'An emerging scandal'
Debt cancellation and the broken promise of Cologne

Fully updated after World Bank/IMF Spring meetings

19 May 2000

A month after the finance ministers gathered in Washington for the Spring Meetings of the World Bank and International Monetary Fund, complacency continues to characterise the faltering international debt relief programme. Current evidence suggests that creditor nations are failing to deliver on promises they made last year to the world's poorest countries. Jubilee 2000 Coalition is warning the world's leaders of `an emerging scandal' if urgent action is not taken. This briefing explains the current situation.

“We have to ask ... why progress in resolving the debt problem is still so slow. Why so many hesitations? Why the difficulty in providing the funds needed even for the already agreed initiatives? It is the poor who pay the cost of indecision and delay.”
Pope John Paul II, 23 September 1999

“If we are successful, it will be a matter not of years or months but weeks before the first country will benefit from debt relief.”
Chairman of the IMF's Monetary and Financial Committee
and UK Chancellor, Gordon Brown, 24 September 1999

“The deeper, faster and broader relief promised last year has yet to materialise.”
Kofi Annan, UN Secretary General, 14 March 2000

How many countries have had debt cancelled under the plan agreed in Cologne?

A month after the Spring meetings of the world's finance ministers in Washington, only five countries (Bolivia, Uganda, Mauritania, Mozambique and Tanzania) had begun to receive relief under the enhanced Heavily Indebted Poor Countries (HIPC) initiative agreed in Cologne. As recently as December 1999, the then Managing Director of the IMF expected between eight and eleven countries to have reached that stage (known as `decision point') by April 2000. <sup>[1]</sup> Uganda is the only country to have reached `completion point' – the moment when debt is actually cancelled— and even this has not been fully implemented by the Paris Club of bilateral creditors. ^[2] The prospects for progress before the end of the millennium year are equally alarming. In December 1999, 24 countries were expected to begin receiving relief by the end of 2000. Now, the World Bank is saying that up to 20 countries may reach decision point in 2000 – but it has firm plans for only fifteen. ^[3] The likelihood is that no more than two extra countries—Bolivia and possibly Mozambique—will reach completion points in 2000.

What happened at the Spring Meetings?

There were three main developments.

1. Japan joined other G7 countries in promising 100 per cent debt cancellation of its export credit debt. This will potentially cover $1.4 billion of debt, but cancellation will not be until completion point and it will not include all categories of debt. ^[4] British Chancellor Gordon Brown also stated that Scandinavian and other non-G7 European countries were likely to declare positions of 100 per cent cancellation in the near future.
2. The decision was taken to set up a new joint implementation committee (JIC) to oversee the implementation of the HIPC initiative and the development of effective poverty reduction strategies. This was originally a British government initiative designed to ensure that the HIPC timetable is kept from slipping any further. The committee became effective in May and will consist of World Bank and IMF staff.
3. Japan, Canada, Denmark, Spain, and Switzerland all announced increased contributions to the fund which provides finance for the World Bank and multilateral development banks (the HIPC Trust Fund), bringing their pledges to $200 million, $104 million, $45 million, $85 million and $58 million respectively. New Zealand made its first contribution of $2 million and Germany paid in the first instalment of its pledge of $243 million. The fund now has over $2.5 billion paid in or pledged, but this still leaves the HIPC programme with significant shortfalls.

These are all positive developments, but campaigners have called for a far more engaged and dynamic approach if broad and effective debt cancellation is to become a reality. A recent IMF World Bank paper states that financing problems may lead to further slowing of the timetable. ^[5]

Why is the process going so slowly?

Table 1 summarises the delays in the implementation of the Cologne deal and the reasons for those delays. A number of cases stand out:

Guyana was expected to be one of the first to come through the enhanced HIPC Initiative, having already gone through the entire HIPC process once in its earlier phase. It has been declared “off-track” in its IMF structural adjustment programme because the government missed its budget spending target, but the IMF's own role has been contradictory and inconsistent. The government sought IMF advice in the summer of 1999 to reach agreement in a pay dispute with public sector workers. The IMF advice was to settle the dispute by awarding a pay rise recommended by independent arbitrators, which meant the government exceeded its budgetary targets. This `overspending' is now being used by the IMF as the reason to delay debt relief.

