Memorandum submitted by Christian Aid
DEBT CANCELLATION, MANAGEMENT AND SUSTAINABILITY
ECONOMIC POLICY CONDITIONS AND HIV/AIDS
INTRODUCTION
Christian Aid supports and collaborates with
more than 500 civil society and community-based organisations
fighting against poverty across the world. Most of them—especially
in Africa—are based in countries where governments depend
for more than half of their annual income on loans and grants
from external donors and creditors. For citizens and communities
in these countries, decisions taken in Washington on debt relief
and economic policies[14]are
bread-and-butter issues—and in some cases can even make
the difference between life and death as we show in the section
on integrating HIV/AIDS into economic policy making. However,
they face enormous difficulties in influencing policies or decisions
that will impact on their lives and livelihoods, or hold their
governments to account for such decisions. This is because these
decisions are taken by bureaucrats, sometimes in their countries,
but often based in Washington, who do not need to explain their
decisions and actions to those elected or appointed to represent
the interests of citizens either in aid recipient or donor countries.
The fact that aid-dependent governments can exercise little autonomous
decision-making is not only undermining the development of local
democracy in these countries—governments often feel more
accountable to donors than their own citizens—but is also
narrowing the scope for citizens to participate in home-grown
economic and social policy solutions to poverty.
Christian Aid therefore welcomes this enquiry
on the IFI Annual Meetings by the International Development Select
Committee as an opportunity to outline some of our and our partners'
concerns and recommendations on five issues:
1. How debt cancellation can fill the MDG
finance gap and the need to monitor the UK Treasury's recent commitment
to cancel "up to" 100% of the debt of ALL countries
that need the money to finance the MDGs.
2. Problems with the World Bank and IMF Debt
Sustainability Operational Framework.
3. The need for public scrutiny—in
aid recipient and donor countries—of loan decisions.
4. UK government disclosure of its votes
at the World Bank and IMF.
5. Integrating HIV/Aids into economic policy
making.
KEY RECOMMENDATIONS
1. The eligibility of developing countries
for debt relief, and the amount of debt to be cancelled, as well
as future debt sustainability assessments should be based on the
additional finances they need to achieve their national poverty
reduction or development targets.
2. The UK IDSC should monitor the terms
and implementation of the UK government's commitment to "up
to" a 100% cancellation of its share of the multilateral
debts of countries that need this revenue to fund their public
investment plans.
3. The IFIs should encourage national governments
to open up loan decisions to scrutiny by citizen groups and their
representatives in parliament and other formal democratic structures
and be bound by the outcomes of these processes.
4. The UK government should provide more
transparent information about the decisions of its representatives
at the IFI boards with regard to programme and project grants
and loans and encourage the IFIs to implement reforms that will
ensure that ALL board members become more transparent.
5. The UK government should ensure that
the IFIs do not prescribe economic policies to borrowing countries,
which are likely to worsen their HIV/AIDS epidemics. This should
form part of a general effort to increase countries' autonomy
in economic decision-making. First, HIV/AIDS should be integrated
into all poverty and social impact analyses (PSIAs) to inform
all economic policy recommendations. Second, the IFIs should provide
additional support to governments to ensure that their responses
to HIV/AIDS are integral to national poverty reduction strategies.
1. DEBT CANCELLATION
1.1 Full debt cancellation needed to finance
the MDGs
In 2000 all United Nations member states collectively
agreed to work together to reach the Millennium Development Goals
(MDGs), which provide moderate development "targets"
for 2015, including halving income poverty. Although these goals
by no means reflect all the development aspirations of the 1.2
billion people living in poverty across the world, they do reflect
an unprecedented international consensus on the minimum outcomes
to which all policies and development interventions need to contribute.
The World Bank recently confirmed that, by their
estimations, most Sub-Saharan African countries will not reach
their MDG targets by 2015.[15]
The reasons are complex, ranging from their inability to produce
for and trade in local, regional and overseas markets to inefficient
or corrupt governments. But a major contributing factor to the
predicament of Sub-Saharan African countries today is a major
shortfall in domestically generated savings and investment needed
to kick-start and sustain equitable growth and human and economic
development. The exact shortfall is difficult to estimate; NEPAD
authors, for example, have estimated Africa's resource gap at
roughly US$64 billion a year.[16]
World Bank staff estimate that with improved fiduciary management
and increased government capacity to spend funds, an additional
US$50 billion a year can be spent well on financing the MDGs globally.
