Select Committee on International Development First Special Report

Memorandum submitted by the Department for International Development

DEBT RELIEF (Third Report 1997-98, Fourth Report 1998-99, and Fourth Report 1999-2000

Progress on the Heavily Indebted Poor Countries (HIPC) Initiative

The Government welcomes the renewed effort by the World Bank and IMF to implement the enhanced HIPC Initiative more quickly. Provided that there is a reasonable level of confidence that debt relief will benefit the poor, the Government has argued that eligable countries should receive their debt relief. By mid September 2000, ten countries had reached Decision Point under the enhanced HIPC initiative, and one, Uganda, had reached Completion Point. These are:

Debt Relief Agreed by Mid-September 2000
($ million, net present value)

Under HIPC1
Under HIPC2
Burkina Faso

The World Bank and IMF have established a Joint Implementation Committee (JIC) to oversee the HIPC initiative. Two countries, Ghana and Laos, have decided not to seek debt relief under the HIPC initiative. The JIC has identified a further 14 countries that could qualify for debt relief before the end of 2000. These countries are:

Cameroon, Chad, Ethiopia, Gambia, Guinea, Guinea Bissau, Guyana, Madagascar, Malawi, Nicaragua, Niger, Rwanda, Sao Tome and Principe, Zambia.

Many of these countries do not have the three-year track record of implementing economic reform programmes normally required under the HIPC initiative for Decision Point. In some cases this is because of the country's previous involvement in conflict. The Government has pressed for the track record requirements to be interpreted flexibly, and for conditionality to be focussed only on those policy action which are critical for tackling poverty; the World Bank and IMF Boards have shown a willingness to do this.

The JIC have also begun work to look at how debt relief savings are being spent in country. In many cases, governments will need to make greater progress in establishing accountable and transparent public finances, and demonstrate that they have the will to tackle corruption rigorously.

Of the remaining HIPC countries, many are unable to qualify for debt relief because of their involvement in conflict. In July 2000, at the G8 Summit in Okinawa, the UK pressed for further efforts to be made with these HIPC countries. The G7 agreed, and officials are discussing the steps that could be taken. The purpose of this action would be to encourage progress towards a lasting peace, as a necessary first step to poverty reduction, and where feasible to discuss a possible roadmap to gaining HIPC relief. There are ten countries that are classified by the World Bank as affected by (current or recent) conflict and that are unable to qualify for debt relief in 2000; these are Burundi, Central African Republic, Congo, Democratic Republic of Congo, Ethiopia, Liberia, Myanmar, Sierra Leone, Somalia, and Sudan. In addition the civil strife in Cote d'Ivoire is one of the factors delaying their qualification for debt relief. The UK has proposed that it should lead this initiative in Sierra Leone and Ethiopia, where there is now a cessation of hostilities with Eritrea.

There is no immediate prospect of Sudan, Somalia or Liberia entering HIPC. Sudan has successfully implemented a Staff Monitored Programme for the last two years, but the continuing conflict and the level of its arrears remain significant hurdles. Provided there is peace, a 'best case' scenario recently produced by the IMF sees Sudan beginning a Rights Accumulation Process in 2001, which could lead to the clearing of arrears. This would provide the necessary track record on economic reform, and provided that the Government also produced a poverty reduction strategy, HIPC Decision Point could be reached in 2004.

No substantive progress on debt relief for Somalia can be made until it has some form of internationally recognised national government. The Djibouti Peace Conference in August this year has made progress, but there is more to do. They would need to follow a similar track to Sudan to qualify for their debt relief. In Liberia, corruption and economic mis-management remain rife, although the IMF began a Staff Monitored Programme in January 2000. President Taylor is suspected of facilitating the conflict in Sierra Leone. Entering HIPC remains a distant prospect.

Considerable progress has been made in securing the necessary financing for HIPC. The World Bank's need for resources was discussed during the IDA mid-term review, and it has been agreed that the need to replenish the HIPC Trust Fund will be formally reviewed back-to-back with the discussions on IDA resources. For the Latin American multilaterals, a working group chaired by the US, has agreed the delivery mechanism for Inter-American Development Bank's debt relief and its financing. The Finns chaired a similar working group for the African Development Bank (AfDB). The Government was pleased that substantial frontloading of debt relief was agreed for AfDB, but disappointed that this was not mirrored in the Latin American case.

Substantial bilateral contributions have been pledged to the HIPC Trust Fund, and there is no immediate need to identify additional resources. However US Congressional approval for the $600 million promised by President Clinton remains essential, not least because some of the bilateral pledges are conditional on this. Congress also need to approve the use of the remaining proceeds of the IMF gold sales. The first tranche of the funds from the EC was paid in July 2000.

No recent work has been carried out on commercial debt, which is small for HIPC countries. DFID commissioned work on domestic debt, which was finalised earlier this year. One of the outputs is guidance for developing countries to use in formulating their debt strategies. DFID continues to raise domestic debt issues with specific governments that have large domestic debt burdens. In Ghana, for example, DFID has been funding technical assistance to the Debt Management Unit, and has helped formulate Ghana's Debt Reduction Strategy. The European Commission has also been doing some work in this area and have provided budget support specifically tied to reducing domestic debt. DFID does not provide assistance in the same way; however DFID contributes directly to the budget in some countries, and governments may use some of their resources to reduce domestic debt. This is appropriate when the reduction of domestic debt will lower interest rates, which at high levels contain investment and expenditure on poverty reduction.

Poverty Reduction Strategies (PRS)

Many countries are now preparing their interim or full poverty reduction strategies. By the beginning of August, 15 countries had presented these to the Boards of the World Bank and the IMF. DFID is closely involved in the discussions in countries where we have a programme, and in some cases has funded projects to support civil society involvement. For example, we provided funds for a training course for Southern African NGOs on understanding government budgets; in Nicaragua, we are working with UNDP and the Government to deepen and broaden civil society involvement at all levels in the PRS process; in Uganda, we are funding the Participatory Poverty Assessment.

In recognition of the central role which civil society plays in PRS processes, DFID's Civil Society Challenge Fund will give preference in the next funding round (2001/02) to initiatives aimed at building the capacity of civil society in developing countries to engage in national policy processes, including Poverty Reduction Strategy Papers. In preparation for this, work has been commissioned into the role which Northern NGOs and other civil society groups can play in supporting Southern partners in these processes. In addition, DFID hosted a conference in Glasgow in May which considered ways in which official donors can support the closer engagement of governments and civil society in pro-poor policy formulation.

Commonwealth Debt Initiative

Aid debts for 11 countries, worth more than £46 million, have been forgiven under this initiative in support of poverty reduction and the achievement of the international development targets. Most recently, and as part of the above strategy, DFID agreed to relieve Jamaica's debt repayments for the years 2000/01-2002/03, worth £11.4 million; this brings Jamaica's relief on its aid debts to the UK to £24.2 million.

Export Credits

Each application for the provision of UK export credits guarantees to IDA-only countries is assessed on its developmental merits. No request has been refused to date. IDA-only countries do not generate many applications as ECGD cover, where available, is generally on very restricted terms. At the Okinawa Summit, the G7 underlined their support for productive expenditure, and as a consequence of this, the UK is taking the lead in formalising the voluntary agreement on productive expenditure within the OECD.

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