Rogue creditors, including Iraq and Taiwan, threaten HIPC

By Romilly Greenhill and Ann Pettifor

1^st October 2002

1) Introduction

The World Bank and IMF's Heavily Indebted Poor Countries (HIPC) initiative is looking increasingly threadbare. Rogue creditors, including Iraq, are threatening this “voluntary” initiative. Driven as it is by one set of creditors (the multilaterals), setting the rules for other groups of creditors (the Paris Club and commercial creditors), HIPC is falling apart. Because it is not a process seen to be independent from both debtors and creditors, it is widely perceived as unjust and ineffective. Conditionalities attached to HIPC relief through IMF programmes have been lambasted by NGOs in both North and South, for being veiled mechanisms for transferring resources from debtor to creditor countries.

Now, however, the initiative is under threat from another quarter – non participating creditors, including mercenary organisations like Executive Outcomes; and governments like Iraq and Taiwan.

One of the central principles of the HIPC initiative, as with most debt restructuring agreements, is a fundamental rule of bankruptcy law: that all creditors should be treated equally; and all creditors should share the burden of losses. ^[1]

What this means is that, when a country's debt needs to be reduced, all creditors should take their share of the 'haircut.' Failure to follow principles of burden sharing can undermine any debt reduction agreement, as each creditor tries to hold out and wait for other creditors to provide relief, thus gaining a larger share of the remaining cake for themselves.

Jubilee Research has pointed out that the 'burden-sharing' provision within HIPC is already being violated by the IMF and World Bank through their inclusion of 'additional' bilateral relief in debt sustainability calculations ^[2]. But the burden sharing provision is also being violated through so-called 'non-participating creditors.' These creditors, which range from countries such as Iraq and Taiwan, to companies of dubious repute such as mercenary firm Executive Outcomes, are refusing to write-off their share of HIPC debts. For certain countries, some of which are not even members of the World Bank and IMF, decisions taken in Washington by one set of creditors mean nothing – they want their money, and fast. And as we will show below, creditors are increasingly resorting to litigation to ensure their claims.

Creditor non-participation is bad news for HIPCs, most of which will not have their debt levels brought down to 'sustainable' levels, according to the HIPC criteria, even with full participation of creditors. And for those facing litigation – at least 10 of the 26 HIPCs which have already passed Decision Point – it is nothing short of a disaster.

In this short briefing, we look at the scale of the problem, and address some proposals made for reform.

2) How big is the problem?

The impact of non-participating creditors on debt burdens will depend on the proportion of debt relief that should be provided by these creditors under the HIPC initiative. Unfortunately, this proportion can be quite high. In the latest HIPC 'Status of Implementation Report ^[3]' by the World Bank and IMF, it was shown that 11 out of the 20 countries in the interim period between Decision Point and Completion Point ^[4] have firm commitments on less than 90% of the relief they should be receiving. Niger and Senegal look set to receive less than 80% of the relief they are due. This is particularly worrying given that even with full creditor participation, neither Niger nor Senegal are expected to receive sufficient debt relief to bring down their debt burdens to the sustainability thresholds determined by the HIPC initiative. With more than 20% of the relief they deserve denied to them, their debt burdens will be even more problematic ^[5].

Even amongst countries that are already past Completion Point, creditor participation remains a problem. For Mauritania, which reached Completion Point in June of this year, only 80% of the relief due has actually been committed, while Burkina Faso, Mozambique and Tanzania have received commitments for less than 90%.

Unfortunately, we do not have enough information about individual country cases to provide details of the effects of creditor non-participation on each country's debt sustainability. It is hoped that future World Bank and IMF reports will include more information on this area.

3) Which are the dissenting creditors?

Adding to the headaches for HIPCs, all categories of creditors include some 'dissenters' – both multilateral, official (including those within the Paris Club), and commercial.

For multilateral creditors, however, the problem is relatively small. In total, non-participating creditors only account for about $46m of the relief, in NPV terms ^[6], that the 26 post- Decision Point HIPCs should be receiving. Chief amongst the problematic creditors are the Economic Community of West African States (ECOWAS) and the Arab Monetary Fund, withholding $15m and $13m of relief respectively.

