Ghana and HIPC: What Should Be Done?

By Akoto Ampaw
Coordinator for Jubilee 2000 Ghana

Accra, March 2, 2001

Choices facing the NPP government

The Kufour government has pressing foreign exchange needs. The British Development Minister, Clare Short, has dangled the prospect of $200 million a year for the next five years, if Ghana enters the HIPC programme. In this context, the analysis we make below may appear as a luxury - not relevant to the practical realities of surviving as a government.

But the experience of the Third World and of Ghana in particular shows that there is not much to be gained by way of development and transformation by sticking to IMF structural adjustment programmes (SAPs).. Indeed, the NPP and its leading economic commentators have been critical of the doctrinaire implementation of SAPs by the erstwhile NDC government. It would therefore be legitimate to expect something different from the Kufour government, even if not radically different.

It is also not valid to say that we are a proud nation, and to accept HIPC would be an admission that we were bankrupt and had become beggars. Whether we are bankrupt or not, whether we are indeed a beggar nation is, and should be, determined by our real economic circumstances. And the reality is that since 1984 we have survived, as a nation, on hand-outs-loans, grants and aid - from the West. Without it the PNDC government would have collapsed well before.

So for those who are concerned about our national pride let them understand that it was long jettisoned.

As regards the Japanese position on HIPC no one should be mislead by the arguments of the Japanese government, in opposing debt relief and threatening to withhold new loans. Japan's government has no principled opposition to cancellation. For when the big banks in Japan were hit by the financial crush in the 1990s, the Japanese government had to put together a bail-out plan which cost her not less than US$600 billion of the Japanese taxpayer’s money. This is far more than the total indebtedness of African countries! The reasons for Japan’s adamant stance must therefore be looked for elsewhere - in the use of loans and aid to bribe our governments and prise open markets in Africa where it has to compete with old colonial forces such as Britain and France as well as with the US and its African Growth and Opportunity Act.

The real issue however is that the problems of Ghana’s debt and economic crisis are not likely to be resolved with the framework of Ghana as the sole reference point. A West African and continental vision is the only solution. And the recent decision by African Foreign Ministers in Libya a few days ago to approach the daunting problems of our external debt from a collective standpoint may prove far more beneficial for a long term development of our continent, than HIPC.

The Kufour government therefore has a choice to make: if it simply intends to survive as a government without any great ambitions of moving this country forward, then clearly, it has something to gain in joining HIPC, and adopting another IMF structural adjustment programme. Indeed, it would amount to cutting one’s nose to spite one’s face, to reject HIPC, while nevertheless pursuing structural adjustment and the conditionalities of the IMF.

If however it seeks to tackle the socio-economic problems of this country from the root, and move us forward as a proud and able people, then it ought to reject HIPC without a second thought. However if it were to do so, it ought to know, and every Ghanaian ought to know, that there will be some tough and difficult days ahead. Will the Kufour government be bold and visionary enough to take this path of struggle; or will it capitulate to the path of servitude and relative tranquillity? And are our people, especially the vociferous middle class, ready to stand up to the demands of struggle? Time will tell.

Ghana's debt crisis

Ghana is in the midst of a severe debt crisis, both external and domestic. We are informed that we bear a colossal domestic debt of ¢ 9.4 trillion and spend almost 50% of government revenues, servicing domestic debt. Together with the demands of external debt servicing, servicing domestic debt takes up about 75% of total government revenue. This leaves hardly anything for development financing.

Ghana's external debt is about US$6 billion. In the past 15 years or so, we have spent on average over 30% of our export earnings in debt servicing. Indeed, though Ghana has scrupulously been servicing her debts since 1984, the reality is that our total debt stock has been increasing as we service our external debt. Thus from about $1 billion dollars in external debts since 1982, our debt has risen to $6 billion. So grave is our external debt problem the President Kufour has, in his state on nation address earlier this month, announced that his government would be studying the possibility of accessing the HIPC initiative should it conclude that it is in the interest of the nation.

Admittedly, the problem of our domestic debt is critical. Its impact on interest rates, the contraction of production, the fuelling of inflation and the general distinctive to economic development is well chronicled. We do not however intend to discuss this crippling financial problem in today's presentation. What we propose to do is to address the question of the external debt and its implications for our development efforts.

