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Africa: Unions Call for Debt Cancellation

AfricaFocus Bulletin
Apr 12, 2005 (050412)
(Reposted from sources cited below)

Editor's Note

"In spite of positive rhetoric ... concrete actions [on new debt relief] have been delayed from meeting to meeting, in part because of disagreements between donor countries on the specific elements of an expanded debt relief initiative." In a new statement released in March, global unions joined other campaigners for debt cancellation in calling on international financial institutions to stop delaying and act for full debt cancellation for developing countries fighting poverty. But the prospects for action at this week's meeting of the World Bank and IMF remain uncertain.

In the World Bank's Global Monitoring Report released today, debt relief does not even figure on the five-point agenda presented to accelerate progress on achieving the Millennium Development goals ("country-owned" strategies, more private investment, more human services delivery, more open trade, and more aid). See

This AfricaFocus Bulletin contains the statement from a coalition of global unions representing more than 145 million members in 154 countries. The statement not only calls for debt cancellation, but contains specific critiques of conditions imposed by international financial institutions. Also included below is the section on debt relief from the World Bank's Global Monitoring Report 2005, released on April 12.

The statement from global unions is in accord with the prevailing consensus among African governments, civil society, debt campaigners, and development analysts, calling for urgent action for more debt cancellation. If the Bank's latest report is taken as an indicator, however, neither the international financial institutions nor the donor countries have yet absorbed the message. In these circles, the assumption still seems to prevail that only minor incremental adjustments in debt relief are required.

For a recent restatement of the critique of HIPC and call for full debt cancellation, see the article by Demba Moussa Dembele, "G7 leaders and the debt trip to nowhere, " in the March 10 issue of Pambazuka News (

For additional background on debt and the campaign for debt cancellation, see

For news on debt relief in Zambia, which recently became the latest to gain approval of a package under the creditors' Heavily Indebted Poor Countries (HIPC) program, see and

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

Statement by Global Unions to the 2005 Spring Meetings of the IMF and World Bank (Washington, 16-17 April 2005)

Global Unions International Confederation of Free Trade Unions (ICFTU)
Global Union Federations (GUFS)
Trade Union Advisory Committee to the OECD (TUAC)

March 15, 2005

The ICFTU represents unions in 154 countries with a total of 145 million members. The ICFTU works closely with the Global Union Federations (GUFs), representing workers in different sectors, and with the TUAC. All the above organizations are on the Global Unions web site:

Advancing the Global Call to Action Against Poverty

Statement by Global Unions to the 2005 Spring Meetings of the IMF and World Bank (Washington, 16-17 April 2005)


1. During the World Social Forum in Porto Alegre (26-31 January 2005), the ICFTU and other member organizations of Global Unions joined with a wide-ranging alliance of groups to launch the Global Call to Action Against Poverty Information on the Global Call for Action Against Poverty can be found on GCAP's web site: The alliance is pledged to mobilize support in favour of trade justice, debt cancellation, more and better aid, and concerted efforts to reach the Millennium Development Goals (MDGs). The Washington-based international financial institutions (IFIs) have assumed major responsibilities in designing partial debt relief initiatives, in channelling development aid, and in creating national development plans whose professed aims are to achieve the MDGs. That these efforts will not be sufficient to reach the development goals has been demonstrated by the World Bank's first Global Monitoring Report on the MDGs, which concluded that, based on current trends, most MDGs will not be met by most developing countries by the 2015 target date. Global Unions urge the International Monetary Fund (IMF) and World Bank to adopt the measures put forward in this statement in order that their actions consistently contribute to the eradication of poverty and the attainment of the MDGs, as advocated by the Global Call to Action Against Poverty.

