By Romilly Greenhill, Jubilee Research

29^th April 2002

In two new reports issued by the World Bank in time for the recent IMF and World Bank Spring Meetings*, the World Bank has admitted that its own Heavily Indebted Poor Countries (HIPC) Initiative is failing.

The two reports from the World Bank show that:

• Of the 5 countries already at Completion Point, at least 2 of these do not have sustainable levels of debt according to the HIPC criteria.

• Of the 21 countries which are currently between Decision Point and Completion Point under the Initiative, at least 8-10 countries will not have sustainable levels of debt at Completion Point, according to the same criteria.

• Of the same group of countries, 9 have had their interim relief from the IMF suspended due to failure to stay ‘on track’ with IMF supported Poverty Reduction and Growth Facility (PRGF) programmes. These countries are supposed to receive interim relief on their debt service between Decision Point and Completion Point.

• There have even been delays in providing interim debt service relief for some countries which are entitled to this relief and are ‘on track’ with IMF programmes.

In this paper, we examine the two World Bank reports in detail, and provide an overall assessment of how the HIPC initiative is measuring up to the Bank’s own criteria. We find that the World Bank’s own assessment shows that 31 out of the 42 countries within the HIPC initiative are being failed by the process — even according to the World Bank criteria.

Under the Heavily Indebted Poor Countries (HIPC) initiative, debt sustainability is measured for most countries by comparing total debt in net present value terms to a country’s total exports. When the total stock of debt is more than one and half times the value of exports, the country is deemed to have an ‘unsustainable’ level of debt. Under the HIPC initiative, debt relief is provided by both multilateral and bilateral creditors to bring down the total stock of debt to within ‘sustainable’ levels.

Jubilee Research and other NGOs have repeatedly charged that the export projections used by the World Bank and IMF to calculate the amount of debt relief that will be needed have been overly optimistic, and that such optimism has been used by the creditors to limit their own contribution to the initiative. For example, for the first 24 HIPCs to reach Decision Point, the average growth in exports for 2001 was projected to be 11.6%. This is an extremely high figure, and bears little resemblance to the historical trend of the HIPC countries. In fact, since 1965 annual export growth for low income countries has been less than one third of this level.

It comes as no surprise, therefore, to learn that the actual export growth for these 24 countries during 2001 was less than half the World Bank’s projected level, at 5.1%. The performance of each of the HIPCs against projections is shown in Chart 1. As the chart shows, all but three of the HIPCs (Madagascar, Mali and Sao Tome) have seen lower than projected export growth during 2001. In four cases, (Guinea-Bissau, Nicaragua, Niger and Uganda), the World Bank projected strong levels of growth — whereas in fact, exports have fallen from their 2000 levels.

As a result of this shortfall, the average ratio of debt to exports in 2001 for the 24 countries considered is now estimated to have been a staggering 280%, almost twice the levels deemed ‘sustainable’ by the World Bank and IMF. Even the four countries which had already passed Completion Point are estimated to have an NPV of debt to export ratio of 156%. In total, 8 to 10 of the 20 countries which were between Decision Point and Completion Point at the time of writing can no longer expected to have a NPV of debt to exports at Completion Point of less than 150% (Benin, Burkina Faso, Chad, Ethiopia, The Gambia, Guinea-Bissau, Malawi, Rwanda, Senegal, and Zambia.)

In their report, the World Bank almost admits that their export projections were overly optimistic, noting that ‘long term economic forecasts.. depend critically on the underlying assumptions especially on the future course of government policies as well as external market conditions.’ But they excuse their dramatic failure to provide accurate projections on the grounds that the assumptions were ‘based on policy scenarios and thus predicated upon the successful implementation of a comprehensive set of economic and structural reforms.’ In other words, if the projections fail, the country is itself to blame for not undertaking sufficiently thorough ‘structural reforms.’

The technique for laying the blame at the door of poor countries themselves is not new in the land of the World Bank and IMF. As they write ‘the growth of income, exports and fiscal revenue to a large extent reflect a country’s economic policies.’ Much of the ‘Washington Consensus’ has been concerned with laying blame for Africa’s catastrophic economic performance at the door of ‘corrupt’ and ‘inefficient’ African bureaucracies. But, in this case in particular, this view simply does not meet the reality.

Firstly, as the World Bank acknowledges, much of the shortfall in exports has been caused by dramatic falls in commodity prices over 2000-01, particularly for coffee and cotton (which fell by 60% and 10% respectively.) For this fact alone, the HIPCs can hardly be held responsible, except to the extent that under their IMF tutelage they have all simultaneously been attempting to increase exports, putting downwards pressure on the price. Worse, protectionism in the North has severely worsened the volatility of commodity prices. When prices are protected in the North under agricultural agreements such as the Common Agricultural Policy and similar US agreements, all the change in price in response to natural fluctuations in commodity prices must be borne by the poor countries - countries that are already suffering markets which have been flooded by cheap exports, as a result of excess production in the North caused by agricultural subsidies.

While the World Bank does concede as much,their response is that the HIPCs should do more to diversify their production and export base, and note that ‘the experience so far with export diversification in low-income countries that are primary commodity producers has been rather disappointing.’ They list a host of reasons for this, including ‘governance concerns’ (i.e. corruption), ‘limited protection of property rights’ (i.e. not paying enough attention to the needs of foreign investors and creditors), ‘structural impediments to private sector development’ (i.e. protection for the poor, small farmers and workers), and ‘limited availability of entrepreneurial capital and technical skills’ (i.e. blame the poor for being ignorant.)

