APPENDIX 2
Memorandum from CAFOD
At the launch of the World Bank and International Monetary
Fund's Heavily Indebted Poor Country (HIPC) initiative
in October 1996, the world's poorest countries were promised "a
robust exit" from their burden of unpayable debt. Eighteen
months since this promise was made, no single country has reached
Completion Point. What CAFOD welcomed as a comprehensive approach
to debt relief which had the potential to maximise benefits to
the poor is, today, caught up in a system which is dragging out
the promise of debt cancellation to minimise the cost to the world's
richest creditors.
CAFOD believes that resolving the humanitarian crisis of
unpayable debt is a necessary condition for the British Government
to achieve its stated ambition of meeting the OECD target, of
halving world poverty by 2015. For at least 41 countries in the
world, with a combined population of over 700 million people,
the debt burden is the single greatest obstacle to tackling poverty.
Huge unpaid and unpayable debts are a deterrent to economic
investment and an obstacle to the expansion of economic productivity.
Economic growth is accepted as a necessary condition for poverty
reduction. For Sub-Saharan Africa to meet the OECD target the
United Nations Development Programme (UNDP) estimates the region's
economy needs annual positive per capita growth rates of
at least 1.4 per cent compared with the negative growth rate of
2.4 per cent experienced between 1990 and 1994.
It is a perverse irony that, in the poorest countries, the
overhang of unpayable and unpaid debt undermines economic growth
and the ability of debtor countries to maintain their debt servicing,
still less pay off their debts.
The economic instabilities introduced by the debt burden
are not only confined to the marginalised economies of highly
indebted poor countries. The financial liabilities that accrue
from unpayable debts are deepening for both creditors and debtors.
During a time of ever-closer International Monetary Fund (IMF)
and World Bank involvement with most of the 41 highly indebted
poor countries, their total debt stock has actually increased—
from US$55 billion in 1980, it rose to US$ 183 billion in 1990,
reaching an estimated total of US $215 billion in 1997.
Other costs associated with the continuing renegotiations
between creditor institutions and debtor governments include less
visible "transaction costs". These costs divert scarce
policy planning resources away from efficient government and administration.
Between 1980 and 1996, 30 African governments have been engaged
in over 10,000 negotiations with their creditors.
Most alarming of all, the human costs of the debt overhang
are substantial and growing. All but seven of the 41 heavily indebted
poor countries are in Sub-Saharan Africa. This region has the
highest proportion of people living in poverty. All human development
indicators show a marked deterioration of life chances in the
continent. The UNDP estimates that nearly a third of Africans
living in heavily indebted poor countries will die before reaching
age 40. The debt burden is a powerful deterrent to human development.
According to the 1997 Human Development Report: "relieved
of their annual debt repayments, the severely indebted countries
could use the funds for investments that in Africa alone would
save the lives of about 21 million children by 2000 and provide
90 million girls and women with access to basic services.
"
There appears to be a growing contradiction between the rapid
deterioration of life chances caused by the debt crisis, particularly
in Africa, and the complacency of key decision-makers amongst
the world's richest creditors.
When the proportion of the world's poorest countries' fiscal
revenues claimed by debt-servicing is on average 40 per cent and
when some of those countries would have to allocate over 100 per
cent of their revenues to debt-servicing if they were to meet
their debt obligations in full—there is clearly a need for
a substantial breakthrough in the ongoing perpetuation of the
debt cycle. As it stands, there is an accumulating body of evidence
suggesting that the HIPC initiative in its current form will not
provide such a breakthrough.
CRITICAL FAILINGS
OF THE
HIPC INITIATIVE
It is now becoming apparent that the HIPC initiative has
serous deficiencies in meeting its stated objective of providing
"a robust exit" from the burden of unpayable debts for
the world's poorest countries.
Creditors delaying relief—The focus of the policy
has, in practice, shifted from its original position of providing
debt relief according to need, to a position of debt relief according
to creditors' willingness to forgo their claims. The waning political
will behind the initiative has already resulted in costly delays
to fixing particular debtors' debt sustainability thresholds and
Completion dates.
In the case of Uganda, there were costly delays to the agreement
of a Completion Point after some Paris Club creditors insisted
on more conditions. According to the Ugandan Finance Ministry,
the postponement of debt relief by one year cost the country an
estimated US $69-89 million.