Recent Christian Aid research in five African
countries[17]has
shown that external grants and loans will need to increase between
an estimated 10 and 40% from current levels to finance the minimum
level of public and private investment needed to reach the 2015
targets. These figures are based on what we consider realistic
economic and government income growth rates. 100% cancellation
of pre-decision point debts to all bilateral and multilateral
creditors will contribute between 15 and 50% of the estimated
additional finances they would need to achieve the MDGs.[18]
1.2 Monitoring the UK commitment to debt cancellation
Christian Aid welcomes the UK Treasury's recent
announcement that it will cancel its share of up to 100% of the
multilateral debts of HIPC and some non-HIPC countries. Chancellor
Gordon Brown has conceded that such a step would be a cheap and
efficient way of releasing funds directly into the national budget
of developing countries, which can be used to finance the country's
national development strategy or poverty reduction plan. This
will constitute a predictable source of finance to fund the public
investment plans of all countries trying to achieve their MDG
targets over the next 10 years.
However, we recommend that the IDSC monitor
the following issues with regard to this commitment:
— Timing of the relief: the
UK government needs to cancel the bilateral and multilateral debts
of HIPC and non-HIPCs immediately—the money should not be
held in trust by the UK government until the government reaches
completion point as has been the case with its bilateral debt
cancellation commitments. The money is needed by the next financial
year to pay for teachers' and health workers' salaries, textbooks,
basic medicines and rural feeder roads.
— Calculation of relief: the
cancellation should include the full amount of bilateral and UK
share of multilateral debt contracted before the government reached
"decision-point" under the enhanced HIPC initiative.
For non-HIPC countries, a cut-off date for the calculation of
which debts are to be cancelled need to be agreed with the government
and parliament. Analysis based on human development (MDG financing)
needs will show that most African and other indebted countries
will need 100% cancellation of debt contracted until the late
1990s to allow them a fresh start.
— Eligibility criteria: All
countries that are experiencing shortfalls in the finances they
need to reach the MDGs should qualify for full debt cancellation.
— Economic conditions: there
should be no pre-conditions for economic policy reforms such as
privatisation, unreasonable budget deficit reductions, or trade
liberalisation attached to this cancellation—the HIPC completion
point process, which expects governments to implement economic
policy prescriptions designed by IMF and World Bank staff, has
caused painful delays in much-needed debt relief to countries
such as Zambia. The Zambian government was told to privatise the
national commercial bank and reduce its budget deficit by freezing
salaries of teachers to qualify for debt relief. There have been
no assessments to establish whether these reforms will contribute
to or worsen poverty in Zambia. The unwillingness of the government
and Zambians at large to implement these reforms continues to
delay completion point. The Tanzania government, in turn, had
to reduce import tariffs to the base minimum values on all international
prices in order to qualify for HIPC debt relief in November 2001.[19]
Similarly, the Mozambican government, one of the first to reach
HIPC completion point in September 2001, has first had to fight
off World Bank attempts to force it to reduce tariffs on its cashew
exports in the mid-1990s, and in 2000, IMF attempts to force it
to reduce tariffs on sugar imports, as part of loan packages from
these institutions.
2. DEBT SUSTAINABILITY
2.1 HIPC has failed to bring about debt sustainability
Despite Chancellor Gordon Brown's admission
that full debt cancellation is an effective way of delivering
aid as part of a comprehensive MDG financing package, the UK government
continues to support the enhanced HIPC initiative, whose eligibility
criteria and debt relief calculations bear no relation whatsoever
to the MDG financing needs of indebted countries.