Unsurprisingly, what the World Bank does not concede is that the poor response to diversification programmes is the result of their own policies of trade liberalisation. The basic logic of trade liberalisation is that countries become more specialised in areas in which they have a so-called ‘comparative advantage’, and increase their reliance on imports for goods in which they have a ‘comparative disadvantage.’ But the fact is that most of the HIPCs have a ‘comparative advantage’ in pure, unprocessed primary products. As they liberalise, and move further towards the global ‘free trade’ position (much further, indeed, than their protected competitors in the North), they become more dependent on primary commodities, not less. As numerous development economists have pointed out, very few countries have managed to ‘develop’ and diversify their export base under conditions of free trade. As Box 1 describes, Uganda, the ‘star pupil’ of IMF sponsored structural adjustment — is in fact the country which has fallen behind the projections to the greatest extent.

Debt sustainability in the HIPC initiative is not only being threatened by lower exports. As the discussion of Uganda in Box 1 showed, some countries are also borrowing much more than had been previously anticipated — often to compensate for lack of tax revenues due to slower than expected growth performance.

In their report, and during meetings with civil society groups, the World Bank have condemned countries for taking on large amounts of new borrowing following Decision Point. A particular case is Bolivia, which has been criticised for borrowing on non-concessional terms. But the reality is that, as Box 2 shows, Bolivia has been hard hit by the Argentine crisis — a crisis which she did nothing to bring about.

During the recent World Bank and IMF Spring Meetings, debt campaigners were shocked to learn that as many of 9 of the 20 countries between Decision Point and Completion Point are having their interim relief from the IMF suspended as a result of so-called ‘policy slippages’ on their IMF programmes. Contrary to the Bank’s assertion that ‘annual debt relief received during the interim period between decision and completion points is a substantial share of the annual debt relief after completion point…[therefore] countries do not have to rush [to completion point] for the sake of increasing flows of debt relief’, the reality appears to be somewhat different. In fact, 9 of the 20 countries between Decision Point and Completion Point at the time the report was published have seen ‘slippages’ on their IMF programmes. As the World Bank note, when such slippage occurs, suspension of interim relief from the IMF is ‘basically automatic.’ Most of these so-called ‘slippages’ are for delays in meeting the IMF targets on privatisation and liberalisation within HIPC economies, and many are for very minor diversions from IMF programmes.

Even more worrying, the World Bank has also admitted that some relief is being delayed because of ‘administrative bottlenecks’ and difficulties in reconciling data between debtor and creditor countries. In the case of Zambia, Decision Point was reached as far back as December 2000 but interim relief has not yet been approved. The fact the countries that have jumped through all the needed hoops for getting to Decision Point are being delayed interim relief because of creditors failure to get organised is nothing short of scandalous.

NGOs such as Jubilee Research have long condemned the HIPC initiative for failing to meet its stated objectives, for being designed in the interests of creditors, and for imposing structural adjustment type conditionalities on poor countries.

One of the criticisms often levelled at the HIPC initiative is that it uses criteria for assessing debt sustainability which are purely based on simple macroeconomic aggregates, such as exports, while disregarding the human development needs of the HIPC countries, as set out in the Millennium Development Goals. That being said, however, one would expected that that World Bank’s own initiative would meet its own, narrow criteria for debt sustainability.

However, for the first time, the World Bank is now admitting that its own initiative is failing. Table 1 summarises what the Bank says about each HIPC and their progress towards reaching debt sustainability. As it shows, 31 out of the 42 HIPC countries are being failed by the initiative even according to the World Bank criteria.

With a success rate of 25%, one might expect that the World Bank would acknowledge the depth of failure of the HIPC initiative and, like Jubilee Research and other NGOs, call for a new process for debt cancellation, or ‘Jubilee Framework.’ Instead, the World Bank merely writes that: it would be ‘unrealistic to expect…that countries will always stay below the HIPC debt sustainability thresholds.’ The Development Committee of the World Bank has even gone so far as to say that the HIPC initiative is making ‘sustained progress’ in their Communique following their 21^st April meeting in Washington. Such self-delusion is almost unbelievable.

It is time to admit that creditors will have to provide more relief, and fast, to overcome the crushing debt burdens which still engulf the poorest countries on earth. The World Bank should immediately review all the HIPC countries and provide immediate further relief where required. While the Bank and IMF have agreed that more relief may need to be provided at Completion Point in some cases, and indeed have already done so in the case of Burkina Faso, this is not enough. Their statement that ‘there should be no presumption on country eligibility for topping up or the amount of additional HIPC relief at the completion point’ is a clear indication that they intend to wriggle out of providing extra relief, even when this is justified by external conditions. Moreover, there is no provision for any further relief beyond Completion Point.

We call on all creditors to accept their responsibilities to the poorest countries on earth and to cancel the un-payable debts of these countries under an independent process of arbitration, or ‘Jubilee Framework.’ It is time for an end to the endless rounds of broken promises and weasel words that constitute the HIPC initiative. When even the World Bank admits that HIPC is failing, it is time to change. The Jubilee Framework can wait no longer.

*'Heavily Indebted Poor Countries (HIPC) Initiative: Status of Implementation, April 21st 2002' and 'The Enhanced HIPC Initiative and the Achievement of Long Term External Debt Sustainability' both by the International Development Association (IDA.)