DEBT RELIEF
Conditionality Attached to Debt Relief
46. It is broadly accepted that some conditions should
be attached to debt relief in order to ensure that both the potential
economic and human development benefits are realised. Clare
Short told us: "we have got to have the conditionality in
order that debt relief is about poverty eradication, not just
about debt relief for its own sake"[98].
We strongly agree with this, and recommend that any conditionality
require the inclusion of targets in the health and education sectors.
47. In order to receive debt reduction under Paris
Club Naples Terms and under the HIPC Initiative, a track record
of structural adjustment and reform must be established. For low-income
countries, this usually involves the IMF's Enhanced Structural
Adjustment Facility. The precise contents of structural adjustment
programmes for particular countries are not published. However,
there are broad guidelines issued by the IMF Board of Directors:
(a) Encourage members to adopt corrective measures
at an early stage;
(b) Stress that the IMF pay due regard to members'
domestic, social and political objectives, as well as economic
priorities and circumstances;
(c) Permit flexibility in determining the number
and content of performance criteria; and
(d) Emphasise that IMF arrangements are decisions
of the IMF that set out - in consultation with members - the conditions
for its financial assistance[99].
48. Structural adjustment programmes are designed
and agreed on a case-by-case basis. Structural adjustment can
involve public and private sector reforms, in addition to fiscal
measures such as devaluation. The programmes aim to encourage
economic stability, which will in turn improve the likelihood
that the debtor country will be able to sustain its remaining
debts. There are several criticisms of structural adjustment
programmes in terms of their economic achievements, but more importantly
there are issues concerning their appropriateness to the economies
of heavily indebted poor countries, their success in contributing
to the achievement of poverty eradication, and their effectiveness
in inducing genuine policy reform.
49. The success of structural adjustment programmes
in promoting economic stability is controversial. For example,
in his submission to the inquiry of the Treasury Committee on
the International Monetary Fund[100],
Tony Killick, research fellow at the Overseas Development Institute,
suggested that there is no significant impact of structural adjustment
on growth[101]. In
1994, the IMF Board of Directors reviewed the experience of structural
adjustment programmes in 36 member countries. The report found
that "economic growth and investment were frequently slow
to respond to the programmes, however it concluded that structural
reform remained the best way forward in terms of economic achievements[102].
A recent report published by the World Bank[103]
states that "even in the best performing countries the improvements
have not been large enough to make substantial progress towards
the objective of reduced poverty: only five of the ten good compliers
have been able to prevent an increase in the number of poor in
the most recent four years"[104].
The achievements of structural adjustment in pure economic terms
remain unproven, and we are therefore concerned that these programmes
are being imposed on the most vulnerable economies in the world.
The lack of publication makes proper scrutiny of these programmes
and objective evaluation of their achievements impossible, as
has previously been argued by the Treasury Select Committee[105].
The publication of details of structural adjustment programmes
is also necessary in order to enable taxpayers to be informed
of what UK contributions to the IMF ESAF are being spent on. We
urge the Government to insist that the IMF publish its Policy
Framework Papers, and the annual programmes related to them, and
that the World Bank publish its Country Assistance Strategies,
in order that structural adjustment programmes can be properly
evaluated.
50. The appropriateness of structural adjustment
as a development strategy for HIPC economies remains unproven.
For example, the World Development Movement argue that "the
imposition of inappropriate and sometimes damaging macro-economic
conditions attached to debt relief is, in our view, at least as
problematic as the actual drain of resources due to debt repayments
... they are based on an outdated model which damages the poorest
without achieving substantial economic growth"[106].
Jubilee 2000 Coalition point out in their memorandum that
"very few countries are both at the economic equivalent of
death's door, while maintaining the equivalent financial fitness
of an athlete"[107].
51. The impact of structural adjustment on poverty
eradication has been seriously questioned. A recent World Bank
Report[108] states
that "even in the best performing countries the improvements
have not been large enough to make substantial progress towards
the objective of reduced poverty: only five of the ten good compliers
have been able to prevent an increase in the number of poor in
the most recent four years"[109].
CAFOD cite their own research in their submission to this inquiry,
claiming that "the costs of structural adjustment 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"[110].
Dr Joseph Hanlon, Research Fellow at the Open University, argues
in his submission to this inquiry that structural adjustment programmes
"can actually increase poverty in poor countries"[111].
He cites Jobs For Africa, which states that "structural adjustment
is purchased at the price of economic contraction, high unemployment,
and massive poverty[112],
illustrating this argument with the example of Mozambique, which
has become poorer since the introduction of structural adjustment
in 1990 (The World Development Indicators 1997 show that GNP per
capita fell from $90 in 1990 to $80 in 1995). Jubilee 2000 Coalition
claim that structural adjustment can involve the imposition of
spending caps on health, and education[113].