New initiatives for debt cancellation and improved development assistance

2. Global Unions and their affiliates have been advocating more generous debt relief and its expansion to a greater number of countries for many years. Affiliated trade union organizations in some low-income indebted countries have witnessed the beneficial impact of partial debt relief received through the Heavily Indebted Poor Countries (HIPC) programme and have joined other organizations in calling for full debt cancellation so that governments can further expand public services that are essential to attaining the MDGs. Global Unions' affiliates in industrialized countries have lobbied their governments to support full debt cancellation and to allocate the public funds necessary to finance additional resources for low-income countries, including for debt relief. The IFIs' own HIPC progress reports, which have shown that debt levels have remained unsustainable even for countries having received full HIPC assistance, have amply demonstrated the need for expanded debt relief. However the trade union movement has been disappointed that, in spite of positive rhetoric at the last several IFI biannual meetings, concrete actions have been delayed from meeting to meeting, in part because of disagreements between donor countries on the specific elements of an expanded debt relief initiative.

3. Recent statements by the G7 countries expressing support in principle for up to 100 per cent debt cancellation have been encouraging. However Global Unions believe that the new initiative must not be limited by the constraints of the HIPC programme, which severely restrict the number of countries considered eligible for debt relief. For example, despite being the poorest country in the western hemisphere, Haiti has been excluded from consideration for debt relief because its level of indebtedness has not met HIPC parameters. As a result, the almost bankrupt Haitian administration was forced to make a payment to the World Bank of $52.6 million in January 2005 in order to become eligible for a new Bank lending programme.

4. Global Unions believe that an important new debt cancellation initiative must be adopted in 2005. This can be financed by a re-evaluation of IMF gold stocks, some transfer of resources from the IBRD (the Bank's non-concessionary lending arm), and additional contributions from industrialized-country development budgets. Global Unions' affiliates in industrialized countries have campaigned jointly with other organizations in favour of increased development aid. These campaigns have already had positive results in some countries. However trade unions will continue their campaigns as long as the 0.7 percent official development assistance target is not reached. Debt relief should be extended to all low-income countries respecting human rights that have a shortfall of resources to meet the MDGs. It should consist of 100 per cent cancellation of debt owed to the IFIs, not be dependent on structural adjustment conditionality, and not reduce concessionary assistance from the IFIs or other international assistance. Global Unions furthermore support new mechanisms to increase financial flows to developing countries, such as those included in the joint Brazilian-French-Chilean-Spanish initiative, and also endorse the British proposal for an International Finance Facility (IFF). In the medium term, new forms of international taxation should be implemented to avoid a shortfall in aid as IFF loans become repayable.

5. As regards another category of highly indebted country middle-income developing countries whose debt is owed principally to private creditors the prolonged crisis concerning Argentina's economic collapse, default, and arduous debt restructuring negotiation constitute ample proof that another way must be found to restructure unsustainable debts. Global Unions welcomed the IMF's initiatives at the beginning of the decade to create a Sovereign Debt Restructuring Mechanism, though we were critical of various aspects of the proposal, some of which concerned the Fund's own role in applying the mechanism. The manner in which the IMF intervened on numerous occasions in Argentina's recent debt restructuring procedures by attempting to pressure the government to increase its offer to private creditors, even though a strong majority of the latter ultimately accepted the terms proposed by the government, raises the question of whether the Fund can realistically be counted on to act as a neutral broker, let alone in the interests of the indebted country.

6. Argentina's difficulties with the IMF have not yet come to an end, since the Fund must still approve conditions for extending payments of monies owed to it. Argentina is understandably reluctant to allow the Fund to impose yet another structural reform programme in spite of the Fund's claims that such a programme is necessary for Argentina to achieve a sustained growth path. The last time that Argentina attempted to abide by an IMF structural reform programme, the country's GDP shrunk by 21 per cent (between 1998 and 2002 in real terms, according to IMF data). Global Unions reiterate their support for a fair and transparent debt restructuring mechanism, so as to facilitate the restructuring of unsustainable debts owed largely to private creditors, and to prevent or control the spread of international financial crises. In addition, the IMF should adopt a less restrictive form of contingent credit facility, support closer coordination of major currencies, and encourage the adoption of measures such as capital controls and the Tobin tax to limit speculative capital movements.

