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Africa: Debt and Deception

AfricaFocus Bulletin
Nov 4, 2003 (031104)
(Reposted from sources cited below)

Editor's Note

As the U.S. Congress approves $87 billion for the U.S. occupation of Iraq, long-standing promises by rich creditors to provide debt "relief" of some $49 billion for 42 countries remain unfulfilled, and largely off the radar screen for policymakers. Yet debt remains a crippling burden not only for the 34 African countries that qualify as Heavily Indebted Poor Countries (HIPC), but also for major African powers such as Nigeria and South Africa.

Jubilee Research, one of the successor organizations to the Jubilee 2000 campaign for debt cancellation, released a report in September detailing the failure of the HIPC initiative, under the leadership of the World Bank and the IMF, to fulfill even the limited commitments made to date. This issue contains excerpts from that report.

For an earlier summary critique of the HIPC initiative, see http://www.africaaction.org/action/hipc0206.htm

Organizations currently working on debt cancellation include the Jubilee Debt Campaign, [http://www.jubileedebtcampaign.org.uk], World Development Movement [http://www.wdm.org.uk/action], Jubilee USA [http://www.jubileeusa.org], and the American Friends Service Committee's Africa Initiative
[http://www.afsc.org/africa/new-africa]. The agenda of debt cancellation is widely shared among civil society groups in Africa, in creditor countries, and around the world. It is one of the key planks in Africa Action's Africa's Right to Health Campaign [http://www.africaaction.org/action/debt.htm]

A separate issue of AfricaFocus Bulletin, also distributed today, contains the summary of a new report on Debt and Destruction in Senegal by Dembe Moussa Dembele. That report is also available on the website of the World Development Movement at: http://www.wdm.org.uk

++++++++++++++++++++end editor's note++++++++++++++++++++++++

Real Progress Report on HIPC

September 2003 .

a report by Jubilee Research at nef http://www.jubileeresearch.org

In co-operation with
CAFOD - http://www.cafod.org.uk
Christian Aid - http://www.christian-aid.org.uk
EURODAD - http://www.eurodad.org
Oxfam - http://www.oxfaminternational.org .

[excerpts only. For the full report, including charts, footnotes, and detailed tables, see http://www.jubileeresearch.org]

KEY CONCLUSIONS OF THE REAL PROGRESS REPORT ON HIPC

This report reviews the progress of the World Bank and IMF's Heavily Indebted Poor Countries (HIPC) initiative, as at September 2003.

The Real Progress Report on HIPC aims to provide policy makers, politicians, NGOs, campaigners, and debtor governments with a clear view of what the HIPC initiative has really achieved, or not achieved, in terms of restoring the HIPCs to long-term debt sustainability. Prepared by Jubilee Research at the new economics foundation, in co-operation with other NGOs, it is intended as a shadow version of the official HIPC Status of Implementation report.

We are unanimously of the view that the process of agreeing debt relief should be shifted away from the current creditor-dominated framework. In particular, we recommend that the HIPC initiative be replaced with a fair and transparent international insolvency/debt-reduction framework, overseen by an independent arbitration panel nominated by both debtor and creditors.

However, in the absence of such a framework and based on the analysis contained within the report, Jubilee Research and sister organisations CAFOD, Christian Aid, Eurodad, and Oxfam International are calling for the following reforms to the HIPC initiative:

1. Debt sustainability under the HIPC initiative should be assessed not in relation to arbitrary debt-to-export criteria, but to the resources needed by each country to meet the Millennium Development Goals (MDGs). The current debt sustainability analysis, undertaken by the World Bank and the IMF alone, should be replaced with the following procedure:

a. A detailed costing of MDG requirements, as well as other nationally determined priorities for poverty reduction, should be undertaken for each country by the national government, in cooperation with the United Nations Development Programme (UNDP), UNICEF, the WHO, and local and international civil society.

b. Based on these costings, the debtor country should calculate what would be a realistic expansion of domestic resources, without causing excessive distortions to the domestic economy or jeopardising longer growth prospects. It should also provide an indication of its other spending requirements above and beyond the MDGs. The country should also take into account other factors such as the HIV/AIDS epidemic when assessing its ability to meet the MDGs.

c. Where the debtor country cannot afford to meet both the MDGs and its debt-servicing obligations, the international community should transfer more resources to that country. Given the greater efficiency of debt relief over aid as a way of transferring resources to poor countries, we believe that debt relief should be the primary vehicle for providing such finance. In countries where the MDG funding gap cannot be filled by debt relief alone, additional grant aid should be forthcoming.

