PHA-Exchange> CANCELING DEBT:AN APPRAISALOF THE HIPC PROCESS

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From: pambazuka-news at pambazuka.org

CANCELING AFRICA’S DEBT: A CRITICAL APPRAISAL OF THE HIPC PROCESS
Charles Mutasa
Debt relief has become a prominent issue in recent discussions about  
development, poverty and the relationship between developed and  
developing countries. The debt problems of the poorest countries have  
attracted the attention of development agencies that fear that the  
crisis may worsen poverty and economic decline in which the indebted  
nations are trapped. The inability to serve external debt by the  
severely indebted low-income poor countries is vividly reflected not  
only in massive build-up of arrears but most importantly by the number 
and frequency of rescheduling. Thus the debate on debt relief is no  
longer confined to economic and financial spheres; it is transcending  
every human domain - health, education, agriculture and industry.

Many development agencies and skeptics have expressed widespread doubts
regarding the Heavily Indebted Poor Countries Initiative (HIPC) -  
launched in 1996 - and its successor the Enhanced Heavily Indebted Poor
Countries Initiative's (EHIPC) ability to achieve the promised  
objective of a “robust exit from the burden of unsustainable debts” for
developing countries. Problems associated with the design and  
implementation of the initiative suggest that neither of the two HIPC  
versions has succeeded in providing an adequate response to the Third  
World debt overhang. An analysis of key debt indicators shows that  
external debt and debt-servicing problems are most severe and  
persistent in the heavily indebted poor countries (HIPCs), the target  
group of the HIPC Initiative.

Throughout the process, creditors failed to put sufficient political  
will, resources and serious analysis into the debt reduction  
operations. Debt reduction targets were set and reset arbitrarily -  
writing off 30 percent, then 50 percent, and so on - rather than based 
on serious assessments of the needs of each country. Despite claims of 
success by creditors for their Heavily Indebted Poor Countries (HIPC)  
initiative for debt reduction, the IMF estimated that Africa's debt  
service payments would only go as low as 17.1 percent of export  
earnings in 2001 (down from 20.3 percent in 1999), before rising again 
to 18.4 percent in 2002. The process has been much slower than expected
 
and the initiative is suffering from problems of under funding,  
excessive conditionality, and restrictions over eligibility, inadequate
debt relief and cumbersome procedures.

The Overall Picture of the Process
There has been disagreement over what constitutes 'sustainable debt' in
the HIPC initiative. Sustainability is subject to the determination of 
export performance and many debt campaigners fear overly optimistic  
calculations will reduce the amount of debt reduction and may mean that
countries fall back into the debt trap.

It seems the International Financial Institutions are only interested  
in the Third World debt crisis when it reaches proportions that  
threaten the poor countries' ability to service their debt to Northern 
creditors. Thus sustainable debt to the Bretton Woods institutions is  
when a country reaches a level where it can meet its current and future
 
repayment obligations in full. Debt relief has not managed to ease  
domestic expenditure constraints and the curbing of investments.

The 22 African countries that have so far qualified to receive some  
relief are still required to pay almost $2 billion each year in debt  
repayments to wealthy creditor countries and institutions, mainly to  
the World Bank and IMF themselves. African countries' efforts to  
address urgent domestic priorities, from poverty reduction to the fight
against HIV/AIDS, continue to be undermined by their persistent debt  
burden. Most African governments still spend up to three times more on 
debt repayments than on health care for their own people Not only are  
some countries spending more on debt payments after they receive debt  
relief, but they are overshooting the World Bank and IMF's own  
definitions of debt sustainability. Uganda, the first HIPC graduate,  
currently has debts of over 200% of the debt-to-exports ratio. This  
will be the third time Uganda has exceeded its debt sustainability  
after reaching completion points. Surprisingly, the World Bank and IMF 
have changed definitions of debt sustainability to include liquidity as
the operative criterion.

The HIPC initiative is further flawed because it is tied to  
controversial economic adjustment measures. In his speech to the  
International Monetary and Financial and Development Committees in  
Prague on September 24 and 25, 2000, Canadian Finance Minister Paul  
Martin develops a critique of the current HIPC process, including  
Poverty Reduction Strategy Papers (PRSPs), especially the overburdening
of countries with a huge quantity of conditions to fulfill before  
receiving debt relief. Martin cites the problem of overburdening the  
HIPCs with "unrealistic conditionalities", and an excessive concern  
among creditors with the "quantity of conditionality rather than its  
quality."