Since one of the major problems associated with unsustainable
debt is a reduction in social investment spending, it seems perverse
that the conditions attached to debt relief should contribute
to the exacerbation rather than the solution of this problem.
52. Oxfam suggest that instead of being linked to
ESAF programmes, debt relief should be integrated into broader
development strategies. This would have two advantages. First,
the linking of debt relief to internationally agreed development
targets, such as the OECD's Development Assistance Committee targets,
would provide an impetus for renewed political will. Secondly,
it would refocus the objectives of debt relief on human development
rather than simply on economics[114].
Dr Joseph Hanlon suggests that debt relief should be linked specifically
to the achievement of the six measurable goals agreed by the OECD
Development Assistance Committee at its meeting in 1996:
(a) Reducing the proportion of people living
in extreme poverty;
(b) Progress towards universal primary education
(c) More girls in primary and secondary education
(d) Reducing maternal and under 5 mortality
(e) Increasing access to reproductive health
services
(f) Reducing loss of environmental resources[115].
53. These targets have already been endorsed by the
Government[116]. Whilst
we agree that the ultimate aim of debt relief must be poverty
eradication, and that the achievement of the above targets is
central to this goal, there are potential problems with social
conditionality, as advocated by Oxfam, Dr Joseph Hanlon, and others.
As with economic reform programmes, there is no guarantee that
the policies will be adopted once the period of conditionality
is complete, as pointed out by CAFOD. CAFOD raise a further issue,
that a defining human development goals could lead to a decrease
in productive expenditure, such as investment in agriculture,
as a result of over-emphasis on human development over economic
recovery, which would have a negative economic impact, and adversely
affect the poorest people[117].
The Bretton Woods Project and Christian Aid point out that social
conditionality is difficult to monitor, and that the relationship
between expenditure and achievements in the social sector is "notoriously
inexact". Furthermore, compliance is an issue with all types
of conditionality, including social conditionality[118].
54. Even if the focus of structural adjustment programmes
shifted dramatically towards poverty reduction measures, some
witnesses argue that conditionality in itself is inadequate to
induce genuine policy reform[119].
The key issue is not the nature of the conditions, but the degree
of ownership of and commitment to the programmes by the debtor
government [120]. This
has recently been confirmed by a World Bank study, which led the
Bank to conclude that the key factor in the success or otherwise
of structural adjustment programmes in achieving stable economic
growth and creating conditions in which poverty could be tackled
was the degree of ownership by the debtor government[121].
A report by the Working Group to the SPA Plenary made an identical
assertion: "country commitment is the most critical factor
distinguishing successful from unsuccessful reform efforts"[122].
55. In principle, it was envisaged that debtor countries
would participate fully in the negotiation process leading to
the agreement of terms and conditions attached to debt relief.
In practice this does not appear to be the case. Christian Aid
attribute this failure to the "vulnerability of the process
to creditor politics and financial concerns"[123].
Others argue that the main problem is not the will of creditors,
but a lack of technical expertise and resources in debtor countries[124].
Oxfam mention the high "transaction costs" involved
in negotiations, which contribute to the inability of debtors
to participate fully in negotiations. In the Mauritius
Mandate, the Chancellor pledged that the UK would do more to support
debtor-debtor linking initiatives and provide technical assistance
to allow debtor countries to participate fully in debt relief
negotiations and the design of reform programmes attached to the
relief. We welcome this pledge. We note that HMG is not involved
in the programme to facilitate links between debtor governments,
co-ordinated by Debt Relief International, and launched by Austria,
Denmark, Sweden and Switzerland, and endorsed by IMF, World Bank,
UNCTAD, Commonwealth Secretariat and UNDP[125].
We recommend that in its response to this report, the Government
tell the Committee what technical assistance it has so far provided
to heavily indebted poor countries to enable them to become fully
involved in the negotiation process, and that this information
be provided on an annual basis as part of British Aid Statistics.
We also recommend that the Government tell the Committee what
involvement it has had in south-south linking initiatives, and
why it is not involved in the programme of assistance co-ordinated
by Debt Relief International.