An end to privatization and structural reform conditionality

7. In a report published last year on Reforming Insfrastructure, the World Bank spoke of the IFIs' previously exaggerated enthusiasm for privatization as a solution for various problems and characterized their pro-privatization stance as "irrational exuberance". Constructive self-criticism is a positive trait, on condition that it leads to correction of the identified misconduct, which in this case was an unjustified bias in favour of privatization and against public sector solutions. Unfortunately, various IMF and World Bank policy documents, both on the international and country level, still show a strong bias against public provision. One example of this is to be found in the approach called "Output-Based Aid", which the Bank has developed to promote the effective use of public funds for delivery of infrastructure services. While there is no reason given why public services delivered by public providers could not be evaluated on the basis of the outputs actually delivered, Bank publications specify that the government must "delegate service delivery to a third party under contract". Consistent with this approach, several recent World Bank Country Assistance Strategies (CAS) have stated that loans will require contracting public infrastructure services out to private sector firms. The April 2004 CAS for Costa Rica, for example, stipulates that World Bank financial support requires that water and sanitation services must be "transferred to specialized private operators" while "greater private sector involvement" will also be demanded in order to obtain loans for other services.

8. In the case of the IMF, a number of recent Article IV Consultation and other surveillance reports, such as those for Algeria and Nigeria (both February 2005) recommend an accelerated pace of privatization, even while recognizing the social costs. A January 2005 IMF/WB Joint Staff Assessment of Kenya's Poverty Reduction Strategy Paper (PRSP) berates the Kenyan government for not giving more emphasis to privatization in the country's PRSP implementation report. Other IMF reports have reminded governments of privatization conditionality, such as Nicaragua's obligation to introduce a partially privatized pension system in order to benefit from full HIPC benefits. The IMF's November 2004 PRGF Review for Nicaragua states that "the public sector deficit was expected to widen by 1.2 per cent of GDP a year as a result of the start of private pension funds (because of lower contributions)", but the Fund sees no reason against proceeding even if the increased deficit could be used as a pretext to reduce other government services. The latest World Bank CAS for Serbia and Montenegro (November 2004) advises the government that it must take measures to reform its pension system "with a view to introducing second and third [privatized] pillars". Such a prescription is surprising in view of the Bank's latest enunciation of its pension reform policy, Old-Age Income Support in the 21st Century: An International Perspective on Pension Systems and Reform, February 2005. This policy document claims that the Bank has adopted a more flexible approach on pension reform and no longer imposes its classic three-pillar privatization model, which has had many negative impacts on workers and retirees, on women in particular.

9. A recent British government policy document, Rethinking Conditionality (DFID, March 2005), notes that IFI and other donor conditionality on issues such as privatization and trade liberalization have frequently had negative social impacts; have been forced on developing countries "regardless of whether these were in the countries' best interests"; and have prevented poor countries from incorporating lessons from successful development models, notably in East Asia. The British policy paper states that suspension of assistance, which is sometimes carried out by the IMF for misdemeanours as slight as temporarily going "off target" from budget expenditure guidelines, should only occur in three circumstances: violation of human rights, corruption, and diversion of aid to unintended purposes such as military expenditures. Global Unions endorse the call for a substantial reduction of conditions placed on loans and grants, and in particular the elimination of structural conditionality that imposes measures of doubtful benefit to receiving countries, such as service privatization and trade and investment liberalization. Global Unions will continue to argue for a strong public sector, particularly in vital services areas, and to defend the interests of workers adversely affected by privatization. The World Bank and IMF should carry through on their commitments to give the same attention to funding of improvement and modernization of services under public control as under private control, and to undertake proper consultation of workers affected by privatization and restructuring.