The dissenting bilateral creditors are more worrying, accounting for $795m in NPV terms – or around 3% of the total relief that HIPCs should be receiving. Problematically, this group includes a number of current HIPCs, although with the exception of Angola most of these account for very small amounts of relief. However, even small creditors can punch above their weight if they decide to litigate in order to receive their claim – as the recent threats by Burundi to sue Uganda for outstanding claims clearly demonstrates ^[7].

Non-HIPC bilateral creditors are more important in financial terms, however. This list includes both predictable and less predictable names – the predictable being Iran, Iraq and Libya, the less predictable including Peru, Taiwan and Thailand. In financial terms, Taiwan and Libya are the largest culprits with $282.4m and $213.9m of relief due respectively, while Iran, Iraq, former Yugoslavia and Romania are all due to provide more than $35m of relief each – relief which looks unlikely to ever materialise.

According to the HIPC Ministerial Network ^[8], moreover, even some countries which are members of the 'Paris Club' group of official bilateral creditors, are not playing by the rules. They report that some G7 Paris Club creditors continue to exclude certain special debts from relief and are providing cancellation in ways that use funds to pay for non-essential imports or NGO projects ^[9]. For example, some of the relief provided by Japan must be used to purchase imports from that country, with limited impacts on poverty reduction, and implications for future maintenance costs ^[10]. Furthermore, Paris Club agreements to provide interim debt service relief has been delayed for some countries, including The Gambia, Nicaragua, Sao Tome and Principe and Zambia.

For commercial creditors, the picture is even more depressing. Commercial creditors only account for 4.4% of total relief under HIPC, but as commercial debt is concentrated amongst a small number of countries, it can have a disproportional impact. In Ghana, for example, commercial debt amounted to about 10% of total debt before HIPC relief, while for Ivory Coast – which should shortly reach Decision Point, the political situation permitting – the figure is as high as 20%. Commercial creditors can also cause greater problems for HIPCs as they are more likely to sue to receive their claims. Worryingly, in the spring of 2002, the World Bank and IMF noted that 'very few commercial creditors have agreed to provide even limited debt relief under the enhanced HIPC initiative ^[11], and the latest Status of Implementation report notes that 'securing their participation in the HIPC initiative will require extra efforts by the international community ^[12].'

4) Lawsuits and other lunacy

Imagine this. As a heavily indebted poor country, you jump through all the hoops of the HIPC initiative, meet the conditionalities, write your poverty reduction strategy and prepare your new budget. You show that the HIPC relief you are due to receive will be used properly and are congratulated for your sound policies. But just as everything seems to be going right, you receive notice that 6 of your creditors – both commercial and bilateral – are attempting to litigate to recover debt which should have been relieved under the HIPC initiative. The court judges in favour of your opponent – and you are forced to hand over $33.8m of your precious resources.

This is the situation of Uganda, the first country to pass Completion Point under HIPC. But Uganda is not alone. At least 9 other HIPCs, including Guyana (see Box 1) are facing lawsuits to recover debt which should have been cancelled under HIPCs. Guyana's lawsuit, ironically, is being conducted under the auspices of the World Bank. Commercial creditors such as Executive Outcomes, a mercenary outfit used to fight against the government in Sierra Leone, and big TNCs like Booker plc and Red Mountain are now suing governments declared eligible for debt relief, for unpaid charges.

Moreover, the issue of creditor litigation not only applies to commercial creditors. Official bilateral creditors including Taiwan, Iraq and Burundi are also guilty. A US judge recently awarded a claim of $72m to Taiwan in their lawsuit against Niger. This compares to an inflow of IMF resources totalling only $50m over three years ^[13]. One of the creditors attempting litigation against Uganda is Iraq - and even though Iraq is currently under sanctions, this does not stop her from charging Uganda compound interest on her debt until such a time as the sanctions are lifted ^[14].

5) What is the solution?

a) The G8 proposal

To their credit, the issue of non-participating creditors, and of creditor litigation, has not gone unnoticed by the world's leaders. As a result, at the G7 summit in Kananskis in June 2002 it was agreed that a number of actions would be taken to ensure full creditor participation in the HIPC initiative ^[15]. In particular, the G7 agreed to ask the World Bank and IMF to undertake a number of measures:

• 'Provide more information in PRGF reviews and Completion Point documents on participation of each country's creditors in the initiative'. Because of the slow pace of progress of countries through the HIPC initiative, no country has reached Completion Point since the G8 summit in June of this year. The Completion Point document for Mauritania, released in May 2002, does include some information about creditor participation, but this is restricted to multilateral creditors. Jubilee Research will continue to monitor Completion Point documents to ensure that more information is made available in future.