In all cases, the debtor country should be able to clearly demonstrate, with transparent and accountable mechanisms, that any additional resources received by the country, in the form of either aid or debt relief, are channelled to priority areas for meeting the MDGs. Local and international civil society, donors/creditors, and international organisations such as the UN should monitor and report on the use of these resources.

2. As well as debt relief and new aid to meet the MDGs, the international community should design a contingency financing facility to enable both HIPCs and non-HIPCs to weather economic shocks. Such a mechanism would ensure that countries can still meet the MDGs despite shocks such as falling revenues, climatic disturbances, lower commodity prices, or oil-price hikes. Such a facility would include mechanisms to ensure that countries still have an incentive to increase revenue collection or to diversify their exports away from a dependency on a narrow range of primary commodities.

3. Progress in the HIPC initiative should be de-linked from IMF Poverty Reduction and Growth Facility (PRGF) programmes. In order to reach Completion Point, countries should only have to demonstrate that they have a poverty reduction programme that will ensure resources saved from debt relief or raised in new aid are channelled to the MDGs. Progress in reaching Decision Point or Completion Point should be assessed within the framework of the annual Consultative Group (CG) meetings, with full participation from civil society. Interim relief should only be suspended if the CG agrees that funds saved in debt relief are not being spent on MDG requirements.

4. The World Bank and the IMF should ensure that they absorb their fair share of the costs of debt relief under an improved HIPC initiative. In particular, we believe that they too can provide 100 per cent debt cancellation for the HIPCs through the use of IMF Gold Sales and IBRD resources (retained earnings plus future income streams).

5. The international community should provide financial and technical assistance to the HIPCs to enable them to prevent litigation by nonparticipating creditors, particularly commercial creditors.

6. Reporting on the HIPC initiative should occur more frequently and be made more transparent. In particular, HIPC Status of Implementation Reports should provide more information as to when and why countries have gone off-track with their IMF programmes, including whether or not interim relief has been suspended and the reasons why. HIPC and all relevant Board papers must include realistic projections of the contribution that additional resources relieved from debt servicing will make towards financing the MDGs. HIPC reports should also provide more information on the affects of non-participating creditors.

INTRODUCTION

... The HIPC initiative, started in 1996, at the time represented a radical departure from previous debt relief initiatives.

Finally forced by the pressure of millions of campaigners to recognise that the burden of unpayable debt was undermining any prospect of achieving meaningful development in the world's poorest countries, rich country leaders - and the international institutions which they control - realised they had to act. They committed themselves to providing partial debt cancellation under a comprehensive initiative designed to ensure a 'lasting exit' from unsustainable debt burdens for 42 heavily indebted poor countries (HIPCs).

Since the year 2000, however, the pace of the HIPC initiative has been glacial. It appears that creditors have done their best to ensure that as few countries as possible trickle through the net of debt cancellation. Like a game of snakes and ladders, countries have climbed the ladder of 'Decision Point' where debt relief is committed only to slide back down the snake of suspended debt relief and yet more International Monetary Found (IMF) conditionalities.

Moreover, civil society organisations in both North and South have often been kept in the dark about why the HIPC initiative is failing so badly. Countries are being forced 'off-track' by IMF programmes which inevitably delays debt relief, and can also result in the suspension of interim debt service relief. However, apart from a selected few finance ministry officials in debtor countries, and, of course, IMF staff, no one quite knows why. Official World Bank and IMF documents on HIPCs the now once yearly Status of Implementation Reports state only that countries have been delayed 'because they have been delayed'. [2] Yet these are the self same organisations that insist on transparency and 'good governance' in the countries to which they lend.

