Three countries receive debt cancellation Jubilee 2000 Coalition

A Jubilee 2000 Coalition briefing note

11 February 2000

Debt cancellation for the world's poorest countries has been high on the agenda of political leaders for the past year. At the Cologne G8 Summit in June 1999, world leaders agreed a plan to wipe off $100 billion of debt for up to 36 countries. While Jubilee 2000 believes that around 52 countries are in need of debt cancellation, the deal was welcomed as a significant step forward. In September 1999, finance ministers led by British Chancellor, Gordon Brown, confirmed funding for the plan and announced that debt cancellation would begin “within weeks”.

On the 8th February lending countries and institutions announced the first two countries to have some debt cancelled under the Cologne HIPC initiative: Uganda and Bolivia. Two days later they announced the debt relief for Mauritania.

Why only three countries?

The small print of the enhanced Heavily Indebted Poor Countries Initiative agreed at Cologne (HIPC II) showed that although potentially 36 countries could benefit, only 25 could qualify for the initiative before the end of 2000. This was due to the complex and controversial conditions, including a long history of implementation of the IMF's structural adjustment programmes, that must be implemented satisfactorily before creditors will consider debt cancellation. The 25 were reduced to 24 when Ghana, after heavy pressure from the Japanese government, was reported to have withdrawn itself from the initiative.

Of the 24, nine countries had reached a decision under the earlier HIPC initiative (HIPC I) and were therefore expected to receive extra relief generated by the Cologne decisions almost immediately. This group of nine potential `immediate cases' was reduced to eight when Guyana was removed after a dispute over public sector pay (see below) – despite having been through the entire HIPC I process once already.

In December, the Managing Director of the IMF, Michel Camdessus, announced that just four countries would come through HIPC II by the end of January 2000: Uganda, Bolivia, Mozambique and Mauritania. Chancellor Gordon Brown, who linked his promise to cancel 100 per cent of debts owed to Britain to the HIPC timetable, confirmed this. The delays for the other countries that have already been through the initiative once have been attributed to a major new condition which must now be met – eligible countries must produce a Poverty Reduction Strategy Paper (PRSP). The welcome objective of this is to ensure funds released go towards poverty reduction through a participatory process. In practice it appears to have delayed further the delivery of debt relief.

Finally, one of these four countries named in December, Mozambique, was dropped from the group. The country does not now expect to see the benefits of HIPC II until June 2000. Drawing up a new PRSP is being given as the reason for delay. So three are left. Following decisions at the World Bank and IMF (at the end of January and the beginning of February), Uganda and Bolivia reached decision points on February 8th and Mauritania two days later on 10th February. It should be noted that these are the `decision points' for these countries, when annual debt service payments are reduced in line with the planned overall debt write-off. The actual stock of debt is not written off, however, until `completion point' – scheduled in Uganda's and Bolivia's case for later this year – but for Mauritania not until 2002.

What can the three countries expect to get, and what difference will it make?

Details of the expected benefit have been released by the World Bank and the IMF, and these three countries together stand to gain a 35 per cent cut in their annual debt service payments. Additionally, as part of the Chancellor's 100 per cent promise, they should get all their remaining debts to Britain cancelled. Around $212 million each year which would have ended up with rich creditor governments will instead be used in desperately under-funded basic services such as health and education. However, $388 million will still leave these countries each year in the form of debt repayments.

Uganda

Total Debt [1] Average annual debt service 1993-98 Estimated annual debt service 1999-2005 Public education spending (annual) Public health spending (annual)
$3.6 billion $155 million $68 million $174 million $126 million

Source: World Bank, IMF

Uganda, whose total debt stands at $3.6 billion, is now a veteran within the HIPC process, and should see annual debt payments cut by approximately $87 million, or 56 per cent from average levels over the last five years. The actual debt relief proposed is $656 million (in net present value, NPV) or $1.3 billion in nominal terms. This is in addition to the $347 million (NPV) pledged under HIPC I. The total amount to be cancelled under the HIPC initiative is therefore $1.0 billion in NPV, which equates to $2.0 billion in nominal terms.