Table 1: Countries originally expected to reach decision point in 2000

*Information based on formal and informal World Bank, IMF and government sources

**PRSP: Poverty Reduction Strategy Paper (production of a PRSP was added to existing structural adjustment-based conditions as a condition of participation in the enhanced HIPC Initiative)

Mali first reached decision point in the original HIPC phase in September 1998. Now it ias being told that because of the change of government and insufficiently fast reform of the civil service and structural adjustment relating to its cotton sector, it will not reach decision point in the enhanced HIPC until the summer of 2000.

Benin, Ghana and Malawi are all being pressurised by the Japanese government not to apply for debt cancellation under the HIPC Initiative. Japan has made clear to these countries that if they enter the initiative, their concessional financing from Japan will be drastically cut. While Japan – as well as the World Bank and IMF – had claimed Ghana had declared it will not enter the HIPC Initiative, Ghana government sources have confirmed that it has not fully ruled out participation. Similarly, Malawi looks more likely now to resist Japanese pressure and apply.

Who is to blame for the delay?

Not all the blame for each delay can be laid at the door of the creditors – the wars in Sierra Leone and Ethiopia clearly change these country's prospects of debt cancellation. However, in numerous other cases, one of a number of actions by creditors appears to be holding the process up:

• The US Congress is refusing to fund the Clinton administration's request for funding of $210 million for HIPC, in spite of the fact that the United States looks set for a $1 trillion budget surplus over the next 10 years.
• The World Bank argues that writing off its HIPC debt would damage its triple A rating, despite the fact that the Bank is guaranteed by over $180 billion of subscribed capital from members.
• The Inter-American Development Bank has so far refused to provide its own funding for HIPC, seeking to draw as much as it can from the World Bank HIPC Trust Fund.
• The European Union is refusing to confirm the release of unspent aid funds from the European Development Fund because it argues that the US must provide its “fair share” of debt relief.
• The World Bank and other creditors are using the introduction of the new Poverty Reduction Strategy Papers (PRSPs) to delay relief still further. British development minister Clare Short highlighted this, criticising the “search for the perfect poverty reduction plan”.

While the creditors argue amongst themselves, the poorest people in the poorest countries are the ones who pay the highest price.

For the countries that do qualify, is 100 per cent of the debt being written off?

Far from it. World Bank / IMF figures show that despite the widely-promoted figures suggesting that between 90 and 100 per cent of debt is being cancelled, for the countries that have reached decision point so far, the debt burden is being reduced on average by only 40 per cent. The total debt of these five countries (1998 in net present value) is just over $17 billion and the reduction under the enhanced and original HIPC initiative is just under $7 billion. Annual debt payments are reduced by a similarly modest amount. Debt service for these countries before HIPC totalled $874 million, whereas debt service after will be an estimated $565 million. This represents a fall in debt service of only 35 per cent. Table 2 shows the reductions for each country – and the relative spending in health and education.

Table 2: Debt reduction for the first five countries through enhanced HIPC initiative

Source: World Bank

Why has debt cancellation for these countries fallen so far short of 100 per cent?

The Cologne agreement was to reduce debt to 150 per cent of the value of annual exports - still far from a total cancellation. There was agreement by the G7 to cancel 100 per cent of ODA (aid) debt, but this still leaves large quantities of debt untouched by any 100 per cent commitment.

Most important of this is multilateral debt: there are no pledges from the IMF, World Bank and regional development banks to cancel 100 per cent of their debts. Over 35 per cent of the long-term debt of HIPC countries is multilateral. The multilateral creditors are simply required to cancel enough of their debt to reduce the overall debt of a HIPC to the level defined as `sustainable'.

For bilateral debt only a handful of creditors – including the G7 to a greater or lesser extent – are committed to 100 per cent cancellation of non-ODA debt. Therefore only a proportion of the total bilateral debt is covered by these commitments. Private debt is also untouched by any 100 per cent commitment. The result is that HIPCs can expect reductions in their debt of far less than 100 per cent, as the first five cases show.

