How not to Deal with Debt – A Pre-mortem of the HIPC[1] Initiative

Stephen Mandel, Senior Researcher, Jubilee Research at nef

 

The World Bank’s Independent Evaluation Group (IEG) has just released its second evaluation of the HIPC (Highly Indebted Poor Countries) Initiative[2]. At first sight this report reports some progress and recommends only minor tweaking to the initiative, but buried in the detail of its analysis, it demonstrates that the process, which has already disappointed everybody by proceeding much slower than promised, is about to grind to a complete and premature halt, leaving millions of the world’s poorest still paying with their lives to service unsustainable debts to the richest countries (and the international financial agencies). Not only will the Bank close the list of eligible candidates at the end of this year, as expected, but the likelihood of many of the existing candidates reaching the end of the obstacle course[3] set by the IMF in order to achieve full debt relief is slight.

 

This obstacle course includes setting up an IMF-approved reform process, making an Agreement with the Paris Club of rich creditor countries, developing an interim Poverty Reduction Strategy in consultation with civil society to reach Decision Point, and then “keeping on track” with their Strategy and repayments of debt (including clearing any arrears) for a year at least to reach Completion Point.

 

The last IEG review of HIPC was in 2003 and was commented on extensively in our “Real Progress Report on HIPC” released in September of that year[4].

 

Review

So three years on – what has changed? Fundamentally, not a lot. Our criticisms of HIPC remain[5] and are summarised below.

 

·         It is too little and too late.

·         It will not provide a “permanent exit” from the cycle of debt unsustainability and debt rescheduling for poor countries.

·         It is still being used as a tool to advance the neo-liberal agenda of privatisation, removal of capital controls and trade liberalisation which has often proved disastrous to vulnerable economies.

·         Its approach to calculating debt sustainability fails to take into account the human rights of debtor populations to basic education, health care, water etc. (and specifically to meet the Millennium Development goals endorsed by all parties concerned) which should have priority over the claims of the rich creditors.

·         The IMF (effectively controlled by the rich creditor countries) and the Paris Club of rich sovereign creditors remain the judge in their own case against the debtors, thus denying the fundamental right to impartiality essential for justice.

 

What this latest review highlights is some small progress in achieving at least a reduction in  the current debt burden of the countries that have reached Completion Point; to wit 18 countries have received $19 billion[6] (in net present value terms), which has roughly halved their debt ratios[7]. It also concludes that this has been achieved using additional resources, so that the net flows to HIPC countries have increased. In other words, grants and other soft loans have continued to be disbursed at least at the rate they would have done without the HIPC initiative. However, the report notes the following.

• The growth, export and revenue forecasts used to judge how much relief to be granted are still too optimistic.
• The World Bank has scaled back its ambitions from achieving “permanent exit” from debt problems to “removing the debt overhang within a reasonable period”, which may be more realistic but is nevertheless disappointing.
• The ratios (of debt to exports and debt to revenue[8]) which they use in their calculations of debt sustainability have worsened for almost all the countries since Completion, and 8 of the 18 have ratios above the HIPC targets. The extent to which this has happened is more or less proportional to the time since Completion. In other words, far from providing a permanent exit from debt problems, the Initiative has become another step in the seemingly endless cycle of debt renegotiation. Indeed, the report acknowledges this explicitly in setting out some guidelines for “future debt relief efforts”[9].
• Other measures besides debt reduction are required in tandem.

This is what civil society has been saying about the initiative from the start[10]: that the extent of debt relief is inadequate, that other reforms (such as to the balance of power in the system of international trade) are needed and that much greater resources are required if the cycle is to be broken.

 

Alarm bells?

More alarmingly still, the report provides evidence that the remaining HIPC candidates, far from moving steadily towards Completion Point and full debt cancellation, are moving backwards on a number of indicators. It is only natural that the countries which have already jumped through the IMF’s hoops to reach Completion Point are those that are relatively well managed and fortunate in terms of stability and economic performance. It is therefore hardly surprising that Decision Point (DP) and Pre-decision Point (PP) countries, many of whom are emerging from conflict and/or corrupt governments, are doing less well according to these indicators. Nevertheless, the results are striking. The report compares these three groups with all other IDA-only countries on the basis of their Country Policy and Institutional Assessment (CPIA) score, and various corruption and government effectiveness indicators. In all cases DP countries fare worse than either CP (which always come out best) or Other countries, while PP countries rate the worst of all.