However, the IMF and World Bank estimates show that Uganda will still pay in the region of $60 to $70 million each year in debt repayments for the next five years (although front-loading will mean that this will be nearer $40-$50 million in the first two years). This is in a country with one of the highest levels of HIV infection in the world, which has already left one million children orphaned. Uganda has used previous debt relief to help raise primary school enrolment from 54% to 90% and has also managed to bring down the HIV infection rate, mainly through community education programs. The Poverty Action Fund, a transparent and accountable mechanism set up to administer the resources gained through debt relief, could use this money to bolster these community programs which now have to address the devastating affect of AIDS on family structures.

Bolivia

Total Debt Average annual debt service 1993-98 Estimated annual debt service 1999-2005 Public education spending (annual) Public health spending (annual)
$5.4 billion $329 million $240 million $442 million $325 million

Source: World Bank, IMF

Like Uganda, Bolivia has already received debt relief under HIPC I: $448 million in NPV, or $760 million nominal. Under the new package it will be given $854 million in NPV relief, which is equivalent to $1.28 billion nominal. The total amount cancelled will therefore be $1.3 billion in NPV, and $2.0 billion nominal.

Estimates of the reduction in debt service have been increased. In July 1999 the IMF and World Bank estimated that the country would benefit in debt service reduction only by about 3 per cent. The latest analysis suggests that Bolivia will receive a 27 per cent reduction in debt service. This is a welcome increase in debt relief, but it still leaves the government paying $240 million per year – about three quarters of its health budget.

Currently, 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. “If this is all that is going to come out of the HIPC II, I do not understand the great declarations made in Cologne in June of last year”, commented Monsignor Edmundo Abastoflor, the Archbishop of La Paz and Vice-president of the Bolivian Episcopal Conference.

Mauritania

Total Debt Average annual debt service 1993-98 Estimated annual debt service 1999-2005 Public education spending (annual) Public health spending (annual)
$2.6 billion $116 million $80 million $51 million $17 million

Source: World Bank, IMF, except est. annual debt service 1999-2005 – source: Jubilee 2000 calculations

Mauritania, a large country with one of the smallest populations in Africa, is reaching this point in the HIPC initiative for the first time, following delays caused by funding failures for the African Development Bank and the Islamic Development Bank, and indecision from the Paris Club. Debt relief for Mauritania will be $622 million (in NPV) and $1.1 billion in nominal, although it will have to wait until 2002 before its debt stock is reduced by this amount at completion point.

Mauritania can expect a debt service reduction of about $36 million (31 per cent of average levels of the last five years). In Mauritania, the adult illiteracy rate stands at 62%, one of the highest in the world. One in three children are not receiving an education. The $80 million each year that Mauritania will still have to pay could more than double the education and health budgets.

What about the announcements from Britain, the United States and Canada that they are canceling 100 per cent of the poorest countries' debts?

Uganda, Bolivia and Mauritania should all benefit from the bold promises by three of the G7 countries to wipe out the debts owed to them. However, only the UK has so far confirmed that it will do so as soon as each country comes through the HIPC process. The USA has indicated it will implement its promise not now, but at `completion point' (these three countries have no debt to Canada). These announcements will reduce the debts of these countries by a small extra amount. The three debtor countries together owe $39 million to the UK and $101 million to the US – though some of this debt should be covered by the general reduction under HIPC. If the remaining G7 countries were to take the same line (France has indicated a willingness to do so in the last few weeks, though details of its offer are still not confirmed) the benefit to Uganda, Bolivia and Mauritania would be more substantial – as the table overleaf shows.

Debts owed to G7 countries ($m) Canada France Germany Italy Japan UK US
100 per cent commitment:   ?          
Uganda 0 25 1 110 57 9 3
Bolivia 0 44 387 67 566 19 91
Mauritania 0 105 6 0 82 11 7

What about the other countries who are waiting for debt cancellation?

While the benefits to the first three countries are clearly limited, others have yet to gain anything from the new initiative. Both Mozambique and Guyana have already qualified for and received debt relief under HIPC I. In doing so they have fulfilled all the exhaustive IMF conditions necessary. Jubilee 2000 argues that it is unreasonable for these countries to be made to wait for the extra relief promised in June. There are real concerns in these cases that debt is being used as a lever to impose further IMF conditionality.