Rwanda
56. Rwanda is one of the three poorest countries
in the world, with 45.7 per cent of the population living below
US$1 a day[126], and
a GNP per capita of only US$180, compared to US$18,700 in the
UK[127]. Rwanda owes
external debt equivalent to 84 per cent of its GDP: about US$1billion,
including US$99 million arrears. 84 per cent of this debt is owed
to multilateral creditors, comprising 55 per cent owed to the
World Bank, 25 per cent to the African Development Bank, and 4
per cent to other multilateral creditors. The remaining 16 per
cent of Rwanda's external debt is owed to bilateral creditors,
8 per cent being owed to France. Rwanda's net present value of
debt to exports ratio is 550 per cent, and it is expected that
by 2000 this will have escalated to 732 per cent, with a debt
service to exports ratio of 54 per cent[128].
This is clearly a situation which requires urgent and deep relief.
We are concerned that debt relief for Rwanda must be provided
as rapidly as possible, in order to make a real contribution to
Rwanda's economic recovery. This is vital if the projected NPV/exports
ratio of 732 per cent is not to become a reality. We urge the
Government to insist that multilateral debt relief for Rwanda
be implemented as rapidly as possible. We further recommend that
the Government urge all bilateral creditors, in particular France,
to cancel debt incurred by the previous regime.
57. The IMF and World Bank have been working on programmes
in Rwanda since 1994, and have been involved in agricultural,
social, and public and private sector reform measures. IMF officials
in Rwanda told us that there was a possibility that these measures
would be taken into account in discussions concerning the time
frame of relief for Rwanda. We urge the Government to insist
that the reforms already undertaken by Rwanda since 1994 be taken
into account in decisions concerning the time frame of debt relief.
58. The Chancellor told us in evidence that the agreement
of a structural reform programme was imminent in Rwanda. If Rwanda
adheres to this programme for an initial period of three years,
it will be eligible for relief under the HIPC Initiative. During
this time, the World Bank estimate that Rwanda will owe US$60
million in debt service payments. The World Bank in Rwanda told
us that there will be a meeting in June of creditors to arrange
funding for the payment of these obligations, in order to help
Rwanda get through the process. We urge the Government to take
part in discussions concerning Rwanda's debt relief package, and
in the light of its exceptional circumstances, to contribute to
the US$60 million needed to service Rwanda's debts during the
first stage of the HIPC process.
59. The issue of moral hazard in the case of Rwanda
has been raised. IMF officials in Rwanda explained that conflict
should not be "rewarded". We accept that there is a
basis for this argument in some cases, however Rwanda is now governed
by a completely different regime from that which was responsible
for the genocide. Secondly, Jubilee 2000 Coalition pointed out
to us in evidence that "pre-conflict, Rwanda had really quite
a good economic record ... she was liberalising her economy, and
the World Bank and the Fund were pleased with her track record;
post-conflict, she is being penalised for her own civil conflict,
and we think that is very unfair"[129].
Furthermore, greater than the moral hazard is the human hazard
that if the government of Rwanda cannot afford to fund its judicial
system, if it cannot fund its National Reconciliation Programme,
and if it is unable to achieve economic stability, in part due
to its massive external debt burden, there is a real danger of
further conflict. The international community failed to act
when the genocide took place in Rwanda in 1994. It now has a responsibility
to act to do everything possible to prevent such events recurring.
Obviously debt relief is not the only condition necessary for
recovery from genocide, but it is clear that debt relief can make
a significant contribution.
The Cost of Debt Relief
60. The World Bank estimate that the total cost of
the HIPC Initiative will be in the region of US$5.5 billion to
US$8.4 billion in 1996 net present value terms[130].
These figures are tentative, because the amount of relief is not
determined until the completion point is confirmed. The
World Bank will finance its contribution by setting up a Trust
Fund, which will be furnished with World Bank International Bank
for Reconstruction and Development (IBRD) surplus, and donations
from other creditors. The IMF has also set up a trust fund, but
its contribution is controversial. The Fund will finance its Trust
Fund through ESAF loans and grants to be paid into an escrow account
and used only to cover debt service payments to the IMF. The use
of ESAF resources to finance the HIPC Initiative will mean that
rather than new resources being made available to development,
resources which would have been used for structural adjustment
loans will instead be used for debt relief. This is a contentious
point. Some argue that the IMF should sell a portion of its gold
reserves in order to acuire income earning assets which in turn
could finance its contribution to the HIPC Initiative, including
the Government. The Chancellor made clear in the Mauritius Mandate
that the Government will support the sale of IMF gold in order
to finance the contribution of the IMF to the Initiative[131].
61. It is imperative that debt relief involves an
increases in the total resources available to developing countries.