Need to correct IFIs' push for labour law deregulation

10. Even though a specialized intergovernmental body, the International Labour Organization, exists to establish international labour standards and provide expert advice to countries on labour issues, a growing number of IFI country-level reports include recommendations on labour markets questions. A recent examination of Article IV Consultation reports produced by the Fund over a four-month period (November 2004-February 2005) found that 80 per cent of them included recommendations on labour issues. These ranged from comments on the need to reduce labour market "rigidities" in Mexico and Pakistan, to increase labour market "flexibility" in Korea, and to reform the collective bargaining system in Spain. In the case of Germany, close to one third of the November 2004 Article IV report deals with the Fund's recommendations for instituting further reforms in the legal framework for collective bargaining, facilitating dismissal of workers, and making "deeper cuts" to pensions and health care. Ironically, other sections of the Fund's report for Germany note that the benefit cuts already made, combined with stagnant wages, have undermined consumer confidence and are the principal explanation for a sluggish economy and increasing unemployment.

11. Most World Bank CAS, as well as other country-level reports, also advise governments to attack identified problems of labour market "rigidities" or "inflexibility". Some recent examples are the CAS for Bosnia (August 2004) and India (September 2004) and the PRSP Joint Staff Assessment for Kenya (January 2005). The CAS for these countries and several others announce ongoing World Bank research for formulating changes to the countries' labour legislation. While trade unions are frequently engaged in national dialogues in view of modernizing national labour legislation, they have been very critical of the fact that the Bank's main input to national labour reforms has been based on the simplistic premise that any kind of labour regulation, other than those strictly limited to the core labour standards, is inherently bad for development and should be removed. In September 2004 the Bank made public country-by-country Labour Market Flexibility Indexes, calculated on the basis of indicators such as maximum hours rules, minimum wages, and protections against dismissal. Through the Doing Business publication and specific country reports, the Bank invites governments to make their countries more "investment friendly" by dismantling the above standards, as well as numerous other forms of worker protection.

12. Confronted by the impact of globalization and economic restructuring on national labour markets, trade unions have lobbied governments to put in place or expand social protection measures so as to better protect workers and their families in case of job loss or other eventualities that could lead to sudden reduction of income, and to ensure that women workers have a full opportunity to benefit from employment. While the Bank has agreed in principle with these proposals, on a country level the Bank frequently discourages such initiatives or even works to undermine those social protection programmes that exist. For example, in Bulgaria a country which is scheduled to join the European Union in 2007 the World Bank country team informed an international trade union delegation that the Bank was encouraging the government to cut back unemployment benefits because the programme allowed for "leakage to the non-poor". The Bank thus ignored the fact that, by definition, unemployment benefits are an income-maintenance rather than a strictly targeted anti-poverty programme, and that they have an important role to play in well-functioning labour markets as workers move from one job to the next. Similar attacks on income maintenance schemes intended to protect dismissed workers are underway in other countries under the guise of "targeting the most needy". In Kenya, the IMF/WB Joint Staff Assessment of the PRSP discourages the government from going forward with a compulsory national health insurance scheme.

13. Global Unions believe that the IMF and World Bank should encourage and assist countries to develop and maintain comprehensive social protection programmes. These should include old-age pensions, unemployment benefits, child support, maternity, and sickness and injury benefits. Furthermore, the IMF and World Bank must support labour market policies that underline the importance of decent work, that is, policies for maximizing employment creation within a framework of properly implemented labour laws that recognize workers' rights to earn an adequate income, work in safe conditions, combat discrimination, and be protected from abuse, with full application of the ILO's core labour standards. Trade unions need to be fully consulted on proposed amendments to labour legislation.

Measures to make IFI operations consistent with core labour standards

14. On the theme of the core labour standards Core labour standards are internationally-agreed fundamental human rights for all workers, irrespective of countries' level of development, that are defined by the ILO conventions that cover freedom of association and the right to collective bargaining (ILO Conventions 87 and 98); the elimination of discrimination in respect of employment and occupation (ILO Conventions 100 and 111); the elimination of all forms of forced or compulsory labour (ILO Conventions 29 and 105); and the effective abolition of child labour, including its worst forms (ILO Conventions 138 and 182). (CLS), trade unions have welcomed the World Bank's recognition of their positive development impact and the agreement to promote them when the Bank deals with labour issues. Global Unions have encouraged the Bank to go beyond rhetorical support and to ensure that the Bank's own operations are consistent with the standards. An important step was taken by IFC management in 2004 in their proposal to include the principles of the CLS as "performance requirements" for all IFC loans. These new safeguard standards are currently under consultation. Global Unions have recommended that the standards make direct reference to the relevant ILO conventions and also include clearer mechanisms for implementation and enforcement. Global Unions will make further representations to the IFC on these matters.

