Select Committee on International Development Appendices to the Minutes of Evidence


APPENDIX 3

Memorandum submitted by CAFOD

BACKGROUND

  This year's Annual Meetings considered the IMF and World Bank paper—Heavily Indebted Poor Countries (HIPC) Initiative: Status of Implementation—detailing the progress of the enhanced HIPC Initiative and its performance against the policy framework's central objective of delivering a "robust exit from the burden of unsustainable debts". The request for this review, made at the Bank and Fund 2002 Spring Meetings, followed concerns that a number of HIPC countries were moving beyond their thresholds of debt sustainability after reaching so-called Completion Point.

  CAFOD submitted a joint paper (with Christian Aid, Eurodad and Oxfam GB) [9]to the Annual Meetings drawing attention to the increasing weaknesses of the enhanced HIPC Initiative in meeting its central goal of securing a durable debt sustainability for eligible HIPCs.

  This memo sets out the key areas of concern for CAFOD and assesses the World Bank and IMF's review against the IFIs' international commitment made in UN Financing for Development Monterrey Consensus for future reviews of debt sustainability to "bear in mind the impact of debt relief on progress towards the achievement of the development goals contained in the Millennium Declaration."

THE ENHANCED HIPC INITIATIVE—THE RESULTS SO FAR

  Where the HIPC Initiative has freed up resources for poverty reduction, there have been some demonstrable social and economic gains. For instance, user fees have been dropped for child vaccination programmes in Mozambique and for education in Uganda, Malawi, Tanzania and rural areas in Benin. Uganda and Mozambique, among the early beneficiaries of debt relief and enhanced aid flows, have consistently sustained annual growth rates over 5 per cent. And Mali, Mozambique and Senegal have increased expenditures in HIV/AIDS programmes.

  However, the socio-economic gains made with enhanced HIPC debt relief are limited and, where they exist extremely precarious. Low-income countries face development challenges equipped with only scarce and highly vulnerable resources. For almost all HIPCs, private sector flows will not make up for chronic resource deficits. The marginalisation of the African continent from global trade is equivalent to a loss of 21 per cent of regional GDP or $68 billion per annum[10].

  The initial promise made by the Bank and Fund that the HIPC Initiative would provide a robust exit from unsustainable debts is also looking shaky.

    —  Out of 20 HIPCs, which have already reached HIPC decision point, four countries (Mali, Niger, Sierra Leone and Zambia) will have annual debt service payments due in 2003-05 which will actually be higher than their annual debt services paid in 1998-2000.

    —  Five countries will be paying almost as much in debt service payments as before HIPC (Ethiopia, Guinea-Bissau, Honduras, Nicaragua, Uganda).

    —  In six countries, annual debts serviced will be reduced by a modest $15 million in 2003-05.

    —  The medium to longer term projections on debt servicing are also alarming—Senegal's debt service jumps by 61 per cent in 2004; Nicaragua's rises by 60 per cent in 2002; Mauritania's rises by 46 per cent in 2007; and Honduras faces an increase of 93 per cent in 2002.

    —  Over half of the HIPCs are spending more than 15 per cent of their government revenue on debt servicing.

DEBT RELIEF AS A SOURCE OF DEVELOPMENT FINANCE

  A growing body of literature suggests that debt, as a form of resource transfer, is one of the most efficient and effective with strong additional benefits for the macroeconomy.

  In the context of nationally owned poverty reduction strategies, debt relief can enhance national systems of accountability for the prudent and pro-poor management of public resources. It cuts down on the transaction costs associated with recipient country governments negotiating with an array of official donors each with their own competing programming objectives. More recent research shows that debt relief is anti-inflationary and can act as a spur to economic growth. But also, as a predictable source of financial flow, debt cancellation acts as a counter-cyclical form of development finance. [11]

  CAFOD, along with a number of UK aid agencies and partner organisations, is concerned that the calculus used by the World Bank and IMF to determine the levels of debt relief bears no consideration of the finance required to achieve agreed poverty reduction measures or, indeed, address the internationally agreed 2015 Millennium Development Goals (MDGs).

  Following on from the Bank and Fund's undertaking made in the Monterrey Consensus for future reviews of debt sustainability to consider debt in relation to financing the MDGs, the review reporting to the Annual Meetings was an important opportunity for the Bank and Fund to consider debt in the context of achieving these broader poverty reduction goals.