In doing so we shall not delve into the details of figures, significant as they are. Rather, we will seek to confront the fundamental structural and conceptual problems that underpin the debt crisis of Ghana and other African and Third World countries. We need, in this connection, from the onset to expose certain myths associated with the discussion of the external debt problem of the Third World:

1. That the developing countries are natural importers of capital; we need it for our development. The truth is that in the 1980s we have been massive exporters of capital to the so called rich North. Indeed, since the Latin American Debt crisis broke in 1982, right up to the 90s, third World debtor countries have been paying their fabulously rich creditors an average of $30 billion more each year than they have been receiving in new lending.
2. The IMF and World Bank know how to advise countries to correct balance of payments problems. The reality is that these two institutions have been major causes of the debt crises of the Third World debtor countries and have not changed their flawed advice since the crisis broke out.
3. Third World debtors will not get any foreign capital unless they are scrupulous about meeting their old debt obligations. The fact, in the long term, however, is that they are not likely to get new capital unless the old debts (which they clearly cannot pay) are liquidated through debt repudiation, cancellation or some other means.
4. Finally, when the creditor countries of the North advance us credit facilities in one form or the other they do so as a favour to us. In truth, they continue to advance us credit to promote their own business and protect employment at home and open up our markets for their goods and services; accordingly they need to continue this fatal relationship.

Though the debt crisis takes the form of financial crisis, a simple problem of inability to pay, in essence it expresses complex economic relationships between the debtor country and its external creditors which have their roots in production and production relations both inside Ghana and on international level.

These production and production relations were historically developed in the course of colonialism, which set a structure for our economy as one that produces low valued raw materials for export; in exchange for high value imports of manufactured goods and services. The very nature of this exchange (which is nonetheless rooted in economic production) produces a structural imbalance between the value of our imports as against that of our exports. The theory then is that this structural shortfall is balanced from the developed economies of the North through investment, loans and grants - to enable us pay our way through, and continue doing business with, the developed North. This situation is exacerbated by the long-term decline in terms of trade against primary commodities fuelled by the growth of artificial substitutes.

So long as the loans, grants and aid exceed our debt service, there is a positive net transfer from the North to debtor nations; and this enables us to use new loans for servicing old debts. This circular game can go on for a long time - as long as creditors are ready to advance new credit.

This is what we continued to do in Ghana between 1983 and 1997. But, in the nature of things, this financial hoax, this phantom of prosperity and economic stability cannot be permanent. The pretence involved can be likened to confidence trick schemes, such as Pyram R5. The relationship of the debtor country to the creditors is very much like these financial swindles. If we take the view of one borrowing government, the completion of lending by one creditor leads to the beginning of the repayment process. At that stage there is a negative transfer of foreign exchange from the country that allegedly is in need of capital inflows to the rich countries and their banks and multilateral institutions. But this is so only if there is one creditor.

In the world of international finance, however, there are many creditors, as we all know, all fighting to make profits, shore up their economies and open up markets. And so there follows a lending spree until the moment of truth - when there are no new loans, aid and grants to continue this illusory relationship.

The debt crisis becomes manifest when the point is reached where there is overall a net negative transfer from the Third World country. In Latin America, this crisis point was reached when in 1982, Argentina, Brazil and Mexico revolted and reneged on their debts obligations because they simply could not continue to service their debts. In Africa, the net transfer became negative around 1984, which was precisely the time when SAPs were initiated and imposed as a generalised system of economic reform and growth. In Ghana, after years of SAPs, the crisis occurred in 1997 and since then we have been struggling with a persistent debt crisis.

It is clear enough, from this analysis, that the debtor country, or at least its government, has an interest in the continuing flow of capital from the North. That is obvious enough. What is equally true, if not that obvious, is that the creditor governments, banks and multilateral institutions also have a stake in continuing this relationship - their commercial banks and other financial institutions face the prospect of collapse if the debts are not paid. Then again their industries and workers lose markets and jobs in the event of a negative net transfer of foreign exchange.

But that is not all for the creditor governments, banks and institutions. The debt becomes a very powerful instrument by which the North imposes on us economic and fiscal policies fashioned by the IMF which we are compelled to accept willy nilly.

