointly chaired by José Antonio Ocampo,

under-secretary-general for Economic and Social Affairs of the

United Nations and until September 2003 executive secretary of the

United Nations Economic Commission for Latin America and the

Caribbean (ECLAC), and Jan Joost Teunissen, director of

FONDAD.

FONDAD very much appreciates the continuing support of the

Dutch Ministry of Foreign Affairs. Thanks are due to Matthew

Martin and colleagues of Debt Relief International who helped in

preparing an international workshop (August 2002), jointly spon-

sored by the Dutch ministries of Foreign Affairs and Finance and De

Nederlandsche Bank, from which this book emerges. We are grateful

to Matthew Martin, Florence Kuteesa and Mothae Maruping for

their thorough revising and updating of the papers they presented at

the workshop, and to the other authors for the chapters they

contributed.

A special thanks goes to Adriana Bulnes and Julie B. Raadschelders

who assisted in the publishing of this book.

Age Akkerman

Jan Joost Teunissen

February, 2004.

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina vii

Notes on the Contributors

Amar Bhattacharya (1952) is senior advisor, Poverty Reduction and

Economic Management Network at the World Bank. He is the key

spokesperson on the Bank’s financial architecture and how the Bank

works with the International Monetary Fund. He was team leader of

a special World Bank study that examined the policy implications of

private capital .ows and financial integration for developing

countries, and was part of the Bank’s senior team focusing on the East

Asia crisis. Since joining the Bank, he has a long-standing

involvement in the East Asia region, including division chief for

Country Operations, Indonesia, Papua New Guinea and the South

Pacific, and was chief officer for Country Creditworthiness. Prior to

joining the World Bank, he worked as an international economist at

the First National Bank of Chicago.

Geske Dijkstra (1956) is associate professor in economics at the

Erasmus University Rotterdam. After working for several years in

Central America, she first joined the Maastricht University and then

the Institute of Social Studies in The Hague. She has been consultant

on aid issues, among others, for the World Bank, the Inter-American

Development Bank, and the Swedish International Development

Agency. She has published on the effectiveness of aid, the impact of

economic liberalisation, gender and debt. She was the coordinator of

the Evaluation Report on International Debt Relief 1990-1999 carried

out for the Policy and Operations Evaluation Department of the

Dutch Ministry of Foreign Affairs.

Martin Gilman (1948) is assistant director in the IMF’s Policy

Development and Review Department responsible for sovereign

debt and official financing questions, representing the IMF at the

Paris Club. In 2001-2002 he taught economics in Moscow and

drafted a book about Russia. Prior to that, he worked as the IMF’s

senior resident representative in Moscow. Earlier, he dealt with

convertibility questions, review of negotiating briefs for economic

viii

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina viii

ix

Notes on the Contributors

adjustment programmes and G-7 coordination. He joined the IMF

in 1981, after working at the OECD and teaching economics in Paris

and in England. He holds degrees from the London School of

Economics, as well as from Johns Hopkins University and University

of Pennsylvania.

Florence Kuteesa (1960) is acting director budget in the Ministry of

Finance, Planning and Economic Development in Uganda. After her

study in economics at the Makerere University in Uganda and her

Master in human resource development at the Victoria University of

Manchester (UK), she started her career in 1983 at the Ministry of

Planning and Economic Development in Uganda. In 1998, she

moved to the Budget Policy Department as commissioner responsible

for the coordination of the budget process and reforms. Since 1997,

she is a member for Uganda of the Executive Committee on African

Poverty Reduction Network and since 1999 chairperson for Uganda

of the Council for Economic Empowerment of Women in Africa.

Matthew Martin (1962) is director of Debt Relief International and

Development Finance International, both non-profit organisations

which build developing countries’ capacities to design and implement

strategies for managing external and domestic debt, and external

official and private development financing. Previously he worked at

the Overseas Development Institute in London, the International

Development Centre in Oxford, and the World Bank, and as a

consultant to many donors, African governments, international

organisations and NGOs. He has co-authored books and articles on

debt and development financing.

Mothae Maruping (1944) is the executive director of the Macro-

economic and Financial Management Institute of Eastern and

Southern Africa (MEFMI) in Harare. He holds degrees from the

UBLS in Lesotho, the Catholic University of America in

Washington D.C. and the University of Baltimore. He has taught

economics at the Lincoln University in the US and at the National

University of Lesotho. He was dean of Social Sciences and later the

pro-vice chancellor of the National University of Lesotho from 1982

to 1986. In 1988, he became the governor of the Central Bank of

Lesotho from where he moved to his current position in 1998. He

has also served in corporate, national, and international boards.

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina ix

Wayne Mitchell (1965) joined the IMF in September 2001 as an

economist in the IMF’s Policy Development and Review Depart-

ment that is responsible for sovereign debt and official financing

questions, and also represents the IMF at the Paris Club. His mission

assignments have included Lesotho, Estonia and Uganda. Prior to

that, he worked at the Eastern Caribbean Central Bank from 1991

where his responsibilities have included public debt management and

developing the institutional framework for the regional government

securities and equities markets. He holds degrees from the University

of Illinois at Urbana-Champaign and the University of the West

Indies.

Rosetti Nabbumba Nayenga (1968) is policy analyst in the Poverty

Monitoring and Analysis Unit (PMAU) of the Ministry of Finance,

Planning and Economic Development in Uganda, where she plays a

key role in collating poverty-monitoring data and contributing to

Uganda’s poverty reports and budget documents. She worked at the

Agricultural Economics Department, Makerere University, and later

at the Economic Policy Research Centre and other agricultural

institutions in Uganda. She has been a consultant to Uganda’s

government and international agencies including the World Bank,

DFID, EU, IFPRI, EENESA, ISNAR, and UNCTAD, and has

published mainly on agricultural policy.

HIPC Debt Relief: Myths and Reality

x

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina x

xi

Abbreviations

AERC

African Economic Research Consortium

AfDB

African Development Bank

AfDF

African Development Fund

BWIs

Bretton Woods institutions

CABEI

Central American Bank for Economic Integration

CAFOD

Catholic Agency for Overseas Development

CIRR rates

Commercial Interest Reference Rates (official

lending rates of export credit agencies)

DAC

Development Assistance Committee of the

OECD

DFID

Department for International Development (UK)

DSA

Debt Sustainability Analysis

ECAs

export credit agencies

EIB

European Investment Bank

ESAF

Enhanced Structural Adjustment Facility

ESAIDARM

Eastern and Southern African Initiative in Debt

and Reserves Management

EU

European Union

EURODAD European Network on Debt and Development

FDI

foreign direct investment

G-7

Group of Seven (Canada, France, Germany, Italy,

Japan, UK, US)

G-8

Group of Eight (G-7 + Russia)

GDP

gross domestic product

GNI

gross national income

GNP

gross national product

HIPCs

heavily indebted poor countries

HIPC I

original HIPC Initiative (1996)

HIPC II

Enhanced HIPC Initiative (1999)

IADB

Inter-American Development Bank

IBRD

International Bank for Reconstruction and

Development (World Bank)

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina xi

IDA

International Development Association

IFIs

international financial institutions

IMF

International Monetary Fund

IOB

Policy and Operations Evaluation Department of

the Dutch Ministry of Foreign Affairs

MDGs

Millennium Development Goals

MEFMI

Macroeconomic and Financial Management

Institute of Eastern and Southern Africa

NCM

Dutch export credit agency

NEPAD

New Partnership for Africa’s Development

NGO

non-governmental organisation

NPV

net present value (see Glossary)

ODA

official development assistance

OECD

Organisation for Economic Cooperation and

Development

OED

Operations Evaluation Department (of the World

Bank)

OPEC

Organization of the Petroleum Exporting Coun-

tries

PAF

Poverty Action Fund (Uganda)

PRGF

poverty reducing growth facility

PRSC

poverty reduction support credit

PRSP

poverty reduction strategy paper

PV

present value (see Glossary)

SADC

Southern African Development Community

SDR

special drawing right

SILICs

severely-indebted lower-income countries

SIMICs

severely-indebted middle-income countries

SPA

Special Programme of Assistance

STABEX

multiple-purpose funding instrument of the EU

used both for development and trade policies

TRIPS

trade-related aspects of intellectual property

rights

UK

United Kingdom

UN

United Nations

UNCTAD

United Nations Conference on Trade and

Development

US

United States

WB

World Bank

HIPC Debt Relief: Myths and Reality

xii

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina xii

xiii

Glossary

Completion Point: The date at which a country completes the key

structural reforms agreed at the HIPC decision point, including

implementation of its poverty reduction strategy. The country then

receives the bulk of HIPC debt relief without further policy

conditions. As of January 2004, 10 countries reached completion

point: Benin, Bolivia, Burkina Faso, Guyana, Mali, Mauritania,

Mozambique, Nicaragua, Tanzania, and Uganda.

Cutoff Date: The date prior to which loans must be contracted in

order to be eligible for rescheduling. The cutoff date is usually 6 to

12 months before the date of the first rescheduling agreement and

typically remains fixed in all subsequent rescheduling.

Debt Overhang: The excess of a country’s external debt over its

long-term capacity to pay.

Decision Point: The date at which HIPC debt relief is committed and

begins on an interim basis, to be followed by HIPC completion point.

Enhanced HIPC Initiative: A major review of the HIPC Initiative

in 1999 to provide deeper, broader and quicker debt relief.

HIPCs (heavily indebted poor countries): There are currently 42

countries defined by the IMF and World Bank as HIPCs. HIPC

criteria include assessment by the World Bank and IMF showing a

“potential need for HIPC debt relief” and per capita income below

$785, with entitlement to borrow on IDA-only terms from the

World Bank and from the IMF’s PRGF.

London Club: An informal grouping of commercial banks who meet

to determine a common approach to rescheduling commercial bank

debt to a country. The London Club does not have a secretariat

comparable to the Paris Club.

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina xiii

Millennium Development Goals (MDGs): Goals for poverty

reduction and development agreed by the United Nations in 2000.

NPV (Net Present Value): See PV.

Paris Club: The forum of creditor governments belonging to the

Development Assistance Committee of the OECD to negotiate the

rescheduling of the debts owed to them – mainly aid loans and

guaranteed export credits. Rescheduling is actually put into effect by

a series of bilateral agreements negotiated separately by each

individual creditor some time after the Paris Club agreement.

Poverty Reduction and Growth Facility (PRGF): Established as

the Enhanced Structural Adjustment Facility (ESAF) in 1987. Used

as the IMF’s concessional lending facility, which provides finance for

Poverty Reduction Strategy Papers (PRSPs).

Poverty Reduction Strategy Paper (PRSP): PRSPs describe the

country’s macroeconomic, structural and social policies and

programmes to promote growth and reduce poverty, as well as

associated external financing needs and major sources of financing. In

order for a country to qualify for multilateral debt relief, access

PRGF and IDA concessional lending, it must produce a PRSP.

PV (Present Value) (of debt): The discounted sum of all future debt

service at a given rate of interest. If the rate of interest is the

contractual rate of the debt, by definition, PV equals the nominal

value, whereas if the rate of interest is the market interest rate, then

PV equals the market value of the debt. Present Value is sometimes

mis-described as Net Present Value.

Glossary

xiv

xiv

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina xiv

1

1

Introduction

Jan Joost Teunissen

W

hen I was asked in early summer of 2002 by officials of the

Dutch Ministry of Foreign Affairs whether I was willing to

organise an international workshop on how debt relief for heavily

indebted poor countries (HIPCs) could be made more effective, my

first thought was: “Gosh, why did they let this problem drag on for

so many years. They should have resolved it long ago!”

In my opening remarks to the workshop in August 2002, I hinted

at my spontaneous (but silenced) outcry in somewhat more

diplomatic, but still provocative, terms, saying that I hoped the

Forum on Debt and Development (FONDAD) would not be asked

in three years time to organise yet another workshop on how the

HIPC Initiative could be made more effective.

“The Initiative should just achieve what it is meant to do: get rid

of the debt problem,” I stressed.

During the coffee break, one of the Ugandan participants came

to me and said with an ironic smile “You have been pretty tough

with us.”

“No,” I answered, amused, “I wasn’t blaming you so much, but

rather the officials in the rich countries.”

“Come on,” she said, “we share part of the blame.”

Lessons from the 1980s Debt Saga

The first international workshop I organised on how to resolve the

debt problem of developing countries dates back to March 1984.

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 1

1

See for an account of her view and that of other economists, including the late

Robert Triffin, Jan Joost Teunissen, “The International Monetary Crunch: Crisis

or Scandal.”, In: Alternatives, Vol. XII, No. 3, pp. 359-395, July 1987.

2

See for an explanation of this uncommon statement, my article in Alternatives

mentioned in footnote 1.

The meeting took place in Amsterdam and was held a year and a

half after the international debt crisis erupted in August 1982 when

Mexico could no longer repay its debts to the western commercial

banks. At the time, discussions often included the issue of who was

to blame for the emergence of the debt crisis: the poor countries,

the western banks, or the rich countries.

The rich countries and the western banks tended to downplay or

even dismiss their responsibility. Instead, they shifted (most of) the

blame onto the developing countries, accusing them of having

borrowed too much, adjusted too little, and pursued bad economic

policies.

As chair of that March 1984 workshop in Amsterdam, I gave

ample room to a Brazilian professor of economics, Maria da

Conceiçao Tavares, who had a different analysis. She eloquently

presented the view that the United States and Western Europe

were, for a large part, to be held responsible for the emergence of

the debt crisis in 1982.

1

Basically, her argument boiled down to the thesis that the debt

crisis had deep roots in how the international monetary and financial

system had been operating since the establishment of the Bretton

Woods system in 1944. The lack of will of the United States and

Europe to reform the system and de-link it from the US dollar as

the key currency, first led to an explosion of international interest

rates at the end of the 1970s and then, as a consequence of the

extension of roll-over credits by the banks to debtor countries at

very high interest rates (to repay the banks), to the outbreak of the

debt crisis in August 1982.

In Tavares’ succinct and intriguing synthesis: “It all started with

the foreign debt of the United States!”

2

Obviously, some European officials disagreed with Tavares’

analysis. And when she suggested that the Latin American debt

could be easily resolved by establishing a special agency that would

convert defaulting debts into long-term loans with a 7 percent rate

of interest – as had been proposed by some Brazilian and American

bankers – one of the participants, an official from the Dutch central

Introduction

2

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 2

3

Jan Joost Teunissen

bank, said: “I have a problem with these designs for a global

solution. The countries with high debt are very different. Brazil, for

example, is a completely different case from that of South Korea.

Moreover, these countries themselves are not interested in global

solutions because they fear they might be cut off from access to

commercial bank loans in the future. Indeed, Jan Joost is right that

the ministries of finance and central banks of the industrial countries

are not eager to bail out the banks. For such a bail-out, we would

need the agreement of the industrial countries. In the present

circumstances it is absolutely unthinkable that the US Congress

would agree to such a solution.”

What lessons can we learn from this debt debate of twenty years

ago. Many, but I want to highlight only three of them.

The first lesson is that the creditor countries were consciously

delaying debt reduction measures. In this way, they gave the banks

sufficient time to build up reserves for the eventual debt reduction

that would have to come. After seven years, a global solution was

finally adopted which previously had been said to be “unthinkable”.

In 1989, Brady bonds (named after the US minister of finance

Brady) were created to substantially reduce the debt burden of Latin

American countries.

Second, the debtor countries were unable to get their acts

together and negotiate a quicker and better solution. They talked a

lot about forming a debtors’ cartel, but it never got off the ground.

In the meantime, the creditor countries had their own effective

cartel, the Paris Club, and almost full control over the IMF and the

World Bank as instruments to “guide” the economic policies of

debtor developing countries.

Third, the creditor countries and the IMF and World Bank were

successful in convincing (others might say: forcing) the debtor

developing countries to “adjust” and liberalise their economies.

Even though adjustment and liberalisation helped them to regain

creditworthiness and investor confidence, it also led to what in Latin

America is called the “lost decade” of low economic growth, high

unemployment and social suffering.

Can similar lessons be drawn for the HIPC case. Before

answering that question, I will say a few words about the slowness of

action on the part of the policymakers of the rich countries

(including the IMF and the World Bank) prior to launching the

HIPC Initiative, mention the major criticisms of the Initiative, and

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 3

3

The conference was moderated by Helleiner and jointly sponsored by African

central banks and the IMF. The proceedings were published by the IMF, Gerald

K. Helleiner (ed.), Africa and the International Monetary Fund, IMF, Washington

D.C., 1986.

4

Jacob A. Frenkel, Michael P. Dooley, and Peter Wickham (eds.), Analytical

Issues in Debt, IMF, Washington D.C., 1989.

summarise the main suggestions of what needs to be done to resolve

the debt problem of low-income countries.

The Long Way to the HIPC Initiative

The debt debate of the 1980s concentrated on the debt problem of,

in World Bank and IMF parlance, severely-indebted middle-income

countries (SIMICs). In the late 1980s and early 1990s, the debate

shifted to the debt problem of severely-indebted lower-income

countries, or SILICs, most of them being in Africa. At the same

time, the discussion shifted from debt owed to commercial banks to

debt owed to official creditors – donor governments and

international financial institutions (IFIs). Official debt relief can be

split into two segments: (i) debt owed to donor governments, i.e.

bilateral debt; and (ii) debt owed to IFIs, i.e. multilateral debt.

Professor Gerald K. Helleiner of the University of Toronto was

one of the first experts who warned at an early stage that African

countries were running into serious problems with the servicing of

official debt. In his introduction to the proceedings of a conference

held in Nairobi in 1985,

3

Helleiner observed that, as a result of a

collapse in commodity prices, high international interest rates and

protectionism, many countries in Africa were facing debt servicing

obligations that appeared “to exceed prospective servicing capacity”.

Helleiner noted that while a whole range of debt relief measures

were proposed at the Nairobi conference, the IMF paper was very

cautious. Instead of emphasising the need for debt relief, the IMF

paper just emphasised the need for “improved domestic-debt

management systems”.

In another book published by the IMF, Analytical Issues in Debt,

4

Joshua Greene of the IMF’s research department discussed in a

similar cautious vein a whole range of proposals for multilateral debt

relief. Greene saw many obstacles in putting any of these proposals

Introduction

4

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 4

5

See Roy Culpeper, The Debt Matrix, The North-South Institute, Ottawa,

Canada, April 1988.

6

These meetings resulted in the establishment of the European network of

NGOs engaged in debt campaigning EURODAD.

7

This study was the key document at a conference in Abidjan in July 1991 that

was attended by African and Western parliamentarians and former World Bank

president Robert McNamara among others, resulting in a 11-point action plan on

debt relief for poor African countries.

8

This study built on previous work done by Matthew Martin, one of the

contributing authors to this volume.

5

Jan Joost Teunissen

into practice, the main obstacle being that bilateral donors would

have to provide the necessary funding. Such funding would be

highly unlikely, said Greene, “given the present budgetary positions

of the leading donors”.

Helleiner’s concern about the rising debt problems of poor

African countries was shared by another Canadian economist, Roy

Culpeper of the North-South Institute, who was advisor to the

Canadian executive director at the World Bank from 1983 to 1986.

In an April 1988 study, Culpeper observed: “Despite the growing

‘menu of options’ for debt relief offered to individual debtor

countries and their respective creditors, in early 1988 one obvious

option, debt reduction or partial debt forgiveness, was still conspicuous

by its virtual absence. ... The best examples of the scope for debt

reduction derive from the debt of low-income Africa. The debt of

this region is insignificant in global terms.”

5

The lack of will of the IMF and the World Bank (and the rich

countries controlling these institutions) to consider multilateral debt

relief for poor countries in Africa prompted former high-level

World Bank expert Percy Mistry to present compelling arguments

in favour of official debt relief at meetings that FONDAD organised

for European and Latin American development NGOs in the late

1980s.

6

Mistry undertook a number of studies that showed the

urgent need for debt relief to low-income countries that would go

much further than the terms offered in Paris Club deals. In his path-

breaking study, African Debt Revisited: Procrastination or Progress.,

(FONDAD, 1991),

7

Mistry stressed: “Debt relief ... is still being

provided to Africa on a ‘too little, too late’ basis.”

It was another study by Mistry, Multilateral Debt: An Emerging

Crisis. (FONDAD, January 1994),

8

that contributed to putting

increasing pressure on western policymakers to consider substantial

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 5

debt relief for poor countries. But it would still take almost two

years before the Development Committee of the IMF and the

World Bank asked the staff of the Fund and the Bank (October

1995) to come up with proposals for dealing with the multilateral

debt problem.

In April 1996, the staff presented “A Framework for Action to

Resolve the Debt Problems of the Heavily Indebted Poor Coun-

tries”. In June 1996, the framework was followed by a proposal to

create a Multilateral Trust Fund for the financing of multilateral

debt relief. And, finally, in September 1996, the IMF and the World

Bank launched the HIPC Initiative.

The key objective of the Initiative was to provide a permanent

exit from the repeated debt reschedulings of HIPCs in the Paris

Club and bring their external debts to sustainable levels. Three years

later, in 1999, when it became clear that the original framework was

insufficient, the HIPC Initiative was enhanced. However, progress

in implementation remained slow, instigating observers and

policymakers in both HIPC and donor countries to review critically

its effectiveness.

Criticisms of the HIPC Initiative

The criticisms of the HIPC Initiative are manifold and can be

summarised as follows.

First, since the Initiative has not resulted in long-term debt

sustainability, private investors remain reluctant to invest in HIPC

countries. In Chapter 2 of this book, Matthew Martin strongly

advocates that debt sustainability would become an intrinsic goal of

the Initiative, rather than something one hopes would happen after

the debt relief is fully granted. Such a wishful policy “leaves the

attainment of genuine debt sustainability to initiatives beyond and

after HIPC,” observes Martin.

Second, growth assumptions and projections of future debt levels

have proved to be unrealistic. Uganda is a clear example. As

Florence Kuteesa and Rosetti Nabbumba observe in Chapter 3 of

this book, the debt-to-exports ratio of Uganda was in June 2003 fifty

percent higher(!) than before Uganda obtained debt relief under the

HIPC Initiative.

Third, the current requirement to spend all savings from debt

Introduction

6

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 6

7

Jan Joost Teunissen

service solely on social expenditures is seen by most of the debtor

countries as highly in.exible.

Fourth, the implementation of the Initiative has been (extremely)

slow, as the limited number of countries that have reached the

decision point for actual implementation of debt relief indicates. As

Martin Gilman and Wayne Mitchell of the IMF report in their

contribution to this book (Chapter 5), of the 38 countries eligible

for the Initiative, until now (December 2003) only 10 have reached

the completion point and have thus received the debt relief

committed by the international community. In Chapter 4, Mothae

Maruping stresses that the HIPC process has been “slow and

inadequate” in delivering urgently required debt relief to countries

in Eastern and Southern Africa

Fifth, the eligibility criteria exclude countries that are as poor

and hard hit by high debts as the selected group of HIPCs.

Sixth, the Initiative has done very little to protect countries

against exogenous shocks such as the volatility in commodity prices,

and thus failed to address the impact of these shocks on debt

sustainability. Again, star HIPC country Uganda is a good example.

As Florence Kuteesa and Rosetti Nabbumba report in Chapter 3,

Uganda experienced a fall of 28 percent in export earnings during

the three years it received debt relief, which undermined its debt

sustainability.

Seventh, the Initiative has provided very little additional

financing for development – if at all. As Matthew Martin shows,

large amounts of aid are being diverted from bilateral budgets to

fund relief by multilateral institutions. In Chapter 7, Geske Dijkstra

adds another interesting and alarming element to the additionality

debate: large amounts of aid are being used to repay loans due to

western companies! In an evaluation study of the results of debt

relief, Dijkstra reports that during the years 2000-2002, when

implementation of the Enhanced HIPC Initiative began, the

amounts of debt relief destined to repayment of Dutch export

credits exploded. This led to what innocent observers might applaud

as an all-time high of debt relief granted by the Netherlands in

2002. However, in practice it meant, as Dijkstra emphasises, “that

much less money became available for regular aid”.

Eighth, the Initiative is not linked to the funding of the

Millennium Development Goals (MDGs). Matthew Martin argues

that the key question here is whether debt relief is freeing funds for

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 7

government spending on poverty reduction. His conclusion is that

many HIPCs do not include achievement of the MDGs in their

HIPC programmes, and that the current design of HIPC relief does

not maximise its potential contribution to poverty reduction. In

Chapter 6, Amar Bhattacharya, of the World Bank, argues that the

goals of the HIPC Initiative and the MDGs can only be met if the

rich countries give enough aid. “The HIPC Initiative will reduce the

average debt servicing burden to less than 2 percent of GDP by

2005. But on average, HIPCs will need 10 percent of GDP or more

in net transfers if they are to lay the foundations for sustained

growth and accelerate progress towards the MDGs ... Before the

launch of the [HIPC] Initiative, debt and debt service reduction was

the first priority. Looking ahead, it will be additional financing in

suitable terms and form that will be the key,” stresses Bhattacharya.

Ninth, HIPC conditionality impedes the attainment of the

MDGs. Geske Dijkstra comes out strongest against conditionality.

According to her, there are three arguments against setting

conditions for debt relief: (i) HIPCs are forced to spend more on

social projects from their tax income while in many cases debt relief

does not free resources for such expenditures; (ii) it implies the

“double tying” of aid since conditions are first set for the original

loans, and then new conditions are posed to the relief on these same

loans; (iii) the setting of conditions to aid in general has little effect

because governments will not carry out policies that they do not

believe in while the donors seldom impose real sanctions on lack of

performance.

What Needs to Be Done.

The answer to the question of what needs to be done to resolve the

debt problem of poor countries depends on what one wishes to

achieve. Protestors on the streets of Seattle, Genova or Cancún have

urged for putting an end to IMF and World Bank “interference” in

poor countries (or even the outright abolition of the Fund and the

Bank) and for a total cancellation of debt. Others, in a more

moderate tone, have advocated more effective debt relief and a

redefinition of the roles of the IMF and the World Bank in

developing countries.

In the following chapters, this book provides a wide range of

Introduction

8

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 8

9

Jan Joost Teunissen

suggestions of what needs to be done. They can be summarised

under three broad categories: (i) speed; (ii) depth; and (iii) time-

horizon.

The speed of providing debt relief is severely hampered by the

conditions set for the implementation of debt relief. The main

hindrance to quicker debt relief seems to be the traditional IMF

macroeconomic conditionality. Therefore, many experts argue that

such conditionality should either be minimal or even completely

abandoned. The IMF, the World Bank and the rich countries, on the

other hand, oppose this view and argue that conditionality is needed

to guarantee future debt sustainability. In addition to the traditional

conditions applied by the IMF, there is the more specific HIPC

conditionality of reaching agreement on a Poverty Reduction

Strategy Paper (PRSP). Here the story is the same: some observers

suggest eliminating the PRSP as a condition for debt relief while

others claim the need to stick to its adoption.

The depth or profoundness of debt relief granted under the

HIPC scheme has fallen short of what would be needed to achieve

debt sustainability, as Martin Gilman and Wayne Mitchell

acknowledge in Chapter 5. This is awkward and in clear contrast

with the stated objective of the Initiative. Therefore, many observers

argue that additional debt relief is needed and that the problems of

domestic debt and private debt should be addressed as well.

The time-horizon of debt relief in the context of the HIPC

Initiative is too limited. Instead of just looking at the period in

which countries enter and complete the debt reduction scheme,

attention should be focused on the longer-term future of debt

sustainability. It is suggested that bilateral donors should stop

bailing-out the multilaterals (see Chapter 7) and that aid should be

given in the form of grants rather than loans. It is also suggested

that the IMF should completely withdraw from long-term lending

to poor countries, implying that the poverty-reducing growth

facility (PRGF) should be abolished altogether.

The Future of HIPC Debt Relief

At the August 2002 workshop on HIPC Debt Relief organised by

FONDAD, it was remarkable how many of the African participants

hastened to blame themselves for the lack of progress in achieving

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 9

debt sustainability and poverty reduction. It is encouraging that

African officials take their own responsibility. Northern officials, on

the other hand, tend to be less critical about their policies. So it was

equally remarkable that a Dutch Treasury participant exclaimed at

the end of the workshop: “We are putting so many conditions to

HIPCs that we don’t even apply to ourselves!”

Just as happened during the debt crisis of the 1980s, the HIPC

creditors remain reticent in providing substantial and prompt debt

relief. The following chapters provide useful insights into why this

happens. And just as happened before, the creditors remain

successful in putting conditions to the delivery of debt relief. In this

way, they make sure that the IMF and the World Bank continue to

exercise in.uence over the economic policies of the poor nations.

The poor debtor countries, on the other hand, are having even less

power than the middle-income debtor countries had in the 1980s to

in.uence creditor action (or lack of action) on the debt issue.

This book presents a thorough analysis of the successes and

failures of the HIPC Initiative. Although the contributing authors

have diverging views, they share the common objective of providing

facts and arguments that aim to resolve the HIPC debt problem.

The crucial question is, however, how quickly and thoroughly the

problem will be solved.

Introduction

10

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 10

1

Published sources for this chapter are listed in the bibliography, but the main

source is my work with 44 developing countries, through the HIPC Debt Strategy

and Analysis Capacity-Building Programme (funded by the Governments of

Austria, Canada, Denmark, Ireland, Sweden, Switzerland and the UK), and the

work of Development Finance International on aid management and private

capital .ows. I am most grateful to colleagues in these programmes for their input,

and especially to the opinions of HIPC Finance Ministers represented through the

declarations of the HIPC Ministerial Forum (1999-2002), on which this paper is

largely based. For more details, see www.dri.org.uk. However, the views expressed

in this chapter are entirely personal and do not represent those of the Programme

or its donors.

2

For more detail, see Martin (2002a).

11

2

Assessing the HIPC Initiative:

The Key Policy Debates

Matthew Martin

1

I

n 1996, the international community introduced the Heavily

Indebted Poor Countries Debt Relief Initiative (HIPC I). In 1999,

it reinforced this initiative, transforming it into the Enhanced HIPC

Initiative (HIPC II). This chapter assesses the achievements of these

Initiatives. In particular, it looks at the potential role of debt relief in

financing the Millennium Development Goals (MDGs), which aim

to halve world poverty by 2015, by comparing it with other sources of

financing for the MDGs,

2

and assesses whether the Initiatives have

fulfiled this potential.

HIPC II will provide a large amount of debt relief. In terms of

the “debt overhang”, it has promised to reduce the “present value”

(PV) of HIPCs’ debt by $31 billion for 28 countries. When relief is

delivered to all 34 countries which are currently believed to be

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 11

3

All of the data on relief in this paragraph are based on joint publications by the

IMF and World Bank (2002c, 2003a, 2003b, and 2003c).

eligible for the Initiative, pre-HIPC debt overhang will be reduced

by 40 percent. The total amount of debt relief will be $39.4 billion in

PV-terms.

In terms of “liquidity” relief (the .ow of future payments on

debts), HIPC will provide $58 billion of relief over 33 years. This

equals 47 percent of scheduled debt service. Additional pledges of

debt relief by creditor governments, beyond HIPC but linked to its

framework, will add $8 billion of PV relief and $11 billion of service

relief. In total, HIPCs will eventually have their debt reduced by 49

percent and their debt service by 56 percent.

3

Yet the HIPC Initiative has been surrounded by myths and

misunderstandings since its inception. On one side, creditors and

international institutions have made exaggerated claims of its

successes, based on the assumptions that all its promises have been

fulfilled. On the other, NGOs and civil society organisations dismiss

HIPC as a total failure or a means of imposing additional con-

ditionality on developing countries without providing enough

funding. Neither of these perspectives are accurate: the truth is that

HIPC has the potential to achieve much more if reinforced and

surrounded by other initiatives. This chapter attempts to present the

reality of the HIPC Initiative, as perceived by the HIPC govern-

ments themselves and their ideas for how HIPC can help to reach the

MDGs.