Mozambique

Mozambique, on many measures the poorest country in the world, went through HIPC I process and completed it in June 1999. However, the country does not now expect to see the benefits of HIPC II until June 2000. Drawing up a new PRSP is being given as the reason for delay, showing the obvious problems with an initiative in which new conditions relating to poverty reduction are simply piled on top of numerous existing conditions concerning structural adjustment – conditions which have already been met.

Furthermore, when the government does receive extra relief, it will still be expected to find $62 million a year to finance debt repayments – more than is currently spent on health. Over three-quarters of the population in Mozambique have no access to either safe water or basic sanitation.

Guyana

Guyana's case is even more compelling. It has also slipped down the HIPC timetable, despite being one of the four to have passed completion point in the earlier phase. The story behind the delay shows clearly how the stringent – and in this case contradictory – conditions of the IMF conflict with plans to reduce poverty. The government sought IMF consultation in the summer of 1999 to reach agreement in a pay dispute with the public sector. The IMF supported settling along the lines of independent arbitration recommendations, which led to the government exceeding its budgetary targets – targets set by the IMF. This `overspending' is now being used by the IMF as the reason to delay the debt relief owing to Guyana under HIPC II.

When cancellation does eventually come, even if the debt relief is front-loaded, Guyana will be paying on average $65 million a year. This is equivalent to the combined spending on health and education. The Guyanese High Commissioner for the UK, Laleshwar Singh, has commented as follows: “The recent history in Guyana reveals the contradictions within the process of qualification for debt relief. Guyana patiently followed the rules, and now we are not being rewarded for doing so. From the point of view of the Guyanese people, stalling the process is not about new dates – the debt burden is severe and constrains the ability of the Government to act on extremely urgent domestic priorities such as education, health, water, physical infrastructure and public administration capacity. In short, without new debt relief commitments, the economy runs the risk of stagnation.”

Other HIPC countries

The following table shows the current timetable for countries expected to move through the HIPC process in 2000, though on past experience, it is difficult to predict which will do so. There are 12 other countries which are eligible for HIPC but will not receive any relief by the end of the year.

By January 2000 By April 2000 By December 2000
Uganda, Bolivia, Mauritania Benin, Mozambique, Senegal, Tanzania, Mali, Burkina Faso Chad, Cameroon, Cote d'Ivoire, Ethiopia, Guinea, Guinea Bissau, Honduras, Laos, Malawi, Nicaragua, Niger, Zambia, Guyana, Rwanda, Sierra Leone

Non-HIPC countries

Jubilee 2000 argues that more countries are in need of urgent debt cancellation than the 40 [2] officially described by the World Bank as Heavily Indebted Poor Countries, and has compiled a list of 12 that are not on the World Bank's list. One of these is Nigeria, which was included in the original HIPC list, only to be dropped last year for technical reasons. Nigeria is Britain's biggest debtor among the poorest countries, but is not expected to benefit from Gordon Brown's 100% promise. Nigeria is a new democracy, with an elected government struggling to establish economic and social stability under an impossible burden of debt. Creditor countries, whom lent freely to previous military regimes, must share the responsibility to free Nigeria from the debt crisis currently constraining development.

What happens next?

There are a number of actions which in the short-term would secure debt cancellation promised under the HIPC process, and would open the prospect of further debt relief for countries in need:

However, more radical action is required by the international community to find a positive long-term solution to the problems generated by the debt burden. Jubilee 2000 is calling for deeper debt cancellation and a more independent and transparent process for managing debt cancellation and future lending. Only this solution will ensure that these debts do not build up again.

Prepared by John Garrett, Adrian Lovett, and Lucy Matthew, 2 February 2000

For more information

Footnotes

[1] Total debt figures for all countries listed are for 1998. 1999 figures will show a fall in the total debt stock for Uganda, Bolivia, Mozambique and Guyana as they reached completion point in HIPC 1. However, the debt relief granted is spread over a number of years, and so the debt stock reduction is generally less than the notional nominal debt relief stated.

[2] Equatorial Guinea was recently removed from the HIPC list, reducing the total from 41 to 40.


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