15. The other divisions of the World Bank group, as well as the IMF, should also take measures to ensure that, at the very least, the projects and programmes that they fund do not violate CLS. Global Unions have called to the attention of the Bank instances of violation of CLS in Bank-funded infrastructure projects, and in March 2004 the International Federation of Building and Woodworkers submitted detailed proposals for including labour standards in the Bank's procurement contracts. One year later, the Bank has yet to respond to these proposals. The report of the World Commission on the Social Dimension of Globalization emphasized that all IFI policies must support, and must not undermine, compliance with CLS. Global Unions support the requirement to include all four core labour standards in IFC loans as a standard safeguard. CLS should also be included as obligatory clauses in the standard bidding document for World Bank procurement as well as in other Bank loan agreements, and the Bank must make certain that its projects and operations provide safe working conditions and decent wages. Likewise the IMF, which frequently dispenses advice on labour-related issues, must ensure that its policy recommendations are consistent with CLS and other ILO conventions that the country has ratified.

Genuine country ownership of Poverty Reduction Strategy Papers

16. Since the Poverty Reduction Strategy Papers (PRSP) approach was introduced in 1999, trade unions in the PRSP countries have worked to overcome many obstacles to their participation, including instances in early PRSPs of unions being excluded from consultations. Following campaigns by Global Unions and national affiliates, an increasing number of unions have been invited to participate, as documented in the World Bank's Trade Union Participation in the PRSP Process (August 2004). However, with a small number of exceptions, positions put forward by unions are not reflected in finalized PRSPs, most notably recommendations with regards to employment creation and labour conditions, despite the obvious importance of these issues for poverty reduction. In addition, proposals of unions and many other civil society organizations on macroeconomic and structural policy choices are frequently ignored in the final PRSP, something that was confirmed last year in assessments prepared by the World Bank's OED and the IMF's IEO, and also in a joint IMF/WB Concept Note: 2005 PRS Review (February 2005).

17. Meetings have been planned in April 2005 between the IFIs and trade unions and other civil society organizations in the framework of the review of the PRSP process that is currently underway. Unions will highlight the fact that, when given the opportunity to do so, they will take part in national PRSP processes to the extent that their participation has an impact. In countries where trade union proposals on employment, labour and structural policies have been completely ignored or superseded by IFI loan conditions, unions question the usefulness of continuing to take part in the process. Genuine country ownership means that countries are allowed to develop policy option in PRSPs that incorporate broadly shared national priorities, which can be expressed through civil society and also through national parliaments. Parliaments must be given an opportunity to debate on and adopt the PRSP. The IMF and World Bank must encourage borrowing countries to develop policy options in PRSPs that truly reflect national priorities to reduce poverty, rather than standard IFI prescriptions to prioritize market-oriented economic liberalization. A requirement for civil society recommendations to be taken up seriously needs to become a part of the IFIs' approach to attaining the MDGs in countries implementing PRSPs.

Democratization of development strategies and IFI governance structures

18. The IFIs have given much emphasis in recent years to the importance of country ownership over policy choices, whether through the PRSP process or other instruments. As the IFIs have stated to be one of the aims of the PRSP process, this should entail taking the policy choices out of the exclusive hands of the finance ministry or the executive, and allowing the government as a whole and national parliaments to have their say. Unfortunately, the Bank and Fund frequently do not live up to the "country ownership" rhetoric when it comes to formulating lending agreements. For example, beginning in 2002 the IMF has pressured Zambia's executive to renege both on the country's PRSP and decisions of the national parliament by including specific privatization conditions in PRGF loans, even after the PRSP and parliament had rejected these measures. The World Bank's latest CAS for Costa Rica (April 2004) contains the surprising stipulation that "conditions agreed with the Executive related to key reforms should be strictly under the control of the Executive and not dependent upon Congress approval". Rather than objecting to parliamentary control over national development strategies, the IFIs should, in the spirit of true country ownership, encourage countries to make development plans and lending agreements with the IFIs subject to parliamentary approval.

