Jubilee Research : Tracking HIPC : What is HIPC

The World Bank and IMF’s Heavily Indebted Poor Countries (HIPC) initiative was launched in 1996. At that time, it was a radical departure from previous approaches to “debt relief” for the poorest countries. The most important aspect of HIPC is that for the first time in their 50-year history, the debts of the World Bank and the IMF (“preferred creditors” to whom debts have always to be repaid first) were included for write-off under the scheme. HIPC was also the first attempt by creditors to deal with the debts of the poorest countries in a comprehensive way. Previously debtor nations negotiated separately, and at great cost, with sets of bilateral (government to government) or multilateral (institutions owned by a range of governments) or private creditors. As a result their debts were not viewed as a whole. HIPC changed that.

By 1999, however, it was clear that the HIPC initiative was failing to deliver in its stated goal of providing a ‘lasting exit’ to unsustainable debt burdens for the world’s poorest countries. In response to massive popular campaigning by the international Jubilee 2000 coalition, creditor countries in 1999 agreed to ‘enhance’ the HIPC initiative to provide for greater levels of debt cancellation. Since then, several bilateral creditors including all the G7 countries have announced that they would provide 100% debt cancellation for all HIPC countries.

The World Bank and IMF state that in order for a country to be eligible for debt relief under the HIPC initiative they must:

By ‘available debt relief mechanisms’, the World Bank and IMF mean the debt relief that is provided by the Paris Club group of creditors[1]. Paris Club creditors will usually provide a reduction of up to two thirds of the net present value[2] of eligible debt - in other words, debt which was contracted before a certain ‘cut-off date’. Aid debt is usually excluded from this, and is only rescheduled at a lower rate of interest. Other bilateral and commercial creditors are also assumed to provide similar reductions, although in practice they may not do so.

By requiring countries first to go through traditional debt relief mechanisms, the World Bank and IMF are effectively violating the ‘burden sharing’ approach which usually applies to debt reductions. The burden sharing approach states that all creditors should receive a similar ‘haircut’ when providing debt relief. This is because unless the burden of providing relief is fully shared, each creditor will have an incentive to hold out in debt negotiations and hope that all other creditors will provide relief.

Before qualifying for the HIPC initiative, countries must follow IMF and World Bank ‘structural adjustment’ programmes, including liberalisation, privatisation and macroeconomic stability. Civil society groups, particularly in debtor countries, have criticised the HIPC initiative for requiring countries to follow these policies in order to gain debt relief.

At present, 42 countries are deemed to be eligible for HIPC assistance based on the above criteria, although four of these (Kenya, Yemen, Angola and Vietnam) are considered to already have a sustainable level of debt, and are thus unlikely to receive further debt cancellation. While the criteria for HIPC eligibility are supposed to be clear and transparent, the World Bank and IMF have in the past seen fit to adjust the list of countries based on political pressure from creditor countries. For example, Nigeria was discreetly removed from the HIPC list in 1998, despite having a per capita income and debt to export ratio comparable to the other HIPC countries. Jubilee Research believes that the main reason for Nigeria’s removal was that, with an external debt of more than $34bn, her inclusion in the initiative would have been too costly for her creditors.

The judgement as to whether or not countries have reached Decision Point is made entirely by the World Bank and IMF, with no participation of the debtor government, or of civil society in either debtor or creditor nations.

At the Decision Point, creditors commit to providing sufficient amounts of debt relief to ensure that the countries’ debt is reduced to levels deemed ‘sustainable’ (see below.) However, the debt is not actually cancelled until Completion Point. Most, but not all, creditors provide interim debt service relief between Decision Point and Completion Point. However, even after countries have passed Decision Point, the provision of interim relief is not guaranteed – a total of thirteen countries, for example, have seen their interim relief from the IMF suspended at some point.