1 Key HIPC Myths and Realities

Debate 1: HIPC Does/Does Not Provide Debt Sustainability

Proponents of HIPC claim that relief is based on objective criteria

which allow it to make debt sustainable (i.e. payable), at least at the

time of the completion point when full debt relief is delivered,

thereby providing a basis for HIPCs to maintain their debt

sustainability thereafter. Opponents of HIPC claim it does not

achieve this.

Judging whether developing country debt is sustainable involves

four sets of issues: the way to measure debt burdens; the types of debt

Assessing the HIPC Initiative: The Key HIPC Debates

12

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 12

13

Matthew Martin

to include in the measurement; the way to judge payment capacity;

and the thresholds to set to judge debt sustainability.

Measuring Debt Burdens

Three elements are usually suggested for measuring debt burdens: (i)

debt stock – the nominal amount of debt owed by a country; (ii) debt

service – the annual amounts payable on the debt; (iii) the present

value (PV) of debt – future debt service aggregated based on its cost

in today’s money (see Martin, Johnson and Aguilar, 2000, for detail).

Until the early 1990s, stock and service were the preferred debt

burden concepts. They were easy to understand and to calculate for

governments, creditors and foreign and domestic private sector

investors. They remain the key concepts private investors and rating

agencies use to judge debt burdens. Nevertheless, in the 1990s, the

concept of PV debt reduction was introduced to allow Paris Club

creditors to show that their different ways of providing debt relief

(some cancelling debt up-front, other reducing interest rates and

therefore providing relief over several decades) were of equal value to

a debtor country (even if this was not the debtor’s viewpoint). It is

now often suggested that PV is the most theoretically valid concept.

However, while PV re.ects the concessionality of the debt owed by

low-income countries, it is not an accurate measure of what is known

as the “debt overhang” – the burden of debt stock which deters

investors and has other pernicious effects.

First, no private market actors assess debt burdens using PV –

they all use the nominal “stock” of debt. While creditors may wish to

pretend that reductions of stock and service are equivalent by using

PV calculations, the investor community and civil society in the

debtor country react very differently to reductions in debt stock and

service. In Guyana, where civil society believed the press releases that

Guyana would receive $636 million of (PV) debt relief under HIPC

I, they failed to understand PV and burned down part of the Finance

Ministry when the Minister tried to explain that this would be

delivered only over 30 years through gradual debt service reduction.

If HIPC is to continue to use PV rather than stock, creditors and

investors need to be educated about its meaning and trained to track

it – but it would be preferable to abandon the concept altogether and

revert to stock.

Second, many also question the validity of how PV is calculated.

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 13

The IMF (2003f) indicates that the PV discount rate should be based

on the interest rate which countries could earn by investing the loan

disbursements internationally. This would currently be around 2.5

percent, after a dramatic fall in 2001-2003. Yet the actual discount

rates used for HIPC II and IMF calculations of the concessionality

of new loans, are linked instead to the cost of borrowing export

credits from OECD governments (so-called CIRR rates), which are

around 4 percent. So the PV is actually discounted much more

heavily than it should be and therefore seems less of a burden,

depriving countries of debt relief. These interest rates also .uctuate.

With their rise in 1999-2000, countries entering the HIPC

programme by reaching decision points in 2000-2001 lost hundreds

of millions of dollars of debt relief without any objective justification.

As interest rates tumbled after September 11, 2001, when terrorists

attacked the World Trade Center and the Pentagon, countries with

the worst adjustment “track record” gained hundreds of millions of

dollars of debt relief at decision point. If the international community

insists on retaining PV for the overhang measure, it would be far

more equitable among countries and over time to freeze discount

rates at those applying on investments by developing countries

(around 2.5 to 3 percent).

Which Debts to Include

If we are serious about making debt sustainable, we need to include

all types of debt which are important to sustainability. HIPC analysis

has omitted two types of debt which are burgeoning in low-income

countries – domestic debt and private sector debt – largely because

the international community does not wish to relieve these debts

using HIPC funds. The IMF (2003f) suggests including domestic and

private sector debt in wider debt sustainability analysis, but hints that

these would not be important for most low-income countries.

HIPCs’ own analyses, however, reach different conclusions.

Domestic debt is a huge burden in most HIPCs (see Johnson,

2000), even though Treasury bills, bonds and stocks are small in

many countries, partly because they are only just now beginning to

use market-based instruments. However, when less traditional debt –

central bank overdrafts, arrears to suppliers and government

employees – is taken into account, the burden of domestic debt

service is higher than external debt service for more than 20 HIPCs.

Assessing the HIPC Initiative: The Key HIPC Debates

14

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 14

15

Matthew Martin

PRGF programmes largely ignore the domestic debt burden of

HIPCs, assuming optimistic rapid clearance of domestic arrears, or

falls in in.ation which reduce domestic debt interest rates. It is

impossible to ensure adequate resources for poverty reduction

spending unless we analyse and resolve the domestic debt problem.

The international community insists that this burden cannot be

reduced using resources committed for HIPC, but there are many

other ways of doing so, using programme aid or privatisation receipts

(Cape Verde, Ghana, Tanzania). As a result, HIPC Ministers have

insisted that all debt sustainability analyses and PRGF documents

should examine total (domestic and external) debt burdens, while the

international community should give high priority to solving

domestic debt problems, since these are undermining the private

sector, the economic growth prospects and the sustainability of

external debt.

Another key burden emerging for low-income countries,

especially those which have liberalised capital accounts and have

received large foreign investment (e.g. Bolivia, Gambia, Ghana,

Guyana, Mozambique, Tanzania, Tchad, Uganda and Zambia) is the

rapidly growing private sector debt to finance foreign investment

projects or export/import transactions. A recent IMF Board paper

(IMF, 2003f) asserts that most low-income countries have low private

capital .ows, but this is not so (Martin and Rose-Innes, 2003).

Private sector debt stocks of 50 to 100 percent of export earnings are

not uncommon in these countries. So there is an urgent need to

enhance monitoring and analysis of these debts in order to ensure

that they will stay sustainable and not produce foreign exchange

crises in the recipient countries if private sector debtors fail to

reimburse the debts or foreign exchange reserves become short for

other reasons (Baball, 2002; Martin, 2002b).

The recent debate about debt sustainability launched by the IMF

and the World Bank may also run a risk of reducing the breadth of

analysis. Until now, the HIPC Initiative has taken into account all

publicly guaranteed debt in debt sustainability analysis, including

debt contracted by other public sector institutions (parastatals,

federated states, municipalities), as well as debt contracted by the

private sector but guaranteed by the government. Recently, however,

the IMF has suggested that some of such debt (subject to case-by-

case country examination) might be excluded because it is to finance

“enclave” projects which earn enough foreign exchange to repay it.

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 15

However, excluding such loans from past IMF programme

concessionality ceilings encouraged irresponsible lending of

expensive, less high-quality finance by export credit agencies and

commercial lenders, often providing continuing “escape funding” to

parastatal agencies which therefore failed to restructure. Also, high

projected foreign exchange earnings often fail to materialise, and

then the debt service falls on the government or undermines the

foreign exchange market. Finally, all international institutions still

treat such debt as publicly guaranteed debt (see IMF, 2003a).

Therefore, HIPCs would rather see all such debt included in analysis

– though some of it might need to be treated outside the HIPC

framework.

Judging Payment Capacity

There is a lot of confusion about how to judge the payment capacity

of a country. Theoretically, one could use GDP/GNI, exports or

budget revenue, preferably expressed in present value terms if PV is

being used as the measure of the debt. But the fundamental issue

remains who pays the debt service.

Export earnings are not a good indicator of payment capacity, since

most African governments have liberalised foreign exchange markets

and do not have captive private sector export earnings to pay debt

service. In addition, they may be unable (or unwilling given

in.ationary risks) to buy foreign exchange in the markets to

transform private export earnings into government forex to pay

external debt service (or local currency to pay domestic debt service).

This is particularly true when most export earnings are held in

offshore accounts and used to repay private sector debt; or when

export-earning projects are given long tax holidays, so that they

contribute no tax revenue to government. Export earnings can be

used to judge total national capacity to pay debt (public and private

sector), because private sector export earnings are available to pay

private sector debt. However, it is vital in most African countries to

analyse government, parastatal and private sector export earnings

(breaking down the private sector where necessary into sub-sectors

or mega-companies or projects) and their fungibility, to assess the

risk of foreign exchange shortage.

It is very difficult to see what relevance GDP/GNI has to any

assessment of payment capacity for low-income countries, as there is

Assessing the HIPC Initiative: The Key HIPC Debates

16

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 16

17

Matthew Martin

no necessary correlation between it and the availability of resources

to pay debt.

Payment capacity for government external (or total) debt basically

depends on budget revenue. It is sometimes argued that budget

revenue is subject to manipulation by governments and therefore

risks a moral hazard that they would reduce their budget revenue

collection efforts (or falsify its reporting) in order to increase debt

relief. However, this argument is purely theoretical since budget

revenue collection and monitoring is one of the key elements of IMF

programmes. It should be easy for the international community to

trust the IMF to monitor such efforts and avoid any moral hazard.

HIPCs are convinced that budget revenue should be the key measure

of payment capacity for government debt.

Ratios and Thresholds

The amount of debt relief under HIPC has been determined by

eligibility thresholds which (according to public statements by Fund

and Bank officials) were based on initial analysis (e.g. Humphreys and

Underwood, 1989) and then modified to suit political compromises

among G-7 creditors, balancing the need to include strategic G-7

allies and the desire to keep costs down. These compromises explain

the focus, above all, on PV in the two main criteria for debt relief; PV

allows different forms of debt relief to appear equal in their impact.

Moreover, G-7 officials regarded debt overhang as more of a burden

than debt service. The PV/exports threshold was set at 150 percent

(initially 200-250 percent) and the PV/budget revenue threshold at

250 percent. Political compromises especially explain the “Côte

d’Ivoire” criterion – the PV/budget revenue threshold which was set

at a level just low enough to include Côte d’Ivoire, and accompanied

by empirically unjustified sub-criteria to exclude other countries and

keep down costs.

Several studies (Cohen, 2000; Elbadawi et al., 1997; Johnson,

2000; Martin, 1999a; Pattillo et al., 2002; and Vaugeois, 1999) have

examined the levels of debt which have proven historically or

econometrically unsustainable. They have found that the PV/export

criterion of 150 percent in HIPC II is near sustainable levels.

However, the PV/budget revenue criterion of 250 percent is far from

sustainable. Vaugeois (1999) and Martin (1999a) indicate that it

should be reduced to 155 percent. Johnson (2000) finds that the

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 17

4

Many have also argued that judging debt sustainability by ratios of debt

indicators compared to economic indicators is too narrow, and that true

sustainability should be judged by whether sufficient funding is released for

poverty reduction (CAFOD et al., 2003). This chapter returns to that issue under

Debates 4 and 5 below.

PV/budget revenue ratio of total (external plus domestic) debt has

proven unsustainable at 150 percent, implying that much lower

thresholds are needed for external debt. HIPCs believe that the

PV/budget revenue threshold should be reduced to 150 percent.

The dominance of G-7 views in the discussions also explains why

debt service ratios were given much less prominence. The debt

service/exports ratio was treated as a secondary criterion, but at a

high level of 15-20 percent compared to independent studies which

indicate that it has been unsustainable at 12 percent. In spite of the

fact that all HIPCs regard the debt service/budget revenue ratio as

the key indicator of debt burden if the aim is to free resources for

poverty reduction spending to reach the Millennium Development

Goals, HIPC II continues to avoid systematic attention to this ratio.

It aims only for a debt service/budget revenue ratio which is “low and

declining”. This leaves a large leeway for subjective viewpoints, and

especially for tailoring the profile of relief to creditor preferences,

leaving many HIPCs with high ratios in the initial years of HIPC

debt relief. Independent analysis has found that this ratio should be

set at around 13 percent – a level near the 10 percent endorsed by

bodies as diverse as Oxfam and the US Congress. HIPCs advocate a

debt service/budget revenue ratio of 10 percent as the key criterion

for judging debt sustainability, in order to free the maximum funding

for anti-poverty spending.

Summarising, the HIPC Initiative makes some important

progress towards debt sustainability: before its creation, creditors did

not take notice of debt sustainability, instead sticking to debt relief

rules which virtually ignored debtor needs. However, to live up to its

promise of making debt sustainable, it is not enough to broaden

sustainability indicators and tailor analysis to country circumstances

only after HIPC completion point (see IMF/World Bank, 2003a). As

long as HIPC analysis continues to focus excessively on the PV/

exports ratio, it leaves the attainment of genuine debt sustainability to

initiatives beyond and after HIPC.

4

HIPC itself should be giving top

priority to reducing debt service/revenue ratios below 10 percent, to

free funding for poverty reduction spending.

Assessing the HIPC Initiative: The Key HIPC Debates

18

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 18

19

Matthew Martin

Debate 2: HIPC Does/Does Not Make All Creditors Share the

Burden

One of the main claims for HIPC is that it includes all creditors and

obliges them to share the burden of debt relief to the limits of their

abilities (though it does not have the ability to mandate or force

creditors to provide relief). Yet its critics claim that it gives

preferential treatment to some creditors and many others are not

participating.

Preferential Treatment

Before the HIPC Initiative, multilateral creditors had “preferred

creditor” status as a result of which they did not provide debt relief. It

was argued that this was essential to their financial health and

sustainability, although many (Mistry, 1994; UNCTAD, 1993)

disagreed with this assessment. With the launching of HIPC it was

acknowledged that they could provide some debt relief without

disastrous effects, but they retained “slightly less preferred creditor”

status. They only share the burden of additional debt relief that is,

when needed, provided after the 67 percent debt reduction from

bilateral and commercial creditors. However, nobody has made a

convincing argument for keeping this status once the multilaterals

have agreed they can provide relief without damaging their own

funding – except to say that the cost of relieving all of the debt would

be too high. Some have argued that they could easily cancel all of the

debt owed to them without any damage (notably Debt and

Development Coalition Ireland, 2003).

In addition, even to the degree that multilateral institutions are

participating in relief, they are not making the maximum possible

contributions to HIPC from their own resources. While they have

gone further than before, there remain reserves (including IMF

gold), provisions and re.ows which could be used, notably those of

the IMF, World Bank and Inter-American Development Bank, to

fund their own relief – and even the relief to be provided by other

multilateral and sub-regional organisations – without damaging their

financial credibility or future lending to HIPCs or other member

states. Instead, bilateral donors are having to divert grant funding to

support part of this relief, reducing availability of direct bilateral

grants (see Debate 4 below and also Chapter 7 of this volume).

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 19

Non-Participating Creditors

Many creditors of HIPCs are not fulfilling the terms of HIPC

agreements by participating fully in the debt reduction.

Thirty-two non-Paris Club creditor governments are refusing to

participate. These fall into 5 categories: creditors which are non-

members of the Bretton Woods institutions (BWI) or take little

notice of their decisions because they are under international

sanctions; middle-income Arab or North African countries; Asian

countries (largely China and India); former Eastern European

countries; and other HIPCs. In the last 18 months some of these

creditors (e.g. India, Libya) have indicated in principle their

willingness to participate. However, these statements have not been

materialising as actual debt relief for countries (e.g. India has been

relieving only aid debt and not export credits; Libya had not signed a

relief agreement yet).

HIPCs owe $2 billion in PV terms to commercial creditors. A

worrying recent trend has been of some non-Paris Club governments

and commercial creditors refusing to participate and suing debtors

(usually successfully) for full recovery of debt. Though the original

debt is small, judgements in international courts have awarded 3 to 4

times this amount to creditors, due to accumulation of interest and

legal fees, forcing some debtors to pay amounts as large as $50

million in a year, undermining poverty reduction spending plans.

The Paris Club has made major steps forward under HIPC II. It

has agreed that, for many HIPCs where Cologne terms will be

insufficient, it will cancel up to 100 percent of pre-cutoff date debt,

and most Club members have gone further to cancel post-cutoff date

debt where necessary to attain sustainability thresholds. However, a

few creditors are charging excessive interest rates, fees or penalty

interest in Paris Club bilateral agreements (failing to provide agreed

PV reduction). Also, a considerable number of HIPCs (Bolivia,

Ethiopia, Gambia, Guyana, Nicaragua, São Tomé, Uganda and

Zambia) have not received relief immediately under HIPC, because

amounts were small, the period between decision and completion

point was short, there was an administrative backlog in the Club, or

there were delays in creditor discussions or PRGFs.

All major multilateral creditors have agreed to participate in the

HIPC Initiative and some have agreed to provide interim relief

between decision and completion points. However, seven regional

Assessing the HIPC Initiative: The Key HIPC Debates

20

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 20

21

Matthew Martin

and sub-regional institutions (representing 1.4 percent of total HIPC

debt) have not yet agreed to participate in HIPC.

At a global level, non-participation was long seen as insignificant

(representing 10-15 percent of total debt), leading the international

community to ignore the problem. Yet, for individual HIPCs, and at

the margin, it is a critical factor in debt sustainability. HIPCs

themselves estimate at 22 (eight more than the BWIs) the true

number of countries which will be unsustainable at completion point

if non-participation is taken into account. They also indicate that six

of the first nine countries to reach completion point cannot be

sustainable if deadlock with various creditors continues.

In 2001-2003, partly due to dialogue with HIPCs, the

international community has realised non-participation is seriously

undermining sustainability for many HIPCs. Yet it has made little

progress in resolving the problem. HIPCs have urged it to:

• Establish a rapid response legal assistance facility to help HIPCs

to discourage or deal with creditor litigation, run by an

appropriate independent institution. In spite of the urgency of this

issue, there has been no progress. The Bretton Woods institutions

have argued that they cannot run such a facility without appearing

to take sides in legal disputes.

• Publish the details of creditors that refuse to provide relief. The

BWIs are now publishing these annually in BWI Board Papers.

HIPCs are also publishing such details and working with BWIs

and civil society to change such creditors’ minds;

• Widen the use of the IDA commercial debt reduction facility to

cover such creditors. This is currently being studied, and HIPC

Ministers have recently expressed their impatience at the slowness

of this process (HIPC Ministerial Network 2003b);

• Create a separate Trust Fund for clearing HIPC debts to other

HIPCs (and to other countries which have debt cancellation from

the Paris Club).

Unequal Burden Sharing

Some creditors are now formally sharing more burden than others.

The cancellations of 100 percent of debt announced by various

OECD governments were supposed to provide a further $5 billion of

PV relief, and to bring down PV/export ratios by an average extra 21

percent (ranging from 1 percent to 41 percent for individual HIPCs).

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 21

However, they are not being allowed to do so, due to shortage of

funds to finance the overall HIPC relief: without much public

discussion, this “safety margin” of 21 percent has simply been

abandoned. Therefore, in calculating the sharing of the burden, the

intended extra relief provided by some creditors is being used to

ensure that HIPCs reach the HIPC thresholds, and other creditors

are “free riding” on the extra relief. In addition, the cancellations are

not comparable in their coverage or timing – and in some cases are

not cancellations at all. Only Australia, Canada, Italy, Norway, the

UK and the US are genuinely cancelling 100 percent of all bilateral

debt from the decision point. Other G-7 governments are excluding

post-cutoff date debt, or ODA debt. Others are implementing

cancellation in ways (via debt conversions – France and Italy) which

provide no additional budget savings for spending on poverty

reduction. HIPCs therefore urge creditors to ensure that 100 percent

cancellations are treated as genuinely additional, allowing them to

reduce their burdens below HIPC thresholds and forcing all

creditors to share the burden; and that all “cancellations” are

genuine.

Summarising, the HIPC Initiative has made major progress in

obliging most creditors to provide relief. Before HIPC, multilateral,

non-OECD and some commercial creditors provided no relief. Now

most are providing a large amount and participating in the Initiative

– but those which are not participating risk undermining the

credibility of the Initiative and denying HIPCs’ debt sustainability –

and some which are participating could do more to share the burden

themselves. If the international community is serious about debt

sustainability, it will need to introduce measures to protect countries

against lawsuits.

Debate 3: HIPC Does/Does Not Protect Against Exogenous

Shocks

Severe, lengthy and frequent so-called “exogenous shocks”

(unexpected factors beyond the control of the government which

undermine economic prospects) are a crucial factor which regularly

undermine debt sustainability for almost all HIPCs. They impact

negatively directly on the denominators of debt sustainability ratios

(exports and budget revenue) and indirectly on the numerators by

expanding fiscal and balance of payments financing gaps, thus

Assessing the HIPC Initiative: The Key HIPC Debates

22

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 22

23

Matthew Martin

inducing more borrowing by countries to fill the gaps (see Martin

and Alami, 2001; IMF, 2003c; and, World Bank, 2003c).

The HIPC Initiative was never intended to protect HIPCs against

exogenous shocks, even though certain public statements and

modifications of the Initiative led countries and civil societies

wrongly to assume that it might. Two policies led to this assumption.

First, HIPC introduced at a relatively early stage some allowance

for export volatility, allowing exports to be presented on the basis of a

multi-year average which would show a more true picture of

medium-term export trends. Somehow this was transformed in

practice into a fixed 3-year average of exports, which does not by any

means re.ect export volatility in all HIPCs. In addition, the use of

multi-year measurement does not apply either to the PV/budget

revenue ratio, or to the debt service/export ratio, both of which are

based on the most recent year only. So HIPC relief does not really

take much account of recent volatility of exports or budget revenue.

Second, HIPC II agreed to reassess debt sustainability at the time

of completion point, to take account of interim exogenous shocks to

the economy. If prospects had changed negatively, it was to grant

“topping up” (more debt relief) to the HIPC. But almost

immediately, worries about cost implications (given that 14 of 24

HIPCs analysed were believed to need topping up) led to restrictions

limiting topping up to countries where shocks “lead to fundamental

changes in a country’s economic circumstances”. As a result, only

Burkina Faso has received topping up (though Benin and Mauritania

also had unsustainable ratios). In addition, topping up aims to reach

sustainability only at the moment of the completion point. Burkina

Faso has qualified, but will nevertheless have unsustainable debt

ratios for the next 16 years due to future borrowing. Topping up

provides little hope of real long-term debt sustainability.

The .exibility of the HIPC Initiative was never intended to cover

the impact of exogenous shocks between decision and completion

points, or after completion point. While many HIPCs conduct their

own debt sustainability analysis at these times, debt relief is not

adjusted to offset the negative economic impact of exogenous shocks.

As a result, the Initiative is effectively providing debt sustainability

only at one snapshot date. Bolivia and Uganda have both suffered

post-completion point shocks making debt highly unsustainable. So

HIPC II is largely ignoring shocks.

However, more fundamentally, the Initiative is not surrounded by

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 23

a comprehensive international financial architecture to protect

HIPCs against exogenous shocks. In particular, projections of

economic prospects in the PRGF programmes of the IMF, which

accompany HIPC relief, continue to take far too little account of

potential “shocks” to aid .ows, commodity prices and climate. The

BWIs often argue that such shocks cannot be foreseen or that the

programme projections are no more optimistic than those of other

analysts. Yet shocks of similar magnitudes have happened many times

in recent decades, a secular decline or stagnation in the prices of most

commodities is now beyond doubt, and climatic shocks are

predictable where they occur with regular frequency (for example in

Malawi and Niger). In this light, BWI programme and HIPC

document projections are systematically overoptimistic, and many

shocks are really “non-shocks” (i.e. should have been foreseen). This

leads to systematic underestimates of balance of payments “financing

gaps”, future borrowing and debt burden (see also Serieux, 2002).

Moreover, PRGF programmes focus excessively on the balance of

payments impact of “shocks”, while failing to analyse sufficiently

their impact on the budget, GDP growth or poverty. They also

largely ignore another key “non-shock” – the potential impact of the

HIV-AIDs pandemic on growth and debt sustainability. UNAIDS

and the World Bank indicate growth could fall by 2.5 percent a year

in the worst-affected countries, sharply reducing budget revenue and

exports by eliminating skilled labour. Yet only three HIPC analyses

have taken this into account.

Until recently, responses to shocks by the international com-

munity were woefully inadequate, focused on emerging market and

other large economies while ignoring any well-structured mechanism

for low-income countries. The responses have consisted of (pre-

dominantly) asking countries to adjust their economic programmes

and projections downwards to match the shocks, and (secondarily)

providing additional disbursements of multilateral and bilateral

programme loans and grants to compensate for part of the shocks and

fill gaps remaining after additional “adjustment”. In the past these

responses have usually proven too little and way too late to protect

key anti-poverty expenditure from drastic cuts. In general, they have

not included accessing international contingency and compensatory

facilities such as those of the IMF (which are too expensive for low-

income countries), and EU STABEX (which was notorious for

virtually never disbursing). Nor have they distinguished between

Assessing the HIPC Initiative: The Key HIPC Debates

24

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 24

25

Matthew Martin

permanent shocks, to which a country should be expected largely to

adjust, and temporary shocks, which could require external financing.

However, this system of responding to shocks cannot work in the

context of the Millenium Development Goals. Every dollar of

“adjustment” by an African country due to inadequate or inaccessible

financing, or decisions that shocks are “permanent”, is a dollar less

spending (some of which will need to be cut from spending to reach

the MDGs). In addition, this attitude is completely inconsistent with

that of the HIPC Initiative, in which permanent shocks are

compensated while temporary shocks are not!

Recent BWI papers argue that shocks can be overcome largely by

measures beyond debt relief, such as reducing the “over-optimism”

of BWI projections and conducting “stress tests” or “sensitivity

analysis” in programmes. They have also suggested several piecemeal

measures to protect African governments against shocks, such as

lending in local currency, or measures to hedge against commodity

price shocks.

HIPCs see these measures as inadequate to reach the MDGs.

They suggest that:

• All ‘likely shocks’ must be in baseline scenarios of BWI

programmes, including the impact of HIV/AIDs on poverty for

countries with prevalence of 5 percent; regular or frequent

disasters (e.g. droughts or .oods twice in a decade); average

volatility of commodity prices over the last 10 years; and, average

aid shortfalls compared to projections.

• Analysis of shocks should be conducted in every semi-annual

review of each IMF programme, to ensure that measures to offset

them are taken very rapidly.

• All baseline scenarios must attain the MDGs (and other national

poverty reduction goals) for all African countries. A Fund Board

paper this year suggested that countries which could not mobilise

financing to attain MDGs or were projecting over-optimistic

growth might project “alternative realistic baseline” scenarios

which would not reach the MDGs, as the basis for PRGFs.

Subsequently, many African countries faced IMF pressure to be

“realistic”, leading to abandonment of the MDGs, without

discussion with donors or civil society.

• Baseline scenarios should also contain realistic measures to reduce

vulnerability to shocks, e.g. implementing the recommendations

of the World Bank Task Force on Commodity Risk Management,

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 25

focusing PRSPs on export diversification into higher value-added

products, and opening OECD markets for such products.

• All PRGF alternative scenarios should also aim to reach the

MDGs, regardless of the scale of less likely shocks presented, with

explicit discussions of the need for government measures or donor

financing to accelerate poverty reduction.

• IMF PRGF Board Papers should include much broader

contingency measures to protect against shocks, quantifying

possible additional necessary external and budget financing, and

mobilising up-front pledges by donors, through contingency

tranches of donor funding which can be disbursed (e.g. by the EU,

IMF, WB and other donors’ budget support) to offset shocks

immediately.

Summarising, the HIPC Initiative has done very little to protect

countries against exogenous shocks, but has led the international

community to focus more closely on their severity and frequency for

low-income countries. Improvements in HIPC forecasts and many

wider measures are needed to stop shocks from derailing progress to

the MDGs.

Debate 4: HIPC Does/Does Not Supply Additional Finance for

Development

Proponents of HIPC have generally argued that it has mobilised

additional financing for development, while opponents inside and

outside the Bretton Woods institutions have argued that it has not

been additional (or additional enough).

HIPC debt relief has freed additional resources to finance

development – notably via IMF gold sales. Moreover, international

pressure to relieve debt and fund poverty reduction has made a major

contribution to increasing aid budgets in some OECD countries

(notably the UK and Ireland), to accelerating aid disbursements

(AfDB and EU), to providing aid as grants rather than loans (AfDF,

IDA), and especially to pledges at the Monterrey Summit which

could increase annual aid .ows by $16 billion by 2005. So HIPC has

certainly not, as some feared at the beginning, been a zero-sum game

in which “one dollar more debt relief is one dollar less aid”.

However, there is some reason to worry that the funding of HIPC

relief is not sufficiently additional – largely because multilateral

institutions are not providing enough funding from within their own

Assessing the HIPC Initiative: The Key HIPC Debates

26

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 26

27

Matthew Martin

resources. As a result, large amounts of aid are being diverted from

bilateral budgets to fund relief by multilateral institutions: over $3.4

billion of OECD aid has been promised to the HIPC Trust Fund or

used for bilateral payments of multilateral debt in the HIPC

framework; additional contributions to the IMF PRGF-HIPC Trust

are $1.5 billion in end-1999 PV terms; and, donors have also funded

relief by the IADB separately. Though disbursement of these funds

will be spread over several years, there is strong evidence of aid

diversion to fund debt relief.

This limited overall additionality is different from additionality at

an individual recipient country level. Here recent BWI analysis

(IMF/WB, 2002c) indicates that most HIPCs have experienced an

increase in net .ows in 2000-2002 due to a resumption of Fund and

Bank assistance, and a (probably related) increase in loans and grants

from other sources – the total additionality is estimated at about $3

billion a year for all HIPCs combined. However, this message is

qualified by the fact that eight of the 27 countries reaching decision

point did not experience increases in net .ows. The fall in .ows for

these countries re.ected either interruptions in PRGF programmes

(for Guinea-Bissau, Malawi, Nicaragua, São Tomé and Senegal) or

delays or reductions in grant disbursements in spite of good track

records (Mali, Mauritania and Rwanda). It remains to be seen

whether the overall increase in .ows to HIPCs will continue, as it

may well be linked to the acceleration of decision points and PRGF

programmes at the end of 2000. Much will depend on whether the

emerging delays in HIPC progress (see Debate 6) can be overcome,

and on whether the Monterrey Summit promises materialise. At the

moment, these promises do appear to have increased aid .ows in

2002 – though some of the increased .ows to HIPCs represent

diversion from non-HIPCs.

Even though debt relief is a more desirable way of funding than

most aid (see Section 2 below), this advantage depends largely on the

speed with which it is provided. It is obvious that diverting funds

away from fast-disbursing programme aid to trust funds, which

provide debt relief over a long period, is not the fastest way to reduce

poverty. Donors need to minimise diversion and maintain

programme aid levels to give recipients maximum choice in how to

fund poverty reduction (see also Section 2 below).

In addition, the international community is not yet acting as if

extra funding is available or desirable, given the way it designs and

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 27

implements IMF programmes. For example, while allowing Burkina

Faso and Niger to increase future funding of poverty reduction

through external borrowing or grants, the IMF has recently been

insisting that several countries (Ethiopia, Mali and Rwanda) cut

poverty reducing spending in order to reduce new borrowing and

maintain debt sustainability.

In the future, the IMF and World Bank need to take a more active

role in: (i) calculating financing and growth needs for attaining the

MDGs and then mobilising the necessary funding; (ii) mobilising

additional grants to keep debt sustainable; (iii) advocating a .exible

interpretation of debt sustainability to allow countries to absorb

prospective increased aid loans for anti-poverty spending; and, (iv)

ensuring that grant .ows go to countries which are most committed

to poverty reduction rather than those which are donor “favourites”.

Summarising, HIPC has produced considerable extra resources to

fund development. However, given the small scale of debt relief

compared to aid and private capital .ows, overall additionality and

the availability of sufficient funding to meet the MDGs will depend

on the degree to which donors supplement it with extra aid

(especially fast-disbursing and predictable budget aid to support

poverty reduction spending), and to which debt relief encourages

private capital to .ow to low-income countries.

Debate 5: HIPC Can/Cannot Fund the Millennium Development

Goals

Proponents of HIPC have suggested that while it can make some

contribution to funding the MDGs and halving world poverty by

2015, it was not designed to do this. Critics have indicated that it

does not maximise the potential contribution of debt relief to funding

the MDGs.