19. The issue of democratic control over development decisions is also frequently raised with regards to the IFIs' own outdated governance structures, where developing countries are severely under-represented. Recently, the ICFTU joined with a number of other civil society organizations to object to the most visible demonstration of the democratic deficits at the IFIs, namely the selection process for the top positions in the IMF and World Bank. The non-transparent manner in which the managing director of the IMF and president of the World Bank are chosen, and the unwritten convention which reserves the decision to one country or a specific group of countries, are in flagrant contradiction with the IFIs' demands on borrowing country governments that they operate in a transparent and accountable fashion. Global Unions call on the IMF and World Bank to establish transparent and accountable processes for the selection of the heads of the institutions, and move forward on proposals to improve the representation of developing countries on the executive boards of the IFIs.


20. Trade unions have committed themselves to the achievement of the Millennium Development Goals and to the Global Call to Action Against Poverty in order to mobilize support, jointly with other organizations, in specific areas that are vitally important to poverty reduction. The IMF and World Bank have key roles to play in launching an expanded debt cancellation initiative in 2005, which will be one of the major instruments for making substantial progress in poverty reduction in heavily indebted countries, as well as other measures to increase financial flows to low-income countries. The IFIs should take steps to eliminate highly constraining structural adjustment conditionality, to permit genuine country ownership of national development strategies, to make their operations consistent with core labour standards, and to democratize their governance structures. In addition, the IFIs should ensure a greater degree of consistency with other international organizations by implementing the recommendations of the World Commission on the Social Dimension of Globalization in its call for increased coherence between the IMF, World Bank, WTO, ILO and other relevant UN bodies, including through policy coherence initiatives.

World Bank
Global Monitoring Report 2005

[pages 180-184]

Debt Relief

Most debt relief to low-income countries has occurred under the aegis of the HIPC initiative, including the enhanced version of the initiative introduced in 1999. But donor assistance for debt relief involves more than one-time reductions in developing countries' debt levels it also requires ensuring that countries have the capacity and ability to ensure that debt remains at sustainable levels. In addition, recent proposals have suggested that donors introduce new approaches and programs to ease debt.

Progress on the HIPC Initiative

For heavily indebted poor countries, debt relief is crucial to create the fiscal space for much needed increases in spending to promote growth and reduce poverty. Overall, substantial progress has been made in implementing the enhanced HIPC initiative. By March 2005, 27 HIPCs more than two-thirds of the 38 countries that potentially qualify for assistance under the initiative, and accounting for about two-thirds of total expected debt relief in net present value terms had reached their decision points and were receiving relief. Of these, 15 had also reached their completion points when creditors provide the full amount of debt relief committed at the decision points on an irrevocable basis.

Progress on reaching completion points increased in 2004, and three more countries are expected to reach their completion points by mid-2005. For many of the 12 countries in the interim stage between decision and completion points, maintaining macroeconomic stability remains a challenge. Although a number of countries are on track with respect to their macroeconomic programs, others that have experienced difficulties in program implementation are pursuing the policy measures needed to bring their economic programs back on track.67 Most of the countries in the interim stage have finalized their PRSs and are making good progress in implementing them.

Of the 11 countries that have not reached their decision points, 2 are making significant progress and are expected to reach their decision points in 2005. For the others, significant challenges remain: These countries have been affected by domestic conflicts and have protracted arrears to various creditors, which has complicated the design and implementation of reform programs.