It is interesting to observe that although Nigeria's debt stock is the 
largest in West Africa and the country is experiencing growing poverty,
she has not been recognized as an HIPC eligible country. Debt relief  
has been more successful in protecting the interests of the creditors  
than the debtors. It is actually designed and controlled by creditors  
to extract the maximum possible in debt repayments.

According to the UN Secretary General's report of 2000 there are 18  
least developed countries that are not included in the HIPC category,  
and some of them are considered severely or moderately indebted  
according to the World Bank classification. For instance, most of the  
debt-distressed African countries are classified as moderately indebted
middle-income countries such as Zimbabwe while Gabon and Nigeria are  
both severely indebted yet excluded from the HIPC initiative.

The HIPC Initiative obfuscates the illegitimacy of most of Africa's  
debt. As such, it fundamentally undermines the strong imperative for  
debt cancellation. It sanctions the continued exploitation of indebted 
countries by rich creditor nations and institutions. Many of the loans 
that are being re-paid were made during the Cold War to repressive  
regimes and corrupt leaders, who used the money to strengthen their  
rule or to line their own pockets. Many more loans were made without  
attention to the viability of planned projects or to the capacity of  
the recipient country to make repayments.

Out of 20 HIPCs that have already reached HIPC decision point, four  
countries (Mali, Niger, Sierra Leone and Zambia) will have annual debt 
service payments due in 2003-2005 which will actually be higher than  
their annual debt services paid in 1998-2000. Five countries will be  
paying almost as much in debt service payments as before HIPC  
(Ethiopia, Guinea-Bissau, Honduras, Nicaragua, Uganda). In six  
countries, a modest $15 million in 2003-2005 will reduce annual debts  
serviced. Over half of the HIPCs are spending more than 15% of their  
government revenue on debt servicing.

Despite modest recovery in some countries, poverty has intensified, and
human development indicators - life expectancy, infant mortality, and  
school enrolment have worsened. The export basket remains  
un-diversified. Since the start of the HIPC process the fragile  
industrial base has shrunk even further (de-industrialisation) in many 
countries. In short, HIPCs worsened the crisis on a number of scores.  
The debt under HIPCs strongly and negatively affects economic growth,  
threatens the sustainability of reforms, and prevents the development  
of a capable and functioning state due to the fiscal crisis that it  
engenders.

Recommendations:
1.	The way in which debt relief is calculated for each country 
needs to
be reviewed and alternatives adopted. The reliance on a debt-to-export 
ratio to calculate debt relief packages, based on World Bank and IMF  
projections, is flawed.
2.	There is a need for an independent panel of experts not unduly  
influenced by creditor interests to reassess the debt sustainability,  
eligibility for debt reduction, and the amount of debt reduction  
needed, conditionality and financing of developing countries.
3.	Future reviews of debt sustainability should also bear in mind 
the  
impact of debt relief on progress towards the achievement of the  
development goals contained in the Millennium Declaration.
4.	Reform of the international strategy regarding official debt of 
poor
countries should address the problems of debt distressed low-income  
countries that are not currently eligible for special treatment  
accorded to the HIPCs.
5.	Third World governments should be afforded the chance to 
determine  
their own approaches to poverty reduction, in consultation with civil  
society groups and other partners - not to have these prescribed to  
them by external powers.
6.	Needless to re-iterate, the idea of all countries caught in the 
debt
trap forming a cartel to maximise the effectiveness of an international
campaign of debt repudiation has been around for some time.

Conclusion
The analysis above shows that there are serious flaws in the HIPC  
initiative's approach to the Third World debt crisis. Levels of debt  
repayment after HIPC initiative are far too high, undermining the  
necessary investment needed to accelerate poverty reduction. In the  
absence of radical reform, HIPC will join a long list of failed poverty
reduction initiatives. Past and present initiatives at international  
debt relief are increasingly acknowledged to be inadequate and flawed. 
The creditors should not monopolise decision-making on debt resolutions
and there is a need for the debtor countries to come up with their own 
initiatives.

The IMF and World Bank are off-track on meeting their performance  
benchmarks in the HIPC initiative. Any solution to the debt crisis must
move beyond debt relief and conditionality, to consider debt within the
wider context of equitable and sustainable development. It should  
address socio-economic and developmental relations between debtor and  
creditor countries. Needless to state again that if global efforts to  
reduce poverty and fight underdevelopment are to be successful, Third  
World debt must be canceled outright.