If the IMF and Word Bank do not finance their own contributions,
then additional funding will be required from bilateral donations,
which could divert aid money from other necessary development
projects. The Government has made a number of important bilateral
donations in support of the contribution of other creditors to
HIPC debt relief packages. The Government made a contribution
to the African Development Bank of US$10.5 million, to finance
their contribution to Uganda's debt package. The UK also contributes
£20 million per year to the IMF to fund its contribution,
and an additional £34 million was contributed in 1997-98
to the ESAF Fund. The UK owns a 5 per cent share in the International
Development Association (the equivalent to £100 million is
attributable to the UK), and in 1997-98 made additional contributions
of £180 million to IDA, to help fund debt relief[132].
Ann Pettifor, Director of the Jubilee 2000 Coalition said that
they "very much welcome the British Government's role in
helping to replenish the African Development Bank Fund"[133].
Others, however, point out that this is money which would
otherwise have been used for other programmes within the UK aid
budget. For example, Shriti Vadera, Executive Director, SBC Warburg
Dillon Read, told the Committee that "if there is a real
commitment to increasing the level of relief, finding the financing
should not be a serious issue, and that can be done without eroding
the bilateral aid that is essential for other expenditure"[134].
She argued that International Financial Institutions should finance
their own contributions to the HIPC Initiative, and that bilateral
aid should be reserved for developmental projects. Clare Short
told us that "the great bulk of the funding is coming from
creditors themselves, from the World Bank, the IMF, the Paris
Club, and relief under the HIPC is therefore truly additional
to the countries concerned and is not merely a reallocation of
existing aid funds" [135].
Creditors must fund all of their own contributions, not
merely most of them. If bilateral creditors continue to use their
aid budget to finance the contributions of multilateral creditors,
there will be no incentive for those multilateral creditors to
find ways of financing their own contributions. As we argued earlier,
we believe that unilateral action is valid only in circumstances
where further relief from other creditors is unlocked. As a general
policy, the Government must continue to press for the sale
of IMF gold to finance the contribution of the IMF to the HIPC
Initiative. International financial institutions must finance
their own contributions to the HIPC Initiative, providing additional
resources, in order to ensure that debt relief does not merely
represent the same amount of aid delivered in a different manner.
62. The cost to the UK of the Initiative, in reductions
of bilateral debt arising from Paris Club contributions to the
Initiative, will be a maximum of £600 million, if the twenty
countries currently thought to be eligible for HIPC relief all
receive an 80 per cent reduction in bilateral debt. Clare Short
pointed out to us that "a lot of this debt is unpayable so
payments are not being received, and ... there is a premium charged
on all credits to cover bad debt. It may be that the cost to the
Exchequer is really quite limited."[136].
Nevertheless, Clare Short also acknowledged that debt relief is
not a cost-free exercise[137].
We look forward to the Government establishing a timetable
within which it will achieve the UN 0.7 per cent of GNP spending
target to which it is committed[138],
thus providing adequate resources to finance the UK's contribution
to the HIPC Initiative.
63. The case of Mozambique, though now resolved,
has highlighted problems in the sharing of the burden of debt
relief between multilateral and bilateral creditors. The contributions
of the World Bank and IMF are based on calculations of debt sustainability,
and the amount of their claim is reduced accordingly. On the other
hand, the Paris Club has imposed an 80 per cent limit on the reduction
of debt treated under the HIPC Initiative, representing the domination
of the amount creditors are prepared to give over the needs of
the debtor country. In the case of Mozambique, this was not sufficient
to achieve even the already optimistic sustainability level. An
agreement was eventually reached for Mozambique, after some delay,
which involved additional contributions which increased the contribution
of the Paris Club to an equivalent of 85 per cent, and further
donations from some creditors to finance the gap of US$115 million
which remained after the multilateral institutions and Paris Club
members had provided relief. We congratulate the Government for
taking the lead in this case by donating an additional US$10 million.
Although ultimately a solution was reached for Mozambique, there
was an unacceptable period of delay in providing HIPC relief.
For as long as the Paris Club imposes an arbitrary limit on its
contribution to HIPC Initiative debt relief, while the IMF and
World Bank base their contributions on the needs of the debtor
(albeit based on optimistic assumptions about debt sustainability),
these problems will persist. Debt Relief International identify
five countries in addition to Mozambique which will require Paris
Club relief beyond 80 per cent if their exit ratios are to be
achieved (Guinea-Bissau, Madagascar, Nicaragua, Rwanda, and Sao
Tome). It is vital that rules governing contributions to relief,
encompassing all creditors, are agreed before these countries
have to suffer unnecessary delays. The Paris Club must change
its rules in line with the emphasis on sustainability, rather
than the willingness of creditors to contribute in the HIPC Initiative.