Here again is another myth that ought to be exposed. Whereas the pretence is that these prescriptions are to enable the debtor country to achieve a sound balance of trade and payments problems, the real purpose and effect of these programmes is to bribe the government of the borrowing country to prevent them from undertaking the hard but necessary economic changes which will make their economies more independent and self-sustaining.

Without being alarmist, in the final analysis, foreign and capital flows must be seen as a bribe and effective tool of foreign economic policy, a foreign economic policy that keeps us within the paradigm of the colonial economy and neo liberal economic policies, what today comes under the name Structural Adjustment programmes.

As we have noted, in the period under review, the debt crisis set in the early 80s - 82 for Latin America, and '84 for Africa. From this period there were feverish efforts by the creditor governments and their banks to deal with the problem. The old mechanism of continuous rescheduling became ineffective in dealing with colossal debt problems of Mexico, Brazil and Argentina. Then emerged the Baker Plan and Brady Plan - all sponsored by the US to bail out its banks. But these effort failed to produce the desired results. In Africa, the collapse of the colonial economies forced the international community to face up to the tragedy of post colonial Africa. First there were the Toronto terms, then Trinidad Terms and later Naples and Lyon Terms. Then finally, in 1996 - HIPC.

The Highly Indebted Poor Countries (HIPC) Initiative

What is HIPC? It is the latest programme devised by the creditors to deal with the oppressive debt of the so-called poorest countries of the Third World. Under this initiative, a country qualifies for HIPC where the ratio of its debt (debt stock) to its export earnings is between 200% and 250%; and where further the ratio of its debt servicing to export earnings is between 20% and 25%. When debt reaches these levels, the government of the country can apply to join HIPC. But once part of the HIPC initiative, it must pursue harsh austerity IMF policies and conditionalities for three years before it reaches "decision point", when it qualifies for debt relief. So if there is any default in meeting the conditionalities, the whole programme may be suspended. Further, the debtor country must continue another three years before it reaches the "completion point", when it qualifies for actual debt reduction.

So there is normally no automatic debt relief or debt cancellation. Following harsh criticism of the length of time that it takes a country in dire need of relief to reach decision point and then completion point, the G-7 recently made a decision to allow the exercise of discretion in determining when a country that has consistent record of structural adjustment and IMF conditionalities may access debt relief.

The projected percentage of debt reduction offered under HIPC is an average of 34%, though some country may enjoy as little as 10%, 11% or 17% debt reduction. Further, most of the governments of the G-7 countries have committed themselves to the cancellation of 100% of the bilateral debts of countries joining HIPC. Again, apart from the Japanese and a few other lending institutions such as Agence Caisse Francaise, entry into HIPC does not close credit lines to us. The multilateral institutions, especially the IMF, World Bank and IDA will continue to support us with credit; so will the governments of the OECD countries, with concessionary loans and grants. Even the Japanese government will continue to support us with grants, though not with great enthusiasm. It is in respect of commercial loans and direct investment that joining HIPC is likely to create difficulties. But this is largely theoretical. Already, commercial loans and direct investment have hardly been forthcoming. Thus from the viewpoint of short term financial gains, we would admit, there are positive sides to joining HIPC.

HIPC initiative is in addition important for a number of reasons:

1. it constitutes a recognition by the international community that the debt burden of the poor countries of the Third World was serious enough to demand the attention of the world.
2. the heresy of debt cancellation and not debt rescheduling, was accepted for the frist time by the multilateral institutions.
3. It brought together all the creditor to address the question of debt reduction.

But HIPC has its problems.

First is the structure within which it operates which leaves all power in the hands of the G-7 countries who control IMF and the world Bank. It is as a result of this that the IMF is appointed as a gatekeeper for the creditors in supervising the implementation of HIPC. Further, HIPC does not really aim at complete debt cancellation, but, rather debt reduction to enable the debtor country maintain sustainable levels of debt. Further, there are theoretical as well as practical problems about the concept of debt sustainability - it appears an arbitrary accounting figure, with no reference whatsoever to development needs and actual impact on the living conditions of the people. The 200-250% debt stock to export earning ratio and the debt service- export earning ratio of 20 - 25% which constitute the fundamental yardstick for accessing HIPC are not based on any scientific foundation or analysis scientific basis for these figures which are now agreed to be arbitrary. Indeed, at the G7 Summit in Cologne, following the sustained criticism of the 200-250% ratio, the creditors suddenly revised the ratio to 150%. If there had been any doubt this about turn exposed the figures as arbitrary. As one commentator has put it: the right ratio is whatever the IMF say is right.