The key issue here is the degree to which debt service relief is

freeing funds for government spending on poverty reduction.

Developing countries are receiving a total of $55 billion a year in aid

(OECD/DAC, 2004). According to the most reliable available

estimates (World Bank, 2001; Zedillo, 2001) this implies a $48 billion

annual shortfall of funding for attaining the MDGs.

This compares to total current annual HIPC relief of only $1.5

billion. Even cancellation of all HIPCs’ debt would provide only

around $3.2 billion a year. As a result, HIPC makes only a small

Assessing the HIPC Initiative: The Key HIPC Debates

28

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 28

29

Matthew Martin

contribution to funding the MDGs. In addition, the impact on each

country varies considerably. There are two main reasons.

First, some HIPC countries are not reducing their debt service

payments even though BWI data indicate an average debt service

reduction of 30 percent during 2001-2005 compared to actual service

in 1998-1999 (and about 45 percent compared to scheduled service

for 2002-2005). Five countries will be paying almost as much as

before HIPC (Ethiopia, Guinea-Bissau, Honduras, Nicaragua,

Uganda), and four will actually be paying more (Mali, Niger, Sierra

Leone and Zambia). This is a key issue for two types of debtors: those

which were not paying various (especially non-OECD government)

creditors, or had received extremely concessional treatment from the

Paris Club, and now have to pay service to these creditors; and, those

which had mobilised donors to pay a considerable amount of their

debt service to multilateral institutions before HIPC, and therefore

had a lower amount of debt service to pay out of their own budget

revenues – but whose donor contributions fell sharply once “debt

sustainability” was reached.

Second, the debt relief savings themselves may not actually be

spent on poverty reduction. Use of the savings is subject to

negotiation with the BWIs and, in a few countries, they are being

used to reduce budget deficits or domestic debt, or to resolve

financial sector problems. These alternative uses, while highly

desirable in some cases – not least for their positive effects on private

sector activity and counter-in.ation strategies – have not generally

been subject to transparent public debate.

Independent reports by NGOs and the US General Accounting

Office indicate that debt relief on its own will increase HIPCs’ social

spending by only 20 percent. However, the BWIs (IMF/World Bank,

2002c) indicate that social spending as a percentage of GDP has risen

by half during 1999-2002. This seems to show that even if HIPC

relief has not freed huge amounts of funding for poverty reduction,

poverty reduction spending has increased dramatically due to the

combined effects of HIPC relief, new money and the PRSP process.

However, focusing on traditional social sectors – health and

education – leaves us short of measuring anti-poverty expenditures

needed across the range of Millennium Development Goal needs

(water and sanitation, feeder roads, rural electrification, smallholder

agriculture, microcredit, gender programmes, population and social

welfare).

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 29

5

For similar views, see EURODAD (2002) and Sachs (2002).

Some have argued that data and methodological problems make it

virtually impossible to cost the spending needs to attain the

Millennium Development Goals. However, HIPCs themselves,

independent analysts and UN agencies have developed many

methods for such costings. These are based on either a

macroeconomic framework, using poverty reduction or GDP growth

elasticities derived from national poverty surveys, and then modeling

sources and components of growth and the government expenditure

necessary to reach public investment levels; or a more micro

framework, which takes the individual sectoral MDGs (such as child

vaccination), most of which are relatively easy to cost, and aggregates

their budget spending needs. This is by no means a simple process,

but has produced defensible estimates, which indicate that poverty

reduction expenditure based on HIPC debt relief will be woefully

insufficient to reach the MDGs.

5

Under HIPC I, targets set for poverty reduction were strongly

linked to the amount of debt relief and aid available. The most

indebted eligible HIPCs targeted the fastest poverty reduction, and

ineligible HIPCs or non-HIPC poor countries risked losing funds as

aid was diverted to eligible HIPCs to supplement inadequate debt

relief. This distortion has been reduced by HIPC II, because almost

all HIPCs are eligible for relief, and can make some progress to the

Millennium Development Goals. But poverty reduction targets have

still often been based on available debt relief and aid, with insufficient

efforts to mobilise additional aid, especially for those HIPCs which

are not “favourites” of like-minded donor countries who are

increasing aid.

As a result, it is obvious that many HIPCs (notably those in

Francophone Africa) are not even aiming to reach the MDGs by

2015 in their HIPC and PRGF programmes; and additional

resources for poverty reduction have been allocated largely to those

IDA-only countries which are most indebted – rather than on the

basis of current poverty indicators or government commitment to

poverty reduction.

There is no excuse for not trying to quantify MDG costs and

financing needs in PRSPs and then to mobilise the necessary

financing, and simply abandoning the goal of reaching the MDGs on

the basis that costings are not 100 percent accurate or that funding

Assessing the HIPC Initiative: The Key HIPC Debates

30

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 30

31

Matthew Martin

might not be able to be mobilised. HIPCs strongly advocate that all

PRSPs should analyse the financing and growth needed to attain the

MDGs, and the potential sources of the financing, and that the IMF

must thereafter ensure that all its PRGF scenarios project the

attainment of the MDGs.

The HIPC Initiative does nothing to fund poverty reduction in

non-HIPCs. Debt relief could and should fund the MDGs in a much

wider range of countries, given debt relief’s superior qualities in

financing poverty reduction (see Debate 7 below). This justifies

annual examination of the debt sustainability of all PRGF-

eligible/IDA-only countries by the countries themselves, in

cooperation with the BWIs, to see whether all of the most-indebted

countries are receiving the maximum possible debt relief. On this

basis, countries which might benefit from substantial debt reduction,

based on low income and high debt burdens, would include

Afghanistan, Bangladesh, Cambodia, Haiti, Indonesia, Iraq, Kyrgyz,

Moldova, Nigeria, Pakistan and Turkmenistan. On their reinte-

gration into the international community, Cuba and Zimbabwe

would also deserve analysis. The recent introduction by the Paris

Club of the “Evian Terms” (which open the door to debt cancellation

for more countries but on a vague basis, subject to analysis conducted

by the IMF), are a small step in the right direction.

Summarising, the HIPC Initiative was primarily designed to

reduce the debt burden of a group of countries where it was seen as

excessive and hindering growth. It was only from 1999 that the funds

freed by HIPC II were explicitly targeted for spending on poverty

reduction. However, the current design of HIPC relief does not

maximise its contribution to poverty reduction spending; nor is it

surrounded by other funding which would ensure that all HIPCs

reach the MDGs, or by measures to ensure that debt relief makes the

maximum contribution to the MDGs in all low-income countries.

Debate 6: HIPC Conditionality Will/Will Not Accelerate the

MDGs

The more important issue is whether HIPC-related development

policies are allowing countries to make rapid enough progress to the

Millennium Development Goals. According to proponents, the

Poverty Reduction Strategy Papers which define the policy actions

needed to receive debt relief under HIPC II, provide enormous

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 31

potential for growth, poverty reduction and sustainable development.

They represent a fundamental shift away from the pre-HIPC period

in which debt relief was linked to conditionality that was too often

pre-designed by external funders, agreed by recipient governments

with virtually no popular consultation, and paying little attention to

poverty reduction. Under HIPC II, in theory, conditionality is

merely a re.ection of national development strategies which are

focused on poverty reduction, and designed through participatory

consultation of the poor in each country, so that debt relief goes to

countries which are most serious in designing and implementing

their own poverty reduction strategies. Critics of HIPC II and

PRSPs argue that externally-designed conditionality continues to be

imposed on HIPCs, overriding all popular consultation, and

preventing and delaying poverty reduction, growth or sustainable

development.

HIPC ministers are becoming increasingly strident in their

concern about delay in reaching the decision and completion points

at which HIPC relief respectively begins and is finalised. As of

January 2004, 28 countries had begun to benefit from HIPC relief

and 10 had reached completion point – but nearly all of this progress

occurred in the second half of 2000 when 16 countries reached

decision point. Since then only 5 countries have reached decision

point and 9 completion point. All of the rest have had decision and

completion points delayed, by an average of 17 months, and the

momentum of 2000 is disappearing.

What is the cause of this delay. The popular perception – caused

by the welcome vociferousness of HIPC country civil societies and

international NGOs – has been that relief is being delayed by the

design and execution of new participatory processes to design

poverty reduction strategies – leading to much discussion of the

“trade-off” or “tension” between rapid HIPC and slow PRSPs.

PRSPs have generally taken longer than expected to finalise.

However, recent discussions with and publications by Bretton Woods

staff confirm what HIPC Ministers have been saying for two years –

that traditional conditionality rather than PRSP processes are

causing almost all the delay. Only 4 of the 15 African HIPCs have

been able to implement their PRGF macroeconomic and structural

conditions on schedule. Five have had PRGF delays of 0-6 months,

three of 6-12 months, two of 12-24 months and two of more than 24

months. As a result, a maximum of four African HIPCs are having

Assessing the HIPC Initiative: The Key HIPC Debates

32

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 32

33

Matthew Martin

completion points delayed by PRSPs, as opposed to eleven where

delay is due to PRGFs.

Some within the BWIs argue that this delay is justified – i.e. that

relief is being delayed by failure of HIPCs to implement agreed

policies. A few suggest that the “stampede” of decision points at the

end of 2000 was bad because it undermined country seriousness in

programme implementation. However, HIPCs and the international

community generally believe that traditional conditionality has been

rigid and unsuccessful, and that delay in programme implementation

has re.ected three factors. First, over-rigid fiscal and macroeconomic

frameworks to reach lower in.ation targets even in “post-

stabilisation” countries with in.ation around 5 percent. This results

in overambitious targets for expenditure containment and revenue

mobilisation, causing expenditure overruns and revenue shortfalls for

eleven countries. Second, insistence on executing “left-over”

structural conditions from past ESAF/PRGFs (regardless of whether

these will reduce poverty). Delays in executing such conditions have

delayed PRGFs in at least eleven countries; and third, the

proliferation of new poverty reduction performance criteria,

especially for those countries which reached decision points before

the fourth quarter of 2001 when the BWI staff began to reverse such

proliferation. As the latest BWI Board paper indicates, such

conditions may become problems for progress in future.

There has been some recent progress to reduce conditionality: (i)

recent PRGFs have streamlined conditionality, limiting conditions

more to macro issues – but with some structural conditions moving

from IMF to World Bank programmes; (ii) an agreement in March

2002 that the period of execution of a full PRSP could be less than

one year if this will cause major problems for funding; (iii) very

limited evidence of more .exibility on the macro framework for

those countries with in.ation below 5 percent, with more stress

being placed on growth and anti-poverty spending than on further

reducing in.ation and deficits; and (iv) a recent IMF paper (2003b)

has indicated that for countries which are “post-stabilisation”, the

Fund could reduce its lending role, and move to a system of

surveillance in which more .exibility in the macro framework would

be allowed.

However, it is easy to exaggerate the change of conditions.

Ministers and senior officials of 34 HIPCs indicate that most of them

have seen little sign of .exibility either in letting them design their

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 33

own alternative macroeconomic frameworks or in interpreting their

compliance with conditions.

The following measures are essential to ensure that conditionality

promotes rather than impedes the attainment of the MDGs:

• Continued progress to streamline the number of conditionalities

across the programmes of all multilateral and bilateral

organisations;

• Elimination of all structural conditions which have not been

analysed to be essential to growth and poverty reduction, and

especially of all micro-management of their economies.

• Poverty and Social Impact Analysis of macroeconomic

frameworks in all PRGF programmes;

• More .exible macroeconomic frameworks in all PRGFs for post-

stabilisation countries;

• Explicit presentation in all PRGF documents of alternative

macroeconomic scenarios which show the growth and in.ation

trade-offs examined.

• Flexibility in interpreting compliance with poverty reduction

criteria for countries which suffered from excessive proliferation

in 1999-2001.

• Rapid definition of more precise circumstances under which the

IMF would reduce its lending role and move to surveillance for

“post-stabilisation” nations.

• Comprehensive programmes to build the capacity of governments

and civil societies in African countries to design and analyse the

potential and actual impact of macroeconomic and structural

policies on poverty reduction.

• A comprehensive annual review of PRSPs, PRGFs and PRSCs, to

ensure they are streamlining conditionality and promoting

poverty reduction.

The delay in completion points is of growing concern because it

can result in the cancellation or expiry of debt relief. Three countries

have already reached their limits for IDA interim relief, three have

had IMF interim relief suspended due to falling off-track with their

Fund programmes, and five countries had run out of interim relief

from the African Development Bank by the end of 2003. The Paris

Club has also been threatening to suspend relief for countries which

are off-track with Fund programmes. Suspension of relief –

combined with suspension of aid – is disastrous for any country,

providing an immediate “shock” to the economy, and should be

Assessing the HIPC Initiative: The Key HIPC Debates

34

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 34

6

This section summarises earlier analysis in Martin (2002a). See also Birdsall

and Williamson (2002) for similar views.

35

Matthew Martin

assiduously avoided except in extreme circumstances. The IMF, IDA,

the other multilateral development banks and the Paris Club need

urgently to design rules for extending interim relief (providing the

same percentage of debt service reduction as in previous years) in all

circumstances except complete rupture of relations with a country.

Countries coming from con.ict situations or governance

problems that have excluded them from international support, earlier

encountered lengthy delays in entering the HIPC Initiative (see,

Serieux, 2002). Though recent measures have accelerated their initial

integration into HIPC, they need much stronger early interventions

for con.ict prevention and resolution (which HIPC and the BWIs

are not best placed to handle), and .exibility in the macro framework

to allow more rapid post-war reconstruction and supply response

(which is the responsibility of the BWIs), if they are to progress in the

HIPC framework. The fragility of peace and reconciliation in most

of these countries (as well as con.ict-affected neighbours) requires us

to deliver HIPC relief very rapidly, with heavy frontloading to reduce

debt service ratios immediately and free funds for reconstruction.

Debate 7: Debt Relief Is/Is Not Preferable to Other Financing

Advocates of debt relief have stated that debt relief is morally and

economically preferable, but others have suggested that it is no better

than other forms of development finance.

Detailed analysis has concluded that debt relief is more desirable

because:

6

• Debt relief has greater political resonance in OECD countries

than new aid.

• Debt relief is much more stable, predictable and counter-cyclical

than other sources of financing, unless it is tied too tightly to IMF

programmes.

• Under the new PRSP framework, debt relief could be less

conditional than other finance and therefore increase developing

country ownership.

• Aid, NGO .ows and debt relief are by far the cheapest .ows,

preferable to FDI, portfolio investment and hard-window official

lending.

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 35

7

See Government of Tanzania (2001); Government of Uganda (2002).

8

See Elbadawi and Gelb (2002) on aid.

9

Most HIPCs would rather rely on domestic financing. But in many countries

the current scale and potential for domestic financing is limited, and domestic debt

is much more expensive than external financing. HIPC ministers have therefore

stressed the need to provide free access to developed country markets, increase the

value added of their exports, and procure aid-financed goods from other HIPCs.

They have also suggested that much can be done at the micro level to provide

external capital in ways which complement domestic savings. For more on

domestic financing, see AERC (1998 and 2001); and Martin (1999b) and Johnson

(2000).

• Untied debt relief and aid have much greater value for money in

financing development than other .ows.

• The transaction costs of debt relief are much lower than those of

project aid, FDI or other project-specific financing.

• HIPC debt relief absorbs more payment capacity, exchange rate

and intest rate risk than all .ows except grants.

• HIPC debt relief aims to reduce poverty directly, whereas much

non-HIPC debt relief, aid and private .ows do not target poverty

reduction.

• HIPC debt relief has had a positive effect on private capital .ows,

7

aid .ows and domestic private savings and investment, whereas

the evidence on positive linkages among other .ows, and

domestic investment, is much weaker.

8

• Debt relief, increases in anti-poverty spending and improved fiscal

management have encouraged donors to provide more aid – and

in more .exible forms such as multiyear coordinated budget

support.

For all the above reasons, debt relief is the preferable form of

external financing.

9

A dollar of debt relief is much more valuable –

especially if frontloaded – because it is more stable and predictable,

counter-cyclical, has no cost, is high value for money, and (if PRSPs

meet their promises) promotes ownership and poverty reduction.

However, these arguments should not be pushed too far:

• If HIPC stalls, it can suspend fast-disbursing programme aid and

debt relief which is linked rigidly to its progress. The growing

alignment of donors behind Fund conditionality makes .ows

highly vulnerable to suspension of Fund assistance. As long as

Fund conditionality remains too stringent, this is unacceptable.

To avoid this, donors need to keep their programme aid dis-

Assessing the HIPC Initiative: The Key HIPC Debates

36

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 36

37

Matthew Martin

bursement decisions independent of HIPC/PRGF processes and

retain the .exibility to support recipient country policies and have

a policy dialogue based on overall progress towards the MDGs,

maximising recipient choice of how to fund poverty reduction.

• The amount of debt relief (and additional and higher-quality new

finance) is not related to MDG or anti-poverty performance by

individual developing countries, or to the levels of poverty or

finance required to halve them. It continues to depend on the

composition of each country’s donor group and historical/

strategic relations between donors and the country. For example,

Mozambique receives 75 percent of its aid as grants and 35

percent as programme aid, but Mali receives only 35 percent as

grants and 15 percent as programme aid, when both are regarded

as high performers in terms of poverty reduction policy.

• Countries which had made huge efforts to mobilise additional

funds before HIPC (e.g. Rwanda) or which had large amounts of

arrears which they are now having to repay (e.g. DRC) have lost

money since HIPC arrived.

• In addition, even if Monterrey promises produce large increases

in aid, increased .ows to HIPCs mean a diversion from non-

HIPCs, and the majority of poor people live in non-HIPCs

(though, as already discussed, many of them could also benefit

from debt relief).

• Potential debt relief, equivalent to fine a 100 percent cancellation

of debt, exceeds aid .ows in only ten HIPCs, and averages only 10

percent of exports. So potential gains from each percentage

increase in aid and especially trade are much greater than those

from additional debt relief.

• In the current international political climate, given that inter-

national civil society pressure for debt relief has waned, there is

more consensus behind increasing aid .ows to countries which are

performing best in poverty reduction – some of which may not be

the most indebted – than there is behind more debt relief.

In addition, aid donors and providers of private capital .ows could

also do a great deal more to improve the quality and value for money

of their funding for development. Developing country governments

and private sectors could also do more to monitor, negotiate and

coordinate such .ows, and all sides could do more to generate

domestic savings and tax revenues (Martin, 2002a; Martin and Rose-

Innes, 2003; Martin, Johnson and Aguilar, 2003). These measures

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 37

would have much greater effects on the quality of sustainable

development funding.

Extra debt relief could be funded from many sources, including

part of the Monterrey pledges and the proposed International

Financing Facility; gold reinvestment or sales, or issuance and

reallocations of SDRs by the IMF – which remains the only “off-

budget” source of funds available for development, and could easily

be transferred to fund debt relief by other creditors; and limited

multilateral development bank reserves, capital and provisions.

Summarising, debt relief is in principle the best way to fund

poverty reduction in developing countries – but HIPC relief needs to

be complemented by relief for other countries and by large amounts

of new official and private financing, and measures to enhance trade

access (especially for exports with higher added value), and to

promote domestic savings and investment, in order to attain the

MDGs. In addition, unless HIPC is reformed in the ways suggested

in this chapter, especially with regard to PRGF conditionality, HIPC

governments would prefer programme aid which is managed more

.exibly and not so tightly linked to PRGFs.

2 What Could HIPC Achieve .

Advocates and critics of the HIPC Initiative are both correct. HIPC

has made major progress in advocating debt sustainability,

broadening burden-sharing among creditors, mobilising additional

funding for development, and changing the focus of Bretton Woods

conditionality towards poverty reduction. However, it remains

inadequate to fulfil its own aims, let alone the wider goal of financing

poverty reduction to reach the Millennium Development Goals. If

the international community is serious about the MDGs, HIPC

needs to achieve much more, by improving its own design, and by

being complemented by wider measures to guarantee long-term debt

sustainability.

Improving HIPC

HIPC could aim to provide genuine debt sustainability at completion

point by: (i) abandoning the concept of present value and returning

to using debt stock and debt service as the measures of debt burden;

Assessing the HIPC Initiative: The Key HIPC Debates

38

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 38

39

Matthew Martin

(ii) if PV is retained, ensuring that it really measures the time cost of

debt service for developing countries by linking it to their earnings

on reserves, and reducing the PV/budget revenue threshold to 150

percent; (iii) analysing government domestic and total (external and

domestic) debt burdens and reducing them where necessary using

non-HIPC resources; (iv) monitoring and analyzing private sector

debt, and assisting the private sector to obtain less expensive and

more stable financing, to ensure that private debts do not become

government liabilities; (v) continuing to include all (explicitly or

implicitly) government guaranteed debt in debt sustainability

analysis; (vi) focusing sustainability on attaining a debt service/budget

revenue ratio below 10 percent from the decision point, and on

maximising freeing of funds for poverty reduction in the early years

of relief.

HIPC could maximise burden-sharing by all creditors, by (i)

encouraging multilateral institutions to fund more of their HIPC

relief from their own resources, and to move to total cancellation of

multilateral debt; (ii) widening the use of the IDA commercial debt

reduction facility to cover non-OECD commercial creditors, and

creating a Trust Fund to relieve HIPC debts to creditors which have

themselves received debt cancellation; (iii) combating lawsuits

against HIPCs by putting them at the centre of discussions on

international debt “standstill” procedures, ensuring that international

arbitration fora and debtor and creditor jurisdictions forestall such

suits, and providing rapid response legal technical assistance to

debtors where necessary; and (iv) counting 100 percent debt

cancellations by some Paris Club creditors as fully additional, and

ensuring that all such cancellations are genuinely freeing debtor

resources, thereby forcing all creditors to share the burden of HIPC.

HIPC could accelerate the delivery of relief and avoid its suspension,

by streamlining conditionality far more dramatically, across the

programmes of all multilateral and bilateral aid organisations;

eliminating all structural and micro-conditions which are not

demonstrated to be essential to having a major impact on growth and

poverty reduction; interpreting compliance with conditions based on

overall efforts and outcomes, rather than implementation of

individual criteria; designing more .exible growth-oriented

macroeconomic frameworks in all PRGFs, which present alternative

macroeconomic scenarios and growth-in.ation tradeoffs; compre-

hensive Poverty and Social Impact Analysis (PSIA) of all con-

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 39

ditionalities, especially the macroeconomic framework of PRGFs,

conducted by countries with independent third-party assistance;

defining rapidly the precise circumstances in which the IMF will

reduce its lending role and move to surveillance for “post-

stabilisation” nations; establishing comprehensive programmes to

build the capacity of low-income country governments and civil

societies to design and analyse the potential and actual impact of

macroeconomic and structural policies on poverty reduction; a

comprehensive annual review of PRSPs, PRGFs and PRSCs, to

ensure they are promoting poverty reduction in the above ways;

avoiding relief suspension except in cases of complete breakdown of

discussions with the international community; and, accelerating debt

relief measures for con.ict-affected countries to free funds for

reconstruction and reconciliation.

Complementary Measures

Given debt relief’s superiority in principle as a form of development

financing, HIPC-style relief could be expanded beyond HIPCs by

first, immediately (and annually) analysing the debt sustainability of

all IDA-only moderately- or severely-indebted countries so as to

judge whether debt relief should part-fund their progress towards the

MDGs; and second, implementing the Paris Club’s new Evian terms

and ensuring that debt relief measures for other (e.g. middle-income)

countries also maximise liquidity relief in order to fund the MDGs.

However, debt relief cannot be large, additional or well-

distributed enough to finance the MDGs in all developing countries.

Many measures to increase (and improve the quality of) net official

and private .ows are therefore vital (for long lists of these, see

Elbadawi and Gelb, 2002; Martin, 2002a; Martin and Rose-Innes,

2003; Martin, Johnson and Aguilar, 2003). PRSPs need also to focus

much more on increasing the value-added of exports and their access

to developed country markets, and on promoting domestic savings,

investment and tax revenues, in order to reduce long-term aid

dependency.

In particular, new external financing needs to avoid recreating an

unsustainable debt burden. This can be done in two ways, first by

ending irresponsible lending by creditors, who should avoid all non-

concessional loans to the public sector in HIPCs, assure themselves

that all finance provided is for priority PRSP projects to avoid

Assessing the HIPC Initiative: The Key HIPC Debates

40

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 40

41

Matthew Martin

funding white elephants, and improve the quality of all their

financing to provide better “development value” for each dollar

spent; and second, by improving debt management to end

irresponsible borrowing in developing countries. The HIPC

Capacity-Building Programme, run by Debt Relief International and

its partner institutions (BEAC/BCEAO Pôle-Dette, CEMLA,

MEFMI and WAIFEM) will be building capacity in 34 HIPCs on all

external financing in the next two years, encouraging them to assess

the progress of each major creditor or donor, in providing sustainable

finance for poverty reduction. A similar programme, the Foreign

Private Capital Capacity-Building Programme, will be assisting 14

countries to monitor and analyse private capital .ows.

A key first step to mobilising all types of financing is to analyse in

all PRSPs the financing and growth needed to attain the MDGs, and

the potential sources of the financing. Though there are important

data and methodological constraints to these calculations, many of

the costs of the MDGs are quantifiable and growth/poverty

reduction elasticities are calculable. There is no excuse for not even

trying to quantify MDG financing needs in PRSPs. The IMF must

thereafter ensure that all its PRGF scenarios project the attainment

of the MDGs, rather than abandoning them due to anticipated lack

of financing.

Thereafter, the single largest factor keeping countries on course

to the MDGs (apart from their own economic policy and political

stability) will be protecting them against “external shocks”. More

.exible debt relief could help by reassessing sustainability annually

and augmenting relief if necessary to reduce PV burdens. However,

genuine protection requires more comprehensive mechanisms,

including: making projections in HIPC and PRGF programmes

more realistic, by including all ‘likely shocks’ (HIV/AIDs, regular

natural disasters, commodity price volatility and aid shortfalls) in

their baseline scenarios; focusing in PRSPs on realistic measures to

reduce vulnerability to shocks, e.g. commodity hedging, export

diversification into higher value-added products, opening OECD

markets for such products, and providing disaster insurance; In-

cluding contingency measures in PRSPs, by quantifying financing

implications of possible shocks, and mobilising up-front pledges of

contingency budget support which can be disbursed to offset shocks

immediately; and, making aid more predictable and stable, via .exible

multi-donor budget support.

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 41

Finally, to implement the above reforms, two sets of voices need

to be heard more loudly in international discussions: it is vital that

HIPCs and low-income countries are better represented in

international fora, in order to assert their own views on the HIPC

Initiative and their wider needs for financing poverty reduction. Most

existing international groupings do not provide them with sufficient

representation for this purpose, because they are dominated by larger

developing countries or creditors. This is why HIPCs have pursued a

dialogue with the heads of the Bretton Woods institutions and G-7

governments by creating their own Ministerial Network.

Furthermore, HIPC II was created by the energy and commitment

of international civil society campaigners (especially Jubilee, 2000),

together with open-minded leadership by some policymakers in G-7

and HIPC governments and international financial institutions, and

the technical expertise of some of their officials. OECD governments

must maintain the funding of international civil society advocates,

especially those from HIPCs themselves, and expand it into building

civil society capacity on macroeconomic policy issues.

The international financial community faces an unique

opportunity to achieve massive poverty reduction in the poorest

countries. The HIPC Initiative and Poverty Reduction Strategies

have played a large part in inspiring the international community to

believe that all poor countries which are committed to reducing

poverty can reach the Millennium Development Goals. Results can

match these expectations only if we ensure HIPC reaches its full

potential.

References

African Economic Research Consortium (1998), Financial Sector

Reform in Africa, special edition of African Development Review,

Abidjan.

––––– (2002), “Budget Revenue Mobilisation in Africa”, Report of

the 4th Senior Policy Seminar, January.

Baball, Balliram (2002), “Monitoring Private Sector External Debt:

Key Issues and Challenges”, Debt Relief International, March.

Bhattacharya, Amar (2003), “From Debt Relief to Achieving the

MDGs”, Paper for the Annual Bank Conference on Development

Economics – Europe held in Paris on 15-16 May.

Assessing the HIPC Initiative: The Key HIPC Debates

42

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 42

43

Matthew Martin

Bhinda, Nils, Stephany Griffith-Jones, Jonathan Leape, Martin,

Matthew and others (1999), Private Capital Flows to Africa:

Perception and Reality, FONDAD, The Hague.

––––– (2002), “Private Capital Flows, Corporate Social Responsibi-

lity and Global Poverty Reduction”, mimeo, Development

Finance International, March.

Birdsall, Nancy and Michael Clemens (2003a), “From Promise to

Performance: How Rich Countries Can Help Poor Countries

Help Themselves”, In: CGD Brief, Vol. 2, No. 1, Centre for

Global Development, Washington D.C., April

––––– and David Roodman (2003b), “The Commitment to

Development Index: A Scorecard of Rich Country Policies”,

Center for Global Development, April.

––––– and John Williamson with Brian Deese (2002), Delivering on

Debt Relief: from IMF Gold to a New Aid Architecture, Centre for

Global Development/Institute for International Economics,

Washington D.C., April

CAFOD, EURODAD, Jubilee Research and Christian Aid (2003),

“Debt and the Millennium Development Goals”, Working Paper,

August.

Cohen, Daniel (2000), “The HIPC Initiative: True and False

Promises”, OECD Development Centre Technical Paper 166,

Paris.

OECD/DAC (2004), Development Co-operation Report 2003,

Development Cooperation Directorate, OECD, Paris.

Debt and Development Coalition Ireland (2003), “Can the World

Bank and IMF Cancel 100 percent of Poor Country Debts.”,

Dublin, September.

Debt Relief International (2003), “Assessment of HIPC Debt

Management Capacity”, London, November.

––––– (2000), “Implementing the HIPC Initiative: Key Issues for

HIPCs”, March.

HIPC Ministerial Network (2003a), “HIPC Finance Ministers Press

for Urgent Action on HIPC, PRSPs and the Millennium

Development Goals”, Press Release, Dubai, September

––––– (2003b), “Financing HIPC Development”, Declaration of 8th

HIPC Ministerial Meeting, Kigali, April.

––––– (2002a), “Implementing HIPC II: HIPC Ministers Meet

BWIs to Express Concern About HIPC Initiative”, Declaration of

7th HIPC Ministerial Meeting, Washington D.C., September.

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 43

––––– (2002b), “Implementing HIPC II”, Declaration of 6th HIPC

Ministerial Meeting, London, March.

––––– (2001a), “Financing Poverty Reduction Beyond HIPC II”,

Declaration of 5th HIPC Ministerial Meeting, Maputo,

November.

––––– (2001b), “Implementing HIPC II”, Declaration of 4th HIPC

Ministerial Meeting, London, June.

––––– (2000a), “The Need to Reinforce the Enhanced HIPC

Initiative”, Declaration of the 3rd HIPC Ministerial Meeting,

Prague, September.

––––– (2000b), “Implementing the HIPC Initiative: Conclusions

and Recommendations of the 2nd HIPC Ministerial Meeting”,

Geneva, June.

––––– (1999), “Implementing the HIPC Initiative: Conclusions and

Recommendations of the 1st HIPC Ministerial Meeting”,

Copenhagen, December.

Elbadawi, Ibrahim and Alan Gelb (2002), “Financing Africa’s

Development: Towards a Business Plan”, Paper for AERC Policy

Seminar, mimeo, February.

––––– , Benno Ndulu and Njuguna Ndung’u (1997), “Debt

Overhang and Economic Growth in Sub-Saharan Africa”, In: Z.

Iqbal and R. Kanbur (eds.), External Finance for Low-Income

Countries, IMF Institute, International Monetary Fund,

Washington D.C.

EURODAD (2002), “Going the Extra Mile: How and Why

Creditors Should Go Further with Debt Reduction for the

Poorest Countries”, Brussels, February.

Government of Ghana (1999), “Aid Flows: Budgetary, Balance of

Payments and Monetary Linkages”, November, Report to

Consultative Group.

Government of Tanzania (2001), “Report on the Study of Foreign

Private Capital Flows in Mainland Tanzania”, Dar Es Salaam.