Once countries have passed Decision Point, they are required to establish a further track record of good performance under IMF/World Bank supported programmes before they reach Completion Point. For countries that reached Decision Point with only an interim Poverty Reduction Strategy Paper (PRSP), there is also a requirement to prepare a full PSRP and to implement their poverty reduction strategy for at least one year.

At Completion Point, the full debt cancellation which was committed at Decision Point is provided.

In November 2001, it was announced that further relief may be provided at Completion Point where external conditions have worsened significantly between Decision and Completion Points. As of March 2003, only Burkina Faso, which has a relatively small external debt, had benefited from so-called ‘topping up’ of relief.

For a summary of each country’s progress through the HIPC initiative, click here.

At Decision Point, World Bank and IMF Staff prepare a ‘debt sustainability analysis’ to determine how much relief needs to be provided by multilateral, bilateral and commercial creditors. For most countries, a country’s debt is deemed to be ‘unsustainable’ if the net present value of its total external debt is more than 150% of its average exports.

For countries which are exceptionally open (with an export-to-GDP ratio of more than 30%) and with a very high debt in relation to fiscal revenues despite a relatively good revenue performance (above 15% of GDP) a debt to revenue criteria is applied. For these countries, the debt sustainability target is set so that the net present value of debt is at 250% of revenues at the decision point.

In June 1999, the G7 leaders pledged in Cologne that a total of $100bn of HIPC debt would be cancelled. In December of that year, a further $10bn was committed through 100% cancellation from bilateral creditors. However, half of this ($55bn) was debt cancellation that had already been committed through traditional debt cancellation through the Paris Club, or under the original HIPC initiative. In September 2002, creditors committed a further $1bn of debt cancellation under HIPC in order to provide ‘topping up’ for countries affected by worsening commodity prices and thus lower than expected exports when they reach Completion Point.

Assessing the amount of debt which has actually been cancelled is made difficult by the fact that under the HIPC initiative, debt cancellation is committed at Decision Point but only delivered at Completion Point. When announcing the amount of relief that has been delivered, the World Bank and IMF usually include all the relief committed to the countries past Decision Point. This is because countries gain relief on their debt service as from Decision Point, meaning that the total stock of debt has little relevance if it does not have to be serviced.

However, this can overstate the amount of cancellation that has taken place, particularly given that most countries are facing delays in reaching Completion Point, and that almost one third of the countries between Decision and Completion Points have had some of their interim debt relief suspended.

The most obvious and serious criticism of the HIPC initiative is that it is simply not working. It is supposed to be designed to deal with one of the three key elements of longer-term debt sustainability – the outstanding stock of external debt at the decision point. It is supposed to reduce this stock to a sustainable level and, quite simply, it doesn’t.

In April 2002, the World Bank admitted that that of the six countries that had by then passed their Completion Points, at least two still did not have a sustainable level of debt. Furthermore, the external debt sustainability of half of the 20 countries which were between Decision Point and Completion Point at that time had significantly worsened[3].

Indeed, the World Bank at the time concluded that of these countries in the interim period, 8-10 could have debt-to-export ratios above 150% even at their Completion points – i.e., even at Completion Point the debt levels of these countries would still be regarded as unsustainable by the World Bank and IMF’s own criteria![4]

This is for a number of reasons. Partly, the IMF tends to uses highly optimistic projections for economic growth and commodity prices. Analysis of the 24 HIPC countries that had passed decision point as of January 2002 showed that IMF projections can be out by percentage points[5];

The IMF also tends to assume a ‘relatively neutral external environment’, which does not take into account the high vulnerability of the HIPCs to external shocks, such as the volatility of commodity prices, exchange rate devaluations, variable donor aid flows and non-economic shocks such as climatic disasters, desertification, conflicts, political instability and the impact of HIV/Aids in sub-Saharan Africa. Jubilee Research is critical of projections that are substantially based on ‘best possible case’ scenarios rather than more realistic assessment of the historical, political, geographic and economic contexts in which the HIPC countries find themselves

By forcing countries to follow IMF Poverty Reduction and Growth Facility (PRGF) programmes in order to gain debt relief, the HIPC programme is also imposing deflationary, austerity economic conditions on the HIPC countries. Jubilee Research believes that one of the main purposes of these policies is to generate and transfer assets from the debtor to international creditors. When a country follows a PRGF programme, its economy becomes orientated towards exports, in order to raise hard currency revenues for the repayments of debts (and the payment of imports.) The creditor countries rarely remove as many of the barriers to trade that protect their own domestic markets.