A recent UNCTAD report on debt sustainability
in Africa comprehensively outlines the many shortcomings of the
HIPC initiative.[20]
The report's findings confirm many of the concerns voiced by civil
society groups, including Christian Aid, since the launch of the
initiative in 1996. A combination of flaws in the HIPC process,
eligibility criteria, the definition of debt sustainability, the
financing of the initiative, and the harmful economic conditions
accompanying the initiative has led to a situation where Tanzania
is paying back more debt interest in 2004 than it did in 2000
before it reached completion point, Zambia has not yet reached
completion point and is still spending more on debt interest than
on health or education, and Uganda's so-called debt sustainability,
measured as the ratio of debt to exports, has soared since completion
point due to a dramatic fall in world coffee prices. For these
and many other HIPC countries the initiative has failed to fulfil
its main objectives of offering them a permanent exit from the
debt trap and releasing more money into national budgets year-on-year
to be used for poverty reduction expenditures.
2.2 Future debt sustainability in low-income
countries
Christian Aid research in five low-income African
countries has shown that at their current rate of new concessional
borrowing these countries will face a four to five-times increase
in their debt interest repayments after 2010, compared to their
average debt interest repayments between 2001 and 2009.[21]
This is assuming full cancellation of their multilateral and bilateral
debts contracted before 2000.
Given the estimated gap in the finances needed
to fund their public investment plans (such as PRSPs) to reach
the MDGs, this renewed outflow of resources is of great concern
to the citizens of these countries, who will experience the resulting
impact of reduced government expenditure on basic services and
other essential public investments. IMF and World Bank staff members
have also expressed concern about this situation and in response
have drawn up a draft operational framework to assist them in
assessing the debt sustainability of IDA borrowers in all future
loan transactions. This framework proposes three indicators of
debt sustainability:
(1) the quality of policies and institutions
as measured by the Country Policy and Institutional Assessment
(CPIA);
(2) the vulnerability of low income countries
to external economic shocks such as commodity price falls; and
(3) the level of debts to government income.
While these indicators are a useful departure
from the narrow debt sustainability indicators of the HIPC initiative
and while the framework makes very useful recommendations on increasing
the grant component of IDA disbursements, there are a number of
problems with this approach:
— The authors make no conceptual link
to the HIPC initiative, despite the fact this document is basically
an acknowledgement that the indicators, eligibility criteria,
and debt relief calculation methods of HIPC have failed to deliver
a permanent exit from the debt trap to its beneficiaries.
— The framework fails to include the
poverty reduction finance needs of a country as a crucial indicator
of its ability to repay interest on debt.
— The CPIA is a subjective, flawed
and highly contested (even among World Bank and IMF executive
directors) analytical tool. Its policy and institutional prescriptions
reflect the ideological biases of the World Bank and IMF. For
example, trade liberalisation and tight monetary policies are
considered "good" policies that will in theory bring
about the conditions under which countries can pay back loans:
this analysis is not borne out by evidence.
— World Bank and IMF staff assign themselves
and a small number of bureaucrats in borrowing countries the prime
responsibility in determining whether or not a country should
borrow from IDA and the IMF. This negates the crucial and constitutionally
enshrined role of citizens and parliaments in these countries
in approving the loan based on its terms, amount, affordability,
accompanying conditions, and the nature of the programme or project
funded by the loan.
3. PUBLIC SCRUTINY
OF LOAN
DECISIONS
3.1 How loan processes should work
Christian Aid and AFRODAD have argued before
that the process by which aid-recipient countries agree to take
on new loans needs to be opened up to the scrutiny of citizen
groups, their elected representatives and other democratic institutions
such as auditor generals' offices, parliamentary public accounts
committees and anti-corruption bureaus[22]When
deciding on a new loan, these institutions, especially parliament,
should have the final say on the terms, amount, and policy or
project content of the loan, ie whether it meets national development
objectives. It is their constitutional prerogative to accept or
reject the loan.
They should also be able to scrutinise and contest
any conditions attached to those loans, for example policy prescriptions
to liberalise trade, privatise services or lower budget deficits
or inflation, as well as whether the government will be able to
repay new loans when they mature without jeopardising essential
public expenditure on poverty reduction. Scrutiny does not stop
when a loan is decided, however. Citizens and their representatives
should have a role in scrutinising the implementation of a project
or programme funded by an external loan, and hold both their government
and the relevant donor to account for those that fail in both
their aims and lead to an unsustainable debt burden.
Reforming loan processes in this way would help
to avoid lending and borrowing mistakes, which in the past have
led to the build-up of unsustainable debts that now have to be
paid off at the cost of financing the MDGs.