Government of Uganda (2002), Private Capital Flows Survey 2001

Report, Kampala.

Greenhill, Romilly and Elena Sisti (2003), “Real Progress Report on

HIPC”, New Economics Foundation, London, September.

Gunter, Bernhard (2003), “Achieving Long-Term Debt Sustaina-

bility in All Heavily-Indebted Poor Countries”, Discussion Paper

prepared for the Intergovernmental Group of 24, XVI Technical

Group Meeting in Trinidad and Tobago, February.

Assessing the HIPC Initiative: The Key HIPC Debates

44

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 44

45

Matthew Martin

Humphreys, Charles and John Underwood (1989), “The External

Debt Difficulties of Low-Income Africa”, In: Ishrat Husain and

Ishac Diwan (eds.), Dealing with the Debt Crisis, World Bank,

Washington D.C.

IMF (2003a), External Debt Statistics Guide for Compilers and Users,

IMF, Washington D.C.

––––– (2003b), “Update on the Financing of PRGF and HIPC

Operations and the Subsidization of Post-Con.ict Emergency

Assistance”, Finance Department, IMF, Washington D.C., August

18.

––––– (2003c), “Update on the Financing of PRGF and HIPC

Operations and the Subsidisation of Post-Con.ict Emergency

Assistance”, IMF, Washington D.C., August 18.

––––– (2003d), “Fund Assistance for Countries Facing Exogenous

Shocks”, Policy Development and Review Department, IMF,

Washington D.C., August 8.

––––– (2003e), “Role of the Fund in Low-Income Countries over

the Medium Term”, Policy Development and Review Depart-

ment, IMF, Washington D.C., July.

––––– (2003f), “Debt Sustainability in Low-Income Countries –

Towards a Forward-Looking Strategy”, Policy Development and

Review Department, IMF, Washington D.C., May.

––––– (2002a), “Assessing Sustainability”, Policy Development and

Review Department, IMF, Washington D.C.

––––– (2002b), “Review of the Key Features of the Poverty

Reduction and Growth Facility – Staff Analyses”, Paper prepared

by the Fiscal Affairs and Policy Development and Review Depart-

ments, IMF, Washington D.C., March 15.

IMF/World Bank (2003a), “HIPC Initiative – Status of Imple-

mentation”, Report prepared by the Staffs of the IMF and World

Bank, IMF/World Bank , Washington D.C., September 12.

––––– (2003b), “Poverty Reduction Strategy Papers – Progress in

Implementation”, Report prepared by the Staffs of the IMF and

World Bank, IMF/World Bank, Washington D.C., August 7.

––––– (2002a), “The Enhanced HIPC Initiative and the

Achievement of Long-Term Debt Sustainability”, Paper prepared

by the Staffs of the World Bank and IMF, IMF/World Bank,

Washington D.C., April 15.

––––– (2002b), “External Debt Management in Heavily Indebted

Poor Countries (HIPCs)”, Paper prepared by the Staffs of the

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 45

World Bank and IMF, IMF/World Bank, Washington D.C.,

March 21.

––––– (2002c), “Review of the Poverty Reduction Strategy Paper

(PRSP) Approach: Main Findings”, Paper prepared by the Staffs

of the World Bank and IMF, IMF/World Bank, Washington D.C.,

March 15.

Johnson, Alison (2000), “The Fiscal Burden of Debt”, Paper

presented at the Commonwealth Secretariat Seminar on HIPC

Initiative, Debt Relief International, London, July.

Martin, Matthew (2002a), “Debt Relief and Poverty Reduction: Do

We Need a HIPC III .”, Paper for North-South Institute, May.

––––– (2002b), “Analysing the Sustainability of Private Capital

Flows”, mimeo, Development Finance International, March.

––––– (2002c), “Financing Poverty Reduction in HIPCs”, Debt

Relief International, London, February.

––––– (1999a), “Financing Africa’s Development in the 21st

Century”, the Gilman Rutihinda Memorial Lecture, Bank of

Tanzania, June.

––––– (1999b), “Changing the HIPC Indicators”, Report to DFID

by Debt Relief International, London, March.

––––– and Alison Johnson (2003), “Key Analytical Issues for

Government External Financing”, Debt Relief International,

London.

––––– and Cleo Rose-Innes (2003), “Private Capital Flows to Low-

Income Countries: Perception and Reality”, In: Canadian

Development Report, Chapter 2, North-South Institute, Ottawa.

––––– and Randa Alami (2001), “Long-Term Debt Sustainability for

HIPCs: How to Protect Against ‘Shocks’”, Report to the

Department for International Development of the UK, February.

––––– , Alison Johnson and Juan-Carlos Aguilar (2003), “A Lasting

Solution to Africa’s Debt Problems”, Paper for UN Economic

Commission for Africa Ministerial Meeting, October.

––––– , Alison Johnson and Juan Carlos Aguilar (2000), “Imple-

menting HIPC II: Key Issues for HIPCs”, Debt Relief

International, London, March.

Mistry, Percy (1994), Multilateral Debt: An Emerging Crisis.,

FONDAD, The Hague.

Oxfam International (2003), “The IMF and the Millennium

Development Goals: Failing to Deliver for Low Income

Countries”, Oxfam Briefing Paper, London, September.

Assessing the HIPC Initiative: The Key HIPC Debates

46

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 46

47

Matthew Martin

Pattillo, Catherine A., H. Poirson and L. Ricci (2002), “External

Debt and Growth”, IMF Working Paper 02/69, IMF, Washington

D.C., August.

Radelet, Steven (2003), Challenging Foreign Aid: A Policymaker’s Guide

to the Millennium Challenge Account, Institute for International

Economics, Washington D.C., June.

––––– and Sheila Herrling (2003), “The Millennium Challenge

Account: Soft Power or Collateral Damage.”, In: CGD Brief, Vol.

2, No. 2, Centre for Global Development, Washington D.C.,

April.

Sachs, Jeffrey D. (2002), “Resolving the Debt Crisis of Low-Income

Countries”, Brookings Papers on Economic Activity No. 1,

Brookings Institution, Washington D.C.

Serieux, John (2002), “The Enhanced HIPC Initiative in 2002”,

Paper prepared for the Commonwealth Secretariat HIPC Forum

Meeting, mimeo, February.

UNCTAD (1993), Trade and Development Report, Geneva.

Vaugeois, Michel (1999), “Note on Debt Sustainability Indicators”,

Paper prepared for the Department for International

Development of the UK, Debt Relief International, February.

World Bank (2003a), Global Development Finance, World Bank,

Washington D.C.

––––– (2003b), “Supporting Sound Policies with Adequate and

Appropriate Financing:Implementing the Monterrey Consensus

at the Country Level”, Paper prepared for the Development

Committee Meeting, September 22.

––––– (2003c), “The Heavily Indebted Poor Countries Initiative; A

Factsheet”, Operations Evaluation Department, World Bank,

Washington D.C.

Zedillo, Ernesto et al. (2001), Report of the High-Level Panel on

Financing for Development, United Nations, New York, June 28,

(http://www.un.org/reports/financing/index.html).

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 47

3

HIPC Debt Relief and Poverty

Reduction Strategies: Uganda’s

Experience

Florence N. Kuteesa and Rosetti Nabbumba

I

n this chapter, we highlight the main issues relating to Uganda’s

experience in debt stock management and debt relief, explore the

benefits of the HIPC Initiative, and conclude by looking at the

relationship between the HIPC resources, debt sustainability and

poverty reduction. The additional resources from the HIPC

Initiative have been instrumental in reducing poverty but have not

resulted in debt sustainability as expected.

1 Debt Relief Before and After HIPC

Uganda’s debt burden in nominal terms rose from $172 million in

1970 to $3.6 billion in 1998, the year in which it first received debt

relief under the HIPC Initiative. The country’s external debt had

increased over the decades because of arrears accumulation as a

result of successive governments defaulting on debt obligations,

deteriorating terms of trade, expansionary fiscal policies and heavy

borrowing for economic recovery and stabilisation programmes.

Historically, the country had been contracting medium to long-

term loans, short-term credits having ceased in the 1970s. The

proportion of concessional debt to total debt rose steadily in the

1980s and 1990s, exceeding 70 percent by the mid-1990s in line

with the country’s borrowing guidelines.

48

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 48

1

This figure assumed full delivery of HIPC debt relief by all creditors, including

those bilateral creditors who had refused the commercial debt buy-back in 1992

and non-OECD bilateral creditors who were not members of the Bretton Woods

institutions.

49

Florence N. Kuteesa and Rosetti Nabbumba

Debt relief is not a new phenomenon in the case of Uganda. The

country has benefited from debt relief reschedulings from the

international community since the mid-1980s. However, apart from

an IDA-funded commercial debt buyback in 1992, until the late

1990s only bilateral Paris Club creditors were willing to offer debt

relief. Unfortunately, their relief only had a limited impact on

Uganda’s overall debt position, mainly because by 1994, 70 percent

of Uganda’s debt was owed to multilateral creditors. A number of

bilateral donors therefore set up a Multilateral Debt Fund, into

which they paid funds in order to help Uganda repay its debt

obligations to multilateral creditors. This initiative was a precursor

to the HIPC Initiative which engaged the multilateral lending

institutions in direct negotiations on debt relief for the first time.

Uganda’s experience with the HIPC Initiative has been broadly

positive. Uganda was the first country to qualify for debt relief

under both the first HIPC and the Enhanced HIPC Initiative in

April 1998 and April 2000, respectively. The speed with which

Uganda qualified, without having to go through a standard six-year

qualifying period, was a re.ection of the country’s exemplary record

of macroeconomic reform and a proven commitment to poverty

reduction. In total, as a result of both initiatives, Uganda was grant-

ed debt relief amounting to $1 billion

1

in NPV terms to be delivered

over a period of twenty years. As a consequence, Uganda has

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

Table 1 Uganda’s Debt Relief Experiences

Year

Paris Club

• Toronto terms

1989

• London terms

1992

• Naples terms

1995

• Lyon terms (HIPC I)

1998

• Cologne terms (HIPC II)

1999

Commercial Debt Buyback

1992

Multilateral Debt Fund (Uganda)

1992-95

HIPC

1998

Enhanced HIPC

2000

41979-HIPC bw 27-04-2004 15:25 Pagina 49

received substantial cash savings, averaging $60 million per annum

over the past 4 years, accounting for almost a quarter of the total

budget support over the period. This figure has risen now to

approximately $90 million per annum in debt relief and is set to rise

further in the medium term.

2 Poverty Reduction

Prior to the HIPC Initiative, Uganda had adopted a national

strategy for poverty eradication, the Poverty Eradication Action

Plan (PEAP), which guides policy formulation and public spending

over the medium term. As a way of protecting funds going

specifically to poverty eradication programmes from budgetary cuts,

the government formed the Poverty Action Fund (PAF) as an

integral part of the government’s budget. The PAF is a virtual fund

within the budget that is funded by HIPC savings, “earmarked”

donor funds, and government revenues. The trends in HIPC savings

and PAF expenditures are shown in Figure 1, while the increase in

budgets for PAF expenditure areas are shown in Figure 2.

HIPC Debt Relief and Poverty Reduction: Uganda’s Experience

50

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

40

50

60

70

80

90

100

1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05

25%

30%

35%

40%

HIPC Savings (Left-hand Scale)

Poverty Expenditures (Right-

hand Scale)

Figure 1 HIPC Savings and Poverty Expenditures

(in millions of dollars and percentage of total budget)

41979-HIPC bw 27-04-2004 15:25 Pagina 50

Figure 2 Expenditures on Poverty Reduction Areas

(in billions of Ugandian shillings)

51

Florence N. Kuteesa and Rosetti Nabbumba

The resources saved from HIPC debt relief that were purposively

channeled to the PAF allowed Uganda to increase the budget for the

most critical areas such as primary education, primary health care,

rural roads, safe water and sanitation, and agriculture.

Over the past four years, annual expenditures on education

increased by 9 percent. Yearly growth for health expenditures was 20

percent. There have also been substantial increases in spending on

water, rural roads, gender, HIV/AIDS, justice, law and order, and on

environmental spending. Throughout the 1990s, social service

delivery improved significantly and poverty declined noticeably,

as a result of increased budgets for poverty reduction, as shown in

Table 2. These achievements are in line with the fulfilment of the

Millennium Development Goals (MDGs) since there is a substantial

overlap between the Poverty Eradication Action Plan and MDG

targets:

• Education: Uganda’s Universal Primary Education policy,

initiated in 1997, has led to an upsurge in gross primary

enrolment from 2.6 million to 7.3 million pupils in 2002. The

gender gap at the primary level has been closed. However, pupil

retention, the quality of education and increased access to post-

primary schooling still needs to be improved.

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

0

100

200

300

400

500

600

700

800

900

1000

1997/98 1998/99 1999/00 2000/01 2001/02 2002/03

(Budget)

2003/04

(Proj.)

2004/05

(Proj.)

2005/06

(Proj.)

Other (Land Reform, Adult Literacy, Restocking, LGDP)

Accountability

Rural Roads

Agricultural Extension and Exports

Safe Water and Sanitation

Primary Health Care

Universal Primary Education

(Pre-PAF)

41979-HIPC bw 27-04-2004 15:25 Pagina 51

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

Table 2 Development Indicators, Uganda, 1991–2000

Indicator

1991 1995 2000 Target Year

Poverty and Inequality

Poverty Level (%)

56 44 35 10 2017

Gini Coefficient (inequality) 0.364 0.366 0.384

Demographic indicators

Total Population (millions)

16.7 19.3 22.2

Population Growth Rate (%)

2.5

2.9

Macroeconomic Indicators

GDP ($ billion)

5.5 6.2

GDP per capita ($)

285 280

Government Expenditure (% GDP)

17.2 21

Government Revenue (% of GDP)

11.1 11.3

Budget Deficit (% GDP, excl. grants)

6.4 11.5

Education and Literacy

Gross Primary Enrolment (millions) 2.3 2.6 6.8

Net Primary Enrolment (%)

84 77 100 2003

Ratio of girls enrolment to boys (%)

95 99

Pupil-Teacher Ratio

65:1 49:1 2005

Adult Literacy Rate (%)

54 62 68 85 2005

Health and Nutrition

Infant Mortality (per 1,000 live births) 122 81 88.4 68 2005

Children Underweight (weight-for-age)

25.5 22.5

Immunisation (DPT3) (%)

61 48 60 2005

Malaria (proportional morbidity) (%)

25 37

HIV/AIDS Prevalence (%)

14

6.1 5 2005

Fertility Rate (children per woman)

6.9 6.9

Water and Sanitation

Rural access to safe drinking water (%)

39 53 65 2005

Urban access to safe drinking water(%)

62 80 2005

Households with latrine or toilet (%)

79.9 82.3

Sources: Uganda, Ministry of Health, Uganda Demographic and Health Survey,

1995, 2000-2001; Ministry of Finance, Uganda PRSP, March 2002; Ministry of

Water, Lands and Environment, Uganda Poverty Status Reports, 2001, 2003;

Appleton,S., L. Song, “Income and Human Development at the Household

Level”, 1999; IMF and World Bank, “PRSP – Progress in Implementation”, IMF,

2002.

HIPC Debt Relief and Poverty Reduction: Uganda’s Experience

52

41979-HIPC bw 27-04-2004 15:25 Pagina 52

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

53

Florence N. Kuteesa and Rosetti Nabbumba

• HIV/AIDS: prevalence rates have fallen considerably from 14

percent in the mid-1990s to 6.5 percent during 2001-2002.

• Roads: the share of the rural road network being maintained

regularly has increased from 20 percent in 1997-98 to 60 percent

in 2000.

• Water and Sanitation: access to water has improved nationally

from 40 percent in 1997 to 52 percent in 2001. Sanitation,

however, remains a problematic area.

• Health: improving the health status of the Ugandan populations

remains a major challenge. There is still too little progress in

reducing infant, child and maternal mortality rates and increasing

immunisation rates.

• Poverty: incidence fell dramatically from 56 percent in 1992 to 35

percent in 2000, but has since risen again to 38 percent in 2002.

As seen above, the Poverty Action Fund significantly improved

social service delivery and its impact. However, less investment

has gone to the productive sectors, particularly agriculture,

where the majority of the poor derive their livelihood and hence

the observed rise in poverty. Inequalities between socio-

economic groups and regions also persist.

The Medium-Term Expenditure Framework and the newly

created Long-Term Expenditure Framework are being re-oriented

to address these new challenges so as to enhance the poverty focus

of public spending. The government is committed to increase the

share of the budget spent on PAF, which has risen from 18 percent

in 1997-98 to 35 percent in 2001-02, and protect PAF expenditures

from within-year budget cuts arising from the cash-management

system.

3 HIPC and Debt Sustainability

The combined debt relief given to Uganda under HIPC I and II was

supposed to enable Uganda to remain on a sustainable debt path for

the foreseeable future, as measured by a continuing NPV debt-to-

exports ratio of below 150 percent, thus delivering total exit from

debt rescheduling. However, results of two debt sustainability

analyses (DSA) conducted in 2002 showed a rise in Uganda’s debt-

to-exports ratio over the 18 months since the Enhanced HIPC

completion point to almost 200 percent. Calculations made by the

41979-HIPC bw 27-04-2004 15:25 Pagina 53

2

Uganda’s National Debt Strategy stipulates that all new borrowings must have

a minimum grant element of 78 percent, and/or have equivalent concessionality to

IDA lending.

Ministry of Finance, Planning and Economic Development at the

end of 2003 suggest that this ratio has since risen further, to 307

percent as at end of June 2003. This ratio is fifty percentage points

higher than Uganda’s NPV debt-to-exports level prior to accessing

HIPC I.

It should be noted from the outset that the rapid rise in the

unsustainability levels of the debt is not a result of poor

macroeconomic management: in.ation remains at an average level

of 5 percent, the government is currently pursuing a fiscal strategy

of deficit reduction to enhance private sector development and

emphasis is being placed on efficiency rather than volume of public

spending. Rather, there are four main reasons explaining the rise in

Uganda’s debt-to-exports ratio.

First, the terms of trade deteriorated for Uganda’s major exports,

due to the fall in global commodity prices. For example, at the

Enhanced HIPC decision point, the three-year average value of

Uganda’s export earnings for the year ending 2002-03 was projected

at $1,007 million but the actual value turned out to be $726 million,

re.ecting a fall of 28 percent.

Second, at the Enhanced HIPC decision point, estimates for new

financing in the macroeconomic framework and balance of

payments were not fully incorporated in the Debt Sustainability

Analysis. Uganda has borrowed $1 billion since reaching HIPC

completion point, and although these new borrowings, which were

primarily from the multilateral development institutions, have been

on highly concessional terms,

2

they have led the nominal debt stock

to increase from $3.2 billion at the time of Enhanced HIPC to $4.2

billion as at end of June 2003.

Third, not all creditors have been willing to deliver debt relief

under the HIPC Initiative, as had been assumed. In particular,

commercial creditors who refused the 1992 debt buyback and non-

OECD bilateral creditors have been unwilling to extend relief,

leading to arrears accumulation, which has contributed to the rise in

the debt stock. As at end June 2003, arrears amounted to 7 percent

of the total debt stock.

HIPC Debt Relief and Poverty Reduction: Uganda’s Experience

54

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 54

55

Florence N. Kuteesa and Rosetti Nabbumba

Fourth, low global interest rates have increased the present value

of Uganda’s debt and reduced the concessionality of IDA lending

terms. Given prevailing market interest rates, IDA lending is only

55 percent concessional, a decline of almost twenty percentage

points since HIPC completion.

Other unforeseen challenges relate to the fact that not all

creditors have been willing to participate in equal burden-sharing

and some have outright rejected participation in the HIPC initiative.

A number of creditors have taken Uganda to court, suing it for the

payment of their debts in full, plus compensation. To date, four cases

have been successful, although one is currently on appeal, and

Uganda has been forced to pay over $20 million in recompense so

far. This amounts to almost a quarter of this year’s HIPC relief

savings.

Uganda has adopted a three-pronged strategy for maintaining

debt sustainability in the future: ensuring all new borrowings

continue to be highly concessional; reducing the country’s fiscal

deficit in the medium term; and implementing of growth-enhancing

policy reforms that expand and diversify export production, thus

minimising shocks to the economy.

However, the international community needs to do more in

helping Uganda achieve and maintain debt sustainability in the

future. First, Uganda has been unduly penalised by virtue of the fact

that it was the first country to access the HIPC debt relief initiative.

Errors made in the calculation of HIPC debt relief to Uganda have

been corrected for subsequent countries. Moreover, subsequent

countries accessing the Initiative have had their exports valued at the

prevailing lower global commodity prices, which means they have

been given relatively more relief to enable them to arrive at the same

PV debt-to-exports ratio. There is therefore a strong case for

additional relief to be extended to Uganda to rectify these

inequalities and to help improve its debt sustainability indicators.

Second, Uganda has not received all the relief it expected, as a result

of the non-participation of a number of creditors. Further

international debt relief would also help to ease the financial impact

on Uganda of this unforeseen non-participation. Third, the inter-

national community can help reduce Uganda’s future debt burden

by giving more aid in the form of grants, rather than loans, thus

reducing Uganda’s future borrowings from multilateral development

institutions.

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 55

4 Challenges for the Future

Key challenges to be addressed now and in the medium term are:

the unsustainability of Uganda’s current debt despite the HIPC

Initiative; the slow implementation of pay reform; the tensions

between fiscal decentralisation and capacity at local government

level; the fiduciary issues associated with budget support; and the

need to reduce Uganda’s fiscal deficit.

Macroeconomic policies can contribute directly to poverty

reduction by delivering stability and growth. However, in the short

run there is a trade-off between strong growth in budget

expenditure funded by donor aid, on the one hand, and

macroeconomic stability, on the other. This is because large donor-

funded expenditures have a macroeconomic impact, which needs to

be ‘neutralised’ by a stronger exchange rate or higher interest rates

to enable in.ation to remain under control. A stronger exchange

rate hurts export production, while high interest rates discourage

private sector investment. This trade-off can be partially avoided by

integrating donor projects into the budget so as to allow sectors to

shift from project to budget support, thus reducing inefficient

project spending funded by donor loans and grants, and increasing

the efficiency of budget allocations and expenditures. A lower fiscal

deficit should also enable Uganda to slowly bring its debt back to

sustainable levels. Conversely, the macroeconomic impacts of aid-

financed budget expenditures can also be mitigated if more aid is

given as debt relief, rather than in the form of new concessional

loans.

HIPC Debt Relief and Poverty Reduction: Uganda’s Experience

56

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 56

57

4

Lessons from Eastern and

Southern Africa

Mothae Maruping

T

he initial reactions to the advent of the HIPC Initiative in 1996

was that it was a comprehensive and concerted programme that

marked a total break with past piece-meal external debt relief.

However, it soon became apparent that the Initiative’s delivery of

debt relief would not only be fairly slow and in.exible, but also that

its impact on debt and poverty would be less than expected. Public

pressure prompted IMF and World Bank-led reviews of the

Initiative, which culminated in the significant enhancements at the

turn of the millennium.

Notwithstanding the improvements in the Enhanced HIPC

Initiative, it has not been able to speedily and fully achieve its

objective of restoring external debt sustainability among the world’s

42 HIPCs, of which 34 are African. The persistence of external debt

problems in the first countries that reached the HIPC completion

point clearly demonstrates that “we aren’t out of the woods yet”.

This begs the question of how to further enhance the speed and

depth of debt relief, to ensure a lasting impact on debt sustainability.

It is against this background and the concerns about the

effectiveness of HIPC relief raised at various high-level fora that this

chapter is revisiting the Initiative. The aim is to provoke additional

thinking on which further improvements could be brought to bear

on the Initiative to reinforce it into a re-enhanced HIPC Initiative.

Also, in recognition of the widely held view that the Enhanced

HIPC Initiative will not be a panacea for attaining either long-term

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 57

1

The MDGs seek to address extreme poverty eradication; universal primary

education; gender inequality; child mortality, maternal health; HIV/AIDS;

environmental sustainability and global partnership for development by 2015.

external debt sustainability or the Millennium Development Goals

(MDGs),

1

I will discuss other national and international options for

addressing long-term post-HIPC debt sustainability and, more

broadly, the financing of development. In this regard, HIPC

resources should be seen for what they are: they are one source of

financial resources in addition to several others that must be

explored.

1 The HIPC Initiative and Other Debt Initiatives in Africa

Debt Relief Measures Up to the HIPC Initiative

Since its inception, the Paris Club, as an informal grouping of

mainly OECD countries chaired by the French Treasury, has

attempted to address external debt problems by offering successively

improved debt reorganisation terms, including among others:

standard terms; Houston (1990); Toronto (1988); London (1991);

Naples (1994); Lyon (1996); and Cologne (1999) terms or accords.

Historically, Paris Club arrangements have suffered mainly from

lack of legal enforceability of its equitable burden-sharing principle

outside the Club’s membership. In spite of the Club’s insistence on

non-payment of debt service to non-compliant non-Club creditors,

a number of non-OECD countries and some commercial creditors

declined to be bound by the Club’s principles. In some cases, the

creditors have opted for litigation, much to the detriment of the

debtor countries concerned.

Another historical setback to adequate Paris Club debt relief has

been the limited eligibility of external debts for restructuring. The

fixing of Paris Club debts’ cutoff dates, excluding new debts from

the restructuring process, blocked a more pragmatically addressing

of more recently acquired but often equally heavy bilateral debt

burdens. The Paris Club contends that maintaining fixed cutoff

dates would avoid deterring creditors from advancing critical new

lending to the HIPCs.

Prior to the HIPC Initiative, multilateral creditors, though not

Lessons from Eastern and Southern Africa

58

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 58

59

Mothae Maruping

directly writing off their claims, also participated in ameliorating

external debt problems in other ways, on a case-by-case basis. This

has included the IDA’s Debt Reduction and Debt Service Facility

(often also co-funded by some bilateral donors) that has provided

grants to repurchase some handsomely discounted external bilateral

and commercial debts. New concessional financing has been another

multilateral instrument.

Debt restructuring under the London Club, which successfully

dealt with mostly Latin American commercial debts, has not

significantly benefited African countries. The core external debt

problems of the latter have been in the official category. Similar to

the Paris Club, the London Club is also informal. Its composition

and chair varies by debtor country, depending on the degree of

exposure. On a case-by-case basis, the bank with the highest

exposure would normally chair the restructuring process, which only

reschedules principal. It also provides a variety of refinancing bonds,

alongside market-based instruments, such as debt conversions and

buy-backs, which would seek to meet the burden-sharing clause of

the Paris Club.

Current Debt Relief Measures: The Enhanced HIPC Initiative

The Paris Club’s Naples, Lyon and Cologne terms have been

included in the overall framework of the HIPC Initiative. By

targeting lower and sustainable thresholds of external debt ratios

through concerted efforts from all creditors, the Enhanced HIPC

Initiative has attempted to address the issue of inclusiveness that has

bedeviled the Paris Club. It has sought to be more comprehensive

and concerted in providing sustainability-linked levels of external

debt relief from all creditors concerned, on an equitable burden-

sharing basis. The question is: has this been adequate. Was the

modus operandi adopted sufficient.

Assessment of HIPC

The objectives of the Enhanced HIPC Initiative were to achieve

deeper, wider and faster debt relief; to promote economic growth

and to ensure release of financial resources for increased social

spending aimed at reducing poverty.

After completion point, HIPCs’ debt levels remains precarious.

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 59

2

HIPC Finance Ministers’ Perspectives expressed at Commonwealth HIPC

Forum, February 20, 2000, Lilongwe, Malawi is one example. Further HIPC views

have been expressed at other international fora such as the Commonwealth HIPC

Review meetings held in London over the last few years, and the March 2002

international Conference on Financing for Development held in Monterrey,

Mexico.

In other words, post-completion point is not yet synonymous with

post-HIPC status, because debt relief has been too superficial.

There has been high-level recognition of the potential positive

contributions of the Enhanced HIPC Initiative in Africa in as far as

it helps reduce external debt burdens and unlocks aid for

development.

2

It has increased the attention being paid to poverty

reduction resources, their spending and monitoring, and linkages to

debt, macroeconomic and social policies, including good governance

and improved aid accountability.

There has been high-level concern, however, with the limited

consultation of HIPCs in the design of the Initiative. In spite of the

fact that external and domestic debt both constrain poverty

reduction expenditure, domestic public debt has been left out of the

core-HIPC Debt Sustainability Analysis (DSA), partly as a result of

this limited consultation. This has constrained the Initiative to only

a partial solution to the debt problem. In addition, delivery of debt

relief has also been rather slow, while the risk of failed objectives and

targets has remained high.

The Initiative also has a heavy baggage of rigid conditionalities

that have become serious hurdles towards accessing relief for

HIPCs. The overall effect has been that high expectations have been

raised, but have not been matched by real and timely action, as well

as attainment of effective results on the ground. This could

jeopardise the credibility of the Initiative.

The above-mentioned concerns, however, need not detract

attention from the significant improvements in the Enhanced HIPC

Initiative. Noteworthy among these are the enhanced prospects for

broader participation brought about by the lowering of thresholds of

eligibility indicators, front-loading of interim debt relief; .exibility

in the timeframe through use of .oating completion points, and a

greater link between debt relief and poverty reduction.

However, in spite of these steps forward, experience from

Eastern and Southern Africa indicate that the HIPC process is still

rather slow and remains inadequate in delivering sufficient and

Lessons from Eastern and Southern Africa

60

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 60

3

The percentage share in exports for three main products for the four MEFMI

eligible HIPCs ranged from 63% for Uganda; 67% for Zambia; 40% for Tanzania;

to as high as 75% for Malawi, as at 1999.

4

In fact, the IMF (April 2002) indicated that 16 out of 24 HIPCs experienced

lower than projected exports in 2000-2001, raising questions about the realism of

projections.

61

Mothae Maruping

urgently required debt relief. Added to that, non-compliance from

some non-OECD creditors is a real problem for the HIPCs in the

sub-region. Ideally, debt relief should be .owing from all creditors.

This includes the difficult issue of inter-HIPC debt relief.

Experiences of Eastern and Southern African Countries

Initially six of the eleven member countries of the Macroeconomic

and Financial Management Institute of Eastern and Southern Africa

(MEFMI), have been identified as HIPCs.

After recent World Bank and IMF evaluations, it was established

that Angola’s and Kenya’s external debt were sustainable through

the application of traditional relief mechanisms like rescheduling.

The four remaining MEFMI countries eligible for HIPC debt relief

are Uganda, Tanzania, Malawi and Zambia. As of January 2004, only

Uganda and Tanzania had reached HIPC completion point.

However, they cannot be considered to have permanently exited

into a long-term sustainable debt realm. They remain vulnerable to

exogenous shocks, such as adverse weather and deteriorating terms

of trade, given their undiversified narrow-based export sector.

3

Uganda has been particularly adversely affected by a significant

deterioration in market prices of her key exports.

Completion points for the two other cases (Malawi and Zambia)

are still pending, owing largely to governance considerations.

However, both have been recently disaster-stricken from severe

drought later followed by .oods that threatens to reverse poverty

reduction efforts. For Zambia, the prospects have been further

dampened by the problems in the mining sector. Export shortfalls

relative to initial projections for years 2000-01 were considerable for

Zambia, much as for Uganda.

4

The situation of these countries clearly signals a glaring need for

a review of the HIPC Initiative. What is needed is a more urgent

and realistic approach that would lead to accelerated debt relief

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 61

alongside emergency aid and increased official development

assistance (ODA). Further delays in obtaining the requisite external

financing would only tend to worsen debt sustainability at

completion point. Also, under current circumstances, pressure to

resort to domestic public debt financing could quickly build up, thus

further exacerbating the already strained overall fiscal sustainability.

Angola, which is just emerging from armed con.ict, has been

treated as ineligible for HIPC relief so far. This is because it is

considered to be sustainable once traditional debt relief measures are

fully implemented and, also, due to the favourable price of oil

exports. The country’s situation however warrants close monitoring,

and a .exible application of HIPC eligibility indicators, macro-

economic and social conditionality and external financing re-

quirements for post-con.ict reconstruction and poverty reduction.

