Examination of witnesses (Question 200 - 219)
31 MARCH 1998
MS SHRITI
VADERA and MR
KEVIN WATKINS
Chairman
200. We have touched on this but if you could just list
those points that would be very useful to us.
(Mr Watkins) Let me give you a couple of practical
examples. When we initially, with other people, raised our concerns
about the time frame of HIPC and the idea that countries should
go through two successive IMF programmes, ie over a six year period,
before becoming eligible for their reduction, the Development
Committee of the World Bank and the IMF put out a statement saying
that these criteria would be interpreted with great flexibility
and that where countries had a strong track record on reform under
IMF programmes that would be taken into account, and that gap
between the first phase of their compliance requirements and the
second phase would be shortened. The first two countries which
came up were Bolivia and Uganda. Both of them had track records
of over ten years' compliance with IMF programmes, both of them
were required to wait for over a year before receiving debt reduction
at considerable cost to both countries. These were best case scenarios
because of their track records. In the case of a country like
Tanzania, it will not qualify for debt reduction under HIPC until
2002. Now, interestingly, Tanzania also has a relatively good
track record, contrary to what is often assumed. We estimate that
it has been on track in IMF programmes for over seven years since
1986, it came off track in 1994, started a new programme with
the IMF in 1996 and the IMF's position is that Tanzania's track
record starts in 1996 and therefore it will not qualify until
2002. This is not an acceptable approach to the debt problems
of these countries. It is clear that flexibility is not being
shown. We know, as I said, there are about 12 to 15 countries
that will not qualify for debt reduction until after 2000. The
British Government under the Mauritius Mandate want this time
frame accelerated. I think in order to accelerate it that initial
requirement of a six year compliance period has to be reviewed.
We would argue that it ought to be shortened to one programme
over a three year period with due account taken of the track record.
I think another set of problems relate to the thresholds themselves.
We would say they have been set far too high. If you take debt
service ratios as a case in point, reducing the debt service ratio
of a country like Mozambique or Ethiopia to 20 per cent in a sense
is an abuse of the term "reduced" because they have
not been paying more than 12 per cent or 14 per cent as it is.
You are actually setting the threshold at a higher level than
they have been able to pay previously. I think that raises very
serious questions about where the debt service ratio has been
set. In relation to the fiscal criteria, as you may know, and
I am not sure this is the place to go into a lot of technical
detail, the fiscal criteria for debt sustainability in HIPC were
introduced largely to accommodate Côte d'Ivoire and French
interests in seeing Côte d'Ivoire brought into the HIPC
framework at the earliest possible date. The problem was that
Côte d'Ivoire did not qualify on debt service grounds, it
did not qualify on debt stock to export grounds, so they came
up with a debt to government revenue criteria which allowed Côte
d'Ivoire in but they introduced additional conditionalities which
virtually excluded everybody else from coming in through that
window. This raises the question if the rules can be changed to
accommodate Côte d'Ivoire it is quite clear that they can
be changed to accommodate a wider group of countries without derailing
the entire initiative. That is where we have argued that a more
appropriate fiscal criteria ought to be woven into the framework.
Mr Khabra
201. My second question is Oxfam suggest that there is
"enough flexibility within the case-by-case approach to allow
opponents of debt relief to obstruct implementation". Others
argue for increased flexibility. How can a balance be achieved
between flexibility and prescription, taking account of openness
to political manipulation and the need for a case-by-case approach?
(Mr Watkins) I think you have hit the nail on
the head with regard to the problem. There are advantages to flexibility
in any framework if that framework is applied with imagination
and a commitment to addressing the problems which the framework
is intended to address. What we have seen happening under HIPC
is that the flexibility has been abused by the Paris Club, by
the G7 countries, to delay implementation. I think the bottom
line is that however you cast the rules, if you do not have the
political will to make this work then frankly you can forget it.
You can have rules as good as you like. I think where we have
to focus our energy is on making what we have got better than
it is and making it work. I think the broad framework is not unacceptable.
I would still argue that the broad framework can be made to work
if the political will is committed to doing that.
Chairman
202. Could you comment on the Uganda situation which
we found which I hope in this month we are about to enter they
are going to get their first payment under HIPC. As I understand
it, and as the Committee understands it, that payment will actually
be less, mean less debt relief to Uganda, than that they are presently
enjoying under the Nordic/Dutch Initiative which actually uses
bilateral money to repay current debt. Is that right? Is that
your understanding of the situation?