3.2 How loan processes really work
AFRODAD and Christian Aid research looked at
the current processes for deciding and monitoring loans, and their
effectiveness, in Malawi, Mozambique, Tanzania, Uganda and Zambia.
Whilst there were some good structures in place in some of the
countries surveyed, they were generally not functioning sufficiently,
and in most countries substantial reforms are required. Where
parliaments have a formal role in the process, it is often symbolic
and reduced to rubberstamping new loans. The role of civil society
has been very limited. There is no formal legislation in any of
the countries surveyed to involve civil society in the loan cycle,
and they lack the resources and skills to research, monitor and
advocate on government loans. Other democratic institutions, such
as the auditor general's office, are often under-funded, under-staffed,
or are not sufficiently independent from the executive. And whilst
constitutions may assign these institutions an important role
in monitoring public finances, they rarely use this power to monitor
public loans. So IFIs and governments are often left signing loan
agreements in a non-transparent and non-accountable way.
3.3 Involving parliaments in loan decision-making
and monitoring
Citizen pressure groups as well as parliamentarians
in African countries have played an important role in pushing
for reform of national processes to decide and monitor loans.[23]
In August, a number of members of the SADC Parliamentary Forum
came together to discuss the role of parliaments in loan decisions.
They issued a statement which recommended, amongst others, that
the role of parliaments in debt contraction and monitoring be
enshrined in national constitutions, that parliaments should ensure
that borrowing is only for unavoidable national expenditure, and
that parliamentary Public Accounts Committees' capacity be developed
to monitor and track the loan contraction process as well as safeguard
public funds.[24]
Christian Aid has been actively promoting the
International Parliamentary Petition. This calls for democratically
elected representatives of recipient nations to be the final arbiters
of all economic policies in their countries. It also demands changes
within the World Bank and IMF to that ensure parliamentarians
can hold their governments to account for decisions made at the
boards of those institutions.[25]
4. UK GOVERNMENT
DISCLOSURE OF
ITS VOTES
AT THE
WORLD BANK
AND IMF
4.1 The need for greater transparency
Owning the Loan made a specific recommendation
to the UK government to report to the UK parliament on the vote
of the UK executive directors in the World Bank and IMF on project
and programme loans and grants. The UK government has made welcome
commitments to greater transparency about its own decisions made
on the boards. At present the Treasury provides an annual report
to parliament on its decisions within the IMF and DFID has committed
to providing something similar regarding the World Bank. However,
the Treasury report only explains the policy behind government
votes on project and programme grants and loans, it does not give
the actual votes. This makes it very difficult for UK parliamentarians
and civil society to monitor that decisions are being made in
line with their stated policy commitments. Recently John Healey,
Economic Secretary to the Treasury, said that the Treasury "can
go further" and that it would "continue to work to make
clear the stance that we have taken in the IMF board and how we
have voted throughout the year". It is not clear, however,
what this means in practice and Christian Aid requests greater
clarity from the government on how they plan to do this.
4.2 Changes needed within the World Bank and
IMF
UK moves to reveal more information will only
go so far, because of the disclosure rules and board practices
of the World Bank and IMF. Last year, Christian Aid presented
evidence to the IDSC about this issue. We called for the publication
of board minutes, the publication of Executive Directors' statements,
the replacement of consensus voting with a formal voting system
and substantial changes to the distribution of votes and seats
to give developing countries greater say in decisions made on
the Boards. One year on, Christian Aid is very frustrated at the
limited progress on this issue. It is far from clear what the
UK government position is on the various recommendations to improve
the governance and transparency of these institutions, what they
argued for at the recent meetings and what actions they are now
planning to take to promote these vital reforms.
5. INTEGRATING
HIV/AIDS INTO ECONOMIC
POLICY MAKING
5.1 The World Bank and HIV/Aids
Although the World Bank has significantly increased
its HIV/AIDS funding in recent years, it is failing to recognise
the potential impact of its economic policy prescriptions to borrowing
countries on the spread of HIV/AIDS. The World Bank Users'
Guide to Poverty and Social Impact Analysis does not even
mention HIV/AIDS. Moreover, two thirds of poverty reduction strategy
papers contain no indicators to measure progress on HIV/AIDS.