As one would expect, resources from HIPC debt relief, while

important for short to medium-term debt sustainability, will only

constitute a small fraction of what the HIPCs actually need to cut

poverty in half, consistent with the 2015 Millennium Development

Goals. A poverty-reduction deficit seems imminent under the

current approach.

It is of utmost importance that the HIPC Initiative be re-

enhanced to, as far as possible, increase the amount and efficiency of

HIPC resources that would be freed and channeled into poverty-

reducing spending. The risk and costs of exogenous shocks need to

be addressed, including the circumstances of countries in, emerging

from or affected by armed con.ict. Other extra-HIPC national and

international development financing should be increased and used

more efficiently.

Proposed HIPC Reinforcement Measures

As the foregoing review demonstrates, the international community

is still in a learning process regarding how to provide debt relief that

leads to debt sustainability and poverty reduction. While

recognising the significant enhancements incorporated into HIPC II

and accepting the fact that HIPC will not necessarily be a panacea

for poverty eradication or development financing, the experiences

with the Initiative to date suggest that there is ample room for

further improvements. These could pave way for a re-enhanced

HIPC Initiative. There are three areas that require further

Lessons from Eastern and Southern Africa

62

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 62

63

Mothae Maruping

innovations: burden-sharing and funding, speed and formula of debt

relief, and post-completion point debt sustainability.

Burden Sharing and Overall HIPC Funding

The HIPC Initiative is not legally binding or enforceable. HIPC

burden-sharing could be improved by systematically addressing the

negotiation problems of non-OECDs and inter-HIPC or, more

broadly, inter-low-income country debt relief. To deepen debt relief,

the Paris Club cutoff dates should be re-examined wherever

warranted. Bilateral debt cancellations beyond the minimum HIPC

requirements could also be intensified and widened to provide

additional debt relief.

The same goes for ensuring adequate funding of the HIPC

Initiative by all creditors. This could be achieved through concerted

dialogue among creditors and through instituting legally binding

arrangements. In this regard, international proposals for debt

restructuring mechanisms need to be examined. These would bring

about a more orderly legal process for debt restructuring.

A way of assisting HIPCs with legal expertise to discourage

litigation should be devised. A soft facility should be created, or

existing soft facilities could be extended and replenished, to be used

by HIPCs in case they lose litigation. Meanwhile, the practice of

publicising non-compliant creditors, as a deterrent against litigation,

should be continued.

Speed and Formula for Debt Relief

Considering the human costs of delays in delivering debt relief,

providing overall debt relief should be speeded up. Partly, this could

be achieved through re-enhanced front-loading of future debt relief,

in support of the attainment of the 2015 Millennium Development

Goals, and the acceleration of assistance to post-con.ict HIPCs.

These measures should be synchronised with parallel higher

development financing, which would take into account countries’

absorptive capacities for maximum impact.

The formula for computing debt relief to be provided to the

HIPCs has important implications for the actual quantum of debt

relief each HIPC will ultimately obtain. In view of the unmitigated

short and long-term risks of exogenous shocks on the HIPCs, the

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 63

eligibility ratios, including related benchmarks and projections, need

to be re-examined. Contingency provisions for additional funding in

the event of significant impact from purely exogenous shocks should

therefore be systematically built into the Initiative. The amount that

would be set aside in this respect could be based on historical

experiences, on a case-by-case basis.

In this regard, it is proposed to adjust the export data used to

calculate PV debt-to-exports and debt service-to-exports ratios.

Export earnings could be discounted with expenditures on essential

imports (e.g. critical food and health related imports, capital goods

and related supplies and raw materials, especially for the production

of export products), minimum required foreign exchange reserves

and offshore export earnings.

For pre-decision point countries, there is still an opportunity to

use this suggested methodology when they do reach decision point,

together with more realistic forecasts. For post-decision and post-

completion point countries, this methodology can still be applied

retroactively together with actual figures (outturn instead of

forecasts). The results could then be used to determine minimum

top-up debt relief for the period going back to the decision point.

This would contribute towards making topping-up more objective

and transparent. For current and future topping-up, this improved

methodology using realistic forecasts and meticulous analysis of

scenarios would suffice.

In broad terms, these proposals point to the need to increasingly

focus on the external sector of the HIPCs for debt sustainability

indicators. Experience shows that the dampening of the effects of

the HIPC Initiative emanate from the external sector.

It would be of interest to see how else export revenue losses from

exogenous shocks could be catered for. External factors that are to

be addressed include effects of global economic slow-down,

deteriorating terms of trade, protection and subsidies in developed

industrial countries which tend to reduce external market access,

costs of aid disbursement delays, etc.

Similar considerations could also be explored for the PV debt-to-

revenue ratio. For instance, global economic slow-down, adverse

terms of trade and protectionism all affect government budget

revenues in different ways that constrain economic growth and

trade. These in turn are key determinants of budget revenue

performance. This is especially important in view of the usual heavy

Lessons from Eastern and Southern Africa

64

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 64

65

Mothae Maruping

reliance by HIPCs and developing countries in general on indirect

taxes, such as value-added tax or sales tax and external tariffs, for the

bulk of their domestic budget revenues.

It is necessary to explore the possibility of shifting the HIPC

objective from merely restoring external debt sustainability to

achieving fiscal sustainability of total public debt. The latter would

target the PV ratio of total public (domestic and external) debt in

relation to appropriately adjusted domestic budget revenues.

Domestic debt should be addressed, which does not necessarily

implicate that it should be relieved from HIPC funds.

Finally, it is essential that debt sustainability leads to fiscal

sustainability. Including both domestic and external debt in debt

sustainability analyses would re.ect the true picture of the burden

on the fiscus. Countries are urged to adopt a risk-based sovereign

balance sheet management approach. Mushrooming domestic debt

is a matter of concern calling for full attention.

Long-Term Post-Completion Point Debt Sustainability

Several national, regional and international measures could be

considered to assist in preventing HIPCs from slipping back into

unsustainable levels of indebtedness, while ensuring that efforts to

attain international development goals are not being compromised.

Sovereign debt has to be managed competently, efficiently and

transparently, leading to a comprehensive, meticulous and

preventive control of public debt. That would call for providing

adequate funding to relevant regional organisations engaged in

building sustainable debt management capacity and emphasising

retention of well-trained staff. In this regard, consideration could be

given to allocating part of HIPC debt relief for the strengthening of

debt management capacity and closely related functions in the

HIPCs. If this would ‘crowd out’ poverty reduction spending, then

additional grant resources could be provided for capacity building in

debt management in HIPCs and non-HIPCs as well.

Financing any gap above the annual sustainable financing levels

should be restricted to grant financing, assuming that the decline in

ODA would be arrested and reversed. Positive net resource .ows

should be at least maintained and preferably increased. Net new

concessional debt accumulation should not exceed annual debt

relief, in PV terms. The excess needs to be provided as grants, to

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 65

avoid a net re-build-up of external debt over time, thus causing a

relapse. Any exceptions to the rule would need to be justified and

would need to take place only on a limited scale.

Creditors and borrowers jointly should seek ways of enforcing

sustainability-linked external borrowing ceilings (for both amounts

and terms) that would keep external debts within sustainable levels.

In this way, they would stimulate a serious consideration of the

costs, risks and returns for debt-financed activities, through

monitoring and sharing of information on the uses of borrowed

funds. Additional debt relief could be provided as a reward for

channeling new debt into agreed social priorities and productive

sectors, particularly in the export sector.

The aim would be to avoid post-HIPC debt re-building up

beyond sustainable levels, thus causing a relapse into HIPC status.

This, together with realistic sovereign credit ratings, would assist

debtor countries to restore their international creditworthiness,

thereby paving the way for accessing of capital markets and

attracting foreign investment.

Although the HIPC Initiative will release only a small fraction of

the required development financing, all avenues to increase the

amount should be exhaustively explored. In particular, innovative

measures need to be devised to enhance and accelerate the front-

loading and topping-up of total debt relief, in a truly additional

manner (e.g. a mix of debt moratoria and better-than-current HIPC

debt cancellations). This is most pressing for countries that are

experiencing pre and post-completion point shocks and for post-

con.ict HIPCs. These proposals may have higher cost implications

for the HIPC Initiative. However, if this would solve this persisting

debt problem, it would be worthwhile and pay-off to all down the

line in the future.

2 Broader National and International Development

Over and above measures to re-enhance the HIPC Initiative, there

are a number of public and private sector options that can be

pursued at the national, regional and international levels by both

developing countries and international development partners.

Lessons from Eastern and Southern Africa

66

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 66

67

Mothae Maruping

National

It is reasonable to anticipate that, beyond HIPC debt relief, the

HIPCs themselves will have a more important role to play in

ensuring long-term debt sustainability. Already, there are growing

calls for them to make effective use of any new official and private

development financing. Therefore, a comprehensive and integrated

risk-based approach to the monitoring of capital .ows and

management of entire public assets and liabilities is critical.

In addition, HIPCs and, indeed, all other low-income developing

countries, need to foster sustainable growth for the purpose of

poverty reduction and overall development. They should maintain

course on necessary structural and environmental reforms, focusing

on the development and diversification of competitive export sectors

to broaden the export base and to make them more resilient to

shocks. At the same time, this economic growth should be

participatory, pro-poor and environmentally friendly.

To ensure growing and more stable government revenues the tax

base should be broadened and the tax collection be improved.

Similarly, the quality of public expenditure needs to be improved,

with a fair share for social pro-poor programmes.

Developing the financial sector is important to enable economic

growth. Mobilising domestic savings will make them available as

credit and equity financing for the public and private sector entities.

Primary and secondary domestic financial markets should develop

into deeper, more active and stable low-risk and low-cost sources of

additional development financing. Governance and institutional

capacity should be reformed to enhance the competence, efficiency

and stability of the financial sector. Financial sector surveillance

should be strengthened to reduce the frequency and impact of

financial crises and the need for government bail-outs for financial

sector players. Monitoring private capital .ows enables well-timed

policies to ward-off financial crisis.

To encourage small and medium enterprises and integrate the

informal sector, targeted sectoral policies and financing are required,

e.g. through the provision of micro-finance at lower costs and less

stringent or government-assisted collateral and guarantees.

To attract higher and stable external finance and investment an

enabling political, macroeconomic, institutional and regulatory

environment should be created. Carefully calculated and cautiously

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 67

5

NEPAD envisages attracting financing from capital .ows (domestic resource

mobilisation; debt relief, ODA reforms and private capital .ows) and external

market access for diversified exports (from mainly private sector-led growth and

trade liberalisation) and global partnerships with industrialised countries and

international financial institutions.

approached capital account liberalisation should be pursued as part

of the enabling environment. A development-friendly legal

framework should be put in place. Elimination of corruption and

bureaucratic excesses would need to be addressed decisively, by

taking measures that meet domestic and international standards and

expectations in the areas of efficiency, accountability, consistency,

transparency and absorptive capacity.

Investing in infrastructure and human resources, including

addressing health and education requirements is important, not only

to achieve economic growth. In this regard, funding for combating

HIV/AIDS and malaria is urgently needed.

Finally, capacity building is needed to encourage and consolidate

ownership of macroeconomic and social policies, to achieve stronger

economic growth and policies that are more effective.

Regional

In the last two decades, regionalisation attempts have almost stalled

in Africa. Very little progress is being made in exploiting benefits of

symbiosis and synergies. There is need to re-invigorate regional

integration and harmonisation of socio-economic, political and legal

systems and standards, in line with adopted regional principles, e.g.

African Union’s New Partnership for Africa’s Development

(NEPAD),

5

SADC, etc. This could help to achieve sound public and

corporate governance and stimulate cross-border trade, finance, and

payments systems.

International

The international community should improve opportunities for

increased market access for HIPC exports through transparent and

equitable trade liberalisation and trade negotiations that take the

special needs of the less developed countries into account. Initiatives

such as the USA’s Africa Growth Opportunity Act (AGOA) and

Lessons from Eastern and Southern Africa

68

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 68

69

Mothae Maruping

other direct export financing and guaranteeing facilities need to be

expanded. These could be channeled through regional development

banks. Trade will profit from mitigating international financial

instability and cushioning its adverse effects.

The international community should ensure increased provision

of predictable and appropriately concessional external financing for

the attainment of the Millennium Development Goals, without

contributing to debt unsustainability. In this regard, the UN target

for ODA of 0.7 percent of the GNPs of developed countries needs

to be followed up with concrete action in a truly additional way. The

generous aid efforts of the Nordic countries and the Netherlands are

worth emulating in this regard, while the recent announcements by

some donors of their intention to increase aid resources are

commendable and need to be followed up with concrete action. The

international community should seriously consider arresting and

reversing the declining trend of ODA in a financially and politically

stable global environment.

Bilateral and multilateral donors should harmonise aid

procedures and streamline conditionality, including untying aid and

channeling aid through government budgets, especially in countries

where accountability is guaranteed. They could promote more

innovative financing arrangements, targeted particularly at boosting

of export diversification, to mitigate the effects of financial volatility

and shocks from changes in volume and terms of trade, aid financing

and natural conditions.

The HIPC Initiative shows the need for legal mechanisms for

orderly international debt restructuring and mediation.

3 Building Capacity for Debt Management

It should be reiterated that it is essential to manage sovereign debt

competently, efficiently and transparently. To do this, human and

institutional capacity should be built and maintained. HIPCs should

not relapse back into unsustainability of debt after completion point

just because of poor debt management. Non-HIPC low-income

developing countries should not slip into HIPC status simply

because of weak debt management.

Capacity building has been found to be superior to technical

assistance. History has shown that technical assistance tends to

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 69

perpetuate dependence. Capacity building tends to successfully wean

the country off technical assistance addiction.

Experiences with the pervasiveness and urgency of the external

debt problem, lately coupled with mushrooming domestic public

debt, have heightened the need to put in place best practices in debt

management in HIPCs and non-HIPCs alike. In 1994, these

experiences culminated in a pilot project of Eastern and Southern

African countries, to strengthen external debt management capacity

in the sub-region. The project, then called the Eastern and South-

ern African Initiative in Debt and Reserves Management

(ESAIDARM), prioritised capacity building in the area of external

debt management. The management of the meagre external foreign

exchange reserves was also prioritised in order to link the external

debt liabilities to sovereign external assets.

With time, and as capacity to manage external debt improved in

tandem with HIPC external debt relief efforts, it became imperative

to introduce a more holistic and risk-based approach to the

management of the entire sovereign balance sheet.

In pursuit of these broad objectives, ESAIDARM was trans-

formed into the Macroeconomic and Financial Management

Institute of Eastern and Southern Africa (MEFMI) in 1997. Since its

launch, MEFMI has contributed to capacity improvements,

especially in the area of debt and aid management. These efforts

have not been confined to HIPCs, but have included non-HIPCs as

well. Current endeavours are geared at assisting HIPCs in obtaining

debt relief while strengthening capacity to prevent non-HIPCs from

falling into the debt trap.

The ultimate objective remains that of attaining best practice in

all aspects of debt management, consistent with sound macro-

economic and financial management in the region. With un-

wavering support for the region’s efforts from international

development and technical partners, this objective will not be out of

reach for HIPCs and non-HIPCs alike, within a reasonable

timeframe.

4 Conclusion

The Enhanced HIPC Initiative has been beneficial to HIPCs. It has

not, however, attained its objectives. Post-completion point HIPCs

Lessons from Eastern and Southern Africa

70

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 70

71

Mothae Maruping

are still in a precarious position regarding external debt sustaina-

bility. Economic growth remains low to moderate in most post-

completion point countries. Poverty reduction remains a

monumental challenge.

Perhaps it should be noted that it has always been clear from the

beginning that, given the demands and costs, the HIPC Initiative in

its present, or hopefully re-enhanced, form would still not

necessarily become a panacea for financing poverty eradication,

including the attainment of the international development goals (see

Chapter 6).

However, everything possible should be done to ensure that the

Initiative at least realises its primary objective of restoring HIPCs’

debt sustainability, thereby also enhancing their economic growth

opportunities. In this regard, it needs to be emphasised that the

export sector is key. Focus should fall on that sector when seeking to

reinforce or re-enhance the HIPC Initiative. Both developing

countries and international development partners need to be

encouraged to each play their part in this respect.

Beyond the provision of HIPC debt relief, additional options

should be explored to raise the necessary development financing that

would be critical to the halving of world poverty by the year 2015 in

keeping with the MDGs. Hopefully, goal posts will not have to be

shifted for lack of sufficient mobilised financial resources and slow

progress in achieving set objectives.

The HIPC Initiative, as pointed out at the beginning, is not, and

was not intended to be panacea for all woes facing HIPCs. Other

measures still have to come into play to ensure enduring debt

sustainability, strong and sustained growth as well as poverty

reduction. In the same spirit, dire assistance needs of non-HIPC

low-income developing countries should not be forgotten and

ignored. They too need meaningful assistance and reinforcement in

their development effort.

Poverty is not mere statistics. It means actual suffering of a large

part of humanity. The 1999-2001 momentum and enthusiasm,

which were the result of pressure exerted by the new millennium

related civil organisations, have lost steam. There is need to rekindle

and maintain keen global interest in this important issue. The HIPC

Initiative should be improved and decisively pursued to its logical

conclusion.

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 71

1

The views expressed in this chapter are those of the authors and should not be

interpreted as those of the International Monetary Fund.

5

Achievements to Date and

Challenges Ahead:

A View from the IMF

Martin Gilman and Wayne Mitchell

1

T

his chapter is intended as background for facilitating an

understanding of the objectives of the Enhanced HIPC (Heavily

Indebted Poor Countries) Initiative and the progress made to date. It

summarises the key features of the Initiative and spells out the

context for assessing progress in its implementation. It reviews the

status of and the challenges facing countries during their interim

period, the impact of the Initiative on debt stocks, debt service, and

poverty-reducing expenditures, as well as the status of creditor

participation, and culminates with a summary of the main challenges

ahead for the Initiative. Lastly, the chapter provides an assessment of

HIPCs’ external debt outlook and outlines the key responsibilities of

governments and creditors in facilitating the achievement of long-

term debt sustainability in HIPCs.

Since the 1980s, there have been various efforts by members of

the international community to alleviate the debt burden of low-

income countries. In the late 1980s, industrial countries, primarily

members of the Paris Club, first agreed to reschedule low-income

countries’ debts on concessional terms in the context of the so-called

Toronto

2

terms. By the mid-1990s, there was a general recognition

72

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 72

2

The Toronto terms were granted in October 1988. They provide for a

concessional rescheduling with a reduction in the net present value (NPV) of

eligible debt of up to one-third of debt. The Naples terms, granted from January

1995, effect a two-thirds reduction in the NPV of eligible debt.

3

See IMF and World Bank, “Modifications to the Heavily Indebted Poor

Countries (HIPC) Initiative”, IMF, Washington D.C., July 23, 1999,

(http://www.imf.org/external/np/hipc/modify/hipc.htm).

73

Martin Gilman and Wayne Mitchell

that the debt problems of the low-income countries were more

structural and permanent in nature than it was initially thought.

Consequently, under what came to be known as Naples terms,

2

Paris

Club creditors were forgiving two-thirds of low-income countries’

eligible debts. Despite these efforts, some low-income countries,

especially those in sub-Saharan Africa, continued to face heavy

external debt burdens and difficulties in servicing them, sometimes

repeatedly resorting to debt rescheduling. This often re.ected a

combination of factors, including a lack of perseverance with

structural and economic reform programmes, a deterioration in their

terms of trade, poor governance, civil unrest, and also a willingness of

creditors to continue to provide new loans.

In September 1996, the IMF and the World Bank launched the

HIPC Initiative. The Initiative marked a significant shift in the

development finance regime, as the supporting framework sought to

resolve the persisting debt crises in a sustainable way by linking debt

relief with the policy environment, conditionality with ownership,

and social impacts of macroeconomic policy reforms with public

expenditure prioritisation. A stated key objective of the HIPC

Initiative was to reduce the overall external debt burdens of eligible

countries to sustainable levels.

3

To this end, target levels in the range

of 200 to 250 percent for the net present value (NPV) of debt-to-

export ratio and 280 percent of NPV for the debt-to-revenue ratio

was established as thresholds for debt sustainability. Unlike

traditional debt reduction mechanisms the Initiative involved, for the

first time, debt relief from multilateral financial institutions.

The 1996 Initiative was enhanced following extensive consul-

tations with interested parties from civil society and the Group of

Seven (G-7) countries. The Enhanced HIPC Initiative launched in

late 1999 by the IMF and World Bank Executive Boards, aimed to

provide broader, faster, and deeper debt relief to a larger number of

countries. Consequently, the targets established under the original

HIPC Initiative in 1996 were lowered to 150 percent of a country’s

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 73

4

Under the Enhanced HIPC Initiative, the external debt burden of a poor

country is deemed sustainable if the net present value of debt does not exceed 150

percent of exports or 250 percent of fiscal revenue. Eligibility for assistance under

the fiscal window is subject to thresholds for the openness of an economy (export-

to-GDP ratio) of 30 percent and for the revenue effort (revenue-to-GDP ratio) of

15 percent.

5

Ross, Doris C., R. Harmsen et al., Official Financing for Developing Countries,

World Economic and Financial Surveys Series, IMF, Washington D.C., 2001.

exports (or 250 percent of government revenues) at a given point in

time.

4

This enabled a broader group of countries to benefit under the

Initiative; earlier assistance was provided through interim relief from

creditors; and .oating completion points were initiated, enabling

countries to benefit faster and more effectively from debt relief. In

line with these objectives, those HIPCs committed to achieving and

maintaining macroeconomic stability, and pursuing reforms aimed at

improving governance, stimulating growth, and reducing poverty

have benefited from substantial debt relief.

1 Key Features of the HIPC Initiative

The design of the Initiative provides a way forward for HIPCs to

effectively use the resources released from lower debt service

payments toward poverty-reducing expenditures. Given that the

countries targeted are among the poorest in the world, con-

siderations in.uencing its architecture have centred on its ability to

make a substantial contribution to poverty reduction. In this context

it is important to note that recent historical gross resource .ows to

HIPCs were three and a half times the level of debt service payments

made. But while the contribution of the HIPC Initiative is important,

in terms of these countries’ future resource needs to support their

poverty reduction strategies (PRSPs), much broader international

support is needed. Experience has shown that external support can

only be effective if it reinforces sound policies implemented by

HIPCs themselves.

Debt relief under the HIPC Initiative is provided in two stages

(Figure 1).

5

In the first stage, the debtor country needs to

demonstrate the capacity to use prudently whatever debt relief is

granted by adhering to IMF and World Bank supported economic

adjustment programmes. During this period, the country will receive

Achievements to Date and Challenges Ahead: A View from the IMF

74

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 74

75

Martin Gilman and Wayne Mitchell

debt relief from Paris Club creditors under traditional mechanisms

(usually a .ow rescheduling on Naples terms) and concessional

financing from the multilateral institutions and bilateral donors. At

the beginning of the second stage, when the decision point under the

Initiative is reached, the Executive Boards of the IMF and World

Bank determine whether the full application of traditional debt relief

mechanisms would be sufficient for the country to reach sustainable

levels of external debt, or whether additional assistance would be

required under the Initiative. In the latter case, the IMF and the

World Bank would commit to granting debt relief, provided the

country continues implementing macroeconomic reforms and

structural adjustment policies, including strengthened social policies

aimed at reducing poverty. At the same time, Paris Club creditors

provide additional debt relief through a .ow rescheduling, and

commit to providing at the end of the second stage, when the

completion point has been reached, a stock-of-debt operation. The

full amount of debt relief by the IMF and the World Bank will be

provided at the completion point as well, on the condition that other

creditors (including multilateral development banks, commercial

creditors and non-Paris Club official bilateral creditors) participate in

the debt relief operation on comparable terms.

Expectations raised by the HIPC Initiative among stakeholders

and development partners are understandably high and at times, the

Initiative has been criticised for not achieving results beyond its

intended scope. Some facts are emphasised below for setting the

context for assessing achievements to date and understanding the

role and scope of the Enhanced HIPC Initiative. First, it builds on

traditional external debt reduction mechanisms over the last two

decades, to provide additional external debt relief from the wider

international community to countries requiring HIPC relief.

Consequently, the external debt of these countries following suitable

policies will be significantly reduced when traditional and HIPC

relief is combined over time. Second, it provides a solid basis for

HIPCs to achieve debt sustainability and to exit the rescheduling

cycle. This is a major achievement, but maintaining debt at

sustainable levels over time is a more complex undertaking – which

requires efforts both by debtors, on the one hand, and creditors and

donors, on the other. For this, it is essential that debtors pursue

sound economic policies, including good debt management. It is also

essential that creditors/donors are ready to support HIPCs by

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 75

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

Achievements to Date and Challenges Ahead: A View from the IMF

76

Figure 1 Enhanced HIPC Initiative Flow Chart

Decision Point

Either

Paris Club stock-of-debt operation

under Naples terms and comparable

treatment by other bilateral and

commercial creditors

is adequate

for the country to reach external debt

sustainability

========> Exit

(Country does not qualify for HIPC

Initiative assistance)

Or

Paris Club stock-of-debt operation

under Naples terms and comparable

treatment by other bilateral and

commercial creditors

is not sufficient

for the country to reach external debt

sustainability.

========> World Bank and IMF

Boards determine eligibility for

assistance

All creditors (multilateral, bilateral,

and commercial) commit debt relief

to be delivered at the .oating

completion point. The amount of

assistance depends on the need to

bring the debt to a sustainable level.

This is calculated based on latest

available data at the decision point.

First Stage

• Country establishes three-year track record of good performance and develops

together with civil society a Poverty Reduction Strategy Paper (PRSP);

in early cases, an interim PRSP may be sufficient to reach the decision point.

• Paris Club provides .ow rescheduling on Naples terms, i.e. rescheduling of

debt service on eligible debt falling due (up to 67 percent reduction on a net

present value basis).

• Other bilateral and commercial creditors provide at least comparable

treatment (recognising the need for .exibility in exceptional cases).

• Multilateral institutions continue to provide adjustment support in the

framework of World Bank- and IMF-supported adjustment programmes.

41979-HIPC bw 27-04-2004 15:25 Pagina 76

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

77

Martin Gilman and Wayne Mitchell

Figure 1 (Continued)

Second Stage

• Country establishes a second track record by implementing the policies

determined at the decision point (which are triggers to reaching the .oating

completion point) and linked to the (Interim) PRSP.

• World Bank and IMF provide interim assistance.

• Paris Club provides .ow rescheduling on Cologne Terms (90 percent debt

reduction on NPV basis or higher if needed)

• Other bilateral and commercial creditors provide debt relief on comparable

terms.*

• Other multilateral creditors provide interim debt relief at their discretion.

• All creditors continue to provide support within the framework of a

comprehensive poverty reduction strategy designed by governments, with

broad participation of civil society and donor community.

“Floating” Completion Point

• Timing of completion point for nonretroactive HIPCs (i.e., those countries

that did not qualify for treatment under the original HIPC Initiative) is tied to

at least one full year of the implementation of a comprehensive poverty

reduction strategy, including macroeconomic stabilisation policies and

structural adjustment. For retroactive HIPCs (those countries that did qualify

under the original HIPC Initiative), the timing of the completion point is tied

to the adoption of a complete PRSP.

• All creditors provide the assistance determined at the decision point; interim

debt relief provided between decision and completion points counts toward

this assistance.

• All groups of creditors provide equal reduction (in NPV terms) on their claims

as determined by the sustainability target. This debt relief is provided with no

further policy conditionality.

• Paris Club provides stock-of-debt reduction on Cologne terms (90 percent

NPV reduction or higher if needed) on eligible debt.

• Other bilateral and commercial creditors provide at least comparable

treatment on stock of debt.*

• Multilateral institutions provide debt relief, each choosing from a menu of

options, and ensuring broad and equitable participation by all creditors

involved.

*

Recognising the need for .exibility in exceptional cases.

41979-HIPC bw 27-04-2004 15:25 Pagina 77

6

Guyana and Nicaragua have since reached the completion point in December

2003 and January 2004, respectively, bringing the total number of completion

point countries to ten.

providing adequate resources on appropriately concessional terms.

Third, HIPC relief is provided on a voluntary basis and depends on

the concern and goodwill of each participating creditor for these

heavily indebted poor countries. Some non-Paris Club and

commercial creditors have chosen not to provide debt relief. Making

creditor participation mandatory would require the ratification of

international agreements by each participating country. Fourth, it

lowers debt service payments for decision point HIPCs on average to

levels significantly below that paid by other developing countries.

Lower debt service payments by HIPCs allow scope for higher social

spending, which reached more than three times the level of debt

service payments by 2002.

2 Progress in Implementation

Implementation Update

Since October 1999, 27 HIPCs (of a potential list of 38 countries)

qualified for assistance under the HIPC Initiative or reached the

decision point, the most recent being the Democratic Republic of

Congo in July 2003. In net present value (NPV) terms, they account

for 85 percent of the total expected relief for the 34 HIPCs for which

data are available. By July 2003, eight of these HIPCs had reached

the completion point and have received debt relief committed by the

international community. The most recent of these has been Benin

and Mali in March 2003.

6

A number (ten) of other countries have been making progress

towards the completion point by adopting programmes which will

achieve macroeconomic stability, facilitate growth and help reduce

poverty. To illustrate, as at July 2003, a number of countries between

the decision point and completion point (the interim period) have

satisfactory performance records in their macroeconomic

programmes.

The remaining nine countries had either recently experienced

problems in programme implementation or did not have an IMF-

Achievements to Date and Challenges Ahead: A View from the IMF

78

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 78

7

See IMF and World Bank, “Initiative for Heavily Indebted Poor Countries –

Status of Implementation”, IMF, Washington D.C., September 12, 2003,

(http://www.imf.org/external/np/hipc/2003/status/091203.htm).

79

Martin Gilman and Wayne Mitchell

supported programme in place after protracted delays in establishing

a satisfactory record of performance. Among the former, Cameroon,

Ethiopia, The Gambia, Guinea, and Zambia are currently making

efforts to implement measures that would facilitate programme

continuation.

7

Challenges in reaching the completion point re.ect many factors.

Some countries experience extended interruptions to PRGF

programme implementation risking macroeconomic stability with

fiscal policy slippages, primarily expenditure overruns, being the most

common. Weak budget execution and poor policy implementation are

often associated with limited institutional capacity, weak governance

and deteriorating political and security conditions. Preparing fully

participatory PRSPs has taken longer than expected, but on the other

hand, most of the countries in the interim period have finalised them

and will likely not be constrained by the one-year satisfactory

implementation requirement from reaching the completion point in

2004. Many countries lack the institutional and human resource

capacity in preparing timely PRSPs and underestimate the time and

effort required to fully engage all stakeholders in a participatory

process, collect and analyse data, establish priority objectives and

sectoral strategies and undertake their costings. Progress in meeting

the social and structural completion point triggers has generally been

slower than envisaged but varies across countries in the interim

period. In many cases, within specific sectors such as health and

education, performance on most triggers has been satisfactory but one

or more triggers may not have been met or insufficient information is

available to make a determination. Difficulties with key triggers could

prove to be obstacles to reaching the completion point in the future,

though they have not been in the past.

Eleven countries have yet to reach the decision point. In most of

these (Burundi, Central African Republic, Comoros, Côte d’Ivoire,

Liberia, Myanmar and Somalia), continuing domestic con.ict or

unsettled transitions from post-con.ict situations have hampered

effective policy implementation and institution building. Domestic

conditions need to stabilise and security conditions need to be

maintained before these pre-decision point countries can move

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 79

8

The comparability of NPV statistics derived from Global Development

Finance (GDF) data (on developing countries) and HIPC documents and staff

estimates (on HIPCs) is limited by the use of different methodologies to account

for debt relief and differences in debt coverage. Debt relief is re.ected in the GDF

database only when actual debt relief agreements are signed, whereas debt relief

estimates in HIPC country documents are based on the assumption of full creditor

participation in the HIPC Initiative. Furthermore, debt indicators for HIPCs

cover only public and public guaranteed debt whereas debt indicators for

developing countries cover total public and private debt. GDF debt service data

typically overstate debt service because grants associated with HIPC relief were

accounted for separately until 2001.