In our view, international creditors should pay more attention
to ensuring that the indebted countries receive the appropriate
level of finance instead of wasting valuable time in squabbling
over individual contributions. In the context of the wealth of
industrialised countries and the overall benefits that can be
provided to developing countries, the sums involved are comparatively
slight. The United Kingdom has taken a lead in some cases in
arguing for flexibility, going beyond the 80 per cent reduction
in bilateral debt stock. We welcome this. We recommend, however,
that the Government should argue explicitly for a revision of
Paris Club rules to allow bilateral debt to be reduced to a level
sustainable for debtor countries, on a case by case basis, rather
than to a fixed percentage of debt stock. Clear rules encompassing
all creditors are likely to be essential to the success of the
Initiative in the future.
Conclusion
64. The development of debt relief initiatives since
the onset of the debt crisis in the 1980s has been reactive, and
has proceeded at the pace of the most reluctant creditor. Robin
Fellgett, HM Treasury, told us that "Even if the case for
some change is clear, to go back to the drawing board and renegotiate
will result in the process stopping for a period" [139].
We believe that if the HIPC Initiative is to be successful in
achieving the targets of the Mauritius Mandate and beyond, there
are some key changes which must be made:
(a) The sustainability ratios must be lowered
(b) The time frame for the implementation of
the initiative must be reduced
(c) There must be increased transparency in the
negotiation process leading to debt relief agreements
(d) Conditions attached to debt relief must be
published, and must show emphasis on social measures in addition
to economic measures.
65. Debt relief should be financed by the relevant
creditors, in recognition of their responsibility in the creation
of the crisis. As a general policy, bilateral aid should not be
used to finance the contributions of multilateral or other bilateral
creditors, but should instead be used to fund projects which support
human development measures in support of economic reform.
66. The achievement of these changes is a question
of political will. The challenge facing the Government, and the
international community as a whole, is to ensure that sufficient
political will is generated to implement these changes. We agree
with Oxfam and others that the best way to achieve this is to
discuss debt relief in terms of its role in the achievement of
international development targets, since several creditors are
already committed to these as OECD members. In two days time,
debt relief will be discussed at the meeting of the G7 in Birmingham.
This opportunity must be grasped. It is vital that the issues
we have raised in this report are discussed and resolved if the
HIPC Initiative is to be successful in resolving the debt problems
facing the poorest countries in the world once and for all.
98 Q.260. Back
99 IMF
Survey on the Fund, September 1997. Back
100
Fourth Report from the Treasury Committee, The International Monetary
Fund, Session 1996-97, HC 68. Back
101
Ibid. p.15. Back
102
IMF Supplement on the Fund, September 1997. Back
103
"Adjustment Lending in Sub-Saharan Africa: An Update"
Report No. 16594, May 1997. Back
104
Ibid. Paragraph 6. Back
105
Fourth Report from the Treasury Committee, The International Monetary
Fund, Session 1996-97, HC 68. Back
106
Evidence p.99. Back
107
Evidence p.27. Back
108
World Bank Report no. 16594, "Adjustment Lending in Sub-Saharan
Africa: An Update" May 1997. Back
109
Ibid. paragraph 6. Back
110
Evidence p.96. Back
111
Evidence p.105. Back
112
Evidence p.105. Back
113
Evidence p.27. Back
114
Evidence p.56. Back
115
"Shaping the 21st Century: The Contribution of
Development Co-operation", OECD, May 1996. Back
116
The White Paper on International Development, "Eliminating
World Poverty: A Challenge for the 21st Century, Cm.
3789. Back
117
Evidence p.97. Back
118
Evidence p.103. Back
119
For example Bretton Woods Project evidence p.93. Back
120
Evidence p.99. See also Christian Aid evidence p.103. Back
121
World Bank Report no. 16594, "Adjustment Lending in Sub-Saharan
Africa: An Update" May 1997. Back
122
"Higher Impact Adjustment Lending", Report of the Working
Group to the SPA Plenary, October 1995, p. 5. Back
123
Evidence p.102. Back
124
Evidence p.110. Back
125
Evidence p.111. Back
126
British Aid Statistics1992/3-1996/7. Back
127
World Development Indicators 1997. Back
128 Evidence
p.6. Back
129
Q. 98. Back
130
World Bank Annual Report, 1997. Back
131
Rt Hon Gordon Brown MP, Speech to Commonwealth Finance Ministers
Meeting in Mauritius, 16 September 1997. See also Q.59. Back
132
Evidence p.90. Back
133
Q.169. Back
134
Q.172. Back
135
Q.255. Back
136
Q.283. Back
137
Q.320. Back
138
The White Paper on International Development, "Eliminating
World Poverty: A Challenge for the 21st Century, Cm.
3789, page 77. Back
139
Q.74. Back
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