Responses to the debate on Ghana and HIPC: what should be done? by Akoto Ampaw

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A response to Ampaw: why Ghana took the plunge and went for HIPC.

by Jubilee +'s special correspondent in Accra. 

Why did Ghana apply for HIPC debt relief ?

Ghana's recent decision to go for the HIPC Initiative has been hotly debated in the press, on radio and TV - an sign of the openness of the new government under Kufuor, and of the degree of participation there will be in preparing Ghana's full Poverty Reduction Strategy this year. But debate was clouded by some misinformation and misperceptions, and some people remain opposed to the decision. So this article tries to suggest why the Ghanaian government went for HIPC, and is based on conversations with people close to the decision.

The first thing the government had to think about was - what were Ghana's options for debt relief ?

It very quickly became obvious that "the only game in town" was the HIPC Initiative. Without opting for relief under the HIPC Initiative, Ghana could not get any of our debt written off, except for an offer from Canada, which has less than 1% of our total debt. All other creditors make their relief conditional on other creditors joining in as part of the HIPC framework, so that the relief they give is not used to pay other less generous creditors. Even the cancellations which many G7 governments have announced since Jubilee 2000's successes over the last two years are part of this framework. In spite of continuing lobbying by Jubilee among others, there is no sign that creditors will delink their debt relief from the HIPC framework.

So we could not hold out for 100% cancellation - if Ghana wanted debt relief we had to go for HIPC.

Of course this implies that Ghana has to fulfil HIPC conditions - which mean, as all readers of this website will know, the complicated and lengthy process of designing and implementing a Poverty Reduction Strategy agreed with the IMF and World Bank.

Some suggested that we would be mortgaging our economic sovereignty and giving in to the dictates of the international financial institutions. But it is important to remember four things.

• First, we had already designed our own Poverty Reduction Strategy and agreed it with the IMF and World Bank, so this did not mean any extra conditions compared to the recent past.

• Second, the previous government had been trying to implement our Poverty Reduction Strategy relying only on tax revenue and foreign aid money. Rawlings' government found that aid money had all kinds of detailed conditions of its own which made it hard to get the money - even after donors had pledged it -whereas at least the debt relief would go straight to the budget, and be immediately available for spending.

• Third and most important, given the appalling state in which Kufuor's new government has found public finances due to overspending, domestic borrowing and shortfalls in aid flows before the elections, Ghana had no choice. The government had to either cut public spending massively or to ask the international community at the very least, for more aid money.

But aid money is also linked to the same conditionality as HIPC relief. HIPC itself does not involve any extra conditionality - other countries which are poor but not HIPC (eg Bangladesh) are having to implement the same types of conditions under an IMF Poverty Reduction and Growth Facility programme, even though they are not getting HIPC relief. All HIPC does is to choose a few of the conditions from a PRGF programme. Creditors decide that these are the ones they will look at, in deciding when to give a country its debt relief.

So the new government soon realised that it needed external help and that help might need to be via HIPC debt relief. However, before deciding on HIPC the government had to be sure that the financial gains were going to be large enough to overcome any possible negative effects - which would include negative political effects. It did its own analysis of these issues and then discussed in great detail with the IMF, World Bank, Western governments, the international and domestic private and banking sectors. The conclusion was inescapable: that Ghana would gain massively - financially - by going for HIPC.

The calculations of the gross debt relief were that Ghana would have around 55% of its total debt stock cancelled which, depending on exactly how the relief was then provided, would mean $200-250 million a year of savings for the budget. Some suggested that this would not come for several years, but they were looking at the old (pre-1999) version of HIPC. Under the new version, a lot of relief can potentially come immediately.

Against this had to be set potential losses of three kinds.

• First, the Japanese had indicated that they would not be able to lend money to Ghana if we went for HIPC. But, drawing on the experiences of other countries like Malawi, the government realised that Japan would probably keep providing a substantial amount of aid - just shifting it from loans to grants (and thereby reducing the future debt burden !), so this was seen as unlikely to cost more than $50 million a year.

• Second, some Western governments had been providing export credits to Ghana and suggested these might be suspended if Ghana went for HIPC. Ghana talked to the lenders and realised that some of these loans would continue to come, as they had done in other HIPC countries, and that a lot of the pledges of such money had never actually materialised in the past. So it would probably lose less than $25 million a year from these sources.

• Third, some suggested that going for HIPC might damage private sector creditworthiness and increase its cost or reduce its access to new loans which were essential for it to be the engine of growth. But discussions with lenders and borrowers revealed that private sector projects are assessed separately by potential lenders, who look at the potential profit of the project (especially its foreign exchange earnings), so there would be no negative effect. Indeed lenders even suggested that, as they had seen with other HIPCs and with Latin American countries in the 1980s, if the overall Ghana debt burden was reduced, they would have more faith in Ghana's ability to pay its remaining debts out of its tax revenue and foreign exchange, and would be likely to lend (and even invest) more in Ghana's private sector - so its creditworthiness would rise. The government was also aware that the negative consequences for the private sector if they continued previous policies and did not access debt relief (high inflation and interest rates, devaluation and budget cuts) would be appalling, whereas debt relief would allow an improvement in economic prospects.

Overall, Ghana stood to gain between $125 million and $175 million a year from going for HIPC. Of course, because the fiscal situation inherited from 2000 was such a mess, most of this will be spent on clearing up that mess rather on additional spending for poverty reduction - but at least it will avoid spending cuts in 2001, and from next year should provide a lot more money to reduce poverty.

The Government took the right decision, which would bring much more money to Ghana, through the only possible route to debt relief, without any extra conditionality.

Stop Press: Ghana's debt relief under threat

But since those calculations were made, it looks as if those promises may have come under threat. The Ghanaian government believes it has a strong case for an almost immediate "decision point" (the point when lots of relief begins to be delivered) under the HIPC Initiative.

Normally to reach a decision point, countries need to have a) a track record economic conditionalities - of reasonable length - with the IMF and b) the government needs to have designed its own Interim Poverty Reduction Strategy Paper (I-PRSP). (Despite these conditons quite a few countries got decision points last year (due to Jubilee 2000's pressure) with virtually no "track record" (3-9 months in several cases)).

Ghana had been following IMF programmes since 1983 with a few breaks, and since 1995 consistently until mid-2000. As a result, its Poverty Reduction Strategy Paper was approved by the IMF in June 2000.

Had Ghana decided to go for HIPC at that time it would have got an immediate decision point. But the IMF thinks that the fiscal situation inherited from the last government is such a mess that there cannot be a decision point before the end of this year or maybe even early next year.

So now, nine months on from its "missed decision point", the new government is being penalised and treated worse than countries with virtually no track record. We cannot afford to wait that long because the financing hole in the budget is so big that without early debt relief government will have to cut spending sharply - and that will hurt the poor.

Once again we call upon the global Jubilee movement to mobilise support for Ghana at the forthcoming meetings of the IMF and World Bank in Washington - to make sure that Ghana gets what it should have got a year ago, so we can sort out our budget problems and get on with reducing poverty faster from next year.