9

Traditional relief refers to Naples terms stock-of-debt operations, involving a

67 percent NPV reduction.

forward quickly toward the decision point. Another potential

impediment to reaching the decision point is the settlement of

protracted external payments arrears, including arrears to

multilateral creditors. In several HIPCs, such as Liberia, Somalia and

Sudan, a concerted international effort would be needed to resolve

outstanding arrears.

Impact on Debt Stocks, Debt Service and Poverty Reducing

Expenditures

The Initiative is projected to substantially lower debt indicators of

participating HIPCs at the completion point to levels comparable to

other developing and low-income countries (Table 1).

8

The weighted

average NPV of the debt-to-exports ratio for the 27 decision point

countries is projected to decline from almost 300 percent before

HIPC relief at the decision point to 128 percent by 2005 when most

HIPCs are expected to have reached their completion points. The

weighted average NPV of the debt-to-GDP ratio is projected to

decline from 60 percent before HIPC relief at the decision point to

30 percent in 2005. These projected levels are close to those of other

low-income countries.

The HIPC relief committed as at July 2003 to the 27 countries

that have reached their decision points, together with debt relief

under the traditional debt relief mechanisms and additional bilateral

debt forgiveness over and beyond the HIPC Initiative, represents a

reduction in the outstanding debt stock of about $52 billion in NPV

terms, or a two-thirds reduction of the overall debt stock of these

countries (Figure 2).

9

In the eight countries that reached their

Achievements to Date and Challenges Ahead: A View from the IMF

80

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 80

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

81

Martin Gilman and Wayne Mitchell

41979-HIPC bw 27-04-2004 15:25 Pagina 81

10

The 2003 projections for the eight completion point countries are based on the

assumption of full creditor participation. This assumption tends to overstate the

achieved debt reduction, but financing assurances already obtained for these

countries average approximately 90 percent of total required HIPC relief.

completion points, debt stock reduction averaged more than 60

percent in 2002 NPV terms (Figure 3).

10

The HIPC Initiative continues to provide substantial savings in

terms of debt service payments for HIPCs, notwithstanding the delay

in bringing a number of them to their completion points. Significant

Figure 2 NPV of Debt for the 27 Decision Point Countries

(in billions of dollars, in 2002 NPV terms)

Achievements to Date and Challenges Ahead: A View from the IMF

82

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

77

65

26

32

0

20

40

60

80

100

Before traditional

relief

After traditional

relief

After HIPC relief

After additional

bilateral relief

Figure 3 NPV of Debt for Completion Point Countries

(in billions of dollars, in 2002 NPV terms)

22

8

18

0

10

20

30

NPV before traditional relief NPV after traditional relief Projected NPV at end-2003

41979-HIPC bw 27-04-2004 15:25 Pagina 82

11

An exception is the Democratic Republic of Congo, where debt service ratios

rise significantly after the enhanced decision point. The increase is partly due to

the resumption of debt service payments following the arrears clearance operation,

as the Democratic Republic of Congo had not been servicing most of its debt in

the previous period.

12

The definition of poverty-reducing expenditures varies across countries

although many countries include primary education and basic health as well as

expenditures for rural development.

13

Country authorities are putting in place public expenditure management

systems that would ensure the efficiency of poverty-reducing expenditures. See

IMF, “Actions to Strengthen the Tracking of Poverty Reducing Public Spending in

Heavily Indebted Poor Countries (HIPCs)”, IMF, Washington D.C., March 22,

2002, (http://www.imf.org/external/np/hipc/2002/track/032202.htm).

83

Martin Gilman and Wayne Mitchell

debt service reductions occur before countries reach the completion

point due to the provision of interim relief by Paris Club and key

multilateral creditors which eases the resource constraint of HIPCs

and allows them to increase poverty reducing expenditures. Primarily

because of interim relief, the average debt-service-to-exports ratio

for HIPCs had already fallen to 9.9 percent by 2002 from an average

of 16.9 percent in 1998, and is projected to fall to 8 percent by 2005.

These debt service ratios are considerably below the corresponding

20 percent ratio in other low-income countries.

11

Similar improve-

ments are also recorded in the other debt service capacity ratios such

as debt-service-to-revenue and debt-service-to-GDP.

Poverty-reducing expenditures in the 27 countries that have

reached the decision point were almost four times as great as debt

service payments in 2002 (Figure 4).

12

Annual debt service by these

countries is projected to be about 30 percent lower during 2001-2005

than in 1998 and 1999, freeing about $1.0 billion in annual debt

service savings. Poverty-reducing expenditures, meanwhile, in-

creased from about $6.1 billion in 1999 to $8.4 billion in 2002 and

are projected by staffs to increase to $11.9 billion in 2005.

13

The

amount of debt service savings and the related increase in poverty

reducing expenditures in the near term vary across countries

depending on their specific situations. Poverty-reducing spending is

expected to increase in all countries that are on track in their

economic reform programmes and implementing their PRSPs with

financing from increased revenue and international support in the

form of new aid .ows and debt relief.

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 83

14

See IMF and World Bank, “Initiative for Heavily Indebted Poor Countries —

Status of Implementation”, IMF, Washington D.C., September 12, 2003,

(http://www.imf.org/external/np/hipc/2003/status/091203.htm).

15

The first three countries also have protracted arrears problems.

Creditor Participation: Costs, Commitments and Delivery

The total cost of the HIPC Initiative for the 34 HIPCs for which

external debt data is available is estimated at $39.4 billion in 2002

NPV terms.

14

In nominal terms, these costs represent about $51.1

billion in debt service relief over time. Of the total cost in 2002 NPV

terms, $33.3 billion is associated with the countries that have

reached the decision point. This estimate does not include the costs

for Liberia, Somalia, Sudan, or Lao PDR because reliable data for

these countries are not yet available.

15

Preliminary calculations

suggest however, that including Sudan, Liberia, Somalia, and Lao

PDR in the estimates could increase the cost of HIPC relief by more

than 25 percent or $10.6 billion to $50.0 billion in 2002 NPV terms.

Most of these additional costs are concentrated in Sudan.

Achievements to Date and Challenges Ahead: A View from the IMF

84

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

Figure 4 Poverty-Reducing Expenditures and External Debt Service

in the 27 Decision Point Countries

(in billions of dollars)

0

4

8

12

16

1999 2000 2001 2002 2003 2004 2005

Poverty-reducing expenditures

Debt service paid or projected

41979-HIPC bw 27-04-2004 15:25 Pagina 84

16

Cologne terms entail stock-of-debt operations, involving an 90 percent NPV

reduction.

85

Martin Gilman and Wayne Mitchell

Multilateral Creditors

In NPV terms, multilateral creditors accounted for $19.0 billion, or

48 percent of total HIPC costs. Twenty-three of 30 multilateral

creditors have indicated their intention to participate in the

Initiative, representing more than 99 percent of the total debt relief

required. The large multilateral creditors, including the IDA, the

IMF, the African Development Bank (AfDB), the Inter-American

Development Bank (IADB), the European Investment

Bank/European Union (EIB/EU), and the Central American Bank

for Economic Integration (CABEI) are providing relief to most

countries in the interim period. In October 2002, the East African

Development Bank agreed to participate in the HIPC Initiative and

the Arab Monetary Fund reconfirmed its participation in early 2003.

So far multilateral creditors have delivered more than $3.8 billion in

relief.

Bilateral Creditors

Most of the costs attributable to official bilateral creditors are borne

by members of the Paris Club which account for $15.2 billion of the

total HIPC costs in 2002 NPV terms. All Paris Club creditors have

committed to delivering their share of HIPC relief to the countries

that have reached the decision point. Many Paris Club creditors are

providing interim relief and relief over and above that required under

the HIPC Initiative. Since September 2002, Paris Club creditors

have agreed to a number of stock-of-debt operations on Cologne

terms

16

for a number of countries going beyond the degree of

concessionality generally provided by Naples terms, these include

Benin and Mali at their completion points and .ow reschedulings for

Nicaragua and The Gambia at their decision points. The .ow

rescheduling on Naples terms for the Democratic Republic of Congo

was instrumental in clearing arrears to external creditors. In addition,

many Paris Club creditors offered terms for the arrears clearance that

went beyond this. In addition the Paris Club has agreed to consider

topping-up the Naples .ow rescheduling amounts to Cologne terms

once the Democratic Republic of Congo reaches the decision point,

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 85

17

Although Libya has agreed to participate in the HIPC Initiative it has yet to

establish the legislative framework to facilitate this. Staffs estimate that traditional

debt relief, i.e. a stock-of-debt operation on Naples terms, will cost around $900

million in 2002 NPV terms.

18

See IMF and World Bank, “Enhanced HIPC Initiative – Creditor Partici-

pation Issues”, IMF, Washington D.C., April 8, 2003,

(http://www.imf.org/external/np/hipc/2003/creditor/040803.pdf).

which would reduce the country’s debt service obligations by another

70 percent.

The participation of non-Paris Club bilateral creditors has

steadily improved. The 51 non-Paris Club official bilateral creditors

account for $3.4 billion of HIPC relief costs in 2002 NPV terms, of

which the costs for the 27 decision point countries represent $3.3

billion. In September 2002 Libya agreed to fully participate in the

Initiative and deliver $225 million (in 2002 NPV terms) in HIPC

relief to 16 countries.

17

In June 2003 India announced its decision to

write off all claims on HIPCs, thereby benefiting Ghana, Guyana,

Mozambique, Nicaragua, Tanzania, Uganda, and Zambia. Delivery

of relief by non-Paris Club official bilateral creditors can only be fully

measured after their debtors reach the completion point.

Consequently, delivery of relief becomes an issue once countries to

which they have outstanding loans reach the completion point.

Thirteen non-Paris Club bilateral creditors have indicated

commitments to deliver full debt relief under the HIPC Initiative

framework and 14 have made commitments to deliver HIPC relief

on some but not all claims on HIPCs. Twenty-four non-Paris Club

creditor countries representing about 21 percent of the total cost

attributable to this group have not yet agreed to deliver HIPC relief.

In March 2003 the Boards of the Bank and the Fund reviewed

measures to provide relief by HIPC creditors to HIPC debtors.

18

Based on the input received from the Board discussion staffs have

been working with bilateral creditors and donors to further explore

options to resolve this issue.

Commercial Creditors

The size of commercial debt owed by HIPCs has already been

substantially reduced as a result of the Debt Reduction Facility for

IDA-Only Countries and debt relief required from them accounts for

about 5 percent of HIPC relief. In some HIPCs, however,

Achievements to Date and Challenges Ahead: A View from the IMF

86

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 86

87

Martin Gilman and Wayne Mitchell

commercial creditors account for a significant proportion of

outstanding debt. Although the claims of commercial creditors are

small in NPV terms, they are nevertheless a cause of concern. In nine

countries commercial creditors and some non-Paris Club bilateral

creditors have resorted litigation as a means of debt recovery. There

are many cases where debtors have not remitted payments after

creditors have received judgments, however, in some cases debtors

have made payments in excess of that required had the creditor

provided HIPC relief. Pending litigation and outstanding court

judgments also prevent HIPCs from regularising financial

relationships with the international community.

Challenges Ahead for the HIPC Initiative

For the countries in the interim period delays in reaching the

completion point have been attributed to the challenge of

maintaining macroeconomic stability, preparing and implementing

poverty reduction strategies and meeting the social and structural

completion point triggers. Although there is a strong desire to see

more countries reach the completion point quickly, the Boards of

both the IMF and the World Bank as well as development partners

have stressed that ownership and quality in the PRGF programmes

and PRSPs should not be sacrificed for speed.

Staffs of the Bank and the Fund have sought to provide support

for countries which are experiencing difficulties in meeting the

required conditions. Where PRGF programmes have either lapsed

or been discontinued, IMF staff have sought to work with the

respective country authorities to implement Staff Monitored

Programmes that would facilitate the resumption of financial support

from the international community. In principle therefore countries

with protracted interruptions in their macroeconomic programmes

could be back on track within a short period of time and reach the

completion point provided other conditions are met. Additionally,

IMF and World Bank and Fund staff have been working with others

to alleviate constraints facing countries in PRSP design and

implementation. In this regard the PRSP preparation status reports

have also helped identify bottlenecks and the need for technical

assistance.

The HIPC Initiative is open to all eligible countries that establish

a performance record leading to the decision point by the end of

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 87

19

The sunset clause stems from the 1996 Programme of Action which

established a time limit in order to prevent the HIPC Initiative from becoming a

permanent facility and to encourage HIPCs to adopt adjustment programmes that

could be supported by the IMF and IDA. The Boards subsequently agreed to two-

year extensions in 1998, 2000, and 2002.

20

See World Bank, “World Bank Group Work in Low-Income Countries Under

Stress: A Task Force Report”, World Bank, Washington D.C., September 2002,

(http://www1.worldbank.org/operations/licus).

2004 when the sunset clause takes effect.

19

A critical challenge that

lies ahead is to ensure that the remaining pre-decision point

countries qualify for entry before this date is reached. The approach

contained in the World Bank Task Force Report on Low-Income

Countries Under Stress (LICUS) may be useful in supporting HIPCs

that face con.ict-related, governance or capacity obstacles to

reaching decision points.

20

Full participation in debt relief by all creditors poses another

challenge. Such participation is essential in order to ensure that the

debt stocks of HIPCs are reduced to sustainable levels. Such support

is also critical for many countries in their interim periods which may

take longer than anticipated to reach their completion points due to

the need to develop their PRSPs and overcome difficulties in the

implementation of their economic adjustment and reform

programmes. The provision of interim assistance by major creditors

during this period is critical as it supports the efforts of HIPCs, and

lowers their near-term debt service costs substantially.

Non participation in the Initiative and in particular, creditor

litigation against HIPCs, frustrates the achievement of these

objectives. The latter diverts the HIPCs time and resources, is

financially costly, undermines the burden-sharing principle

underlying the Initiative. Given the voluntary nature of debt relief

under the Initiative, moral suasion is the only approach pursued by

the Fund and Bank staff in dealing with this issue. Encouraging

commercial creditors to deliver HIPC relief, however, is complicated

by their limited interaction with the World Bank and the IMF.

Accordingly, the Fund and Bank will continue to (a) give extensive

publicity to the problems arising from the sale of HIPC debt in the

secondary market and to known litigation cases in the semi-annual

HIPC Initiative implementation reports and (b) contact the

authorities of creditor countries and multilateral creditors about their

expected participation as HIPCs reach critical points under the

Achievements to Date and Challenges Ahead: A View from the IMF

88

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 88

21

Contacts are limited with Iraq, North Korea, and Taiwan Province of China;

the latter two are not Fund members.

22

See IMF and World Bank, “Heavily Indebted Poor Countries Initiative –

Status of Implementation”, IMF, Washington D.C., August 16, 2002,

(http://www.imf.org/external/np/hipc/2002/status/092302.htm).

23

This primarily re.ects exports in countries with a narrow resource base and

heavily concentrated in primary commodities such as, coffee, cotton, cashews, fish,

and copper. The world price for coffee, the main export crop in five HIPCs, fell by

35 percent in 2001. Cotton, the main export in three HIPCs, fell by 19 percent.

Other commodities that constitute the primary export of at least one HIPC saw

large price declines: cashews (a decline in prices of 69 percent), fish (21 percent),

and copper (13 percent).

24

Ghana and Sierra Leone both reached their decision points in 2002 and thus

are not included in the comparison of 2001 outturns vs. decision point projections.

89

Martin Gilman and Wayne Mitchell

Initiative;

21

and (c) encourage the debtor countries to take an active

and constructive role in seeking debt relief from their non-Paris Club

official bilateral and commercial creditors.

3 Debt Sustainability in HIPCs

Review of Debt Sustainability

The global economic slowdown in 2001, together with a significant

decline in many primary commodity prices, led to a deterioration of

external debt indicators in many HIPCs and fears that some

countries could have debt ratios exceeding the HIPC threshold ratios

at the completion point. These concerns prompted public officials,

academics, and non-governmental organisations (NGOs) to call for a

better understanding of the causes and nature of the recent changes

and to propose actions to ensure that the objectives of the HIPC

Initiative are achieved.

An IMF and World Bank staff review in August 2002

22

confirmed

that (i) for the group of HIPCs whose debt indicators worsened in

2001, the principal source of the deterioration was lower exports

owing mainly to declining commodity prices;

23

and (ii) while the

world economy is recovering slowly, the prices of key export

commodities of HIPCs continue to be depressed and were not

expected to recover quickly. When compared to projections made at

the decision point, the NPV of debt-to-exports ratios in 2001 are

estimated to have been higher in 15 out of the 24 countries including

completion point countries for which data are available (Table 2).

24

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 89

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

Achievements to Date and Challenges Ahead: A View from the IMF

90

Table 2 Updated NPV of Debt-to-Export Ratios at end 2001 Compared

with Ratios Projected at their Decision Points

(in percentage points)

Percentage Effect of

Effect of

Points Difference NPV of Debt Exports

NPV of Debt-to- (Numerator)

1

(Denominator)

Export-Ratio

15 Countries with

Worsened Debt Ratios

Benin

82

70

11

Burkina-Faso

88

57

30

Chad

. . .

2

. . .

2

4

Gambia, The

21

6

15

Guinea

. . .

2

. . .

2

25

Guinea-Bissau

. . .

2

. . .

2

99

Guyana

55

49

5

Honduras

. . .

2

. . .

2

12

Malawi

. . .

2

. . .

2

9

Mauritania

75

37

38

Nicaragua

11

-47

59

São Tomé and Principe

. . .

2

. . .

2

45

Senegal

. . .

2

. . .

2

33

Uganda

44

19

25

Zambia

58

1

57

9 Countries with Improved/

Unchanged Ratios

Bolivia

-36

-33

-4

Cameroon

-1

-2

1

Madagascar

-31

-7

-25

Mali

-8

10

-18

Mozambique

-34

-7

-27

Niger

. . .

2

. . .

2

-11

Rwanda

-49

3

-51

Tanzania

-41

-22

-19

Note:

The decomposition of debt and export effects is derived as

(Dt/Xt) = (Dt-1/Xt)*( Dt/Dt-1 - Xt/ Xt-1)

where D is the NPV of the debt, X is exports, and is the first difference operator.

1

Includes new borrowing and revisions in the outstanding stock of debt. In the case of Benin,

Burkina Faso, and Guyana, the higher NPV of debt is largely due to delays in reaching

completion points.

2

Insufficient information on the NPV of debt was available to make a complete assessment of

the NPV debt-to-exports ratio. The estimated effect of exports (3

r d

column) shows the change

in the ratio assuming the NPV of debt was as predicated in the Decision Point.

Sources: Decision Point documents, and World Bank and Fund staff estimates.

41979-HIPC bw 27-04-2004 15:25 Pagina 90

25

The full impact of debt relief on debt stocks is projected at the decision point

for provision at the completion point. However the delivery of debt relief does not

occur as projected when countries are delayed in reaching the completion point.

This results in an increase in debt levels relative to projections at the decision

point.

26

See IMF and World Bank, “The Enhanced HIPC Initiative – Completion

Point Considerations”, IMF, Washington D.C., August 21, 2001,

(http://www.imf.org/external/np/hipc/2001/cpd/cpd.pdf).

27

To date, Burkina Faso is the only country that has benefited from this

.exibility.

91

Martin Gilman and Wayne Mitchell

Revisions to the debt stock at the decision point and delays in

reaching the completion point compared with decision point

projections also raised the debt ratios in several countries.

25

In some

cases higher borrowing than projected at the decision point as well as

changes to discount and exchange rate assumptions also contributed

to the deterioration of debt ratios.

The structural characteristics of these economies show that, on

average, the countries with worsened debt indicators have a slightly

higher export commodity dependence and a much greater volatility

in historical exports, as compared to other HIPCs. These structural

characteristics, together with the type of commodities they produce

and export, were a contributing factor determining performance in

2001. Thus assessing debt sustainability in HIPCs must take account

of each country’s specific situation and requires that a fuller

discussion of the relative roles of domestic policies versus exogenous

factors and judgment on whether the changes are temporary or

permanent.

The current framework of the HIPC Initiative has the .exibility

to respond to a deterioration of the debt sustainability outlook for

countries that have yet to reach their completion point. This

approach was endorsed by the IMF and World Bank Boards in

September 2001 and an operational framework for providing such

additional assistance or “topping up” at the completion point beyond

that committed at the decision point was established.

26 27

Central to

the approach is a comprehensive assessment based on actual debt and

other economic data available at the completion point, on whether a

country’s economic circumstances have been fundamentally changed

due to exogenous developments. The IMF and World Bank staffs will

continue to be involved with HIPC authorities not only in the

context of their respective programmes and PRSPs but also in

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 91

28

See IMF and World Bank, “Heavily Indebted Poor Countries Initiative –

Status of Implementation”, IMF, Washington D.C., September 23, 2002,

(http://www.imf.org/external/np/hipc/2002/status/092302.htm); and, Doris Ross

and Lisandro Abrego, “Debt Relief Under the HIPC Initiative: Context and

Outlook for Debt Sustainability and Resource Flow”, IMF Working Paper

WP/01/144, IMF, Washington D.C., 2001. This subsection draws substantially on

these papers.

29

For progress in improving the tracking of poverty-reducing public expenditure

provided them with assistance to update their DSA, strengthen debt

management capacity, including new borrowing policies, and

increasing the effectiveness in the use of foreign aid.

Maintaining Debt Sustainability Beyond the HIPC Initiative

The level of relief provided under the HIPC Initiative should be

sufficient for HIPCs to embark on a path of sustainable debt –

excluding shocks that fundamentally change these countries’

macroeconomic conditions for a prolonged period of time.

28

The

challenge for HIPCs however, is to remain on such a path. Long-

term debt sustainability depends not only on (i) the existing stock of

debt and its associated debt service but also on (ii) the evolution of a

countries’ fiscal and external repayment capacity, as well as on (iii) the

growth and terms of new borrowing. The HIPC Initiative deals only

with the first of these elements by providing a one-time debt

reduction, but this is not an ongoing guarantee of debt sustainability.

The other two elements fall beyond the Initiative’s scope and more

under the responsibility of HIPC governments and their creditors.

To maintain debt sustainability, HIPCs have a responsibility to

adhere to sound macroeconomic policies and implement structural

reforms to diversify their production and export base away from

commodity dependence, and to strengthen growth and export

performance overall. They should utilise their Poverty Reduction

Strategy Papers (PRSPs) as the main vehicles for addressing these

tasks by taking the central role in diagnosing country-specific

challenges, deepening ownership of economic development

strategies, and improving governance and institutions and, hence, the

effectiveness with which they utilise resources, including foreign aid.

In this regard, it is important that HIPCs continue to improve their

public expenditure management systems, building on the progress

made in this area under the HIPC Initiative.

29

Achievements to Date and Challenges Ahead: A View from the IMF

92

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 92

and public expenditure management system in PRSP countries, see IMF and

World Bank, “Poverty Reduction Strategy Papers – Progress in Implementation”,

IMF, Washington D.C., September 11, 2002,

(http://www.imf.org/external/np/prspgen/2002/eng/091102.htm).

93

Martin Gilman and Wayne Mitchell

In addition to ensuring improvements in a country’s repayment

capacity, strengthened debt management is important in improving

debt sustainability prospects (see Box 1). Irrespective of export

performance, HIPCs undertaking new borrowing should aim to

adhere to the following key principles: limiting or avoiding non-

concessional borrowing; integrating plans for new borrowing with

the broader macroeconomic and fiscal framework and tailoring new

borrowing to a country’s debt servicing capacity; following best

practices in debt management; and ensuring a productive use of funds

to assure sufficient returns to repay future obligations.

On the donor/creditor side, responsibility lies in providing

adequate external financing on sufficiently concessional terms in

support of HIPCs’ poverty-reduction and growth strategies without

jeopardising their external debt sustainability. This includes an

increase in grant financing from both bilateral and multilateral

development partners. The recently concluded 13th IDA re-

plenishment agreement to provide a proportion of IDA resources in

the form of grants to particularly vulnerable low-income countries

will be an important step forward in this regard (see Box 2). The

effect on the debt ratios of a substitution of part of HIPCs’ new

borrowing with grants would be small in the short term, but the

cumulative impact could be significant over the longer term. More

concessional financing from the international community would help

ensure that new external financing is consistent with the payments

capacity in countries that are particularly vulnerable. Over the longer

term, however, the international community must help these

countries to regain their creditworthiness and reduce their reliance

on grants. Further support from the international community to

increase the access of low-income countries to global markets would

allow the latter better opportunities for growth and export

diversification and enhance their capacity to service their debt

obligations.

Looking ahead, IMF and World Bank staffs are currently working

on developing a forward-looking framework for assessing debt

sustainability in a post-HIPC world while making judgments about

financing, borrowing, and debt management strategies. The

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 93

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

Box 1 Strengthening Debt Management Capacity in HIPCs

Following a 2001 survey and the presentation of the March 2002 report to

the World Bank and IMF Boards,

1

Executive Directors recommended that

staffs explore proactive measures to improve the coordination of donors,

technical assistance providers, HIPCs and multilateral institutions so as to

strengthen debt management capacity in HIPCs. The survey also revealed

substantial demand by HIPCs for improvement in information sharing

among HIPC debt management agencies, and for support from technical

assistance providers to strengthen cooperation and coordination. Staffs have

continued to work with donors, technical assistance providers and HIPCs in

order to strengthen the mechanisms for improving debt management

capacity.

Recognising the importance of debt management capacity building, staffs are

currently evaluating potential measures to: (i) strengthen the linkages

between HIPC country level debt management and broader country

economic management; (ii) establish a stronger communication link between

agencies as a means of collaborating on capacity-building measures; and

improve efficiency by reducing duplication and strengthening

complementarities; (iii) improve country ownership of debt management;

and (iv) establish a set of HIPC debt management standards. A number of

measures could be implemented without delay:

• As part of a comprehensive approach to strengthen HIPCs’ debt

sustainability prospects, with the assistance of their development

partners, HIPCs are expected to prepare and update their own DSA

regularly as they reach the completion point. Uganda’s recent DSA

provides a good example. This could be part of the macroeconomic

framework defined in the PRSP and be followed up in subsequent PRSP

progress reports.

• Stronger monitoring of new borrowing both by debtors and creditors is

also key to maintaining such sustainability. Domestic debt should be

included as part of a systematic and regular monitoring of overall public

debt. Moreover, creditors should take on increasing responsibility for

disclosure of the terms and conditions of outstanding credits.

• A key measure for maintaining long-term external debt sustainability is an

institutionalised periodic review of the effectiveness of external financing

by HIPCs themselves. This could be done as part of periodic public

expenditure review or review of the public investment programme.

1

See IMF and World Bank, “External Debt Management in HIPCs”,

SM/02/92, March 22, 2002

(http://www.imf.org/external/np/hipc/2002/edm/032102.htm).

Achievements to Date and Challenges Ahead: A View from the IMF

94

objective is to allow low-income countries to take maximum

advantage of resource .ows to promote growth and reduce poverty

while minimising the risk of future “debt distress” and, in particular,

ensuring that progress towards sustainability arising from HIPC

relief is not undermined. The framework will be based on several

41979-HIPC bw 27-04-2004 15:25 Pagina 94

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

95

Martin Gilman and Wayne Mitchell

80

120

160

200

240

280

2001 2003 2005 2007 2009 2011 2013 2015 2017

Decision point

New IDA disbursement

projections

New IDA disbursement

projections + grants

Box 2 The Impact of an Increase in IDA Grants on HIPCs’ Debt

Sustainability

Over the past two years, IDA lending to the ten countries that were projected

in the HIPC progress report of spring 2003 to have their NPV of debt-to-

exports ratios above the HIPC threshold at the completion point

1

has been

slightly greater than was anticipated in the decision point documents and

future lending is also programmed at higher levels in many cases. As a result,

the NPV of debt-to-exports ratios in these countries may therefore increase

beyond the levels previously projected. At the same time, IDA donors have

recently agreed that up to 40 percent of financial support to HIPCs under

the thirteenth replenishment of IDA resources (IDA-13) may be furnished in

the form of grants.

Chart 1 Weighted Average of the Debt-To-Exports Ratio for the Ten

Countries

(in percentages)

As a result of increases since decision point in projected IDA disbursements,

the NPV of debt-to-exports for the ten countries is projected to average 155

percent in 2010 compared with 135 percent projected in the decision point

documents. By 2018, the average ratio is now projected at 135 percent

compared with the previous estimate of only 112 percent.

If the ten countries would qualify to obtain 40 percent of IDA resources in

the form of grants, the likely impact would be to offset almost completely by

2018 the effect on the debt-to-exports ratio of larger-than-anticipated IDA

lending. With 40 percent of new IDA financing being furnished in grant

form, the NPV of debt-to-exports ratio would average 114 percent in 2018,

which is very close to that projected in the decision point documents.

It is clear that the beneficial impact on HIPCs’ long-term debt sustainability

outlooks of shifting IDA lending toward partial grants can be magnified if

other creditors followed suit to adjust their financing terms to increase their

concessionality.

Note:

1

Benin, Burkina Faso, Chad, Ethiopia, Gambia, Guinea-Bissau, Malawi,

Rwanda, Senegal, and Zambia. Burkina Faso reached its completion point

subsequently in April 2002.

41979-HIPC bw 27-04-2004 15:25 Pagina 95

indicators that relate prudent debt bearing capacity to country-

specific factors mentioned above, i.e. the quality of a country’s

policies and institutions, its past and prospective growth

performance, the degree of openness of the economy, the volatility of

revenues and exports, and its vulnerability to shocks. To date

extensive consultations have been held with stakeholders, in a

number of workshops around the world, with a view to gaining

support for and refining this new approach. The latest of these has

been the October 2003 meeting of the multilateral development

banks in Vienna. The IMF and World Bank Executive Boards review

of this framework is envisaged in early 2004.

Achievements to Date and Challenges Ahead: A View from the IMF

96

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 96

1

Revised version of a paper presented by the author at the Annual Bank

Conference on Development Economics – Europe held in Paris on 15-16 May

2003. The views expressed are those of the author and do not necessarily represent

those of the World Bank.

97

6

From Debt Relief to Achieving the

Millennium Development Goals

Amar Bhattacharya

1

D

ealing with the debt difficulties of the poorest countries has

been an important element of the development agenda of the

1990s. While the initial thrust was on reducing the debt overhang of

the heavily indebted poor countries, the focus has shifted to

achieving sustained growth and poverty reduction while preserving

long-term debt sustainability. I will argue that while debt relief is a

necessary first step towards these development objectives, a more

comprehensive and concerted approach is needed to accelerate

progress towards the Millennium Development Goals (MDGs) in

these countries.

The next section reviews the status of implementation of the

Heavily Indebted Poor Countries (HIPC) Initiative and assesses

what the Initiative can and cannot do in the pursuit of different

development objectives. Section 2 sets out an agenda to accelerate

progress towards the MDGs, building on the foundations laid in the

HIPC Initiative, and mindful of the need to preserve debt

sustainability. Section 3 concludes.

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 97

2

Several FONDAD publications provided key information for the debate that

preceded the HIPC Initiative.

3

For a comprehensive review and assessment of the Initiative see OED, 2003.

4

Including four countries that are potentially sustainable without HIPC

assistance (Angola, Kenya, Vietnam and Yemen), see Table 2.

1 Implementation of the HIPC Initiative and

What It Can(not) Yield

The HIPC Initiative was launched in 1996 following extensive

debate

2

and deliberations provoked to a large extent by strong

advocacy on the part of key non-governmental organisations. The

Initiative was modified in 1999 to encompass, in addition to the

original objective of “removing the debt overhang”, the additional

objectives of debt sustainability through a “permanent exit from

rescheduling” and poverty reduction by “[freeing] up resources for

higher social spending … to the extent that cash debt service

payments are reduced.”