• 'Post comprehensive information on creditor participation on the Bank and Fund websites, including creditors explanations for non-participation.' The latest HIPC 'Status of Implementation' report can be seen as a step in the right direction in this regard, although, contrary to the requests of HIPC Ministers ^[16], it does not provide a detailed analysis of how creditor participation will affect each country's debt sustainability at Completion Point. Jubilee Research concurs with the HIPC Ministers and calls for such an analysis to be undertaken as a matter of urgency.

• 'Prepare a comprehensive report on legal action brought against HIPCs by non-participating creditors, including by commercial creditors, and on options for HIPCs to obtain technical assistance to facilitate resolution of disputes.' To date, no 'comprehensive report' has appeared on the World Bank or IMF websites on this issue. Furthermore, the formation of a rapid response legal technical assistance team to help countries fend-off lawsuits by creditors has been slow, according to HIPC Finance Ministers ^[17].

• 'Encourage creditors who are members of [the World Bank and IMF] to participate fully in the HIPC initiative, particularly relatively wealthy creditors that have a significant amount of claims.' The World Bank and IMF have reported that they have sent letters to Governors of the Bank and Fund calling on these authorities to participate in the initiative, and have had follow-up discussion with a number of creditors. However, the outcome of these discussions has not yet been made public.

• 'Identify creditor countries' participation in the initiative ahead of any debt rescheduling with the Paris Club.' The Chair of the Paris Club is asked to 'consider inviting, on a case-by-case basis, non-member official creditors to participate in its negotiations with HIPC countries on the understanding that these creditors will join a satisfactory consensus and will abide by Paris Club principles.' According to the HIPC Status of Implementation Report, the only countries which have been treated by the Paris Club since the G8 summit are Mauritania and Sierra Leone ^[18]. Looking at the Paris Club website, no non-Paris Club creditors attended the meeting to reschedule Mauritania's debt after Completion Point, despite the fact that she owes money to a number of other bilateral creditors, including some traditional 'dissenters' such as Libya, Iraq, Algeria, Saudi Arabia and China ^[19]. Jubilee Research is in the process of contacting the Paris Club secretariat to ask whether these creditors were invited to the meeting, and will be monitoring this issue from now on.

b) What are the other options?

The G8 proposals outlined already may go some way towards ensuring creditor participation in the initiative. But to date, progress in this area has been much too slow, and the effects too small. We now, therefore, consider some of the other options for ensuring full participation of creditors in the HIPC initiative.

• HIPC-to-HIPC Trust Fund. This fund would operate on a similar basis to the current HIPC Trust Fund which uses bilateral contributions to fund the costs of debt relief to multilateral creditors. The HIPC-to-HIPC trust fund would receive similar grant financing to cover the costs of debts owed by HIPCs to other HIPCs. This proposal has been suggested by the IMF and World Bank, who note that the total costs would be quite small ($26m, in NPV terms.) G7 representatives meeting with HIPC Finance Ministers on Friday 27^th September 2002 also apparently welcomed the proposal, although they did not provide details as to when or how this fund would be set up. The 12 HIPC creditor countries which are members of the HIPC Ministerial network have also agreed to discuss this solution positively ^[20].

It is possible that some of the $1bn of additional funding for HIPC agreed at the G8 meeting in June 2002 and committed at the recent Annual Meetings may be used for the HIPC-to-HIPC trust fund. However, as Jubilee Research has noted elsewhere ^[21], this $1bn is far from sufficient to meet the current financing needs of the HIPC initiative, let alone provide for any further funding for a HIPC-to-HIPC Trust Fund. Given the small size of the resources needed, Jubilee Research urges that bilateral donors cover the costs out of additional resources.