Bolivia, one of Latin America's poorest countries, has had
its debt cancellation delayed because its biggest single creditor,
the Inter-American Development Bank, would not agree to provide
its share of relief. The intransigence of some of its shareholders
(principally Argentina and Mexico) has held up the prospects of
a just settlement for the Bolivians.
More recently, Mozambique's case has thrown up a tension between
the levels of debt cancellation necessary to reduce its debt to
a sustainable level and the political acceptability to Paris Club
creditors of cancelling debts beyond the levels required of them
by the HIPC agreement in order to meet the sustainability target.
Narrow measure of debt sustainability—The original
design of the HIPC initiative was based on the experience of middle
income Latin American countries and the amounts actually paid
to service their debt. It is increasingly clear that these criteria
for HIPC debt sustainability use overly optimistic assumptions
about the patterns of export growth, inflation, and availability
of credit. The analytical framework, perhaps appropriate for richer
Latin American economies is not appropriate for the capacities
of this group of the world's least developed economies.
The HIPC initiative's core criterion for judging the level
at which a country's debts are sustainable is measured according
to debtors' capacity to service external debts in terms of their
foreign exchange income from trade. A debtor country's thresholds
are measured by the Net Present Value of their debts in proportion
to their exports. The levels at which the Net Present Value of
a country's debts is judged to be sustainable range between two
and two-and-a-half times the country's annual exports and similarly
a debt service-to-exports ratio of between 20-25 per cent.
However, this narrow measure of debt sustainability does not
take into account more appropriate criteria for judging a poor
country's ability to repay its debts. CAFOD argues that governments
in poorer countries have a duty to channel their expenditures
into raising human development. Donors need to ensure a coherence
between the conditions they stipulate for debt cancellation and
the demands that human development priorities place on debtor
governments' fiscal policies.
Judgments regarding the capacity of debtor governments
to repay their debts should therefore take into account the revenue
debtor governments need for health, eduction and productive investment.
In addition, judgments need to be based on more realistic assessments
of the potential revenues available to finance ministries.
Currently, the HIPC framework and its debt sustainability analyses
do not take into account these constraints.
These serious deficiencies are leading to doubtful judgments
as to levels of debt sustainability and, CAFOD fears, to a recycling
of the debt problem for the next millennium.
Even the World Bank's April 1997 "CAP" paper admits
that levels of debt cancelled after the full six-year HIPC treatment
may be insufficient to sustain HIPC's promise of a "robust
exit" from the debt burden. The paper concedes that, "sustainable
growth without recourse to adjustment lending or balance of payments
support may be reached in many HIPCs, although in some cases,.
. .this support may need to continue until several years after
the completion point." In other words their debts will still
be serviceable only if they receive further loans.
Research commissioned by the Dutch government also questions
whether the current ratio used for measuring sustainability would
provide an appropriate threshold at which debt would be payable.
It proposes lower thresholds of between 100-150 per cent for the
Net Present Value of debts-to-export ratio.
CAFOD calls for the inclusion of human development criteria
to assess a country's ability to repay its debts. Expenditures
directed towards meeting basic human development needs, in health
and education, should be ring-fenced from analyses of potential
allocations for debt repayments in order to reduce the pressure
which debt servicing exerts on the ability of poor countries to
meet basic needs and invest in productive activities.
Policy conditions without pro-poor growth policies—HIPC
governments are required to follow tight economic conditions set
out in austere International Monetary Fund (IMF) structural adjustment
programmes for at least six years.
Typically, these require cutting back on social sector spending—a
cost borne most heavily by the poorest and most vulnerable members
of society. CAFOD's own research has shown that the costs of structural
adjustment programmes are felt most acutely by the poor. The introduction
of user fees and cost recovery measures in health and education
have contributed directly to falling rates of enrolment at primary
school level, rising infant mortality rates, falling adult life
expectancy and falling per capita incomes.
In an age when economists refer to the importance of education
in terms of a nation's human capital formation, the debt burden,
by absorbing opportunities for social sector spending is remorselessly
crushing the development prospects of whole nations.
CAFOD calls for a greater transparency and inclusion of
civil society at the design stage of IMF Policy Framework
Papers and the World Bank's Country Assistant Strategy
papers, In recent years, the World Bank has approved, at least
in principle, the concept of participation by beneficiary groups
in the project approval cycle. The IMF has not established a similar
policy.
CAFOD believes that civil society has an invaluable role
to play in the design and implementation of country-specific policies.
