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
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