(Mr Watkins) I think a lot will depend on what
happens to the multilateral debt fund that Uganda has been operating
with Nordic support. I think there was some controversy over whether
Nordic countries would continue to support that whilst HIPC was
being implemented. I am not sure what the outcome of that discussion
was. I think what has been very encouraging in Uganda is one of
the problems the country had was the rate of disbursement of debt
relief, especially from the World Bank, was going to be relatively
slow but the World Bank agreed a couple of weeks ago to front
load debt reduction to Uganda. That is going to result in additional
transfers of around US$14 million this year rising to $20 million
for the next two years. That is a very encouraging development.
I am afraid I cannot answer the specific question about the multilateral
debt fund.
(Ms Vadera) My understanding is that the amount
of the multilateral debt fund from the Nordics is higher, so it
is a matter of whether it continues. I think Uganda in a funny
way has always been discriminated against for being the first
out there, they always get the first set of terms for anything
and then they are refined later for other countries. It is exactly
the same thing that happened to it in the Paris Club because it
was the first to get the exit terms under Naples. It really ought
to have got a bit more in the way the reduction was calculated
and a bit more was given subsequently to others. Uganda tends
to be up front and they iron out the problems for Uganda later,
or sometimes not, but they use that to iron out others problems.
203. Would you not argue, Ms Vadera, that in fact the
use of the Nordic fund for debt relief is in fact a reduction
of money that they would otherwise have got for economic development?
(Ms Vadera) Absolutely. The reason this is so
ludicrous is because it is such an inefficient use of bilateral
aid. I do not want, and the British taxpayers do not want, this
to be funded in this way, I would prefer that the World Bank and
the IMF fund their own problems, problems for which they are partly
responsible, and bilateral aid go to other matters otherwise this
is just a circular game.
Chairman: I deprived Mr Robathan from asking a question
on gold so I invite him to do that and then lead us on to conditionality.
Mr Robathan: I would like to pin down this question
of gold because you have suggested selling gold reserves. Personally
I think gold makes very nice jewellery. I have always thought
it rather strange that——
Dr Tonge: Except Ratners!
Mr Robathan
204. I would not be rude about Ratners at all, a lot
of people like that. I have always found it rather strange that
Fort Knox or whatever it might be is accorded such importance
in the world of monetary markets. However, it may be that gold
remains a bastion of financial stability throughout the world.
If that is the case I am rather surprised that you should be lobbying
for selling gold now when the price is $300 and something an ounce
whereas in 1980 I can recall it was $800 and something an ounce.
Would it not be a rather bad use of resources to sell the gold
now? It is a specific question about timing.
(Ms Vadera) It would obviously have been better
if they had sold it even at the time it was first suggested which
was in 1994/95 where they would have netted $8 billion more nominal
and about $10 million or $11 million more real. That would have
certainly solved the problem here. I am not a gold analyst. I
would be very happy to send you the report, and I will.
205. I doubt that I would understand it. I am certainly
not a gold analyst.
(Ms Vadera) Most forecasts for gold prices are
in the long term to stay at that range. The SBC Warburg forecast,
for example, is around US$320 for the next ten years, which is
not to say there will not be points at which it could be sold
higher. I am not saying you will be able to sell it tomorrow but
in the opinion of most analysts you are not going to be going
back to the $800 mark really. Essentially on an ongoing basis
it is a very low yielding asset. Gold is not going to disappear
from people's reserves but there is an issue about what level
of gold you need for reserves. If you are actually saying it is
really hard to sell gold as a reserve then people are questioning
what is its value as a reserve in that case exactly. European
central banks are having a debate about what level they should
fix on. Right now I think with the IMF sitting on 100 million
ounces of gold reserves while we have a very serious problem in
Africa, which is really about sustainable economic recovery, it
is more expensive to continually fund aid than to actually solve
the problem today and let the country get on with it. I would
suggest that waiting for an increase in the gold price that may
or may not happen——
206. I think that is a very fair answer, thank you very
much. That is something that has puzzled me. Perhaps they should
have sold it in 1980. Could I move on. I am particularly interested
in conditionality but I would like to pick you up on something
you said which was that if the Paris Club had recognised the facts
in the early 1980s we probably would not have the problem we have
got. This is why it relates to conditionality because actually
in the early 1980s, 15 years ago, Obote was in power in Uganda,
Mobutu, who was referred to indeed in your submission, was in
power in Zaire as it then was and the situation in Rwanda had
not reached its climax. Would that not actually have led to the
benefits of what you are suggesting, going to totalitarian governments
who would have benefited in terms of being able to spend the money
on defence or whatever it might be, and oppression?