At the 2004 Annual Meetings of the World Bank and IMF, Christian
Aid presented its new report Downward Spiral—the absence
of HIV from economic policy making [26]during
a Civil Society Dialogue meeting with World Bank and IMF staff.
Action Aid USA, who focused on the need for greater flexibility
in public sector budget ceilings for countries fighting HIV, and
World Vision International, who focused on a proposal to create
"AIDS Affected Country Status"[27]also
participated in this meeting. Although Bank and Fund staff acknowledged
the need to integrate HIV/AIDS concerns into economic policy making,
did not generally agree with the specific proposals for practical
action made by NGOs.
5.2 The downward spiral of HIV/AIDS and poverty
Nineteen out of 20 people living with HIV/AIDS
are in the developing world. In South Africa, HIV/AIDS could result
in "complete economic collapse" within three generations,
according to a World Bank study. And seven of the world's 10 most
unequal countries are also in the top 10 countries for HIV/AIDS
prevalence. HIV/AIDS exacerbates poverty, and poverty and inequality
can make people more vulnerable to HIV/AIDS. Therefore economic
policy decisions that increase poverty, can also hasten the spread
of HIV/AIDS.
Economic policy reforms in developing countries
are often necessary and desirable. However, policies, which may
be intended to bring about overall improvement in economy, can
leave some groups of people worse off. The policy architects may
argue that this impoverishment will be short term, but if this
results in people contracting HIV/AIDS, their poverty will be
permanent. Once they are HIV-positive, their poverty is likely
to deepen, and high levels of HIV will dramatically affect a country's
long-term growth prospects.
5.3 Sugar cane in Western Kenya
This process has been illustrated in an area
of western Kenya that is economically dependent on sugar cane.
The high poverty rate there is exacerbated by the high prevalence
of HIV/AIDS, which in turn has contributed to a fall in income
and an increase in household poverty. Today, agricultural productivity
is falling, health services are overstretched and school drop
out rates are increasing.
In 2000, key restrictions on sugar imports were
removed as part of Kenya's commitments under the Common Market
for Eastern and Central Africa (COMESA) trade agreement, bringing
gains to some Kenyans, but not to smallholder sugar cane farmers.
Processors were unable to compete with imports from more competitive
African producers. Payments became unreliable, and when prices
paid to cane growers fell by more than a third, it had knock-on
effects on the entire local economy. Christian Aid, with partners
the Catholic Correspondence Course Franciscan Missionary Charism
(CCFMC) and the Anglican Church of Kenya (ACK), asked a wide range
of people in affected communities how this drop in income had
influenced their vulnerability to HIV. The general consensus was
that it had had a detrimental influence. Some of the main reasons
they gave were:
— The inequality of income has increased,
encouraging people to become involved in sexual transactions,
and to take on more sexual partners.
— More women were involved in sex work,
many on a part-time and informal basis, including young women,
married women and widows.
— Economic pressures have encouraged
some traditional practices, such as wife inheritance, whereby
a widow is "inherited" by her brother-in-law. While
this practice can act as an economic safety net, it can also lead
to increased HIV transmission.
— More women were boosting their income
by making and selling illegal brew. The availability of this cheap
alcohol could lead to high-risk sexual activity.
— Falling incomes have led to higher
drop-out rates from secondary school, as parents could no longer
afford school fees, leaving teenagers with few economic opportunities,
which further encouraged sexual transactions.
If, as seems likely, these changes lead to higher
HIV prevalence, this in turn will further harm the economy and
lead to an increase in poverty. This situation could have been
avoided if the impact of trade policies on these key vulnerable
groups had been taken into account, and if the trade liberalisation
process had been undertaken in a more nuanced and gradual way.
Indeed, the Kenyan government has, somewhat belatedly, recognised
the problems caused by liberalisation, and introduced some protection
for the sugar sector for a limited time. The IMF is tolerating
this, but appears to be putting some pressure on Kenya to ensure
this protection is short-term.