The sunset clause of the HIPC initiative has been extended by two years to the end of 2006, with its application ring-fenced to poor countries with unsustainable external debt based on end-2004 data. All IDA-only and Poverty Reduction and Growth Facility (PRGF)-eligible countries that have not benefited from HIPC debt relief and whose external indebtedness (based on end-2004 data) exceeds the enhanced initiative's thresholds after the assumed full application of traditional debt relief are potentially eligible for the initiative. World Bank and IMF staff are preparing a preliminary list of countries that meet this criterion for consideration by the institutions' boards in August 2005. As now, countries would receive debt relief based on the level of debt at the time of reaching the decision point.

HIPC relief is projected to substantially lower debt stocks and debt service ratios for most HIPCs that have reached their decision points. Net present values of debt stocks in the 27 HIPCs that reached their decision points by mid-March 2005 are projected to decline by about two-thirds once they reach their completion points. HIPCs in the interim period have benefited from debt relief from the Paris Club as well as from several multilateral creditors. Ratios of debt service to exports and to fiscal revenues for the 27 countries that have reached their decision or completion points are estimated to have fallen from an average of 16 percent and 24 percent in 1998 9 to 7 percent and 12 percent in 2004, respectively (table 5.4). The near-term debt service ratios of these countries are below the average for non-HIPC low-income countries.

Debt relief under the HIPC initiative has helped countries increase poverty-reducing spending. In the 27 countries that have reached the decision point, such spending rose from an average of 6.4 percent of GDP in 1999 to 7.9 percent in 2004 about four times the amount spent on debt service.68 In absolute terms, poverty-reducing spending is estimated to have increased from nearly $6.0 billion in 1999 to $10.5 billion in 2004, and is projected to increase to $14.5 billion in 2007 (see table 5.4).

Although creditor participation has improved, some non Paris Club bilateral and commercial creditors have not committed to providing HIPC relief. Most of the costs attributable to bilateral creditors continue to be borne by members of the Paris Club. Commercial creditors represent less than 5 percent of the net present value cost of relief, in part because of measures by the Debt Reduction Facility for IDA-only countries that have reduced the stock of commercial debt in HIPCs. Moral suasion remains the principal measure for encouraging participation and discouraging litigation by remaining commercial creditors. With respect to multilateral debt, 23 of the 31 multilateral creditors have indicated their intent to participate in the initiative, representing more than 99 percent of the total debt relief required.

A key premise of the HIPC initiative is that debt relief should be additional to other forms of external financing assistance. An important issue is whether countries receiving HIPC debt relief are receiving additional resources, or whether debt relief crowds out other aid flows. Merely observing the size of flows does not provide conclusive evidence of additionality, as there is no way of knowing how much aid countries would have received without the HIPC initiative. There are also substantial difficulties in measurement because different donors account for debt relief in different ways. Debt relief is sometimes explicit, such as through grants for debt relief, and sometimes implicit, such as through debt service reductions.

The August 2004 HIPC status report, based on updates of debt stock and debt service indicators in post completion point countries, found that the net present value of debt ratios had climbed since the completion points.69 Most of the increase was due to interest and exchange rate changes, while high exports had significantly lowered debt ratios. Debt service ratios for these countries had also increased but remained close to 10 percent on average. While the low level was due to HIPC debt relief and the high concessionality of new debt, the average change masked important differences between countries. Medium-term projections generally pointed to stable or declining trends in debt and debt service ratios. The review indicated that notwithstanding HIPCs' high vulnerability to shocks, sound economic policies and close monitoring using the proposed debt sustainability framework for low-income countries (see below) would help prevent the reemergence of unsustainable debt.

Debt Sustainability

Continued measures are needed by HIPCs and by creditors to ensure that debt sustainability is maintained after completion points, just as similar measures are needed for other lowincome countries. The Boards of the IMF and World Bank have endorsed key elements of a proposed debt sustainability framework for low-income countries aimed at supporting these countries' efforts to achieve the MDGs without creating future debt problems and keeping countries that have received debt relief under the HIPC initiative on a sustainable track. In guiding future financing decisions, the framework rests on three pillars:

  • An assessment of debt sustainability guided by indicative country-specific debt burden thresholds related to the quality of their policies and institutions.
  • A standardized, forward-looking analysis of debt and debt-service dynamics under a baseline scenario and in the face of plausible shocks.
  • An appropriate borrowing (and lending) strategy that contains the risk of debt distress.

