Select Committee on International Development Minutes of Evidence

Memorandum from OXFAM

INTRODUCTION

  1.1 Oxfam welcomes the decision of the Select Committee to conduct an inquiry into the issue of external debt of developing countries as we believe that debt repayments from the world's poorest countries to official and multilateral creditors are contributing to poverty and undermining efforts to achieve sustained economic recovery. While the economic consequences of debt can be measured in terms of low investment, deteriorating infrastructures and chronic balance of payments instability, our research has focused on the human costs of debt. These can be measured in terms of lost opportunities for health, education, and employment, and increased vulnerability to illness, illiteracy and poverty. For less than is currently being spent on debt repayments, it would be possible by the year 2000 to make social investments which would save the lives of around 21 million African children and provide 90 million girls with access to primary education.

  1.2 Oxfam acknowledges that in certain cases, debt burdens have accumulated under corrupt and repressive regimes which have shown little concern for the welfare of their own people. Nevertheless, we think it is important to recognise that it takes two to create a bad debt and that creditors who have indulged in irresponsible lending must bear their share of the responsibility and play a full role in seeking a solution. This applies with special force to the case of Zaire, now Democratic Republic of Congo, which is saddled with a debt of $5 billion.

  1.3 Over the past few years, Oxfam has published a wide range of briefing papers on the subject of debt based on our field experience and these are listed at the end of our submission for further reference. In this memorandum, we will attempt to address the Committee's specific concerns and end without own suggestions on the best way forward.

THE TERMS AND CONDITIONS OF THE HEAVILY INDEBTED POOR COUNTRIES (HIPC) INITIATIVE AND ITS PROGRESS TO DATE

  2.1 When agreement was reached on the HIPC Initiative in 1996, Oxfam welcomed the move as a major breakthrough in international efforts to resolve the debt problems of low income countries for the following reasons:

  —  It was the first time that the multilateral institutions had recognised their own responsibility for reducing debt in a concerted fashion;

  —  It set out a comprehensive framework for debt relief which included bilateral, commercial and multilateral debt;

  —  It attempted to establish sustainability ceilings for debt, thereby aiming to provide an exit strategy from future debt negotiations;

  —  It included as eligibility factors the vulnerability of a country's economy (i.e., dependence on one primary commodity, high public debt of post-conflict reconstruction);

  —  It was accompanied by statements from the World Bank that factors measuring a government's performance on poverty reduction would be taken into consideration alongside judgements on fiscal and monetary performance.

  2.2 At the same time, we made clear from the outset our concerns regarding the weaknesses of the HIPC Initiative including:

  —  An overly long time-frame for implementation, based on a three year track record of compliance with an IMF programme to reach a "decision point", followed by a further three year period, when concessional funding may be available, before reaching a "completion point".

  —  An unrealistically high debt sustainability ceiling, defined as debt stock to export ratios in the range of 200-250 per cent and debt service ratios of 20-25 per cent. The choice of ratios was based on the experience of the Latin America debt crisis of the 1980s and we were concerned that these would prove too high for commodity dependent and post-conflict countries in Africa;

  —  Over-reliance of the eligibility criteria on strict compliance with IMF adjustment conditionality, with the risk of poverty criteria not being granted the same level of importance in practice;

  —  Enough flexibility within the case-by-case approach to allow opponents of debt relief to obstruct implementation;

  —  Insufficient political will to generate the necessary funding, with particular concern regarding the timing and form of the IMF's contribution to the Initiative.

  2.3 Two years on from the adoption of the HIPC Initiative, we regret that our concerns appear to have been justified and there is a growing perception that HIPC has failed to deliver. Too few countries are entering the process and those that do are leaving with inadequate levels of debt relief, exposing them to the risk of future debt problems. The unwillingness of some creditors to finance the initiative is undermining implementation, casting doubts on the level of political support for the initiative.