5.4 Integrating HIV/AIDS into economic policy-making
This example illustrates the need to integrate
HIV/AIDS into all economic policy-making. HIV prevention, treatment,
care and support programmes, though essential, are insufficient
if they are implemented in isolation from economic policies. In
practice, this will mean different things in different contexts:
it could result in new and different economic policy approaches;
it could mean implementing a policy more slowly, or making HIV/AIDS
prevention and care more widely available. To break the downward
spiral, policy-makers need to incorporate the impacts and costs
of HIV/AIDS during economic planning, and they must reassess policy
options for economic change in the light of their likely effects
on the spread of HIV/AIDS.
5.5 UK government position
Taking Action—the UK's strategy for
tackling HIV and AIDS in the developing world, published in
July 2004, shares Christian Aid's concerns: "PRSPs need to
incorporate a discussion of AIDS programmes, and other parts of
the PRSP also need to be assessed for their impact on AIDS as
well as poverty, social and environmental aspects. For example,
if a government decides to privatise a previously state-owned
asset, there may be implications for employment in nearby communities,
leading to poverty and vulnerability to HIV/AIDS. When a major
highway is built, it may increase the access of poor people to
markets and services, but may also make them more vulnerable to
HIV/AIDS. The impact on HIV/AIDS of each proposed reform must
form a part of analysing the poverty, social and environmental
aspects of programmes." We recommend that UK government officials
raise this concern in their discussions with Bank and Fund staff.
RECOMMENDATIONS
1. The eligibility of developing countries
for debt relief, and the amount of debt to be cancelled, as well
as future debt sustainability assessments should be based on the
additional finances they need to achieve their national poverty
reduction or development targets.
2. The UK IDSC should monitor the terms
and implementation of the UK government's commitment to "up
to" 100% cancellation of its share of the multilateral debts
of countries that need this revenue to fund their public investment
plans.
3. The IFIs should encourage national governments
to open up loan decisions to scrutiny by citizen groups and their
representatives in parliament and other formal democratic structures.
4. The UK government should provide more
transparent information about the decisions of its representatives
at the IFI boards with regard to programme and project grants
and loans and encourage the IFIs to implement reforms that will
ensure that ALL board members become more transparent.
5. The UK government should ensure that
the IFIs do not prescribe economic policies to borrowing countries,
which are likely to worsen their HIV/AIDS epidemics. This should
form part of a general effort to increase countries' autonomy
in economic decision-making. First, HIV/AIDS should be integrated
into all poverty and social impact analyses (PSIAs) to inform
all economic policy recommendations. Second, the IFIs should provide
additional support to governments to ensure that their responses
to HIV/AIDS are integral to national poverty reduction strategies.
October 2004
14 These economic policy prescriptions form the core
of a range of conditions that accompany all World Bank and IMF
loans. Back
15
World Bank, Global Monitoring Report, 2004. Back
16
This calculation, however, is based on an assumption that a 7%
a year growth in GDP will reduce income poverty by half by 2015.
Evidence has shown, however, that the quality and distribution
of the benefits of growth (providing livelihoods and safety nets
to those living in poverty) are even more important than the average
year-on-year increase in domestic economic activity. Back
17
The countries were Malawi, Mozambique, Tanzania, Uganda, and Zambia. Back
18
See Christian Aid, Owning the Loan-poor countries and
the MDGs, April 2004, p 7 table 1. Back
19
For detailed information on economic conditions in Tanzania see
SAP Information Alert Series, Year 2000 country profile-the status
of Tanzania with the IMF and World Bank, Globalisation Challenge
Initiative, Washington, 2000. Back
20
United Nations Conference on Trade and Development, Economic
Development in Africa: debt sustainability, oasis or mirage,
Geneva, 2004. Back
21
See Christian Aid, Owning the Loan-poor countries and
the MDGs, April 2004, page 14, table 3. Back
22
For more information, see "Owning the Loan",
op cit. Back
23
These groups include the Uganda Debt Network, the Mozambican Debt
Group, Jubilee Zambia, the Tanzania Coalition on Debt and Development,
and the Malawi Economic Justice Network. Back
24
See AFRODAD, "African CSOs in dialogue with SADC
parliamentarians: the loan contraction process", Harare,
August 2004. Back
25
More detailed recommendations are available from Christian Aid
on request. Back
26
http://www.christianaid.org.uk/indepth/409hivaid Back
27
A note of this meeting is available on the World Bank website. Back
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