Consideration of the widespread poverty in these five countries shows clearly why this level of relief is woefully inadequate. After full implementation of the Cologne deal, its first five recipients will still be paying more than half a billion dollars every year to foreign creditors – almost as much as they spend on health care. Uganda has one of the highest levels of HIV infection in the world, which has already left one million children orphaned. 60% of the population in Bolivia do not have

access to even basic sanitation, and one third of the population has no access to safe water. In Mauritania the adult illiteracy rate stands at 62%, one of the highest in the world. Mozambique is now facing the daunting task of reconstruction following the worst floods that the country has experienced in living memory. In Tanzania about a third of the country's children are malnourished, and under half are enrolled in primary school.

Much less debt is so far being cancelled than the headlines after the Cologne G8 summit last year suggested. In Cologne and ever since, creditor governments declared that they have agreed to cancel up to $100 billion. In fact, so far, less than $13 billion of that total has actually been cancelled – and most of that had already been cancelled before the Cologne summit. Since Cologne, less than $2 billion has been written off. Table 3 shows how the $100 billion figure was calculated and how much has actually been cancelled so far. ^[6]

Table 3: Composition of debt cancellation delivered and promised

Source: World Bank, Jubilee 2000 calculations

Ten months after Cologne, delivery of the $100 billion in debt cancellation is looking highly doubtful without a major overhaul of the speed and scale of relief.

One of the things that will jeopardise further the delivery of $100 billion in debt cancelled and reduce the benefits to countries is that the promise that ODA cancellation will be additional to the amount of debt relief agreed under the enhanced HIPC initiative is now also under threat. As arguments over funding have continued between Paris Club creditors, sources indicate that the IMF proposed (in the case of Nicaragua) that they should ignore the promise made in Cologne and include ODA debt in all calculations to bring down the debt to the agreed level of sustainability. This completely contravenes what was promised in Cologne, and the basis of the $100 billion headline figure. Even more depressing is the reported response from the secretive Paris Club - that they were already doing what the IMF suggested anyway.

How much debt should be cancelled?

The social crisis in the heavily indebted poor countries is now so acute that total cancellation of the foreign debts of many of these countries is needed as a first and necessary step towards effective poverty reduction. The Meltzer Commission, set up by the US Congress to make proposals for the future shape and status of the Bretton Woods institutions recommended exactly this – not only for the bilateral lenders, but also for the multilateral institutions, led by the World Bank and IMF. It was unanimously agreed by the commission and received widespread agreement from opinion formers in the USA. ^[7] The United Nations Conference on Trade and Development (UNCTAD) have also added their voice. ^[8] In April the Secretary General of the United Nations, Kofi Annan, echoed the call in his 21^st Century Action Plan, when he said: “I call upon the donor countries and the international financial institutions to consider wiping off their books all official debts of the heavily indebted poor countries in return for those countries making demonstrable commitments to poverty reduction.”

A number of bilateral creditors have now accepted this position as far as their own debts are concerned – the US, UK and Canada are three examples. It is time now for the multilateral creditors to declare their support and commitment to the cancellation of 100 per cent of the multilateral debt, by matching at the very least the policies of these more progressive bilateral creditors. Recent information received by Jubilee 2000 that the President of the World Bank is considering writing off 100 per cent of the debt owed by HIPCs to the Bank's non-concessional lending arm, the International Bank for Reconstruction and Development (IBRD) – about $1.8 billion of debt. This will put even more pressure on the IMF to use its own reserves to cancel 100 per cent of its own debts from the poorest countries.

If the HIPC timetable can be restored, will all the countries that need debt cancellation get it?

No. Jubilee 2000 has consistently called for countries beyond the official HIPC list of 40 to be included. A number of countries are clearly in particular need of debt cancellation now:

Nigeria was discreetly removed from the HIPC list in 1998, despite having income per head less than $300 and an effective debt to export ratio of over 250%. ^[9] The debt service due ($3.6bn) ratio to export revenues is over 30%. Both these ratios exceed by far the ratios for eligibility for HIPC set by the IMF and World Bank. The government is in the process of reaching agreement with the IMF over its economic programme, which will involve no future borrowing from IBRD, (eligibility for this kind of borrowing was the reason given for taking it off the HIPC list). It is of critical importance not only to Nigeria but for the whole of West Africa that the new government of President Obasanjo succeeds and that stability is restored to the region. Yet, the IMF appears content for the country to allocate only $360 million in poverty alleviation – ten times less than it is due to pay in debt service.