  2.4 At the time of writing, the case of Mozambique is particularly topical. Mozambique is one of the poorest countries in the world, desperately trying to recover from its sixteen year civil war, yet the annual costs of servicing its external debts are nearly equivalent to its entire export earnings. The case for debt relief is clear and has been accepted in principle by the IMF and the World Bank. They agreed in September 1997 that Mozambique was eligible for HIPC and needed to reduce its debt to the lower range of 200-220 per cent debt to export ratio to achieve debt sustainability, and also agreed the completion point for debt relief should be mid-1999.

  2.5 Oxfam and other NGOs have argued that even this ration is too high for Mozambique, given its extreme poverty and post-war status, yet creditors have spent the last five months wrangling over who will foot the bill under the burden-sharing agreement established within the HIPC Initiative. Because three quarters of Mozambique's debt is bilateral, the only way its debt can be lowered to the designated ratios is if bilateral creditors reduce the greatest portion of debt, and this will mean Paris Club creditors moving beyond the existing ceiling of 80 per cent to a threshold of 90 per cent. Despite discussing Mozambique's case in October and November, deadlock within the Paris Club has stalled progress and at the time of writing, Mozambique is scheduled for further discussion at the January meeting.

  2.6 In many ways, Mozambique has become a test-case for the HIPC Initiative: if HIPC cannot deliver debt relief for Mozambique, where can it succeed? Two years after its launch, we fear that the HIPC Initiative risks losing credibility with governments in the south and campaigners in the north alike. The challenge is to revitalise creditor support and Oxfam's suggestions for achieving this are set out in the final section of this memorandum.

THE POLICY OF THE UNITED KINGDOM ON BILATERAL (OFFICIAL SECTOR AND COMMERCIAL BANK) AND MULTILATERAL DEBT RELIEF, INCLUDING THE MAURITIUS MANDATE

  3.1 Debt is one area of policy where both previous and current UK Governments have taken an international lead and deserve credit for their actions. In launching the Mauritius mandate, Gordon Brown made it clear that he intends to follow Kenneth Clarke's example in keeping the issue of developing country debt high on the agenda. There is much in the Mauritius mandate which we welcome including:

  —  the attempt to introduce a timetable for implementation of HIPC;

  —  the writing off of remaining UK aid loans to Commonwealth countries;

  —  the agreement to apply debt relief to "post cut-off date debt",

  —  the announcement of further technical assistance to help poor countries with debt management;

  —  the continuing commitment to sale of IMF gold as a means of funding the institution's contribution to HIPC;

  —  the announcement that for the next two years, the UK will ensure that export credits for poor, highly indebted countries will only support productive expenditure;

  —  the commitment to a stronger debt voice in debt negotiations.

  3.2 The key question, however, is whether these proposals are sufficient to breathe new life into the HIPC initiative by generating renewed political will for implementation on the part of creditors at the same time as delivering swifter and deeper debt relief which is so urgently needed by debtors. In Oxfam's view, the proposals, while welcome, do not go far enough. In particular, they do not address the central issue of getting countries through the HIPC process within a three year period.

  3.3 This leads on to the question of whether further unilateral action by the UK Government to reduce debt is necessary and/or desirable. In Oxfam's view, unilateral action is merited in two specific cases. Firstly, we believe that unilateral action, or the threat of unilateral action, is valid as a tactic for shaming other creditors into further action themselves. Leading by example has been shown to work in the past, e.g., Kenneth Clarke's Trinidad terms initiative. Secondly, there may be particular cases where more generous debt relief from the UK automatically unlocks the door to more generous debt relief from the UK automatically unlocks the door to more debt relief from other creditors, again making it a legitimate tactic. For example, if the UK were unilaterally to write off its debt to a particular country, it could exclude itself from further discussions on that country's debt, thereby reducing its potential leverage over other creditors.

