APPENDIX 4
Memorandum from Christian Aid
1. INTRODUCTION
Christian Aid considers debt relief of primary importance
in eradicating global poverty. This view is clearly shared by
the UK government in its White Paper on International Development
[Eliminating World Poverty: A challenge for the 21st Century.
Cmnd 3789, 1997, pages 71-74] and by the UNDP [Human Development
Report, 1997, page 113]. Many of the world's poorest countries
are also heavily indebted, and suffer from debt overhang, major
loss of export earnings and a massive diversion of resources from
expenditure on health, education, agriculture, and infrastructure
into debt service.
Not only does this diversion severely affect the capacity
of poor country governments to provide necessary services, but
it also undermines the complementary efforts of non-governmental
organisations (NGOs), such as Christian Aid, to reduce poverty.
For example, Christian Aid disbursed £32 million in direct
charitable expenditure in 1996. However, the World Bank estimates
that in 1996 low-income countries paid $129.2 million per day
in debt service [Global Development Finance, 1997, page 42]. Christian
Aid's views on debt relief are also substantially informed by
the concerns of our partner organisations which monitor the effects
of debt in their own countries (many of them HIPCs).
2. THE TERMS
AND CONDITIONS
OF THE
HIGHLY INDEBTED
POOR COUNTRIES
(HIPC) DEBT INITIATIVE
AND ITS
PROGRESS TO
DATE
Progress to date
When the HIPC Initiative was originally launched in 1996,
Christian Aid welcomed those aspects of the Initiative which represented
significant progress over previous debt efforts: the co-ordination
of all creditors (including the multilaterals), and a framework
which declared the aim of reducing debts to a sustainable level,
rather than by a certain amount.
However, the experience of the Initiative to date shows that
it has serious shortcomings, and that without substantial reform,
it will deliver too little debt relief, too late. A year and a
half after the launch, no countries have yet received any relief
proper, and only three countries are certain to receive any relief
by the year 2000.
Uganda, the first country to receive a HIPC deal, and which
is due to pay approximately $190 million in debt service next
year, will receive relief worth $20 million [Financial Times
25 April 1997]. This would allow an increase in public expenditure
per head on health from $2.3 to only $3.3, compared to a required
minimum for low-income countries of $12 estimated by the World
Bank. Alternatively, it would allow Uganda to increase annual
expenditure on education from $10 per child of primary school
age to around only $18. Attainment of the 1996 OECD DAC health
and education targets will not come through higher public expenditure
alone, but without at least a basic minimum there is no hope that
they will be.
The Initiative has also mutated in its terms and conditions,
with the most significant change being the addition of fiscal
criteria for debt sustainability for some countries (e.g., Guyana,
Côte d'Ivoire). While Christian Aid welcomes the recognition
of the fiscal impact of debt, this shift has happened largely
for political reasons. It introduces an extra element of arbitrariness
into the HIPC Initiative.
The HIPC Initiative was close to collapse over the case of
Mozambique. With an estimated requirement of $1.7 billion of relief,
it is by far the most important case to date. The limits of and
confusion surrounding the principle of burden sharing led to disputes
between the multilateral and bilateral creditors, and the possible
further postponement of Mozambique's decision and completion points.
Terms and Conditions
According to the World Bank, the aim of the HIPC Initiative
was to be a "comprehensive solution that provides an exit
from unsustainable debt for countries reforming their economies
and fighting poverty". In reality, the HIPC Initiative offers
too little, too late, putting development targets such as those
put forward by the OECD DAC in jeopardy. The reasons for this
failure lie in problems in two key areas: the definition of sustainability,
and the link to a "track record" of IMF reform.
A. Arbitrariness in defining sustainability
The debt sustainability thresholds set under the HIPC Initiative
are defined arbitrarily. There is no clear reason for why the
range of 200-250 per cent for the PV-to-exports has been chosen.
Previous to the Initiative, the World Bank had argued that anything
over 150 per cent was unsustainable in the medium term [World
Debt Table 1993-94 Vol 1 page 40]. The arbitrariness is compounded
by the use of fiscal targets, decided on by a 40 per cent exports
to GNP threshold and using a 20 per cent revenue floor, with a
consequent lack of comparability of treatment for countries receiving
deals under fiscal versus exports criteria.
B. Track Record
The HIPC Initiative lays down a rule that countries must
demonstrate a six-year period of staying "on track"
with ESAF conditionality. The issue of conditionality is discussed
in more detail below. The point here is that no debt relief is
available until the end of a period of conditionality, and there
is no guaranteed interim financing. This means that there is no
proper provision for phasing in progressively larger amounts of
relief to help countries maintain macro-economic stability and
achieve poverty reduction. While the countries wait, their people
continue to suffer poverty and high mortality and illiteracy rates.