 

What is more, the ratings of both DP and PP have got worse between 1999 and 2004 on almost all counts. This demonstrates graphically one aspect of the cost of withholding debt relief and suggests that it will be a long time before any of them satisfy the requirements of the IMF to remain “on track” with their IMF programme for a year (after having produced a Poverty Reduction Strategy Programme) to enable them to move to Completion Point, even if they manage to reverse the downward trend. It is only then that they can receive the bulk of debt relief available under HIPC. This would effectively put on hold both HIPC debt relief and the MDRI (which is only available to CP countries), despite the urgent need for the crushing burden of debt service to be taken off the backs of the populations of these desperately poor countries. It also puts off the day when the creditors have to come up with the debt relief. In this way Blair and the other G8 leaders can get the kudos of offering “100% debt relief” without the pain of having to pay for it!

 

The report itself seems unaware of the implications of its observations about the state of candidate countries for the future of the Initiative. The IEG review fails to make any recommendations as to how to speed up the process of implementing the scheme. On the contrary it expresses the opinion that a longer track record of “good public expenditure management” should be required before relief is granted, on the grounds that some CP countries have not stuck to the IMF’s “straight and narrow” path since achieving CP status.

 

Conclusion

 

In fact this report demonstrates that the lessons from recent attempts at debt relief are just not being learned, namely:

 

• debt relief is needed now for all countries with unsustainable levels of debt; conditionality delays debt relief; delay in cancelling unpayable debt means more unjustified suffering for the world’s poor;
• debt sustainability needs to take into account human rights to have basic needs met[11];
• debt relief should not be used as a lever to advance the agenda of privatisation, liberalisation and the opening of markets to the transnational corporations;
• debt relief without a major increase in grants and a significant change in the balance of power in international trade[12] will be only a temporary solution at best; and
• macroeconomic policies focused on growth are not an efficient (or even a possible) means to achieve poverty reduction on a large scale[13].

 

This report only increases our concern that the HIPC Initiative during the rest of its life and future debt initiatives will merely repeat or even compound the mistakes of the past.

 

Stephen Mandel

Thursday, 04 May 2006

stephen.mandel@neweconomics.org

Annex 1

 

Countries are considered for HIPC if they are eligible for IDA[14]-only terms of lending from the World Bank, and either have a net present value of debt which is 150% of the annual value of their exports, or which has a value of 250% of government revenue, after standard “Paris Club[15]” debt relief has been granted. In addition, they must have established a track record of reform and elaborated a Poverty Reduction Strategy (PRSP).

 

A pre-decision point country is one which meets the initial criteria above but which has yet to fulfill the conditions to reach decision point.

 

In order to reach decision point, a country should have a track record of macroeconomic stability, have prepared an Interim Poverty Reduction Strategy Paper, and cleared any outstanding debt arrears. At this point, staffs of the World Bank and IMF carry out a loan by loan debt sustainability analysis to determine the level of indebtedness of the country and the amount of debt relief it may receive. The amount of debt relief necessary to bring countries debt indicators to HIPC thresholds is calculated, and countries begin receiving interim debt relief on a provisional basis.

 

The interim period between a country's decision and completion points varies, according to how rapidly a country can implement its poverty reduction strategy and maintain macroeconomic stability.

 

For a country to reach completion point it must maintain macroeconomic stability under a Poverty Reduction and Growth Facility-supported program, carry out key structural and social reforms as agreed upon at the decision point, and implement a PRSP satisfactorily for one year. Once a country reaches completion point it receives the full amount of debt relief which now becomes irrevocable.

 

At present (April 2006), there are 18 post CP countries, 11 DP countries and 11 pre-DP countries.