Furthermore, for an initiative designed to address debt sustainability, the official HIPC updates tell us precious little about whether debts are truly being left at sustainable levels, even in the countries in which the HIPC initiative has supposedly worked. In our view, the real meaning of a sustainable level of debt and the debt service that results can only be a level that allows countries to meet their human development obligations. When US municipalities go bankrupt and can no longer pay their debts, they do not have to abandon the basic services which are essential to the health and well-being of their population. Similarly, if a country becomes insolvent as the HIPCs have effectively done they should not be forced to cut spending on the water, sanitation, health services, and education, which are the basic human rights of their people. Given G7 commitments to the human rights embedded in the Millennium Development Goals, the blocking of these vital services becomes doubly unjust and hypocritical. In short, when we assess debt sustainability, we cannot just look at exports, or even government revenues. A new form of 'debt sustainability analysis' is needed. ,,,

DEBT RELIEF TO DATE

According to the original HIPC schedule, by this point 21 countries should have fully passed through the HIPC initiative and received total debt cancellation of approximately $34.7 billion in net present value terms.

In fact, only eight countries have passed Completion Point, between them receiving debt cancellation of $11.8 billion (see Table 1), plus a further $0.26 billion that Guyana received under the original HIPC initiative. ...

Other countries that have not reached Completion Point have also benefited from some 'traditional' debt cancellation from the Paris Club, totalling $14 billion.

In total, 19 countries are between Decision Point and Completion Point under the HIPC initiative and are therefore receiving some reduction in their debt service. If and when these countries reach Completion Point, they will receive a further $17.1 billion in HIPC relief and approximately $5.1 billion in additional bilateral debt cancellation. ...

Therefore, we can say that

  • A total of $26.13 billion, in net present value terms, or roughly 19 per cent of total debt stocks before relief, has been cancelled.
  • A further $22.7 billion of debt relief has been committed, but not yet delivered, to the 19 countries between Decision Point and Completion Point, and to Cote d'Ivoire (which has reached Decision Point under the original HIPC initiative only).
  • If and when all the relief committed has been delivered, debt stocks will fall to $90.6 billion, or approximately two thirds of their level before relief. However, to this total must be added new debt that countries will be taking on after receiving debt relief. Unfortunately, we do not yet have up-to-date estimates of new borrowing by the HIPCs, in net present value terms.

[At Decision Point, creditors commit to cancelling debt and some debt-service relief is provided. Completion Point is the final stage of the HIPC initiative where debts are irrevocably cancelled.

HIPC Completion Point Countries are Benin, Bolivia, Burkina Faso, Mali, Mauritania, Mozambique, Tanzania, and Uganda.

HIPC Decision Point Countries are Cameroon, Chad, D R of Congo, Ethiopia, The Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Madagascar, Malawi, Nicaragua, Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, and Zambia.

HIPC Countries likely to reach Decision Point are Burundi, Central African Republic, Cote d'Ivoire, Comoros, Rep. of Congo, Myanmar, and Togo.

Remaining HIPC countries are Angola, Kenya, Laos, Liberia, Somalia, Sudan, Vietnam, and Yemen]

IMPLEMENTATION OF THE HIPC INITIATIVE

Implementation of the HIPC initiative has been agonisingly slow with only two countries reaching Completion Point and one reaching Decision Point since April 2002.

As Appendix 1 shows, for most countries delays have not been caused by failure to prepare Poverty Reduction Strategy Papers (PRSPs), which show how a country will use the money saved from debt relief to reduce poverty. Rather, countries have been delayed in getting through the HIPC initiative because of failure to stay 'on-track' with strict IMF programmes, and in particular, failure to meet IMF 'structural adjustment' style conditionalities. Going 'off-track' with IMF programmes not only delays countries from reaching Completion Point and results in the suspension of interim debt service relief from the IMF. It can also mean total suspension of promised interim relief from the Paris Club the informal group of bilateral creditors, which includes most of the rich industrialised nations. ...