The arbitrariness of eligibility and sustainability criteria,
and the track record requirement has made the whole HIPC process
vulnerable to political and financial pressures. This can be seen
in all the cases so far announced:
— the delay in Uganda's completion point from
1997 to 1998 was widely seen as due to pressure from the US government
to maintain leverage over the Ugandan reform programme;
— the decision to include fiscal criteria apparently
arose from the desire of the French government to include Francophone
countries such as Burkina Faso and Côte d'Ivoire;
— the timing and level of Bolivia's debt relief
was affected by the willingness and capacity of the InterAmerican
Development Bank to make its contribution;
— the current crisis over Mozambique's deal has
arisen because both multilateral and bilateral creditors are trying
to minimise the cost to them. Certain creditors, such as the German
and Japanese governments, are in any case very reluctant partners
in the Initiative.
RECOMMENDATIONS
These problems with the HIPC Initiative can be addressed.
Christian Aid urges the UK government to press for the following
changes:
— remove the arbitrary nature of the sustainability
thresholds. Base all HIPC debt relief packages primarily on fiscal
sustainability criteria which relate to poverty reduction targets,
and secondarily on debt-to-export sustainability criteria which
relate visibly to economic growth. This is will also involve a
re-examination of the eligibility criteria;
— de-link debt relief timing from the achievement
of a six-year ESAF track record, and instead phase in relief progressively;
— build political will amongst creditors to
commit to debt relief for poverty eradication.
3. THE PROCESS
OF DEBT
NEGOTIATION AND
THE QUESTION
OF CONDITIONALITY
Debt negotiation
The HIPC Initiative originally envisaged major participation
by debtor governments in the negotiations over debt reduction.
But the vulnerability of the process to creditor politics and
financial concerns means that these governments (let alone civil
society in debtor countries) have been largely excluded. In addition,
while the debt sustainability analysis exercise is supposed to
be tripartite between the IMF, the World Bank and the debtor country
government, many HIPCs lack the capacity to produce detailed independent
analyses, meaning that in reality the lead is taken by the IMF.
This includes the assumptions made about future growth rates and
export performance. Despite a recommendation by the 1996-97 Treasury
Select Committee on the IMF that the UK Executive Director ensure
realistic assumptions, Christian Aid is concerned that implausibly
optimistic assumptions are persisting.
More widely than the HIPC Initiative, there is a severe lack
of information and a failure of open government in the loan negotiation
process both at creditor and debtor ends. In the UK, there is
a paucity of publicly available information about the Export Credit
Guarantee Department, which argues that it has to protect client
interests even though public money is at stake. In multilateral
institutions, incentive structures for staff have focused on the
quantity of loans, rather than quality. At the debtor end, information
about loans has not been made available to parliaments or more
widely to civil society. To avoid a repetition of the current
situation, and attain a genuine exit from unsustainable debt,
there is an urgent need to address these issues.
Conditionality
Debt relief under the HIPC Initiative has been linked directly
to IMF conditionality under the Enhanced Structural Adjustment
Facility (ESAF). ESAF conditionality already applies to IMF concessional
financing, which in turn often triggers over official financial
flows. The HIPC Initiative requires six years of ESAF "track
record" to be established before a country receives debt
relief. In addition, the HIPC Initiative requires countries to
commit to undertake social policy reform, especially in the areas
of health care and education. These two areas are dealt with separately.
A. Economic conditionality (ESAF)
The rationale for ESAF conditionality is that debt relief
resources would be wasted if countries were not macro-economically
stable and capable of achieving growth and poverty reduction.
Christian Aid agrees with this rationale. However, the requirement
of six years of ESAF conditionality is a poor way of going about
this.
Both independent studies and a 1997 internal review of ESAF
show that compliance with conditionality is poor. The review shows
that since 1986 there were 51 significant interruptions of ESAF
or SAF-supported programmes, affecting 28 out of 36 countries
reviewed. Only one out of four arrangements were completed without
interruption. Two-thirds of these interruptions were due to severe
policy slippages. [IMF 1997 The ESAF at 10 Years: Economic
Adjustment and Reform in Low Income Countries Washington,
DC page 71].
At the root of this "compliance problem" is a lack
of government ownership of (and hence commitment to) reforms,
meaning that they often do not reflect political possibilities.
In addition, ESAF conditionality is often characterised by very
long lists of reforms right down to the micro level. Where the
IMF chooses to be inflexible, this offers almost endless scope
for a country to be seen to be "off-track". A recent
example is Ethiopia, where despite approval from other donors
for the government's commitment and action on reforms, the IMF
is unhappy with the timing of a subset of conditions. As a result,
Ethiopia is now considered "off track", which may jeopardise
its HIPC Initiative deal.
ESAF conditionality not only fails as a relationship; it
has also performed poorly in terms of delivering macro-economic
stability and growth. The design and timing of reforms is based
on a model of the economy entirely inappropriate for most of the
countries it is applied to. The recently published IMF internal
review of ESAF shows that that "for the most part, the intended
transition to low inflation was not achieved". In terms of
growth, the authors of the review estimate that ESAF policies
in non-transition countries produced per capita growth
of the order of less than 1 per cent, independent of other factors.
This evidence supports the assessment of independent experts such
as Tony Killick, who pointed out to the 1996-97 Treasury Select
Committee on the IMF that "there is no significant impact
on growth" of structural adjustment, and no association between
adjustment and lower inflation [Treasury Select Committee Report
on the IMF, HC 68, page 28].