3

Forty-two countries have been identified as HIPCs

4

accounting

for 14 percent of the developing world’s population and 5 percent of

GNI. Their share of developing country debt is only 8 percent but

large relative to their own economies. Relative to other low-income

countries, their debt burdens increased sharply during the 1980s and

the early 1990s (Table 1). The main factors behind the build-up of

debt were: adverse shocks and secular deterioration in terms of

trade; sustained macroeconomic imbalances and weak policies and

institutions; non-concessional lending and refinancing policies of

creditors; inadequate debt management; and civil strife and political

upheavals (Brooks et al., 1998).

From Debt Relief to Achieving the MDGs

98

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

Table 1 External Debt as Percentage of GDP

(period average)

Category

1980–1984 1985–1989 1990–1994 1995–2000

HIPC

38

70

120

103

Other IDA countries

21

33

38

33

Other LMI* countries

22

30

27

26

Note:

* Lower-middle-income.

Source: World Bank, Global Development Finance, 2002, and World Bank, World

Development Indicators, 2002.

41979-HIPC bw 27-04-2004 15:25 Pagina 98

99

Amar Bhattacharya

Implementation is progressing steadily but more slowly than

anticipated. Of the 42 HIPCs, 27 have reached decision point under

the enhanced framework, and ten have reached their completion

point including Mali and Benin in March 2003, and Guyana and

Nicaragua in December 2003 and January 2004, respectively (Table

2). Four countries are considered to have sustainable debt burdens

without debt relief. Among the 11 countries still to reach decision

point, most are con.ict affected. Côte d’Ivoire was about to reach

decision point but the HIPC process was derailed by sudden

domestic con.ict. And in the case of the Central African Republic,

preparation of the HIPC preliminary documents was interrupted by

an upsurge in civil strife. The Democratic Republic of Congo has

reached its decision point in July 2003.

The HIPC programme can be considered to bring debt levels of

HIPC countries to the same level as other poor countries and to

eliminate the excessive debt overhang that posed a constraint to

growth and poverty reduction. Although the reduction of the debt

burden under the HIPC Initiative reduces the debt burden

significantly, it cannot guarantee a net increase in external financing.

As shown in Figure 1, aggregate official in.ows to HIPCs have

exceeded debt service. But official net transfers trended down in the

second half of the 1990s, although there has been considerable

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

Table 2 Status of the 42 Eligible HIPCs

(as of January 2004)

Reached completion point Benin, Bolivia, Burkina Faso, Guyana, Mali,

Mauritania, Mozambique, Nicaragua, Tanzania,

Uganda

Reached decision point and Cameroon, Chad, Democratic Republic of

receiving interim relief

Congo*, Ethiopia, The Gambia, Ghana,

Guinea, Guinea-Bissau*, Honduras, Madagascar,

Malawi, Niger, Rwanda*, São Tomé and

Príncipe, Senegal, Sierra Leone*, Zambia

Not yet at decision point Burundi*, Central African Republic*, Comoros,

Republic of Congo*, Côte d’Ivoire, Lao P.D.R.,

Liberia*, Myanmar*, Somalia*, Sudan*, and

Togo

Potentially sustainable without Angola*, Kenya, Vietnam, Yemen

HIPC assistance

Note:

*Con.ict-affected countries.

41979-HIPC bw 27-04-2004 15:25 Pagina 99

variation in the pattern of net transfers to individual HIPCs.

Aggregate net transfers have fallen from a peak of $14 billion in the

early 1990s to less than $10 billion in 2000. This is a larger decline

than the savings in debt service due to the implementation of the

HIPC Initiative. This trend underscores the importance of

additional financing to support the development objectives of the

HIPC countries. While net transfers to HIPCs have declined it is

worth noting that they have received an increasing share of

aggregate net transfers to developing countries. This is both because

of a shift in official development assistance (ODA) to HIPCs and the

increased concessionality of .ows to these countries.

The aim of the HIPC Initiative is to reduce the debt burden to a

reasonable level at exit, but it cannot ensure debt sustainability of

HIPC graduates in the long term. Uganda’s debt-to-exports ratio,

for example, was brought down to the targeted 150 percent at

completion point, but a downturn in export earnings and higher

than anticipated new borrowings led to an increase in the ratio to

From Debt Relief to Achieving the MDGs

100

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

Figure 1 Net Resource Transfers to HIPCs

(in billions of dollars, in 2002 NPV terms)

0

2

4

6

8

10

12

14

16

Aggregate net transfers

Official net transfers

Official debt service

Source: World Bank, Global Development Finance, 2002.

41979-HIPC bw 27-04-2004 15:25 Pagina 100

101

Amar Bhattacharya

171 percent in 2001, 43 percent higher than the ratio of 128 percent

projected at decision point. Increased levels of borrowing and

poorer than expected export performance were also responsible for

increases in debt-to-exports ratios in the case of Burkina Faso and

Mauritania. Bolivia, Tanzania and Mozambique have remained

below the target largely as a result of low borrowing. So while a

reduction in debt stocks can help restore debt sustainability at a

point in time, long-term debt sustainability depends crucially on

export performance and on the amounts and terms of new financing.

In parallel with debt relief, the HIPC Initiative is aimed at

supporting policy and institutional reforms that can lay the basis for

sustained growth and accelerated poverty reduction. There is an ex

ante requirement of the establishment of a strong policy track record

for a country to reach the decision point. While such a track record

was binding in the case of the initial entrants, this requirement was

eased during 2000 in order to allow more countries to join the

Initiative. In order to reach the completion point, a HIPC has to

fulfil three requirements: (i) staying on track with the IMF’s PRGF

macroeconomic stabilisation and reform programme; (ii) the

development and implementation (for at least one year) of a full

PRSP; and (iii) performance criteria focused on public expenditure

reform, governance and increased and improved social expenditures.

The improvements in policies and institutions that have begun to

take hold in many though not all the 26 countries that reached

decision point has been re.ected in improved growth performance.

Fourteen of the 26 countries that have reached decision point

recorded annual GDP growth rates in excess of 4 percent since

1995. Countries that have already reached completion point show

the strongest performance re.ecting more sustained policy and

institutional improvements. In addition to stronger growth, HIPCs

have been increasing social spending as part of enhanced poverty

reduction efforts.

Despite this encouraging progress, none of the HIPCs are on

track to meet a majority of the MDGs. HIPCs appear best

positioned on access to safe water where 9 out of the 24 countries

with available data appear on track to meet the goal by 2015. In

contrast, only 1 out of the 37 HIPCs with available data are likely to

meet the goal on child mortality, and none of the 28 HIPCs with

data are likely on the basis of current trends to meet the primary

school enrolment goal.

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 101

2 Achieving the MDGs

Three developments have generated a new dynamism in the global

efforts to accelerate development and fight poverty. First, the

Millennium Summit and the adoption of the MDGs marks an

important milestone in the global commitment to development.

The MDGs recognise the multi-dimensionality of poverty and set

international benchmarks to focus and measure the effectiveness of

the collective efforts of the international community. Second, the

Poverty Reduction Strategy Paper for low-income countries has

gained wide acceptance as a new approach to development at the

country level – based on principles of country ownership and

participation, of a comprehensive and long-term approach, and of

partnership and alignment. Third, the Monterrey Conference on

Financing for Development (in conjunction with Doha and

Johannesburg) has generated a “consensus” on the way forward to

meet the MDGs and broader development goals. Developing

countries committed to sound policies and good governance, and

the rich countries committed to provide market access, debt relief

and more and better aid.

There is also agreement, or at least less disagreement than appears

to be sometimes the case, on the development framework to achieve

the MDGs. First, there can be no disagreement that progress on

MDGs hinges critically on sustained economic growth. Indeed, there

is no country that has made rapid progress on the MDGs without

robust growth. Second, we also know that countries’ ability to

translate growth into progress on poverty reduction and other

development goals varies widely depending on their policy

orientation. Third, while growth is critical, in many poor countries it

is unlikely to generate sufficient domestic resources to finance the

attainment of all of the MDGs. To take an example, Ethiopia

currently spends $74 million per year on primary education, or less

than $14 per student. Only 25 percent of children complete primary

school and only about 60 percent of children are even enrolled. To

reach the 2015 target, expenditures would need to double, reforms in

the quality and delivery of schooling would be required, and $200

million in annual external financing would be needed to bridge the

expected financing gap. If Ethiopia were to rely solely on its own

domestic resources, the goal of 100 percent primary school

completion would not be reached before 2050. In the area of health,

From Debt Relief to Achieving the MDGs

102

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 102

103

Amar Bhattacharya

expenditure needs are even greater and the sums expended even

lower. And this does not take into account the direct and indirect costs

of HIV/AIDS, of the environment, of investments in infrastructure.

Hence for the poorest countries the MDGs can only be met with

substantial increases in external financing. But such external

assistance will only be effective if it is based on a framework of

measurable results – based on sound country strategies, on good

governance and public financial management and effective service

delivery. These foundations will necessarily take time. But the

international community can and must provide assistance where

there are reasonable foundations in place and clear commitments

that can provide the basis for scaling-up actions by the countries and

matching support by the international community. The challenge

now is how to translate these principles into concrete actions and to

accelerated progress on the development goals.

In response to a request from the Development Committee,

Bank and Fund staff have proposed a framework for monitoring of

policies and actions – by developing countries and by their inter-

national partners – needed to implement the Monterrey consensus

and achieve the MDGs, to complement the work of the UN on

monitoring progress on the MDGs. The aim of this framework is to

enhance transparency and accountability and allow the international

community to focus on those priority areas of attention needed to

maintain momentum on the development agenda. It is only through

the combined actions of developing countries themselves and

complementary actions on the part of their development partners

will poor countries be able to lay the foundations for sustained

growth and invest in their poor.

The initial assessment that was carried out shows that there is

encouraging progress, but much more is needed. On the part of

developing countries, there has been a clear improvement in policies

and institutions. The Country Policy and Institutional Assessments

carried out by Bank staff re.ect this progress, with the greatest

improvements in macroeconomic management and trade policies.

The area that is most lagging is public sector management and

governance, and there remains a wide dispersion in performance

across countries.

The trend for HIPC countries is similar but not as strong. While

performance of the countries that have reached completion points

have been strong and sustained, there have been slippages in some

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 103

countries that are between their decision and completion points.

Performance on public sector management and governance is a

particular concern in many HIPCs. An assessment of public

expenditure systems in HIPCs carried out by Bank and Fund staff

last year shows that benchmarks for budget formulation, execution

and reporting were not met by most HIPCs. Without a strong

public expenditure management system, it will be difficult for

HIPCs to ensure that resources that are freed up by debt relief, or

new aid resources, are effectively deployed. Hence strengthening

public expenditure management and governance is a critical need if

countries are to be successful in scaling up their efforts to meet the

MDGs. HIPCs also need to take complementary actions to

strengthen service delivery mechanisms.

These efforts of the HIPC countries will only be successful if

there are commensurate efforts on the part of developed countries.

Monterrey underscored the critical importance of trade to the

attainment of the MDGs. The three core development issues in the

Doha agenda – agriculture, TRIPS and medicines and special and

differential treatment – are of particular relevance to the HIPCs.

Market restrictions and subsidies in agriculture are the single most

important external impediment to development in HIPC countries

given that they are mainly commodity exporters. Many HIPCs

suffer disproportionately from HIV/AIDS and would stand to gain

from an accord on medicines. And HIPCs could benefit from

targeted special and differential treatment as they integrate with the

global economy.

The second requirement from rich countries is to meet their

commitment on debt relief. The G-8 and other industrial countries

have reaffirmed this commitment, demonstrated most recently in

the replenishment of the HIPC Trust Fund. The goals of the HIPC

Initiative and the attainment of the MDGs can only be met if

developed countries are able to raise the quantity and quality of aid.

The HIPC Initiative will reduce the average debt servicing burden

to less than 2 percent of GDP by 2005. But on average, HIPCs will

need 10 percent of GDP or more in net transfers if they are to lay

the foundations for sustained growth and accelerate progress

towards the MDGs. When the debt service burden was in excess of

5 percent as it was before the launch of the Initiative, debt and debt

service reduction was the first priority. Looking ahead, it will be

additional financing in suitable terms and form that will be key.

From Debt Relief to Achieving the MDGs

104

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 104

105

Amar Bhattacharya

Leading up to and since Monterrey developed countries have

announced commitments, that if implemented could increase ODA

by some $16 billion. The immediate challenge is to ensure that

these commitments are translated into actual outlays. Although

these new commitments fall short of the total aid that is estimated to

be needed to reach the MDGs, HIPCs could benefit greatly if these

new commitments and existing aid programmes are more effectively

deployed than the past.

In particular, efforts to target aid to the poorest countries and

those with credible reform programmes, to make aid more

predictable, to make it more fungible including for recurrent cost

financing, to harmonise and simplify donor practices as was

committed at the Rome High Level Forum and to untie aid could

ensure that there is true additionality to debt relief and that the

HIPCs have adequate resources to meet the MDGs. Of critical

importance to HIPCs also is that this aid be provided on terms that

assures long-term debt sustainability.

Long-term debt sustainability depends primarily on growth and

export prospects, on vulnerability to shocks, and on the magnitude

and terms of new financing. The ability of the government to

mobilise resources will additionally determine the sustainability of

the government’s own finances. This assessment has necessarily to

be done on a case-by-case basis. There are a few HIPCs where

growth prospects and government finances have strengthened to the

point and where the export base has developed and diversified

sufficiently to warrant borrowing that could take the NPV debt-to-

exports ratio above the 150 percent target adopted by the HIPC

Initiative. But for most HIPCs the magnitude of net external

financing needed and the high degree of vulnerability warrants a

very cautious approach to new borrowing. For some time, the bulk

of the financing needs of HIPCs must be provided by grants. While

HIPCs can also rely on the concessional lending by IDA, for some

the ability to utilise their full allocations of IDA will be constrained

without increasing the grant element for these countries. The

decision to allow up to 40 percent grants for the most vulnerable

countries in IDA-13 was an important step in this regard.

There are two important policy challenges ahead therefore for

the HIPC countries and for the international community. The first

is to be able to curb inappropriate borrowing. Experience has shown

that HIPCs can quickly build up their debt to cope with shocks or to

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 105

finance increased public investments through borrowing. HIPC

countries need to have rigorous debt management systems in place

to avoid any borrowing that can threaten long-term debt

sustainability. Where warranted, the international community needs

to be able to help meet exceptional financing needs with grants or

concessional loans so as to prevent a recurrence of debt overhangs.

A second challenge is to ensure that HIPCs can have long-term

access to external financing in suitable amounts and concessionality.

As HIPCs undertake policy and institutional reforms to accelerate

progress towards the MDGs the international community needs to

be prepared to step up its external financing. As the experience of

the Education Fast Track Initiative shows the international

architecture is not yet in place to ensure that such matching support

will be available when needed. While some HIPCs will be able to

absorb some amounts of new borrowing, for most HIPCs the bulk

of such financing has to be provided on grant terms.

3 Conclusion

The HIPC Initiative, when fully implemented, will reduce the debt

burden of HIPC countries to levels comparable to other low-income

countries. The HIPC process will also have set in motion the

strengthening of policies, governance and institutions in HIPC

countries that can pave the way for accelerated growth and faster

progress towards the MDGs. But none of the HIPCs will reach a

majority of the MDGs without scaling up their own efforts and

without complementary support from the international community.

In addition to steps to improve market access and elimination of

subsidies in agriculture, more and better aid is a critical priority for

HIPC countries. As a group, they will remain more dependent on

new external financing than any other group and such financing has

to be provided on grant or highly concessional terms. Without

concerted and comprehensive actions on the part of both the HIPC

countries and the international community, the benefits of the debt

relief effort of the 1990s will not endure and the HIPC group will

be the most at risk in not reaching the MDGs.

From Debt Relief to Achieving the MDGs

106

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 106

107

Amar Bhattacharya

References

Birdsall, Nancy, Stijn Claessens and Ishac Diwan (2001), “Will

HIPC Matter.: The Debt Game and Donor Behavior in Africa”,

paper presented at WIDER Development Conference on Debt

Relief, August 17-18, Helsinki, Finland.

Brooks, Ray, Mariano Cortes, Francesca Fornasari, Benoit

Ketchekmen and Ydahlia Metzgen (1998), “External Debt

Histories of Ten Low-Income Developing Countries: Lessons

from Their Experience”, IMF Working Paper WP/98/72, IMF,

Washington D.C.

Claessens, Stijn, Enrica Detragiache, Ravi Kanbur and Peter

Wickham (1997), “Analytical Aspects of the Debt Problems of

Heavily Indebted Poor Countries”, In: External Finance for Low-

Income Countries, IMF, Washington D.C.

Elbadawi, Ibrahim and Alan Gelb (2001), “Financing Africa’s

Development: Toward a Business Plan.”, Paper presented at the

AERC Policy Seminar, Dar Es Salaam, February.

EURODAD (2002), “Putting Sustainable Development First”,

European Network on Debt and Development, Brussels.

––––– (2003), “HIPC Additionality: Some Concerning Projections”,

European Network on Debt and Development, Brussels.

Gelb, Alan and Xiao Ye (2001), “Debt Sustainability for Africa’s

Non-Oil HIPCs: A Note”, mimeo, Washington D.C.

IMF and World Bank (1996), “A Programme for Action to Resolve

the Debt Problems of the Heavily Indebted Poor Countries”,

Report of the Managing Director of the IMF and the President

of the World Bank to the Interim and Development Committees,

Report No. DC/96-17, IMF/World Bank, Washington D.C.

––––– (2002a), “Heavily Indebted Poor Countries (HIPC) – Status

of Implementation”, IMF/World Bank, Washington D.C.,

September 12.

––––– (2002b), “The Enhanced HIPC Initiative and the

Achievement of Long-Term Debt Sustainability”, IMF/World

Bank, Washington D.C., April 15.

Jubilee 2000 Coalition (1999), “Unfinished Business–The World’s

Leaders and the Millennium Debt Challenge”,

http://www.jubilee2000gk.org/

Martin, Matthew, with Randa Alami (2001), “Long-Term Debt

Sustainability for HIPCs: How to Respond to Shocks”, mimeo,

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 107

Debt Relief International, London.

OED (2003), “The Heavily Indebted Poor Countries (HIPC) Debt

Initiative”, Operations Evaluation Department, World Bank,

Washington D.C.

Oxfam International (2003), “Debt Relief and the HIV/AIDS Crisis

in Africa”, Washington D.C.

World Bank (2002), Global Development Finance: Financing the Poorest

Countries, World Bank, Washington D.C.

From Debt Relief to Achieving the MDGs

108

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 108

1

This chapter is largely based on an evaluation of debt relief carried out for the

Policy and Operations Evaluation Department (IOB) of the Ministry of Foreign

Affairs of the Netherlands. The text draws heavily on the second synthesis report

of that study, Results of International Debt Relief (IOB, 2003), written by the author,

but also on the first synthesis report, Dutch Debt Relief Policy (IOB, 2002, only

available in Dutch), written by Dick van der Hoek, IOB Inspector and responsible

for the overall study.

109

7

Debt Relief from a Donor

Perspective: The Case of the

Netherlands

Geske Dijkstra

1

T

he Netherlands recognised relatively early that the debts of the

international financial institutions (IFIs) were a heavy burden

on developing countries. Loans from the IFIs were not only part of

the solution, but also part of the problem. Out of the 1.6 billion

Euros that the Netherlands spent on debt relief between 1990 and

1999, an increasing share was spent on multilateral debts.

Multilateral debt relief included contributions to the “Fifth

Dimension” of IDA (providing funds to repay earlier non-

concessional IBRD loans to enable IDA-only countries to repay past

IBRD loans), to Multilateral Debt Funds under supervision of the

debtor country from which multilateral debt service was paid, and

more recently to the HIPC Trust Fund.

From 1995 on, the Dutch government also played an active role

in promoting the creation of the Enhanced HIPC Initiative in 1999.

The Dutch Minister for Development Cooperation supported, for

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 109

example, the Jubilee 2000 activities for putting pressure on the G-7

meeting in Cologne, where the principal decision in favour of

Enhanced HIPC Initiative was made (IOB, 2002). Once the

Enhanced HIPC Initiative had been approved in the Annual Board

Meetings of the World Bank and the IMF in September 1999, the

Dutch officials expressed themselves firmly in favour of the

Initiative. The Netherlands immediately began providing resources

to the HIPC Trust Fund managed by the World Bank, and urged

other donors to do the same. The Dutch view was that multilateral

debt relief and debt relief from the IMF should be financed as much

from bilateral contributions as possible, in order to not reduce the

IFIs’ lending capacity for the poorest countries. Furthermore, these

contributions should be in addition to the regular foreign aid .ows

from bilateral donors. By August 2001, the Netherlands was the

biggest contributor to the HIPC Trust Fund in terms of actual

disbursements, bypassing much larger countries like the US, Japan

and the UK (IOB, 2002).

The Dutch government also strongly supported the conditions

for the HIPC Initiative. It expected that the requirement of

elaborating a PRSP with participation of civil society would bring an

end to the traditional form of policy conditionality by the IFIs,

leading to more “ownership” of the receiving country. In addition, it

would enhance participation and democracy, and favour increased

donor coordination in aid. PRSPs also became the leading device for

Dutch bilateral development cooperation policy in general.

In sum, the Netherlands embraced the HIPC Initiative as an

ideal solution to the debt problems of the poor countries, and

appears to be the ideal donor in relation to this HIPC Initiative.

This chapter aims to add some question-marks to each of these

statements. It brings to the fore some problematic aspects of the

HIPC Initiative, aspects related to the international decisionmaking

processes on debt and debt relief and to the financing of debt relief,

in particular: (i) the role of donors and creditors in perpetuating

debt problems by providing (the means for) new loans, thus raising

the question of the coherence of debt relief policies; (ii) the lack of

additionality of debt relief; and (iii) the problematic consequences of

setting conditions for debt relief.

These three issues are discussed in the following sections, and

where possible illustrated for the case of the Netherlands. Whether

debt relief is additional to other aid .ows may vary from donor to

Debt Relief from a Donor Perspective: The Case of the Netherlands

110

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 110

111

Geske Dijkstra

donor, and therefore this is examined extensively for the

Netherlands. The last section summarises the changes that should

be made around HIPC debt relief and around aid in general.

The analysis in this chapter is largely based on an evaluation of

debt relief carried out for the Policy and Operations Evaluation

Department (IOB) of the Ministry of Foreign Affairs of the

Netherlands. This evaluation comprised a study of Dutch debt relief

policies, a literature review and econometric study, and eight

country studies: Bolivia, Jamaica, Mozambique, Nicaragua, Peru,

Tanzania, Uganda and Zambia, out of which three were field studies

(Mozambique, Nicaragua and Tanzania).

1 The Role of Donors in Perpetuating Debt Problems

One of the characteristics of current debt problems of the poorest

countries is that they have persisted for such a long time, despite

successive rounds of debt relief. Today’s heavily indebted poor

countries have, on average, experienced low growth rates in the past

20 years, and they still need more debt relief. Two different

conclusions can be drawn: (i) some argue that the international

community has done far too little in alleviating the debt burden of

poor countries, giving them debt relief just sufficient to enable them

to pay their primary creditors, but not enough to allow their

economies to grow, let alone to reduce poverty (Hanlon, 2000;

Sachs, 2002); (ii) others conclude that too much relief has already

been given, and that more debt relief is likely to perpetuate bad

policies (Easterly, 2002).

Thus, the primary question is whether the HIPC Initiative will

be no more than just another round of rescheduling, unable to end

the debt burden and stop low growth in poor countries, either

because it delivers too little debt relief or because it delivers debt

relief leading to a continuation of bad policies. Many authors (also in

this book) have already pointed to the optimistic GDP and export

growth projections in the Debt Sustainability Analyses (DSAs) made

for HIPC countries at decision point, which suggest that future debt

sustainability is unlikely. But much less attention has been given to

the numerator of the debt sustainability ratios, in other words, the

creditor side of the loan relationships. All DSAs project large

amounts of new loans. Although these loans are expected to be

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 111

2

Only in Nicaragua this figure was lower, at about 60 percent.

mostly concessional (that is, on soft conditions), the past ten to

fifteen years have shown that this is no guarantee for the ability to

repay these debts.

The IOB evaluation of the results of international debt relief

efforts in the 1990s has shown that the volume of new loans to the

eight countries involved in the study exceeded debt forgiveness

during the 1990s. Eighty per cent of the new loans to governments

originated from the international financial institutions.

2

The share

of multilateral debts in total debts increased during the 1990s, and

since multilateral creditors are preferred creditors, the actual debt

service paid did not decrease. The large volume of new loans was

one of the reasons for the limited effectiveness of debt relief. Long-

run debt sustainability analysis shows that continuation of the trends

of the 1990s with respect to new loans and export growth will

quickly make debts unsustainable again (IOB, 2003).

Why was there so much new lending to these countries during

the 1990s. The most general reason is that the international

community apparently posed the wrong diagnosis of the debt

problems in the early 1990s. It acted as if countries had a temporary

liquidity problem. The response to a temporary liquidity problem

was to grant debt reschedulings and to extend new loans and grants,

so that countries could grow out of their debt problems. However,

these countries in fact had a solvency problem.

This wrong diagnosis was very much related to the fact that the

creditors were official governments and multilateral agencies, and

not private institutions. During the 1980s, the debt crisis was

primarily a problem of private creditors, mainly big US and

European banks. They began to withdraw from the debtor

countries, no longer providing them with new money and writing

down on the old loans. Yet, and partly due to large incoming official

.ows, they managed to get large .ows of debt service out of these

countries (Dooley, 1994). Official creditors, on the other hand,

never wrote down on their dubious loans. There are no agencies

enforcing them to do so, so both the bilateral export credit agencies

(ECAs) and the multilateral institutions always maintained the

fiction that they would receive the full value of their claims. Since

the IFIs are preferred creditors, they indeed received most of their

debt service in time, but these were often paid for from bilateral

Debt Relief from a Donor Perspective: The Case of the Netherlands

112

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 112

3

In the context of the HIPC Initiative, they contribute to the HIPC Trust Fund.

113

Geske Dijkstra

grants to these countries. While during the 1980s official creditors

bailed out private creditors, during the 1990s and especially in low-

income countries, bilateral creditors and donors bailed out

multilateral creditors. This implies that the IFIs experienced moral

hazard. They could continue their imprudent lending behaviour

much longer than if they had had to suffer the consequences of non-

repayment themselves.

The bailing-out of the IFIs, thus allowing moral hazard, is only

one of the ways in which bilateral donors helped to maintain this

.ow of new loans and, as a consequence, the debt problems. The

bilateral donors also made these loans possible. In fact, bilateral

donors and creditors paid in three different ways for the

concessional loans of the IFIs. First, they contributed to the special

funds of the IFIs that provide the interest subsidies or other means

to make these concessional loans possible. Bilateral donors like the

Netherlands spend part of their development grants as contributions

to the ESAF Trust Fund of the IMF, to the IDA Replenishment

Fund and to similar funds of the regional multilateral development

banks, such as the Fund for Special Operations of the IADB.

Second, the preferential status of the IFI loans reduced the value of

bilateral debt claims, making more bilateral debt relief necessary

than otherwise would be the case. Third, bilateral donors provided

debtor countries with programme aid or even direct debt relief on

multilateral debt service so that these countries can pay the

multilateral creditors.

3

This is not an efficient use of aid money.

Although most bilateral donors themselves only provide grants to

these heavily indebted countries, they perpetuate debt problems

indirectly through these three mechanisms. In a way, they throw

“good money” after “bad money”.

Over the course of the 1990s, Dutch contributions to the IDA

Replenishment Fund amounted to 1.6 billion euros (IOB, 2002, p.

112), or about equal the entire amount of Dutch debt relief in the

same period. The Netherlands also contributed substantially to the

subsidy account of the Enhanced Structural Adjustment Facility

(ESAF) of the IMF. With the creation of the original HIPC

Initiative in 1996, and since debt relief granted by the IMF had to be

financed partly from this Trust, its name was changed into an ESAF-

HIPC Trust in 1996, and later into the PRGF-HIPC Trust. In 1996,

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 113

4

If the funds do become available, it will probably be at the expense of bilateral

grants (see the remarks on additionality in the next section).

the Dutch Minister of Finance announced another large contri-

bution to this Trust, making the Netherlands the largest donor. In

1999, when the Enhanced HIPC Initiative was launched, the

Netherlands immediately became the biggest contributor to the

HIPC Trust Fund of the World Bank – at least, in terms of actual

disbursements. The Netherlands had disbursed $138 million, plus

$34 million through the European Union (IOB, 2002, p. 111).

The US had disbursed $122 million, Canada 114 and the UK

90 million.

Will these debt dynamics change with the HIPC Initiative. At

first glance, there is a change. With the HIPC Initiative, the IFIs

bear part of the costs of debt relief for the first time. Further

consideration of the financing of debt relief on multilateral debt,

however, reveals that bilateral contributions are still essential. As

regards the World Bank, IBRD profits only provide for $2.15

billion of the expected total costs of $8.1 billion. The remaining

$5.95 billion will have to be met from bilateral contributions in the

framework of the 14th IDA Replenishment, planned for 2005 (IMF

and IDA, 2002b). If that additional money is not forthcoming, debt

relief will be at the expense of new World Bank loans to the poorest

countries.

4

So far, bilateral donors have pledged more than $2.5

billion to the HIPC Trust Fund, but that money is used to finance

debt relief for other multilateral development banks.

The costs of the HIPC Initiative for the IMF are estimated at

$2.7 billion (SDR 2.2 billion), a large part of which will have to be

met from the IMF’s own resources. At first, the IMF planned to sell

part of its gold reserves for the purpose, but the major gold-

producing countries objected to this. The IMF then proceeded to

‘off-market’ gold sales, meaning that a quantity of gold is to be sold

symbolically and then bought back in the framework of a transaction

with a member state. This ‘paper’ sale and repurchase of gold

enables its book value to be upgraded. The investment income on

the proceeds of this upgrading, to the amount of SDR 1.8 billion, is

then used for the HIPC Initiative. The disadvantage of using the

bookkeeping profit of symbolic gold sales is that a slightly larger

part of IMF’s capital becomes illiquid (Felgenhauer, 2000), thus

reducing the basis for future loans. To restore this lending capacity,

Debt Relief from a Donor Perspective: The Case of the Netherlands

114

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 114

5

In two out of the four countries that had reached their completion points under

the HIPC Initiative in 2000 and 2001, debt-to-export ratios had again become

unsustainable in 2002 (IMF and IDA, 2002a).

115

Geske Dijkstra

the IMF would have to appeal to its shareholders, i.e. the bilateral

donors.

Given that bilateral donors are expected to finance part of the

relief given on IFI debts, moral hazard can continue. It is already

clear that multilateral institutions continue to provide new loans to

countries that have reached their decision point of the HIPC

Initiative. Although these loans are concessional and have a grace

period of 10 years (World Bank and other development banks) or

five years (IMF), they will eventually increase debt service. If

problems should re-appear regarding debt sustainability, and debtor

countries are again unable to pay off their debts, it is likely that the

multilateral institutions will again be preferred creditors and that

bilateral donors once again will have to step in with relief on

multilateral debt service.

5

In sum, the success of the HIPC Initiative requires that the

volume of new loans from the IFIs be reduced. A simple measure is

to have the multilateral development banks extend only grants to

these poor and heavily indebted countries, as the Meltzer com-

mission has proposed for IDA (International Financial Institution

Advisory Commission, 2000). Another measure to stop the IMF

from long-term lending to poor countries, is to abolish the PRGF.

This has also been proposed by the Meltzer commission, on the very

justifiable grounds that these poor countries do not suffer from

temporary liquidity or balance of payments problems, which was the

original rationale for IMF borrowing. There are more reasons for

abolishing the PRGF, and these will be discussed below.