• An international conference on 'innovative mechanisms' for providing debt relief. This option has been advocated by the HIPC Ministerial network. They suggest that for creditors which are refusing to participate in the HIPC initiative, but are not threatening litigation, a conference may be sufficient to provide moral suasion. The conference should specifically aim to review innovative mechanisms for providing debt relief, including the HIPC-to-HIPC trust fund already discussed. However, on its own, such a conference is unlikely to provide sufficient motivation for rogue creditors to cease their unethical activities.

c) The long run solution: implement the Jubilee Framework for international insolvency

Jubilee Research is proposing that HIPC debt should be treated, as with middle income country debt, under an international insolvency procedure – the 'Jubilee Framework.' This process would be based on Chapter 9 of US bankruptcy law, (as proposed by Prof. Kunibert Raffer) and would enable countries that are struggling with unsustainable debt burdens to do what Enron has done. Namely, to

• effectively declare themselves insolvent;

• to enjoy legal protection from their creditors; while ensuring the fundamental human rights of their people are guaranteed;

• to be eligible for interim financing as their debts are re-structured; and

• to engage, within a transparent framework of justice, in negotiation with their creditors ^[22].

At the same time such a process would engage civil society (at a national and international level), and therefore mobilise legitimacy for the debtors' position. In just the same way as the US Congress, Senate and Courts have protected Enron as a debtor; but also enabled employees; shareholders and suppliers to challenge the actions of Enron management, shareholders and creditors; so a public, transparent insolvency framework would give legitimacy to the sovereign debtor's insolvency, while protecting the fundamental human rights of the debtor nation.

International legitimacy, legal protection and public participation in an orderly framework of justice, would make it difficult for rogue creditors or “hold-out” creditors to threaten the sovereign state.

In October 2001, G7 finance ministers surprised observers by advocating a similar process for international insolvency – a proposal which became the Sovereign Debt Restructuring Mechanism (SDRM). This would allow countries to receive protection from litigation by their creditors and to negotiate with their creditors to ensure a debt restructuring. Unfortunately the SDRM framework, like HIPC, is fundamentally flawed, as it excludes certain classes of creditors from the burden sharing process, such as the multilateral institutions. There is ongoing debate in Washington as to whether the G7 creditors themselves, organised in the Paris Club, should be excluded from burden-sharing under the SDRM ^[23]. We should not be surprised that, as a result of inherent discrimination towards creditors, the SDRM is opposed vigorously by the class of creditors that will be required to carry the whole burden of debt write-offs – commercial creditors. (The SDRM proposal has not yet been finalised, and is still under discussion within the IMF and the broader international community.)

While the IMF's proposal differs fundamentally from the Jubilee Framework ^[24], both agree on the need to ensure that debtors are given legal protection from their creditors while the restructuring or relief is being negotiated, and to force creditors to stick with the negotiated agreement once it has been reached. The IMF is proposing a change to its Articles of Agreement to bring this into law.

Jubilee Research does not believe that such a change is necessary, or indeed politically feasible. (We will explore these issues in a forthcoming briefing on SDRM). Instead we believe that the necessary protection for debtor countries could be achieved through minor changes to the law of just a few key jurisdictions in which such litigation currently occurs, in particular the US and UK. Such a proposal to protect HIPC countries from litigation has also been endorsed by the HIPC Ministerial network.

6) Conclusions

As we have shown, the issue of creditor litigation is a serious one. For countries facing lawsuits, such litigation can threaten to undermine even the limited benefits that the HIPC initiative is currently providing.

Jubilee Research therefore calls upon the G8 countries, the Bretton Woods Institutions, and the Paris Club secretariat, to implement the commitments made at the G8 summit in June. In particular, donor countries should act fast to provide capacity building for countries facing litigation, and to establish the HIPC-to-HIPC trust fund – a fund which, as already noted, would require minimal additional financing.

We also urge the IMF and World Bank to act more quickly to undertake a serious analysis of the impacts of creditor non-participation on each country's debt sustainability. We do not advocate that other creditors should necessarily make good the contributions of non-participating creditors – this would create so-called 'moral hazard' issues for creditors, and violate the principle of burden sharing. However, we do believe that the World Bank and IMF should take into account the issue of non-participating creditors when undertaking debt sustainability analyses. Such analyses should ensure that all countries are brought below the 150% debt-to-export threshold used in the HIPC initiative, even without the participation of creditors accounting for up to 20% of their debt.

In the long run, however, we believe that the issue of creditor non-participation, and in particular that of creditor litigation, can only be dealt with under the Jubilee Framework. While even the G7's proposed Sovereign Debt Restructuring Mechanism (SDRM) is still a long way off, and is by no means certain to be implemented, we believe that change in individual jurisdictions could happen much more quickly. The UK and US, for example, could act quickly to change the laws governing litigation against HIPCs in their own countries. This would not only help HIPCs in the short term – it would also amount to a crucial stepping stone on the way to implementing the Jubilee Framework for international insolvency.