(Ms Vadera) I have a certain sympathy with that
view. I do have a slightly different angle on conditionality which
is that I think it is illogical to apply it for debt forgiveness.
These countries are going to be continually looking for official
flows of funds and the degree of grant element in that will vary
according to how sustainable their debt relief has actually been
but they are always going to be dependent, at least in the foreseeable
future. Korea until recently was borrowing from the Bank (ie.
the World bank). There are other ways of imposing conditionality.
I think that using conditionality for something in the past where
there has been mutual complicity really is probably inappropriate.
If you had given debt relief in the 1980s I do not think you can
speculate on what would have happened in terms of Obote or indeed
anybody else. I think that economic growth and benefits getting
straight down to the population are a very stabilising factor
and you should take that into account. I agree there really is
not much point. You can name some countries in the world today
where there really would not be much point———
207. I was avoiding that.
(Ms Vadera) We will not in that case.
208. Can I turn to Mr Watkins because you particularly
talk about debt being a human problem and you suggest ways that
benefits of debt relief can be passed directly to the poorer sections
of society, special treatment, taking debt relief and putting
it in education and health. How can this form of special treatment,
how can the performance in terms of social conditions, switching
debt relief to health and education, be assessed? That is pretty
important from the creditor country, the donor country point of
view.
(Mr Watkins) It is. We have done a paper on this
which I will send you.[28]
Very briefly, what we have argued is that in almost all of the
HIPC countries targets have been agreed for poverty reduction
in areas like primary health and basic education. In some cases
those targets were adopted following the World Summit for Children,
in other contexts they have been adopted as part of the national
poverty reduction plans. To take the case of Tanzania again, the
government has adopted a plan that is supported by the donor country
to achieve 85 per cent enrolment in primary schools by the year
2003. What we have done is to take such plans and say "supposing
you shorten the time frame or supposing you say that you want
to get 100 per cent enrolment by 2003, what would the additional
financing costs of that be and how could those costs be met and
is it possible that debt reduction could play a role in bridging
the gap?" In many of these countries because of the enormous
weight of debt on government revenues there is considerable scope
for improving social outcomes by converting debt repayments into
social investments. That approach does raise difficult questions
about compliance and conditionality. What would you do, for example,
if a government said "yes, of course we will put all 80 per
cent of debt saving into primary education" and instead they
go and put 80 per into buying a new fleet of BMWs for the ministers
to attend meetings? Our position on that is very clear. For every
dollar that was not allocated broadly along the lines that had
been indicated and agreed under a contractual arrangement between
debtors and creditors it would be subtracted from next year's
aid budget on a dollar for dollar basis with no questions asked.
That is strict conditionality and not incentive, I accept that.
Chairman
209. It is incentive not to buy BMWs
(Mr Watkins) That is true. BMW may take the case
to the World Trade Organisation, I am not sure.
Dr Tonge
210. Absolutely.
(Mr Watkins) The point about this is it is conditionality
with a view to poverty reduction. It is not conditionality, as
is often the case with IMF conditionality, where somewhat arbitrary
and extremely deflationary targets are set for public spending
or credit provision. It is a way of converting HIPC from what
it is at the moment, which is a somewhat inadequate financial
instrument for addressing financial problems, into a broader initiative
for poverty reduction.
Mr Robathan
211. I am very impressed by your draconian measures proposed,
I have to say, because frankly I think donor countries have been
less forceful than they should have been in matters such as this.
I would raise a further question. Do you not think that the governments
involved who resent Structural Adjustment Programmes, understandably,
would resent that sort of programme even more basically because
you would be determining how they spend their money with no particular
leverage?
(Mr Watkins) Some would and some would not. It
is very interesting in the case of Bolivia and Uganda, and now
in the case of Tanzania, that governments have gone to creditors
and said "we will commit ourselves to additional conditionality
related to poverty reduction objectives if you give us earlier
or deeper debt relief". The drive for this, ironically, is
coming from the side of debtor governments. That is not surprising
because they are starved of financial resources in areas where
they need them. We see this initiative as a transition mechanism
to get from where we are to somewhere better. For example, we
have thresholds at the moment set at 20-25 per cent for debt service
ratios, why not say to governments "if you would agree to
commit 80 per cent of any savings that you make from debt into
agreed poverty reduction initiatives, whether it is rural feeder
roads, primary health care, basic education, we will give you
debt relief in two years rather than six and we will give you
debt relief in the range of 15-20 per cent rather than 20-25 per
cent"? That is not a heavy handed conditionality where you
are saying "either you sign on to this or you get no debt
relief at all", you are saying "you can see what the
rules of HIPC are, you know when you are qualified under current
rules, if you want something better come up with a concrete poverty
reduction plan with the donor community that is in the best interests
of the poorest sections of your society and we will use HIPC to
support it!.
