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
pg_0002
HIPC Debt Relief: Myths and Reality
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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
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HIPC Debt Relief
Myths and Reality
Edited by
Jan Joost Teunissen and
Age Akkerman
FONDAD
The Hague
From: HIPC Debt Relief - Myths and Reality
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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
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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
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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
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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.
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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
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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.
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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.
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x
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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)
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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
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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.
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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.
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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.
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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.
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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
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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
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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
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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).
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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
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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).
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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
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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
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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
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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,
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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
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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
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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
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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).
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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
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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
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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
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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
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41979-HIPC bw 27-04-2004 15:25 Pagina 33
pg_0049
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
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pg_0050
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
pg_0051
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
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pg_0052
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
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pg_0053
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
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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
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41979-HIPC bw 27-04-2004 15:25 Pagina 39
pg_0055
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
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pg_0056
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
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41979-HIPC bw 27-04-2004 15:25 Pagina 41
pg_0057
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.
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From: HIPC Debt Relief - Myths and Reality
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pg_0058
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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
pg_0060
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
pg_0061
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
pg_0062
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
pg_0063
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
pg_0064
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
pg_0065
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
pg_0066
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
pg_0067
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
pg_0068
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
pg_0069
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
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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
pg_0071
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
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pg_0072
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
pg_0073
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
pg_0074
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
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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
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pg_0076
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
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pg_0077
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
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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
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pg_0079
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
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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
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pg_0081
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
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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
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pg_0083
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
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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
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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
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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.
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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
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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
pg_0089
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
pg_0090
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
pg_0091
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
pg_0092
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
pg_0093
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
pg_0094
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
pg_0095
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
pg_0096
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
pg_0097
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
pg_0098
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
pg_0099
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
pg_0100
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
pg_0101
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
pg_0102
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
pg_0103
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
pg_0104
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
pg_0105
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
pg_0106
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
pg_0107
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
pg_0108
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
pg_0109
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
pg_0110
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.