  3.4 In general, we believe that secret of success lays in persuading all creditors, bilateral and multilateral, to move ahead on with the necessary speed and commitment. Rather than focusing on further measures to write-off British debts, which form a very small part of the global total, we would like to see the UK Government using all of the political levers at is disposal, including pressure at the highest levels, to persuade fellow bilateral creditors and multilateral institutions to provide the debt relief which is so desperately needed. We believe that it should focus on persuading countries who previously supported HIPC but are now dragging their feet to get back on board, urging those who remain committed to act with a greater sense of urgency and working with the World Bank to make this a priority political project. This is a role which needs to be handled sensitively, as exhortations to others on debt must be matched by upfront financial contributions or they will go down badly with the wider creditor community. The UK deserves credit for being the first bilateral donor to contribute to the HIPC Trust Fund, but having claimed an international lead on debt, it must consistently ensure that its words are matched by its deeds.

THE PROCESS OF DEBT NEGOTIATION AND THE QUESTION OF CONDITIONALITY IN DEBT RELIEF

  4.1 We have already touched on the question of process in this submission, pointing out that debt negotiations are typically complex and protracted, with plenty of opportunities for those who wish to stall the process to do so. Another factor which the Committee might like to bear in mind is that for debtor countries in particular, debt negotiations are also very expensive, with some of the best brains in the civil service constantly tied up in lengthy negotiations. We very much agree with the Chancellor that more needs to be done to strengthen the debtor's voice at the negotiating table and believe that one way of doing this would be to support south-south linking initiatives. encouraging countries hoping to secure debt relief to learn from the experience of those who have already been through the process.

  4.2 At the same time, we think that creditors should look seriously at their current lending policies in order to ensure that the risk of low income countries incurring further debts in future is avoided.

  4.3 We also believe that more work needs to be done within debtor countries to ensure representatives of civil society are able to play a full role in the negotiation process as we believe that this is one of the best ways of ensuring that governments channel the proceeds of debt relief into poverty reduction.

  4.4 This brings us on to the Committee's final question which concerns conditionality on debt relief. Oxfam's starting point on this issue is that debt relief must not be seen as an end in itself: the end must be poverty reduction. With that in mind, we believe that it is essential to ensure that mechanisms for debt relief include some means of ensuring that the proceeds will be invested in programmes and policies which benefit poor men and women. One way of doing this would be to link debt relief to national poverty eradication programmes, with debtor governments entering into transparent agreements based on converting debt relief into poverty reduction. The Ugandan Government has already indicated its willingness to enter into such an agreement and this could act as a model for future debt-for-social-development contracts.

  4.5 In theory, the existing HIPC framework incorporates the principle of social conditionality and gives it equal waiting with economic conditionality. In practice, it is clear that economic and fiscal considerations are given more weight. We continue to be concerned at the extent to which conditionality is based on strict compliance with IMF adjustment programmes, especially given the dismal success record of such programmes in many HIPC countries, and would like to see this link broken.

SUGGESTIONS ON THE WAY FORWARD

  5.1 Oxfam believes that there are three key issues which need to be addressed if the HIPC Initiative is to deliver the necessary levels of debt relief to low income countries.

  5.2 First of all, the timeframe for debt relief must be reduced. If the eligibility period was reduced from six to three years, it would bring within range the targets set by Debt 2000 at the same time as offering earlier benefits to eligible countries. We would also like to see interim targets set for getting countries through the HIPC Initiative.

  5.3 Secondly, in the longer term, the creditor community needs to reform the HIPC framework with a view to broadening and deepening the level of debt relief provided. The debt sustainability ratios included in the framework for debt to export (200-250 per cent) and debt service (20-25 per cent) are at best arbitrary, being based upon selective interpretation of research evidence; and at worst an illustration of how thresholds have been set with a view to minimising costs to creditors rather than meeting the needs of debtors. Both thresholds should be lowered, to between 100-150 per cent for debt to exports and 10-15 per cent for debt servicing. At the same time, more must be done to integrate debt relief into broader reconstruction strategies.

  5.4 Thirdly, and most importantly, the deadlock on financing must be broken by generating sufficient political will amongst creditors to pay their share of the costs.