Jubilee Research is critical that these reforms are often imposed in a blanket fashion, irrespective of differences between local economies. Many countries (Guinea, Guinea-Bissau, Guyana. Honduras, Malawi, Nicaragua, Niger, Rwanda, Sao Tome and Principe) had difficulties implementing the required structural reforms from the IMF because of economic and political difficulties and aid has even been suspended to some countries because of their delays in implementing debt relief (Guinea-Bissau, Guyana, Sao Tome and Principe).

Jubilee campaigns have always been critical of the design of the HIPC framework for debt relief, designed as it is by creditors, to limit debt relief to levels acceptable to creditors. As a result, insufficient debt cancellation is always offered, which means that debtor countries cannot return to sustainability.

Finally, Jubilee Research believes that the very definition of ‘sustainability’ is flawed. The World Bank offers no justification for the arbitrary level of sustainability set by the HIPC initiative, as 150% of exports. Initially, they stated that there was ‘absolutely no analytical justification’ for the reduction of the level of sustainability from 200-250% to 150% when they reformed the initiative; later, the World Bank claimed that the extra debt relief was a ‘cushion effect’ in case the country’s export earnings fell after it had received debt relief.

The World Bank itself admits[6] that the definition of debt sustainability is

‘’quite narrow… it does not deal with issues of domestic debt, which are important for fiscal sustainability, nor does it measure the adequacy of public resources to address priority development programs after debt service has been made’

and that

’Broad indicators such as debt-to-GDP ratios and debt service-to-GDP ratios compare the burden of debt to the ability of the economy as a whole to generate income. Debt-to-exports ratios and the debt service ratio link the levels of debt and debt service to the availability of foreign exchange earning s in the economy as a whole. Debt- and debt-service-to-fiscal revenue ratios link the debt burden more closely to the ability of the public sector to generate income… However no single indicator captures all the elements of debt sustainability.’

But this does not prevent these un-elected powers from using these flawed definitions, to support a flawed process, to make decisions that affect deeply the lives of millions.

Jubilee Research advocates the Jubilee Framework as a solution to the need for a ‘fair and transparent’ process for writing off debts. A global petition calling for such a solution was signed by 24 million people in more than 60 countries of the world

The Jubilee Framework is an international insolvency framework that would involve citizens in the resolution of international debt crises. It is based on existing national and international bankruptcy laws and would, in effect, be a means of allowing a country to declare itself bankrupt (as companies are allowed to), whilst protecting democratic principles and ensuring that basic services are continued (as happens if a municipal government is to go bankrupt).

We believe that introducing an insolvency framework will introduce regulation and discipline over the flows of international capital and will do so not just in bankrupt states but also in states where lax lending and excessive borrowing could lead to bankruptcy. Only by introducing the democratic will onto international capital markets will it be possible to ground these markets in the reality of human societies and human rights; in the reality of endangered environments; and in the reality of democratic, political relations.

[1] The Paris Club is an informal group of bilateral creditors which aims to provide co-ordinated and sustainable solutions to the debt problems of the poorest countries. For more information, see http://www.clubdeparis.org/en/

[2] For a definition of the term net present value, see http://www.jubileeplus.org/databank/glossary.htm

[3] ‘The Enhanced HIPC Initiative and the Achievement of Long-Term External Debt Sustainabiliy’, International Development Association, March 2002

[4] As above.

[5] As above

[6] ‘The Challenge of maintaining long-term debt sustainability’, World Bank, DC2001-2013, April 21, 2001