IMF conditionality is aimed at macro-economic outcomes, rather
than poverty reduction. This fact in itself makes it inappropriate
to link the HIPC Initiative to ESAF. As noted, ESAF conditionality
has failed to deliver sufficient growth to reduce poverty. At
the same time, adjustment has been associated with worsening inequality.
In giving evidence to the 1996-97 Treasury Select Committee on
the IMF, Professor Stewart concluded that "empirical evidence
shows that in the majority of countries adopting Fund programmes
in the 1980s and 1990s, per capita incomes have been falling
and poverty worsening . . . ."
A stringent definition of track record based on adherence
to ESAF conditionality has no place in the HIPC Initiative. It
serves only to delay relief when it is most needed, ignores the
politics of donor-recipient relations, does not deliver macro-economic
stability and growth, and fails to address poverty. Indeed, the
current arrangement puts the cart before the horse. As the World
Bank itself noted in the case of Bolivia, debt relief is an important
precondition for reform rather than the other way round: "the
relief that might be available under the HIPC Initiative could
free up scarce fiscal resources to help accelerate structural
reforms or finance key social programs . . . "
The record of ESAF shows that it could be removed from the
HIPC Initiative, and the conditionality relationship rethought.
Creditors should develop genuinely jointly owned programmes of
reform to achieve macro-economic stability and poverty reduction,
with relief phased in immediately, increasing progressively.
B. Social conditionality
Because of concern that resources freed up by debt relief
should not be captured through corruption, but rather should benefit
the poor in HIPC, there is an element of social conditionality
in the HIPC Initiative. Governments are required to demonstrate
adherence to efforts social targets (e.g., poverty reduction)
between decision and completion point. Again, Christian Aid shares
the view that debt relief resources should benefit the poor, but
believes that social conditionality is not the correct approach.
As with economic conditionality, compliance is a major problem.
Where governments are committed to poverty reduction and improving
health and education outcomes, then conditionality is unnecessary,
and may be counter-productive. Where governments are not committed,
conditionality is difficult to enforce and is not a useful way
to approach the problem.
A second issue is the difficult of monitoring social confidentiality.
The information required to follow resource flows from central
government to service delivery point is inadequate for effective
monitoring in most HIPCs. Even more of a problem is defining what
the appropriate set of targets should be. The relationship between
outcomes in an area and expenditure under that budget are notoriously
inexact. For example, health outcomes are strongly affected by
other types of social expenditure than on the health service,
such as education, and by overall poverty. Plans for social sectors
should focus on outcome targets, and build in maximum flexibility
in how to achieve them. As with economic conditionality, debtor
(both government and civil society) ownership of a programme for
poverty reduction and improvement in health and education targets
is crucial, along with immediately phased in debt relief and technical
support.
However, what is needed for the benefits of debt relief to
reach the poor are reforms in countries which increase accountability
and openness. Unless there is independent scrutiny and informed
public discussion of spending decisions and implementation of
those decisions, then poverty action plans remain just pieces
of paper.
This approach is not unrealistic: examples of the elements
for such reforms can increasingly be found in poor countries.
They will require a mix of legislation (for example, the recently
passed Freedom of Information Act in Rajasthan in India, and Bolivia's
Law on public Participation), effective parliamentary oversight
(as in Uganda), and the development of free and open dialogue
between governments and civil society (which is beginning to develop
in a number of HIPCs, such as Tanzania, Zambia and Mozambique).
RECOMMENDATIONS
Christian Aid urges the UK government to press for the
following changes in the HIPC Initiative:
— delink the Initiative from ESAF conditionality;
— develop flexible programmes for macro-economic
stability, growth and poverty reduction, including social sector
targets, in genuine partnership with governments;
— phase in debt relief immediately to ease reforms
and poverty reduction, possibly in progressively increasing amounts;
— technical support for monitoring spending
flows;
— mechanisms for open and accountable government,
including independent monitoring of poverty reduction programmes
and dialogue with civil society.
4. THE POLICY
OF THE
UNITED KINGDOM
ON BILATERAL
AND MULTILATERAL
DEBT RELIEF,
INCLUDING THE
MAURITIUS MANDATE.
Christian Aid recognises the efforts of the previous and
present UK governments in setting up the HIPC Initiative and providing
a consistent lead on debt relief. We welcome the spirit of the
Mauritius Mandate announced last year, and the statement of commitment
to keeping debt relief on the agenda given by the Chancellor of
the Exchequer in December 1997.
In particular, Christian Aid welcomes the emphasis placed
on speeding up the process of debt relief. The question is how
to do this. The additional bilateral relief offered to Uganda
in the Mauritius Mandate, and the possibility of such relief for
Mozambique announced in December is too small to make a significant
contribution to the debt sustainability of those countries. Less
than 1 per cent of HIPC debt is owed to the UK. While bilateral
relief can provide a moral lead by demonstration, the UK will
be effective in securing speedier debt relief only by using its
much weightier influence on the world stage.
Christian Aid
January 1998
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