Haiti also urgently needs debt cancellation. It is the poorest country in the Western Hemisphere and nearly half of the debt was contracted under the Duvalier dictatorship. It has 50 per cent adult illiteracy, 70 per cent unemployment and infant mortality is more than double the Latin America & Caribbean average. Its debt to export ratio is 171 per cent, significantly above what the IMF and World Bank consider to be sustainable.

Countries like Nigeria and Haiti need to be considered for debt cancellation.

What is the fundamental reason why the HIPC initiative is failing?

The HIPC initiative is designed by creditors and controlled by creditors, and this is the fundamental fault which fails the people who need debt cancellation most. Creditors have the power to define who gets what, and when, and how. This same power means that their own political wrangling, conflicting agendas, lack of consensus and minimising of cost become the dominant issue, not the delivery of the modest debt relief on offer to those most in need. The result is that the majority of countries in urgent need of cancellation are currently getting nothing at all.

How does Jubilee 2000 propose to stop the debt crisis happening all over again?

Jubilee 2000 is proposing a new, more disciplined approach to international borrowing and lending – a model of independent arbitration, signifying a new era in public global finance where both debt cancellation and new lending are negotiated fairly and transparently. In a new report, Kicking the Habit, Jubilee 2000 outlines the steps that need to be taken to break the damaging cycle of reckless lending and unsustainable borrowing.

In the past, both creditors and debtors behaved irresponsibly, and the disastrous result is clear. Jubilee 2000 suggests one possible structure could be a Debt Review Body (DRB), overseen by the United Nations or similarly independent body. The UN would appoint (with the consent of both creditors and the debtor nation) an independent arbitrator who would oversee the work of the DRB and appoint equal members from the debtor and creditor sides, including representatives from civil society in the debtor nation. The documents, deliberations and decisions of the DRB would be made public and its decisions would be binding.

This independent, transparent process would right the wrongs of HIPC. It would ensure that funds released from debt cancellation are carefully monitored and spent on agreed poverty reduction and development priorities. The DRB would also scrutinise future loan offers so introducing a tight discipline into future lending to prevent a crisis on this scale happening again.

The idea of an independent arbitration process is championed by the United Nations Secretary General, Kofi Annan, in his 21^st Century Action Plan. Mr Annan says: “I would go a step further and propose that, in the future, we consider an entirely new approach to handling the debt problem. The main components of such an approach could include immediate cancellation of the debts owed by countries that have suffered major conflicts or natural disasters; expanding the number of countries in the HIPC scheme by allowing them to qualify on grounds of poverty alone; pegging debt repayments at a maximum percentage of foreign exchange earnings; and establishing a debt arbitration process to balance the interests of creditors and sovereign debtors and introduce greater discipline into their relations.” This fresh and progressive thinking from the head of the UN offers a challenge to all those locked into the current process – lenders and borrowers alike.

What should happen now?

The international Jubilee 2000 movement has been campaigning for the cancellation of the unpayable debts of the world's poorest countries by the end of the year 2000, a goal shared and supported by seventeen million people all over the world. Five simple actions need to be taken immediately:

1. All creditors, including the United States, without further delay, must fulfil the obligations they agreed at the Cologne Summit in June 1999 in order to deliver the $100 billion offered then.
2. Creditors, including multilateral institutions, who have not yet made a 100% cancellation pledge must do so now to show they are serious about helping the people in the poorest countries.
3. Creditors should open the process of debt cancellation to countries not currently covered by the HIPC initiative but which are nevertheless impoverished and indebted.
4. To inject urgency and focus into the debt cancellation process, the world's leaders should meet, including leaders from indebted countries in Africa and Latin America, in advance of the July G8 Summit in Okinawa, to agree a comprehensive solution to the debt crisis for the poorest countries.
5. The international community, including lenders and borrowers alike, should consider urgently the case for a new process for dealing with debt and lending – a fair and transparent process that help to ensure the debt crisis does not return in the new millennium.