  5.5 Oxfam believes that this would be possible if debt relief was integrated into an ambitious and internationally co-ordinated strategy for poverty reduction. The advantages of such a strategy are two-fold. First, by linking debt relief to tangible human welfare gains, it would be possible to mobilise new constituencies behind debt relief, creating a political momentum which is currently lacking. Second, there is a powerful case for integrating debt relief into a broader development strategy in order to meet the DAC development goals. There is a huge financial resource gap which must be filled if these targets are to be met and debt relief could help to fill that gap.

  5.6 As a first step towards the development of a new poverty-focused approach to debt relief, Oxfam suggests that the creditor community should focus on education. This is an area where particularly ambitious targets have been set, with the 1990 Jomtien Conference on Education for All calling for the achievement of universal primary education in all countries by 2015. In human development terms, the attainment of basic literacy and numeracy skills is one of the most significant factors in reducing poverty and increasing participation. Investment in education for girls is particularly important, since it is strongly correlated with other measures of progress. It follows that linkage between debt relief and education, with a focus on achieving gender equity, would generate some of the highest social and economic returns.

  5.7 How could the HIPC framework be used to enhance educational opportunity? Oxfam suggests a two phase approach in which creditors would provide financial incentives in the form of earlier and deeper debt relief. In return, debtor governments would accept stringent social conditionality and social policy performance criteria as follows:

  Phase one—Agreement on a debt-for-social development contract—Debtor governments would work with donors to estimate the cost of meeting the targets for education and a plan of action would be adopted for meeting these targets, including capital and recurrent costs. Financing gaps would be identified.

  Phase two—Earlier and deeper debt relief—Creditors would agree to provide additional resources by providing earlier debt relief (within one to three years) and deeper levels of debt reduction within the ranges of 100-150 per cent for debt-to export ratios and 10-15 per cent for debt servicing). Debtor governments would work with donors to agree transparent budget procedures for monitoring actual expenditures and performance against the agreed targets.

  5.8 We would like to stress that the aim of this suggestion is not to create yet another barrier to entry in the HIPC process. It is to offer governments with a commitment to poverty reduction a system of positive incentives for policy initiatives which enhance social development. As such, it should be welcomed by debtor governments, some of whom have already offered to undertake concrete social development investments in return for improved debt relief. For creditors, the new approach offers an opportunity to develop a policy dialogue with government seeking to build a more self-reliant future for their citizens.

  5.9 Oxfam believes that the British Government is in a unique position to take the lead in developing such an initiative for three reasons. Firstly, it would mirror the priority which the Prime Minister is giving to education in the UK, giving Britain the opportunity of extending to the world's poorest countries the same principles of equity and fairness which it expresses at home. Secondly, the British Government's White Paper on International Development places education at the heart of development policy, describing it as "an essential foundation for the process of enabling individuals and countries to realise their potential and make the most of their resources". Establishing a mechanisms for linking debt relief with education would be a means of unleashing this potential. Thirdly, as host of this year's G8 meeting in Birmingham, Britain has a critical role to play in ensuring that HIPC is not allowed to fail. By working for a reformed HIPC Initiative, geared towards the expansion of human opportunity as well as financial sustainability, the British Government could make a decisive contribution towards ending the poor country debt crisis by 2000.

  For further information, please refer to recent Oxfam publications including:

  Multilateral Debt—The Human Costs—February 1996

  The International Monetary Fund and multilateral debt (submission to the Treasury Select Committee)— May 1996

  Debt Relief and Poverty Reduction: New Hope for Uganda—September 1996

  Analysis of the HIPC Initiative—January 1997

  Poor Country Debt Relief—false dawn or new hope for poverty reduction—April 1997

  Debt Relief for Mozambique: Investing in Peace—August 1997

  Beyond the HIPC initiative: an appraisal and proposal for converting debt into educational opportunity— December 1997.

Oxfam Policy Department

Janaury 1998

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Prepared 14 May 1998