As a development agency working in many heavily indebted poor
countries, we are acutely aware of the crucial role that civil
society plays in the successful planning and implementation of
projects and policies. We have witnessed widespread failure when
programmes and policies are designed and carried out without dialogue
and joint decision-making with civil society. Civil society
also has an invaluable role to play in holding debtor governments
to account over the disbursement of funds relieved from debt repayments.
Unnecessarily long time frame—For debtor countries
to achieve debt relief under the HIPC framework, their governments
have to adhere to two three-year Enhanced Structural Adjustment
Facility agreements. The length of these programmes is arbitrarily
determined by the funding cycles of the IMF's adjustment facility
rather than the humanitarian need for swift debt relief.
Indebted countries need relief now. Three and six year cycles
are incompatible with bringing a swift resolution to the humanitarian
crisis. Each year of delay means less debt relief because the
IMF recalculates macroeconomic indicators in anticipation of higher
growth.
CAFOD argues that given the imperative for speeding up
the debt process and the negative impact of structural adjustment
programmes on the poor, it is necessary to conduct an immediate
review the IMF's role in the HIPC process.
CONDITIONALITIES ATTACHED
TO DEBT
RELIEF
As an international development organisation, CAFOD believes
that unpayable international debt is a major cause of poverty.
It threatens the development prospects of whole nations and suffocates
the life-chances of some of the most impoverished people in the
world. For these reasons CAFOD is campaigning for a one off remission
of unpayable debts. We believe that the process of debt cancellation
should free resources for investment in human development and
productive capacity.
CAFOD recognises, however, that not all debtor governments
can be counted on to use resources freed through relief to invest
in the poor and marginalised sectors of society. Debt negotiators
on all sides should ensure that political and administrative processes
and guarantees are in place which inter-link investments in human
development and with the benefits of debt cancellation.
Notwithstanding those guarantees, CAFOD acknowledges that
some forms of "social conditionality" imposed in the
framework of the existing relationship between international financial
institutions and debtor governments can be counterproductive.
On the one hand, they do not guarantee the survival of those programmes
after creditors have disengaged from debt cancellation negotiations.
Secondly, a too-narrow definition of acceptable spending, restricted
only to social expenditures, could limit a country's investment
in its productive capacity, such as small-scale agriculture or
economic diversification, in favour of investment in health and
education. On the other hand, bilateral creditors can misuse social
conditionalities as an excuse to delay debt relief, as in the
case of Uganda.
It is for these reasons that CAFOD calls for debt cancellation
to be linked with investments in human development in ways that
are appropriate within each country and determined after consultation
between governments and civil society. Such consultations, however,
assume an environment in which people are able to speak out and
are heard. We believe that the processes that lead to the cancellation
of unpayable debt should at the outset involve civil society.
Rather than creditors in Northern capitals determining exact levels
of social expenditure in return for debt relief, they should be
facilitating the establishment of frameworks and processes that
institutionalise the participation of civil society in debtor
countries during the formulation of national development strategies
and budgets. This interaction must start with institutionalising
such processes within the World Bank and IMF's interaction with
the South.
SUMMARY
The issue of the burden of unpayable third world debt is
not restricted to economic judgments of capacity to repay. It
is fundamentally an issue of social justice.
The HIPC initiative is in need of immediate reform. By any
standards, including its own, it is failing to provide sufficient
levels of debt relief to match the scale of basic human need in
its target countries. The policy in its current design, excludes
the imperative of human development from its calculations of debt
sustainability.
CAFOD calls for human development priorities to be included
as an integral part of the IMF's and World Bank's analysis of
debt sustainability thresholds and their criteria for considering
debt eligible for cancellation.
Donor governments, particularly members of the G-7, must
acknowledge that their present policies on debt relief are not
producing results for the world's poorest. The UK, as a senior
member of the Commonwealth, as a permanent member of the Security
Council, during its Presidency of the European Union and the hosting
of the Asia Europe Meeting, should be pursuing this issue with
all the energy and creativity it deserves.
In the words of Cardinal Hume, "whatever the detailed
history of today's debt ridden countries, nearly all have on key
fact in common; that those who could be blamed the least, the
poorest people in the poorest countries, have suffered the most."
The world's richest governments have signed up to the OECD's
target to halve global poverty by the year 2015. For most of the
world's least developed countries the debt overhang represents
the most serious obstacle to growth and poverty eradication. If
the international community is to have its policy declarations
taken seriously, the rhetoric of its ambitions must be matched
in the implementation of its policies.
Henry Northover
Public Policy Unit
CAFOD
15 January 1998
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