Terror Attacks Affect Growth, Debt Reduction

13th November, 2001.

Johannesburg: The 11 September terror attacks on New York and Washington have dealt a severe blow to economic growth prospects in the developing world, and according to analysts, are likely to also undermine current debt reduction strategies.

A paper released ahead of this weekend's Development Committee Meeting of the World Bank and IMF in Ottawa warned that the attacks are likely to mean reduced export earnings in the face of declining commodity prices and volumes. According to the Brussels-based European Network on Debt and Development (EURODAD), these declining commodity prices could undermine the Highly Indebted Poor Countries Initiative (HIPC) designed to help poor countries weighed down by debt service obligations.

EURODAD, a consortium of European non-governmental organisations, has argued that for most HIPCs, commodity export earnings are key to export growth, but the current assumptions about the future prices and production volumes of commodities are "over-optimistic", making projections on debt sustainability highly unlikely. "Most HIPCs will not achieve debt sustainability unless they receive substantial additional debt reductions," EURODAD said.

According to the World Bank, the primary purpose of the HIPC initiative is bring debt burdens of poor countries to "sustainable levels". It was proposed by the World Bank and International Monetary Fund (IMF) and agreed by governments around the world in 1996. The approach has been to reduce the external debt of the world's poorest, most heavily indebted countries, by placing debt relief within an overall framework of poverty reduction.

Statistics from EURODAD show that the prices of commodities produced by HIPCs were at 10-15 year lows, which has induced on average a loss of 15 percent of annual export earnings between 1998 and 2000 for commodity dependent HIPCs.

Francis Lemoine, a debt policy analyst with EURODAD, explained to IRIN that most countries qualified for debt relief under the "exports" criteria, with debt relief projections based on the projected increase in income generated from the export of commodities. Lemoine said that part of the problem was the "over optimistic" projections made by the World Bank and IMF.

In the west African nation of Benin, debt relief projections were based on an annual 10 percent increase in money made from cotton and textile exports between 2001 and 2010 - figures which EUORODAD say are unrealistic. In the case of Zambia, where one of the most important export commodities is copper, the country's ability to keep to its repayment plan could be hampered as copper prices fall.

"The stated objectives of the HIPC initiative is to provide a long lasting strategy to break from the debt rescheduling cycle and enable countries to devote additional resources to poverty reduction. However, it is unlikely that debt sustainability levels will remain sustainable meaning that these countries will have gone back to something similar to their pre-HIPC situation by the end if the decade," Lemoine said. So far only three countries globally have completed the HIPC programme - Uganda, Mozambique and Bolivia.

Recently the IMF and the World Bank said that HIPCs may be able to get additional debt relief at "completion" point if they could demonstrate that the increase in debt levels was due to external factors for at least three years. The "completion" point is the stage at which countries have completed all the criteria or conditions as laid out in the HIPC agreement with the World Bank and the IMF. These conditions include policy and structural reforms of a country's domestic economic and political environment.

EURODAD has argued that this provided only an "ad hoc fix" to the structural problems making it likely that such fixes will be required repeatedly over the next 10 years.

"Rather than waiting for HIPCs to slip back into indebtedness, and a new round of debt restructuring 'exit strategies', it is already time to consider new ways to finish the debt crisis once and for all," EURODAD noted. "It should be recognised that the decline in world commodity prices is beyond the control of HIPC policy-makers. These are external structural factors, not policy factors."

According to the World Bank, the delayed global recovery and the continued slump in commodity prices will have a direct impact on poverty reduction - especially in Sub-Saharan Africa.

"Because the prices for agricultural commodities particularly cotton, coffee and sugar - have fallen steeply, farmers, rural labourers and others tied to agriculture - especially those in Africa and parts of Latin America - are likely to bear a major portion of the burden," the Bank said.

"Of the 600 million people in sub-Saharan Africa, the overwhelming majority are poor and many of them are particularly vulnerable to such impacts because they depend on commodity exports and have limited capacity to manage household risks."

It added that development aid would need to double to more than US $100 billion a year to achieve the international development goal of halving extreme poverty by the target date of 2015. According to the Bank an extra US $39 billion will be needed to support poor countries which already have good policies in place, with an extra US $15 billion required if a number of other countries improve their policies enough to qualify for funding.