2 The Lack of Additionality

Debt relief provided under the HIPC Initiative was meant to be

additional to regular aid .ows, so that debtor countries would

experience an increase in net transfers. The HIPC Review of the

Operations Evaluation Department (OED) of the World Bank,

however, showed that net transfers to all HIPC countries between

1995 and 2000 were lower than between 1990 and 1995 (OED,

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 115

2003, p. 53). The decline was even greater for all developing

countries, indicating that there has been some redistribution from

non-HIPC to HIPC countries in the second half of the 1990s,

within a declining total aid budget. This redistribution seems to

have continued in recent years: after 1998, the 26 HIPC countries

that have reached their decision points in the HIPC Initiative, have

experienced an increase of their relative share in total net transfers

to developing countries (OED, 2003, p. 54). Nevertheless, these 26

countries received a smaller net transfer in 2000 than had been

anticipated in the decision point documents.

Although the lack of additionality of HIPC debt relief is a cause

for concern, it should be put in perspective and should not lead to

the conclusion that the HIPC Initiative is not effective. I will argue,

first, that there may be more additionality than the figures on

aggregate net resource .ows indicate. Second, even if there would

be no additionality of debt relief, debt relief may have positive

effects on the recipient countries. And third, even if debt relief to

HIPC countries leads to a declining aid .ow to other, less indebted

countries, the effect on those less indebted countries may ultimately

be positive. I first elaborate on these three issues and then look at

the additionality of Dutch debt relief, in particular.

The first issue is that additionality may be greater than if we just

look at the developments in net resource .ows. What matters for

the additionality issue is what would have happened to aid volumes

in the absence of debt relief. In all eight countries of the IOB

evaluation, debt relief of the 1990s was found to be additional to

regular aid .ows in the 1990s (IOB, 2003). As the OED review also

observed, one reason may be that there has have been a

redistribution of net .ows from countries with low debts to

countries with high debts (see also below). Another reason is that

debt relief is not financed from aid budgets and there are two

possibilities here.

First, creditors that were no longer donors, such as Russia or

some OPEC countries, granted a large amount of debt relief.

Debtor countries were usually not paying on these debts since they

were not getting new resources from these creditors. The only way

for the creditors to see at least part of their money back, was to

substantially reduce the debt stocks. These debt stock reductions are

not included in the OED data on net resource .ows, thus reducing

registered debt relief.

Debt Relief from a Donor Perspective: The Case of the Netherlands

116

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 116

6

DAC is the Development Assistance Committee of the OECD, the

Organisation for Economic Cooperation and Development.

117

Geske Dijkstra

Second, creditors that are still donors may provide part of debt

relief from budgets other than their aid budgets. There are again

two possibilities here. Some modalities of debt relief do not qualify

as net Official Development Assistance (ODA) according to the

definition of the Development Assistance Committee (DAC),

6

and

are by definition additional. The other possibility is that debt relief

does qualify as ODA, but that institutional arrangements within

donor countries imply that it is financed from other budgets than

the aid budget. In this case, debt relief is also additional since the net

ODA .ow from the donor country is larger than if only the foreign

aid budget would be taken into account. This may be different from

country to country and we therefore examine the additionality of

debt relief for the case of the Netherlands in the next section.

The second issue is that debt relief may also have a positive

in.uence on economic growth and, ultimately, poverty reduction for

other reasons than its effect on the reduction of the debt service

.ow. Most publications only pay attention to a possible “.ow effect”

of debt relief. However, the reduction in the debt stock may also be

important. A lower debt stock may lift the “debt overhang” that

hampers private investment and may also prevent good government

policies. Debt relief on a debt that was unpaid before is not leading

to additional resources, but may be very positive if it reduces the

debt overhang. This argument has recently also been brought

forward by Birdsall and Williamson (Birdsall and Williamson, 2002).

Third, there is the issue of the redistribution between recipient

countries. To the extent that debt relief is financed from aid budgets

and does substitute for other ODA .ows, this may imply

redistribution from countries with low debts to countries with

higher debts. This appears to have been the case in the 1990s

(Birdsall et al., 2001; OED, 2003). To the extent that countries with

higher debt levels had less adequate policies and governance – and

the OED Review establishes this to be the case, using the “Country

Policy and Institutional Assessment” measure of the World Bank –

this points to adverse selection in the aid allocation: Countries with

better policies and governance get less aid. However, rather than

being concerned that a HIPC Initiative does not bring additional

resources to the highly indebted poor countries, one could see this

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 117

particular lack of additionality at the country level also as a positive

feature of the Initiative. In other words, even if all debt relief would

be financed from aid budgets so that there is no aggregate

additionality, it could still be beneficial for the less indebted

countries if it brings an end to this adverse selection. Once the debt

levels have been lowered, there is no longer any reason for the

international community to support these highly indebted countries

more than other countries. These other countries may suffer

temporarily, but they may ultimately benefit. However, this pleads

for granting debt relief in a once-and-for-all fashion. Since the

financing of multilateral debt relief has not been secured yet, this is

difficult to achieve in the current situation. According to current

HIPC arrangements, that extend multilateral debt relief over fifteen

to twenty years, this may reduce aid .ows to other countries for a

long period.

3 The Financing of Debt Relief in the Netherlands

The Netherlands has been active in alleviating all types of debt in

developing countries: bilateral, multilateral and private. Debt relief

on multilateral debt, via takeovers of debt service to the IFIs or via

contributions to the HIPC Trust Fund of the World Bank, is

included in the definition of ODA and has always been financed

from the aid budget. The same holds for debt relief on private debts

of developing countries, in particular the contributions to the World

Bank “Debt Relief Facility” that financed debt buybacks of private

debts. In these two cases there is no additionality. Yet, debt relief on

private debts has been effective in decreasing debt stocks and in

reducing the debt overhang of developing countries.

The case of relief on bilateral debt is more complicated. There

are two types of bilateral debt: debts following from bilateral aid

loans, and debts following from the state insurance of export

deliveries from donor countries dealt with by export credit agencies

(ECAs). With respect to alleviating the latter, the Netherlands

followed international agreements in the Paris Club, the informal

group of creditors dealing collectively with bilateral debts of

developing countries. With respect to the former, the Netherlands

has often gone beyond the agreements in the Paris Club.

Until 1997, the classification of what was aid in the Netherlands

Debt Relief from a Donor Perspective: The Case of the Netherlands

118

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 118

7

With a small exception in 1990, as can be seen in Figure 1. See IOB, 2002.

119

Geske Dijkstra

had no relationship with the international ODA definitions. In 1997,

however, the institutional environment of Dutch aid policies

changed drastically. The size of the Dutch aid budget became fixed

as 0.8 percent of GNP and became fully linked to the official ODA

definition. This change had substantial consequences for the amount

of aid available apart from debt relief, i.e. for the additionality issue.

Dutch Export Credits

Until 1997, the forgiveness on export credits as agreed upon in the

Paris Club (33 percent and later higher percentages of debt service

due in a certain period) was financed from general budget resources,

7

and not from the budget for development cooperation – in spite of

the fact that it classifies as ODA. This means that this debt relief,

amounting to about 180 million Euros, was fully additional. After

1997, this forgiveness on commercial credits was financed from aid

budgets, precisely because this modality of debt relief classifies as

ODA and as a result of the changed determination of the Dutch aid

budget.

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

400

350

300

250

200

150

100

50

0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Private

Multilateral

Bilateral export credit

Bilateral loan

Private

Multilateral

Bilateral aid loan

Bilateral

export

credit

Figure 1 Dutch Debt Relief Financed from the Aid Budget, by Type of

Debt, 1990-2002

(millions of current euros)

Source: IOB Database debt relief, extended up to 2002.

41979-HIPC bw 27-04-2004 15:25 Pagina 119

Figure 1 shows that the amounts of debt relief for export credits

became substantial from 1997 onwards. In the years 2000-2002,

when the Enhanced HIPC Initiative began to be implemented, the

volume exploded, leading to an all-time high of total debt relief in

2002. This means that much less money became available for

regular aid.

The Dutch case raises the question to what extent the DAC is

right in classifying all relief on export credits as ODA. Most debts

began to be restructured in the 1980s or early 1990s. The part of

debt service due that was not forgiven was rescheduled and

capitalised so that it maintained its real value. However, the Dutch

export credit agency, NCM, had to compensate the insured Dutch

firm immediately for the full value of both the forgiven and the

rescheduled parts of debt service due, and the Ministry of Finance in

turn had to compensate the NCM. Given that the Netherlands had

and still has a cash budget, this implies that debt relief has already

been registered as expenditure. Nevertheless, the Dutch state

maintained the full claim on the developing country for the

rescheduled part of debt service due; there was no writing down or

writing off – in spite of the fact that it could be foreseen at the time

that the debtor country would never be able to repay the debt fully.

With the HIPC Initiative, creditor countries finally recognise

that debts will not be repaid, and Paris Club creditors agreed to

forgive about 90 percent of the remaining bilateral debt stocks.

However, a large part of these debt stocks consists of earlier

rescheduled and capitalised debt service due. In the Dutch case, this

implies that at least part of the “debt relief” that is now granted just

implies a compensation of the Dutch Ministry of Finance for

expenses made a long time ago, namely when it had to compensate

the NCM.

The IOB evaluation also brought to the fore that the Ministry of

Finance even charges the aid budget for more than the amount paid

to the NCM in the past (IOB, 2002). This is, first, because the bill

includes the own risk of the exporting firms that the NCM never

had to pay to the involved firms. Second, the Ministry of Finance

does not subtract the insurance premiums paid to NCM by those

firms from the amount charged to the aid budget. The bill presented

by the Ministry of Finance includes the full nominal value of the

debt – since that appears to be allowed by the DAC definition of

ODA. These two issues in particular have raised a lot of attention in

Debt Relief from a Donor Perspective: The Case of the Netherlands

120

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 120

8

In November 2003, a parliamentary motion to ask the government to end this

practice of including own risks and premiums, has been kept on hold.

121

Geske Dijkstra

Dutch press and in Parliament. In response, the government wrote a

letter to the DAC asking for clarification of the ODA definition on

this point. In the expectation of a reply from the DAC, members of

parliament have not pushed the government yet to make an end to

this hollowing out of the aid budget on the basis of what could be

considered a weird application of the DAC definition.

8

More in

general, one can wonder whether debt relief should be classified as

ODA if it concerns debts that, in the absence of debt relief, should

have been written down a long time ago, namely, when it was clear

that it would never be paid fully. Birdsall and Williamson have also

made this argument (2002). Furthermore, and more fundamentally,

one can question whether the Ministry of Finance should bail out

the NCM in the first place. As Jubilee Netherlands has pointed out

time and again, this bailing-out is in contradiction with an EU

directive which states that all national export credit agencies (ECAs)

should be self-supporting. This directive obviously aims to avoid

unfair competition between firms from different European

countries, and implies that ECAs should finance their unrecoverable

claims from the premiums received and not from government (aid)

budgets.

Bilateral Aid Loans

With respect to the Dutch relief on bilateral aid loans, the situation

is almost the reverse since this forgiveness is treated differently in

the DAC definition of ODA. The forgiveness of interest on aid

loans classifies as net ODA. The forgiveness of amortisation on aid

loans classifies as gross ODA, but there has to be an imaginary

compensating .ow so that registered net ODA is not increased.

Otherwise, the same aid loan would be registered as ODA twice:

first when the original concessional loan is extended, and then when

it is forgiven. However, in the absence of this forgiveness and

assuming the debt service would be paid, there would be an

amortisation .ow from debtor to creditor so that net ODA would be

lower. Therefore, net ODA is higher with debt relief than without,

if the amortisation due would be paid (Renard and Cassimon, 2000).

In sum, forgiveness on both interest and on amortisation lead to

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 121

9

In practice, the annual development cooperation budget of 0.8 percent GNP is

topped up by the amortisation payments due. If these payments are forgiven, these

amounts are not forthcoming and the actual budget remains at the 0.8 percent.

According to the DAC rules, gross ODA is then increased by the forgiven

amortisation amounts and this is corrected by a counteracting .ow so that in the

end net ODA is again equal to 0.8 percent of GNP.

higher registered net ODA as compared to the case in which this

debt service would have been paid. Conversely, if debt service would

not have been paid in the absence of relief, this debt relief does not

increase registered net ODA. This appears to be fully correct. The

DAC definition of ODA, however, does not mention the case of

forgiveness on principals, i.e. debt stocks that are not yet due. This

means this forgiveness is not counted as ODA. If and to the extent

that one assumes that donors forgive these principals only if they do

not expect to be repaid, this accounting is consistent with the rules

on forgiveness of debt service due.

In the Netherlands, until 1997 all forms of relief on bilateral debt

were financed from the aid budget, despite the fact that part of it

does not classify as ODA. The latter holds, in particular, for

forgiveness on principals. After 1997, the forgiveness of remaining

stocks of aid loans shrunk to almost zero, because paying this from

the aid budget would have reduced the budget to below the fixed

norm of 0.8 percent GNP. Forgiveness of debt service on aid loans

continued after 1997.

9

Yet, the share of forgiveness on aid loans

decreased as of 1997 (Figure 1).

In the context of the HIPC Initiative, creditor countries have

promised to forgive 90 percent of remaining stocks of bilateral aid

loans. The Dutch Minister for Development Cooperation has

announced the intention to grant forgiveness on the full stock of

bilateral aid loans in these HIPC countries. For some countries (the

– so far – nineteen countries that have a special status within Dutch

development cooperation), this is done at decision point; for the

other HIPCs, this is done at completion point. Since this stock

forgiveness does not classify as ODA, the costs involved are financed

from the general budget, and this debt relief has thus become

additional to regular aid. This debt relief is not included in Figure 1,

but the amounts are much smaller than the amounts involved in

forgiveness on export credits. Many aid loans had already been

forgiven before 1999.

Debt Relief from a Donor Perspective: The Case of the Netherlands

122

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 122

123

Geske Dijkstra

The – generous – Dutch contributions to the HIPC Trust Fund

have been presented by the Dutch government as “additional” to

regular aid .ows and as helping to guarantee additionality of

multilateral debt relief. The – then – Dutch Minister for

Development Cooperation even urged other bilateral donors to also

make their contributions to the HIPC Initiative “additional”.

However, since the Dutch contributions have been financed from

the aid budget, they can only be called additional by changing the

usual definition of that concept. In practice, the Dutch government

defended its position by pointing to the growing aid budget during

those years (1999-2001) since it was fixed as 0.8 percent of GNP,

and GNP was growing. However, contributions to the HIPC Trust

Fund have reduced the amount of aid that would have been available

for other destinations in the absence of these contributions. This

policy probably contributed to the observed redistribution of .ows

among recipient countries from low-debt countries to high-debt

countries. In addition, this policy implies a redistribution of .ows

between donors, in the form of a re-allocation of aid money from

the bilateral channel to the multilateral channel. The Dutch effort

to guarantee “additionality” of debt relief of the IFIs in fact boils

down to maintaining the regular lending volume of the IFIs while

reducing the bilateral grant volume. This is another way in which

donors contribute to the maintenance of debt problems and does

not seem to be an appropriate use of aid money.

In sum, it is important that official creditors are also forced to

write down and eventually write off their bad loans, and that the

costs involved should not be charged to aid budgets. The case of the

Netherlands shows that this could be achieved by changing the

ODA definition: debt relief on export credits of countries that are

suffering from debt problems already for a long time, evidenced in

series of debt reschedulings, should not be registered as ODA.

These debts should be written down at the moment that countries

are unable to pay and can be expected not to pay the full value of

their debt service due.

4 Adverse Effects of Conditionality

The last problematic issue of the HIPC Initiative is its

conditionality. Before the HIPC Initiative, the most important

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 123

condition for debt relief was that there should be an agreement with

the IMF regarding structural adjustment. The original HIPC

Initiative required countries to have successfully completed an IMF

programme for three years in order to reach the decision point, and

to do so for another three years to reach the completion point.

Basically, the first HIPC Initiative evaluated past performance. With

the Enhanced HIPC Initiative, however, an additional condition was

set for reaching the decision point. Countries had to elaborate a

strategy for reducing poverty (Poverty Reduction Strategy Paper,

PRSP) and had to do so with civil society participation.

Furthermore, countries must begin to implement the strategy in the

“interim period” (between the decision and completion points of the

HIPC Initiative), to be evidenced by Progress Reports, so that the

international community can be sure that debt relief given in this

period is used to implement the PRSP. The interim period is no

longer fixed at three years, but became “.oating”, depending on the

country meeting the conditions for it. Apart from implementing the

PRSP, the country must also execute a number of more conventional

reforms and must be on track with an IMF agreement. The

conditions for debt relief are thus more comprehensive than in the

1990s and also far more elaborate than those of the original HIPC

framework.

Strangely enough, in roughly the same period, broad consensus

was reached in academic circles (Collier et al., 1997; Killick, 1998)

that it was useless to draw up conditions ex ante because they were

ineffective. Governments generally implement policies only if they

had already intended to do so. The broad acceptance of the

increased ex ante conditionality for the Enhanced HIPC Initiative

can therefore be considered as inconsistent with this academic

consensus. In fact, policymakers also broadly accepted the

ineffectiveness of policy conditions. The case of the Netherlands

illustrates this.

In 1998, the Dutch Minister for Development Cooperation

embraced the Assessing Aid Report of the World Bank (World

Bank, 1998), which was another study concluding that ex ante policy

conditionality was ineffective. The report became the basis for a far-

reaching change in bilateral aid policy. From then on, Dutch

bilateral aid would be focused on those countries that had

demonstrated to be able to carry out good policies and to maintain

good governance in the past. Aid would thus become more selective.

Debt Relief from a Donor Perspective: The Case of the Netherlands

124

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 124

10

Soft loans from multilateral banks have a ten-year grace period, so debt service

payments begin after that period. In Nicaragua, for example, loans from the IFIs

were vetoed by the US between 1983 and 1990, and their volume almost annually

increased since 1990. This implies that debt service due increases almost every year

during 2000-2010.

125

Geske Dijkstra

Despite this, the Dutch government welcomed the requirement of a

PRSP and its accompanying required participatory processes as

additional ex ante condition for the Enhanced HIPC Initiative. Not

long after that, PRSPs even became the basis for Dutch bilateral

development cooperation in general.

Basically, there are three arguments against setting conditions for

debt relief to the poorest countries. A first and important reason is

that debt relief does not always provide additional resources to the

recipient countries. On top of the substitution for regular aid that

may be involved, even debt relief itself does not always free

resources as compared with the situation without debt relief. If debt

relief concerns debts that were not paid before, the country does not

receive additional money. As the IOB evaluation concludes, a large

part of relief from the Paris Club in the past concerned debt service

that would not have been paid in the absence of this relief (IOB,

2003). This may still hold for part of the Paris Club relief under the

Enhanced HIPC Initiative.

The HIPC Initiative may even lead to increased debt service

actually paid to particular creditors, for example, if because of the

comprehensiveness of the Initiative creditors must now be paid that

were not paid before, or if bilateral grants to take over debt service

to the IFIs are no longer forthcoming (and not replaced by budget

support). Debt service may also increase due to the particular

scheduling of multilateral debt service. The HIPC relief on

multilateral debts is computed as a fixed percentage of debt service

due; if debt service due increases, for example because the loan

volume from development banks increased ten years before,

10

the

debt service that must annually be paid also increases.

In all of these cases, debt relief does not free resources and the

requirement to “spend” these resources for poverty reduction

policies may imply higher government expenditure and a higher

deficit, possibly (depending on how the deficit is financed)

provoking higher in.ation, or may be at the cost of other

government expenditure. This may also occur in countries that have

expended little on the social sectors so far (Berthelemy, 2001). The

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 125

11

Double tying means that donors set conditions for the same amount of aid

money twice. For example, a donor provides foreign exchange with which the

country must purchase donor countries’ export goods. The recipient government

must sell these goods in the local market, and the donor then requires that the

proceeds in local currency be used for particular projects.

HIPC Initiative forces such countries to spend more on social

projects from their tax income, possibly at the risk of a greater

deficit or at the cost of expenditure that would have had more effect

on economic growth.

A second reason is that setting conditions for debt relief could be

termed bad donor governance since it implies the “double tying” of

aid

11

– a practice that has been condemned by donors in the context

of the Special Programme of Assistance to Africa (SPA). In the case

of debt relief, conditions are first set for the original (aid) loan,

either in the form of policy conditions but more likely in the form of

particular projects to be carried out, or of particular goods to be

purchased from the donor country. Recipient countries are then

unable to repay these loans. This points to donors and creditors

having made the wrong lending decision: their expectations may

have been too optimistic or perhaps they recommended

inappropriate destinations (projects or supplies) for the use of this

money. Instead of accepting their incorrect expectations or mistakes

and taking their losses, donors and creditors now pose new

conditions to the relief on these same loans. This is double tying of

the same aid money, and can therefore be termed bad donor

practice. Even worse, there is no guarantee that the mistakes of the

past will be avoided: are donors sure that conditions will have

beneficial effects this time.

The third argument against conditions for debt relief is that the

setting of conditions to aid in general is ineffective, as already

discussed above. Furthermore, the setting of conditions for debt

relief may even have perverse effects. Earlier research demonstrated

that two factors are responsible for the fact that setting conditions

has little effect. One is that governments are not likely to carry out

policies if they are not convinced themselves that these are the right

policies, and second is that the donors seldom impose real sanctions

on lack of performance. These two factors probably still hold for the

PRSP process.

As for the first, it has been shown that domestic political factors

are most important in determining government policies (Dollar and

Debt Relief from a Donor Perspective: The Case of the Netherlands

126

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 126

127

Geske Dijkstra

Svensson, 1998). If countries are under severe pressure to reach an

agreement with IMF and World Bank, for example because of a high

debt, conditions may be implemented but often only cosmetically or

partially, or additional measures may be taken to undo the effects of

these earlier measures, for example, by granting many exemptions to

trade liberalisation. The Enhanced HIPC Initiative required

governments to elaborate a PRSP and to do so with participation of

civil society. The idea was that countries would write and own their

own strategies. For this reason, PRSPs would only have to be

“endorsed” by staffs of the IFIs, not “approved”. In practice,

however, recipient countries did not observe any difference in

endorsement and approval. The three field studies carried out for

the IOB evaluation showed that the fact that strategies had to be

approved detracted from their degree of ownership, and also

reduced the chances for real participation (IOB, 2003). NGOs in the

three investigated countries felt that they had not been given a real

chance to in.uence the strategy, and that they had not had much

actual in.uence. In Mozambique, NGOs maintained that they were

not really interested in in.uencing the strategy because it was also in

their interest that the country would qualify for the Enhanced HIPC

Initiative as soon as possible. Without country ownership, it is also

less likely that strategies will be implemented. In two out of the

three countries examined, differences were observed between what

the government set out to do in the PRSP, and what the government

actually did (IOB, 2003).

The second cause for the ineffectiveness of policy conditions

according to earlier research is that actual sanctions are seldom

imposed. They are not applied because of the con.icting interests of

individual donors, who have an interest in continuing the aid

relationship, or they have little effect because donors do not act

collectively. The HIPC Initiative guarantees greater donor co-

ordination, but it still seems difficult to impose sanctions that are

effective. Partly owing to pressure brought to bear by international

NGOs such as Jubilee 2000 and EURODAD, it is in the interest of

the international community that many countries should be

admitted to the HIPC Initiative. In December 2000 in particular,

this led to the approval of PRSPs that did not really deserve it, or to

the admission of countries that could only stay on track with the

IMF with the aid of numerous artificial waivers. Later, in Nicaragua

for example, the full PRSP was approved due to the political

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 127

12

Donors can of course still support the poor people in these countries with bad

policies and bad governance, but they will no longer support the governments of

these countries.

interests of one or two donors, although the donor community as a

whole considered the government in power to be corrupt and not

interested in the reduction of poverty (Dijkstra and Evans, 2003).

Therefore, although in theory the setting of conditions

guarantees that countries receiving debt relief will “use” it to combat

poverty, in practice this is not certain. Furthermore, as long as debt

relief remains tied to policy conditions, it is unlikely that donors will

apply greater selectivity. Debt relief is in itself so necessary and

inevitable that even countries where corruption is rife, those with

poor policies, and those where genuine participation does not exist,

have received it or will eventually do so. Highly indebted countries

will also continue to receive more aid than others do. Because

countries are highly indebted, the cycle of debt relief, aid and new

loans will continue, also in countries with bad policies and bad

governance. Such adverse selection will only be put to an end if debt

relief is no longer tied to conditions. Donors can then start to be

really selective in the allocation of new foreign aid disbursements.

12

The IMF plays a crucial role in maintaining this adverse

selection. As a creditor, the IMF has an interest in reaching a new

agreement with these countries. A new PRGF agreement brings a

small new IMF loan, but more importantly, frees the way for debt

relief and for other and much larger multilateral and bilateral

programme aid, with which earlier IMF loans can be paid. The IMF

is therefore at the same time gatekeeper for international finance,

and beneficiary of such finance (White and Dijkstra, 2003). This

implies that there is a con.ict of interest. This con.ict maintains the

adverse selection in the aid allocation. Donors look at the IMF for

giving a stamp of approval on countries that are performing well and

thus deserve programme aid (debt relief and budget support), while

the Fund is least likely to bring this selectivity into practice. This is

another reason for proposing that the IMF no longer provides long-

term concessional finance to poor countries.

Debt Relief from a Donor Perspective: The Case of the Netherlands

128

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 128

129

Geske Dijkstra

5 Conclusions

This chapter has analysed three problematic aspects of the HIPC

Initiative: the fact that donors continue to extend large amounts of

loans, thereby perpetuating debt problems, the limited additionality

of debt relief, and the conditionality associated with the HIPC

Initiative. The first two imply that debt problems are not likely to be

solved by the Initiative, the third implies that adverse selection in

the aid allocation is likely to continue.

All of this points to a need to change international decision-

making around the HIPC Initiative and around aid in general. In

the preceding pages, some recommendations for changes have been

made. These include:

• All IDA loans should become grants;

• The IMF should no longer provide long-term finance to the

poorest countries;

• A mechanism must be created to ensure that official creditors,

just like commercial creditors, write down on bad loans;

• The writing down on bad loans should not be charged to aid

budgets;

• The debt relief on export credit debts that should long have been

written off, no longer counts as ODA – in line with the DAC

definition of ODA in the case of debt relief on bilateral aid loans;

• Debt relief to the poorest countries should be given without

policy conditions.

Given that chances for success of the HIPC Initiative are grim as

a result of the problems analysed in this chapter, we hope that

donors and creditors begin to consider these possible changes

seriously.

References

Berthelemy, Jean-Claude (2001), “HIPC Debt Relief and Policy

Reform Incentives”, Paper to UNU-WIDER Conference on

Debt Relief, Helsinki.

Birdsall, Nancy, Stijn Claessens and Ishac Diwan (2001), “Will

HIPC matter. The Debt Game and Donor Behavior in Africa”,

Paper presented at the WIDER Debt Relief Conference,

Helsinki, August.

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 129

Birdsall, Nancy and John Williamson with Brain Deese (2002),

Delivering on Debt Relief: From IMF Gold to a New Aid Architecture,

Center for Global Development/Institute for International

Economics, Washington D.C.

Collier, Paul, Patrick Guillaumont, Sylviane Guillaumont and Jan

Willem Gunning (1997), “Redesigning Conditionality”, In:

World Development, Vol. 25, No. 9, pp. 1399-1407.

Dollar, David and Jakob Svensson (1998), What Explains the Success

or Failure of Structural Adjustment Programs., Macroeconomics

and Growth Group, The World Bank, Washington D.C.

Dijkstra, Geske and Trevor Evans (2003), Results of International Debt

Relief in Nicaragua: Case Study for the IOB Evaluation of Dutch Debt

Relief, Policy and Operations Evaluation Department (IOB),

Ministry of Foreign Affairs, The Hague.

Dooley, Michael P. (1994), “A Retrospective on the Debt Crisis”,

NBER Working Paper No. 4963, Washington D.C.

Easterly, William (2002), “How Did Heavily Indebted Poor

Countries Become Heavily Indebted. Reviewing Two Decades of

Debt Relief”, In: World Development, Vol. 30, No. 10, pp. 1677-

1696.

Felgenhauer, Grant (2000), “IMF Off-Market Gold Sales: Questions

of Law and Moral Hazard”, In: Columbia Journal of Transnational

Law, Vol. 39, No. 1, pp. 221-255.

Hanlon, Joseph (2000), “How much Debt must be Cancelled.”, In:

Journal of International Development, Vol. 12, No. 6, pp. 877-901.

IMF and IDA (2002a), The Enhanced HIPC Initiative and the

Achievement of Long-Term External Debt Sustainability, IMF and

IDA, Washington D.C.

IMF and IDA (2002b), HIPC Initiative: Status of Implementation, IMF

and Worldbank, Washington D.C.

International Financial Institution Advisory Commission (2000),

Report of the International Financial Institution Advisory Commission,

Report to the US Congress, Washington D.C.

IOB (2002), Nederlands Schuldverlichtingsbeleid 1990-1999, IOB

Evaluation 291, Policy and Operations Evaluation Department,

Ministry of Foreign Affairs, The Hague.

IOB (2003), Results of International Debt Relief, with Case Studies of

Bolivia, Jamaica, Mozambique, Nicaragua, Peru, Tanzania, Uganda

and Zambia, IOB Evaluations 292, Policy and Operations

Evaluation Department, Ministry of Foreign Affairs, The Hague.

Debt Relief from a Donor Perspective: The Case of the Netherlands

130

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 130

131

Geske Dijkstra

Killick, Tony, with Ramani Gunatilaka and Ana Marr (1998), Aid

and the Political Economy of Policy Change, Routledge, London/

New York.

OED (2003), The Heavily Indebted Poor Countries (HIPC) Debt

Initiative: An OED Review (25160), Operations Evaluation

Department, Washington D.C.

Renard, Robrecht and Danny Cassimon (2000), On the Pitfalls of

Measuring Aid, University of Antwerp, Antwerp.

Sachs, Jeffrey D. (2002), “Resolving the Debt Crisis of Low-Income

Countries”, Brookings Papers on Economic Activity No. 1,

pp. 257-286.

White, Howard and Geske Dijkstra (2003), Programme Aid and

Development: Beyond Conditionality, Routledge, London.

World Bank (1998), Assessing Aid: What Works, What Doesn’t, and

Why, Oxford University Press for the World Bank, Oxford/New

York/Toronto.

From: HIPC Debt Relief - Myths and Reality

FONDAD, February 2004, www.fondad.org

41979-HIPC bw 27-04-2004 15:25 Pagina 131

HIPC Debt Relief: Myths and Reality

Edited by Jan Joost Teunissen and Age Akkerman

Will the HIPC debt relief initiative finally solve the debt problem that the Highly

Indebted Poor Countries are facing since the 1980s. Is there any guarantee that

a country’s external debt remains sustainable after the completion of the HIPC

programme.

Towards the end of the 1980s, concern about the rising debt problems of poor

African countries prompted a few international experts to advocate effective debt

relief to low-income countries. Early FONDAD publications contributed to putting

pressure on western policymakers to consider substantial debt relief for poor

countries.

In 1996, the international community introduced the Heavily Indebted Poor Countries

Initiative to provide a permanent exit from the repeated debt reschedulings of

HIPCs in the Paris Club and bring their external debts to sustainable levels. However,

in 2004 the HIPC debt problem has still not been solved.

This book presents a thorough analysis of the successes and failures of the HIPC

Initiative and provides a wide range of suggestions of what needs to be done.

Issues addressed include the question of whether debt relief should be linked to

IMF conditionality, the need for including domestic debt in assessments of debt

sustainability, the (mis)use of aid funds for debt relief and repayment of export

credits, and the bailing-out of IMF loans by donor countries.

With a view to the future of low-income countries, the book relates the HIPC

Initiative to the Millennium Development Goals and warns that debt relief can only

provide a fraction of the funds required for reducing poverty and avoiding a new

build-up of unsustainable debt.

The book spells out how genuine debt relief could contribute to poverty reduction

and economic growth in poor developing countries.

FONDAD

The Hague, The Netherlands

www.fondad.org

41979-HIPC omslag 27-04-2004 15:29 Pagina 2