Prepared by John Garrett and Adrian Lovett
Jubilee 2000 Coalition
19 May 2000

APPENDIX: Latest figures for total debt burdens

The 40 HIPCs

US$ millions, unless stated otherwise

Additional 12 Jubilee 2000 countries

US$ millions, unless stated otherwise

Source: Global Development Finance 2000, World Bank

Footnotes

^[1] “I note that the expected timetable for processing HIPC cases in the coming months is that, subject to country progress, three countries would reach their decision points under the enhanced Initiative in January--Bolivia, Mauritania, and Uganda--with Mozambique following shortly thereafter. Staff are also working on a number of early country cases, and depending on policy implementation and resolution of outstanding policy issues, a further four to seven countries could reach their decision points in the subsequent three months.” Concluding Remarks by the Chairman of the IMF's Executive Board, December 27, 1999

2 The Paris Club was due to finalise the details of its participation in completion point debt relief on May 16^th. Following fighting between Ugandan and Rwandan troops on 5^th May and a subsequent request by the US State Department to the Paris Club, this has been postponed with no date set for a new meeting. Uganda had previously been deferred due to donor country anger over the government's decision to purchase a presidential jet—at an estimated cost of over $30 million. However a condition of reaching completion point was that this would be fully offset by reductions in the defence budget.

^[3] The World Bank and IMF listed 24 countries that were “assumed to reach a decision point under the enhanced framework before the end of 2000” in Heavily Indebted Poor Countries (HIPC) Initiative – Update on Costing the Enhanced HIPC Initiative, World Bank / IMF, 7 December 1999. The fifteen countries now projected to reach decision point in 2000 are shown in the table overleaf.

4 So-called “post cut off date debt”—debt contracted after a date set by the Paris Club of creditors—will not be included. This is also the current position of Germany, Italy, and France.

5 “Aggregate financing problems...could arise as early as late 2000. Moreover, should some Multilateral Development Banks face financing shortfalls, there could be a slowing down of the consideration of specific early country cases.” Progress Reports on Heavily Indebted poor Countries and Poverty Reduction Strategy Papers. April 15^th, 2000.

6 If we consider the total cancelled under Naples terms for the HIPCs that have passed through the Paris Club since 1995, together with the additional HIPC relief under HIPC 1 for the four that reached completion point and the HIPC 2 relief for Uganda we arrive at an estimate that less than $13 billion of the $100 billion has been cancelled. By 1998 there had been seven stock of debt operations—Uganda and Bolivia in 1995, Mali, Guyana. Burkina Faso and Benin in 1996 and Senegal in 1998—covering more than $3 billion (Global Development Finance 1999, volume 1, page 129). In 1999 Mozambique and Guyana received stock of debt operations on Lyons terms with Guyana $0.2 billion and Mozambique $1.9 billion Global Development Finance 2000, volume 1, page 72). ^[6] There is then the debt cancellation agreed under HIPC 1, which is $650 million for Uganda, $760 million for Bolivia, $3.7 billion for Mozambique and $410 million for Guyana. Finally there is the the additional $1.3 billion of HIPC 2 relief for Uganda together with an estimated $794 million in ODA. The total of this is $12.7 billion. There is some double counting as some of the Paris Club relief is also included the HIPC relief, but there is also cancellation of ODA that has been going on unilaterally by creditors on a non-systematic basis. A fair estimate would be that no more than $13 billion has been cancelled of the promised $100 billion.

^[7] The New York Times leader, quoted in the IHT of 10^th March, argued that “one of the biggest and best ideas in the report is a call to cancel the crushing debt burden of the world's poorest countries. If the commission does nothing else but spur the United States and its allies to get behind this plan, it will have accomplished a lot.”

^[8] The secretary general, Rubens Ricupero, wrote in the International Herald Tribune on 28^th March that UNCTAD “wholeheartedly endorse [the Meltzer commission's] recommendation to write off these debts in their entirety”.

⁹ Based on prices of around $20 per barrel, Nigeria's oil export revenues (95% of all revenues) are of the order of $14.6bn. Allowing for production costs and the share that goes to foreign firms, oil revenues based on $20 per barrel would provide export earnings of no more than $11bn to Nigeria.