Again the debt service to export earning ratio of 20% to 25% is not supported by the history of debt management in international financial markets. First the 20-25% debt service ratio is in stark contrast to the 13% debt service ratio that was imposed on Germany after the World War I. Even then, Germany found this ratio most oppressive and resisted it to the very end. Indeed, later, historical commentators are agreed that the harshness of this debt service ratio was one of the factors that pushed Germany into World War II. In 1951, after the Second World War, Germany was asked to use only 10% of her export earnings to repay her debts, but she resisted this ratio as unsustainable. Eventually, the allies agreed on payments of 3.5% of export revenues.

British repayment for debts owed to the US after the World War II was capped at a mere 4%. Even as recently as 1971, when the West wanted to support Indonesia after the overthrow of the left wing government, ignoring serious human rights violations in the country, the Paris Club dropped a 20% debt service ratio, and agreed to limit Indonesia’s payments to just 6% of its export earnings.

Yet, essentially the same Paris Club members through the mechanism of HIPC are insisting on a debt service ratio of 20% to 25% for the poorest countries in the world! How considerate of them one may say!

But what is most serious about HIPC is that it is premised on the economic policy paradigm of structural adjustment. Only countries that are ready to comply with the rigid austerity conditionalities of the IMF are eligible to access HIPC. This is the root of the problem. The object of these programmes is not to help countries get out of the crisis of development that we face, but rather to keep us locked where we are in the international division of labour and globalisation: under HIPC, the IMF, on behalf of all the creditors, forces the beneficiary country to:

1. remove all restraints (control and other forms of regulation) on the movement of the capital even if that creates massive instability of the financial system;
2. subordinate domestic policy priorities to the interests of foreign capital;
3. develop dependence on borrowed foreign capital and investors, and a lazy mind in leaders;
4. open up markets to international trade by removing tariffs and other barriers;
5. remove subsidies from local producers even though this may hurt its nationals and benefit foreigners who may be beneficiaries of the subsidies provided by the governments of the North;
6. diminish the role of government in economic matters and give unbridle rein to the rule of the market; and
7. carry out doctrinaire privatisation

The example of Japan and the "Asian Tigers"

In Ghana it is fashionable to point to the experience of the Asian Tigers - Taiwan, Singapore, Hong Kong and South Korea. But out of these four, only Korea has been a large borrower. Singapore and Hong Kong, which as entrepot cities are atypical of Third World countries, have virtually no loans. This leaves only South Korea. Perhaps we may even include Japan, the Asian giant, which has profited most out of borrowing. Indeed, South Korea and Taiwan have followed the so-called Japanese model of economic development and foreign trade policy.

The most striking factor for us, with respect to the Japanese model, is that in a number of essentials, it is radically different from the model the IMF and World Bank are forcing down our throats. True enough the Japanese model produced the result that the IMF/World Bank model proclaims to be pursuing, namely export success. But that is all. The means by which the model achieved the results are however quite different. First, the demand for import and exchange liberalisation which is an article of faith of the IMF/World Bank model was not part of the Japanese or Korean way. Indeed, it is said that imports regulation and capital controls were a 'striking feature of foreign economic policy as well as inseparable component of the overall; growth strategy of post-war Japan'. Instead, both countries followed a successful policy of protecting their home market for import substitution. They neither pursued a policy of austerity to restrain domestic demand. Indeed, the most cursory study of the experience of Japan, Korea and Taiwan would show that state direction and control have played a major role in their industrialisation and export success. So would such study reveal that massive state investment in education and training have been key to their success, contrast the education policy we are pursuing today, even in violation of the imperatives of the constitution.

Conclusion

For Ghana to accept HIPC will close the door to creative policies and the possibility of change in economic policy. And the benefits are not that great. No doubt we shall enjoy some degree of debt relief and if we manage to meet all the conditionalities throughout the period, we shall have our total debt stock reduced by some percentage, anything between about 10% to 30%. If however Ghana's new government seeks a genuine fresh start for Ghana, which will move us forward as a proud and able people, then we ought to reject the path chosen for our nation by external creditors, whose interests do not coincide with those of the Ghanaian people.