Building on initial Board discussions of the proposed framework in early 2004, and further considerations in September 2004, Bank and IMF staff are preparing a follow-up paper that attempts to resolve outstanding issues on the indicative debt burden thresholds, the interaction of the framework with the HIPC initiative, and the modalities for Bank-IMF collaboration in deriving common assessments of debt sustainability. It needs to be stressed, however, that debt sustainability is not only a resource flow issue. It also depends on increasing growth, diversifying exports, expanding access to global markets, and mitigating the effects of exogenous shocks.

IDA financial support to poor countries will now take systematic account of their vulnerability to debt. Debt sustainability will be the primary determinant of the grant and credit mix in IDA14, and the joint debt sustainability framework for low- income countries will form the analytical basis to link debt sustainability and grant eligibility.71 Countries facing the toughest debt problems most of them in Sub-Saharan Africa will get all their support in the form of grants, while countries less burdened by debt will receive IDA's highly concessional long-term loans, or in a few cases a mix of grants and loans. The resulting share of grants in IDA support over the next three years is expected to be about 30 percent.

Proposals for Additional Debt Relief

Some G-7 members have proposed mechanisms for additional debt relief (box 5.7). Further debt relief holds the promise of yielding additional development financing beyond what could be forthcoming in the form of additional gross flows, given the broad political support for debt relief. It could also reduce the remaining debt overhang and ease pressures to provide new aid to refinance existing debt service obligations (so-called defensive lending), enabling a more effective policy dialogue between donors and debtor countries. Debt relief also has the advantage that, to the extent that it is committed irrevocably up front, it can provide aid in a predictable and easy to use form.

There is a danger, however, that further debt relief might instead result in a diversion of resources that would have gone to increased direct aid flows. Furthermore, relative to the alternative of higher new aid flows, debt relief has a number of potential disadvantages. First, it allocates resources according to existing debt stocks rather than need or policy performance, and so may prove inconsistent with the principle of allocating assistance to countries where it would be most effective. Second, debt relief may reduce the scope for linking assistance to the maintenance of good policies, to the extent that an irrevocable commitment to debt relief is made upfront. Third, it may create expectations of further relief in the future, increasing the moral hazard associated with any subsequent lending and hindering the development of a credit culture. This could prompt creditors to reduce net lending in the future.

Any new debt relief initiative would leave an unfinished agenda. Further debt relief is inevitably only a small part of a broader agenda that involves stronger policies in developing countries, more and better- targeted development assistance, and a supportive international environment for growth.

BOX 5.7 Proposals for additional debt relief- moving beyond HIPC

Members of the G-7 have put forward a number of proposals for further debt relief beyond the enhanced HIPC initiative. Different motivations drive these proposals. Some proposals reflect a desire to provide additional resources to help low-income countries achieve the MDGs. Others see further debt reduction as a way of increasing the scope for new lending - under the proposed World Bank-IMF debt-sustainability framework - to low-income countries with relatively strong policies, to facilitate the development of a credit culture. Still others aim to eliminate the need for defensive lending and perpetual debt relief for HIPCs.

Motivations apart, the proposals differ importantly along several lines, including the scope and modality of debt relief, the conditionality to be applied, and the source or sources of financing. Differences include:

  • Whether eligibility for relief should be restricted to HIPCs or be available to all low-income countries.
  • Which institutions' debt should be relieved.
  • What percentage of eligible debt should be relieved.
  • Whether relief should take the form of reductions in debt stocks or debt service payments.
  • The strictness of conditionality.
  • How debt relief by international financial institutions will be financed - for example, with contributions from bilateral donors or by the institutions themselves. Some G-7 members have proposed that the IMF sell some of its gold reserves to cover its debt relief.

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