ANNUAL MEETINGS 2002

  Despite the Bank and Fund undertaking made in the Monterrey Consensus paper, the Board paper reviewing the effectiveness of the current HIPC framework gave inadequate attention to the role for debt relief as a form of development finance and particularly as a potential financing stream for meeting the MDGs. The paper only considered the issue with a cursory description of proposals put forward by two NGOs and dismissed these with insufficient analytical justification.

  In a year when the Bank President and Managing Director of the IMF have placed great emphasis on implementing the declarations from the "super-Summits" of 2002, it is disappointing that the one issue in the Monterrey Consensus of direct relevance to the Bank and Fund was given such scant attention in the Board papers to be considered at this year's Annual Meetings. In a 121-paged paper, the staffs of the Bank and Fund mentioned the potential role that debt relief has in financing the MDGs in four sentences.

  CAFOD believes that if the Bank and Fund are to be taken seriously in their stated commitment to aid low-income countries in their efforts to reach the Millennium Development Goals, more thoroughgoing sets of analyses of the potential benefits of all financial flows, including debt relief, must be undertaken. We agree wholly with the HIPC finance ministers' Annual Meetings statement, that:

    "[t]here continues to be no systematic analysis of the contribution that HIPC relief is making to the Millennium Development Goals and world poverty reduction, and the remaining financing gap after debt relief."

  CAFOD is concerned that the calls made by the Irish Government, by the G77 in the UN Financing for Development Conference, by UN specialized agencies and by African governments in NePAD for the integration of debt sustainability analyses with broader human development objectives, including financing the MDGs, are being effectively sidelined by the World Bank and the IMF. We believe that in building an international development consensus around achieving the MDGs, it is not politically justifiable for OECD countries to resort to their majority shareholding of the IMF and World Bank to resist calls for serious analysis of the potential role of debt relief in meeting the Millennium Development Goals.

  While we agree that cancellation of debt is not a sufficient condition for achieving the development goals, nevertheless, while global economic growth prospects remain bleak and the necessary additional aid flows beyond the G8 Africa Action Plan are unlikely to be forthcoming in the medium term, further analysis of the function of debt relief is necessary.

  According to CAFOD's own assessments, and using econometric models developed by the World Bank[12], the full cancellation of eligible heavily indebted poor countries' outstanding debts would move about nine or 10 HIPCs to the levels of economic growth needed to halve the numbers of people living in absolute poverty. We regard this as one of a number of important considerations missed at this year's Annual Meetings.

  At a time when official decision-makers from OECD countries and the international financial institutions are placing such strong emphasis on policy implementation, it is deeply regrettable that the Bank and Fund failed to meet in good faith their international undertakings made at Monterrey.

QUESTIONS FOR THE INTERNATIONAL SELECT COMMITTEE ON DEVELOPMENT

  The Development Committee September 2002 communiqué tasks the World Bank with the—"regular monitoring and review of the policies, actions and outcomes needed to achieve [the MDGs]". Given that most analyses of the financial flows for HIPCs suggest that the majority will not achieve the development goals, will the UK government press for future Bank and Fund analyses to examine in depth the relationship between deeper debt relief and achieving the MDGs?

  Will the Secretary of State give consideration to supporting the proposal made by the HIPC Finance Ministers at the Annual Meetings for "the Bretton Woods Institutions to present MDG financing needs in all HIPC and PRSP-related Board papers"[13]?

Henry Northover

CAFOD

October 2002


9   A Joint Submission to the World Bank and IMF Review of Debt Sustainability 2002-CAFOD, Christian Aid, Oxfam, GB Eurodad (<au0>www.cafod.org.uk/policy/debtsustainability20020902.shtml<xu) Back

10   Can Africa Claim the 21st Century p20-World Bank 2000 Back

11   See CAFOD, Christian Aid, Oxfam GB and Eurodad Joint Submission to the World Bank and IMF Review of HIPC and Debt Sustainability 2002. See website address above. Back

12   Paul Collier and David Dollar Financial Impact and the HIPC Initiative First 26 country cases-World Bank July 2002. The Enhanced HIPC Initiative and the Achievement of Long-Term External Debt Sustainability-World Bank and IMF April 15 2002/ And The Case for Aid for the Poorest Countries-HM Treasury March 2002 Back

13   HIPC Ministerial Network Press Release 28 September 2002 Back


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2003
Prepared 13 January 2003