Footnotes

^[1] One of the weaknesses of the G7's latest initiative for sovereign bankruptcy, the “Sovereign Debt Restructuring Mechanism” (SDRM) is that it proposes from the start to treat creditors unequally, by excluding both multilateral and Paris Club (bilateral) debts from the burden sharing process. For this reason the SDRM is as doomed as the HIPC initiative.

^[2] See 'Latest HIPC report brings more bad news for poor countries' by Jubilee Research, September 2002, available at http://www.jubileeresearch.org/hipc/hipc_news/latest190902.htm

^[3] All figures are taken from this report unless otherwise stated. For a full copy of the report, see http://wbln0018.worldbank.org/DCS/devcom.nsf/(documentsattachmentsweb)

/September2002EnglishDC20020020/$FILE/DC2002-0020(E)-HIPC.pdf

^[4] For a description of the stages in the HIPC process, see ‘What is the HIPC Initiative?’

^[5] According to the latest HIPC Status of Implementation Report, Niger will have a debt-to-export ratio of between 179% and 188% at Completion Point, excluding additional debt relief provided by bilateral creditors. For Senegal, the ratio is even higher at 202-203%. For more information on debt sustainability at Completion Point, see 'Latest HIPC Report Brings More Bad News for Poor Countries' at  http://www.jubileeresearch.org/hipc/hipc_news/latest190902.htm

^[6] For an explanation of the difference between nominal and NPV relief, see the glossary at http://www.jubileeresearch.org/databank/glossary.htm

^[7] It is understood that Burundi's claim against Uganda has now been dropped.

^[8] The HIPC Ministerial Network is a group of 34 HIPC Finance Ministers which meet periodically to review issues of shared concern relating to the HIPC initiative. It includes almost all HIPC countries which are either already past Decision Point under HIPC, or are likely to reach it in the near future.

^[9] Source: Declaration of the 6^th HIPC Ministerial Meeting, HIPC Finance Minister's Network, March 5^th 2002.

^[10] Source: Matthew Martin, Director of Debt Relief International, during press conference in Washington DC on September 28^th 2002.

^[11] Source: HIPC Status of Implementation Report March 22^nd, 2002

^[12] Source: HIPC Status of Implementation Report September 2002, page 18.

^[13] Source: Mr Ali Badjo Gamzhie, Minister of Finance and Economy, Niger during a press conference in Washington DC on September 28^th 2002.

^[14] Source: Matthew Martin during the press conference on September 28^th, op cit.

^[15] Unless otherwise stated, all quotations within this section are taken from the Statement by G7 leaders: 'Delivering on the Promise of the Enhanced HIPC Initiative' available at http://www.g8.gc.ca/kan_docs/hipc-e.asp

^[16] Source: HIPC Ministerial Network Press Release, September 28^th 2002.

^[17] Ibid.

^[18] There was no information on Sierra Leone's treatment on the Paris Club website so we are unable to comment on this case.

^[19] Source: Completion Point document for Mauritania

^[20] Source: HIPC Consultation Meeting: Reinforcing HIPC II. HIPC Finance Ministers Network, London, 5^th March 2002.

^[21] See 'Latest HIPC report brings more bad news for poor countries' op cit.

^[22] For a full description of the Jubilee Framework, see our report 'Chapter 9/11? Resolving international debt crises – the Jubilee Framework for international insolvency' available at http://www.jubileeresearch.org/analysis/reports/jubilee_framework.pdf

^[23] “On the one hand, the mechanism must be sufficiently comprehensive to facilitate an orderly restructuring of debt to a sustainable level, while paying due regard to addressing the inter-creditor equity concerns in order to mobilize broad support....On the other hand, the mechanism must pay due regard to the fact that not all creditors are similarly situated and that, therefore, equity may require differentiation among creditors” Statement on Sovereign Debt Restructuring Mechanism – Further Considerations by Anne O. Kreuger, First Deputy Managing Director, IMF. IMF Executive Board Meeting, Wednesday, September 4, 2002.

^[24] For an update on discussion of the SDRM during the 2002 Annual Meetings, see 'IMF meetings give go-ahead for bankruptcy plan – but on whose terms?' available at http://www.jubileeresearch.org/analysis/articles/imf011002.htm