The main forms of IMF conditionality that have affected the HIPCs have been the following:

  • Fiscal criteria. Most IMF programmes include very low forecasts for budget deficits, even though there is little evidence to suggest that higher budget deficits, particularly when funded by grants, are damaging. The IMF is concerned that increasing the budget deficit will serve to increase inflation, despite the fact that that many economists argue that inflation rates of up to 10 per cent do not pose a threat to macroeconomic stability.
  • Privatisation. Many new IMF programmes have conditionalities that were 'left over' from previous IMF structural adjustment programmes and are thus incorporated into new programmes. UK campaigning organisation World Development Movement has shown that of the 26 countries which had (at the time of research) already passed Decision Point, 15 had specific mentions of future planned privatisations in public utilities or basic services such as energy, telecommunications, water, or transport. For example, Zambia is required to privatise the Zambia National Commercial Bank (ZNCB), and its electricity and telecommunications companies. In February 2003, Zambian President Levy Mwanawasa told the IMF that he wanted to rethink the country's privatisation programme on the grounds that 'there has been no significant benefit to the country' and that 'privatisation of crucial state enterprises had led to poverty, asset stripping, and job losses.'

However, despite these concerns, the IMF representative in Zambia is reported to have threatened the withdrawal of US$1 billion of debt relief under the HIPC initiative if the government did not privatise the national bank. The most recent reports suggest that the Zambian government is now going to privatise ZNCB.

As with other areas of the HIPC initiative, there is a lack of transparency in terms of the reasons for suspension or re-starting of IMF programmes. Decisions on whether or not to suspend IMF programmes which can have far-reaching impacts on the government budget, through jeopardising new aid, which is generally linked to IMF programmes, as well as debt relief are generally taken by IMF staff only, behind closed doors. Local civil society organisations, parliaments, and even other donors are seldom involved.

CONCLUSIONS

In summary, our report has shown that the HIPC initiative is severely behind schedule with only eight countries having received a stock-of-debt reduction to date compared with a projected 21 by this point in time. In addition, the report shows that:

  • The principle of 'burden sharing' is being violated, with the IMF and the World Bank in particular, failing to take their full share of HIPC relief.
  • Creditor litigation against the HIPCs remains a serious issue, and moral suasion alone will not be enough to deal with the problem.
  • Countries are being delayed in the HIPC initiative by conditionalities that are not relevant to debt relief, including overly stringent fiscal criteria and the requirement to privatise large swathes of the economy under IMF Poverty Reduction and Growth Facility (PRGF) programmes.
  • The global economic outlook, falling commodity prices, and the HIV/AIDS epidemic look set to put severe strain on the HIPCs over the next few years.
  • Debt sustainability should be defined according to whether or not countries will be left with sufficient resources to meet the Millennium Development Goals after debt relief; and according to this criteria, the HIPC initiative is failing to restore the majority of countries to debt sustainability.

Why is the HIPC initiative doing so badly? Why are there so many weaknesses? The answer is that the HIPC initiative, like all current frameworks for providing debt relief, is unjustly dominated by creditors. Creditors make loans, often very bad loans; set conditions and interest rates; insist that the loans are repaid in the creditor's, and not the debtors currency; determine whether to reschedule or not; and undertake debt-sustainability analyses using their own criteria and their own methodology. Under this framework, creditors effectively act as witness, plaintiff, policeman, judge, and jury in their own court. This is a deeply unjust process, in which the debtor is perceived as a 'sinner' who has to have debts 'forgiven', while the creditor is perceived, on the whole, as blameless, and capable of 'forgiving'.

Jubilee Research, along with CAFOD and many sister organisations in both North and South, believes that the HIPC initiative cannot be reformed unless the current creditor dominated framework is radically reformed. In particular, we believe that an international insolvency framework based on Chapter 9 of the US Legal Code should replace the HIPC initiative. This new framework would be transparent, independent, and accountable to global taxpayers, North and South. Under such a framework, an arbitration panel consisting of nominees from both the debtor and the creditor would determine debt relief. Only by applying justice and reason to the resolution of debt crises, do we believe that debts could be made truly 'sustainable'.


AfricaFocus Bulletin is a free independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

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