Chairman
212. How can you be confident that expenditure on education
and health will bring about economic development and expansion,
or are you simply saying all we are interested in is poverty reduction?
If that is your position it will only be for a short time, will
it not, because if you do not get the economy expanding poverty
will continue to increase?
(Mr Watkins) That is true. This is not an either/or
scenario. We are not saying adopt very progressive social spending
policies and completely crazy economic policies. We would support
governments continuing with economic reforms that are geared towards
long-term progress towards promotion, of investment and so on.
We are not saying that all the savings from debt relief would
be put into social investment rather than, say, infrastructural
investment. What we are arguing is that a significant share of
savings will be put into poverty reduction investment.
213. There is a balance.
(Mr Watkins) The main point that I would make
in response to your question is I think there is a growing body
of evidence that investment in human capital in areas like primary
health and basic education are some of the most effective investments
that governments can make if they are committed to growth in general
and to equitable growth in particular. The idea that any country
is going to prosper in the next millennium without 100 per cent
literacy rates, with 50 per cent of its children out of primary
school, with high levels of infectious disease in the population
is fundamentally misplaced. These sorts of investments are growth
investments and they are investments which will enable poor people
to participate in growth to a far greater extent than has often
been the case under, for example, the Structural Adjustment Programmes.
214. I want to believe very much, and I am sure many
people do, but what proof have you got?
(Mr Watkins) If we were having this discussion
last May before the financial collapse in East Asia of course
I would have pointed to Indonesia and several other countries.
I do think the evidence of the economic benefits of social investments
in many of those East Asian countries, notwithstanding the current
financial crisis, does indicate that these are investments with
an extremely high rate of return and that they are absolutely
essential investments for governments which are committed to growth.
Again, we have actually done a paper on this which I would be
very happy to send you.[29]
215. Yes, we would like that.
(Ms Vadera) I would just like to add to that I
certainly have anecdotal evidence of investors looking at human
capital as the human capital available to invest and they have
found particularly in a lot of the African countries that it is
not.
216. Where was that found?
(Ms Vadera) It is anecdotal evidence. I spent
my time with investors in Africa and that is essentially the great
competitive disadvantage of Africa where it should be an advantage
because it should be a low labour cost area. If you look at Africa's
economic performance compared to Eastern Europe it is better than
Eastern Europe but there are still more investors going into Eastern
Europe because they find it easier to invest and to work and to
find people.
Chairman: It is loosely called capacity building, is
it not, the lack of capacity?
Mr Robathan
217. That leads me neatly into my next question because
I think one of the reasons people are somewhat loath to invest
in Africa is they have had their fingers burnt in the past because
of the quality of governance. Good governance is a requirement
of the IMF. Would you say that debt relief should be prioritised
depending on the quality of governance in debtor countries?
(Ms Vadera) I hate to say it but I think it is
a precondition because you can waste a lot of resources by giving
aid relief and aid to countries that are not going to adequately
use them. I agree with that. I just do not like the word "prioritise".
218. I do not like the word very much either actually.
(Ms Vadera) I believe there should be sufficient
funds available. If they all get that it is not a matter of who
gets there first or that there is inadequate funding.
219. What does Oxfam think?
(Mr Watkins) I think the governance agenda is
a very important one. I think we would understand some things
somewhat different in the good governance agenda from the IMF.
I would make the point that governance issues are not issues which
lend themselves readily to short-term solutions and they are not
problems that can be resolved by applying short-term financial
pressures. I do not think it advances the good governance agenda
to leave countries with a crippling debt burden. In fact, it may
very well do the opposite in the sense that if governments are
concerned to develop a social contract with their citizens, surely
part of the responsibility on governments is that you must provide
certain basic services to your citizens in order to generate a
degree of loyalty and commitment to the democratic process? If
you are unable to provide even the most basic services to your
citizens because of crippling debt problems I do not think this
is good for democracy.
28 "Beyond the HIPC initiative: an appraisal
and proposal for converting debt into educational opportunity"
Oxfam UK/1 Policy Department 8 December 1997. Back
29
"Oxfam Insight: Economic Growth with Equity. Lessons from
East Asia" Kevin Watkins, 1998. Back
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