Poor Countries Heavily in Debt
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The enhanced HIPC Initiative
The enhanced HIPC Initiative adopted by the Boards of the IMF-World Bank at the 1999 annual meeting, following the Group of Seven summit in Cologne, aimed at accelerating and deepening debt relief. Under the reformed framework, which marked a step forward, the threshold targets for net present value of debt-to-exports has been lowered to 150 percent.
Much has been made by the World Bank, the IMF and the wider creditor community of the generosity of the new HIPC Initiative. Headline figures suggest that the amount of debt relief provided to a group of 32 countries will double to $28bn (in net present value terms), reducing the average debt-to- export ratio by 41 percent to 138 per cent at decision point, and to less than 100 per cent by 2005.
Comparing post-HIPC Initiative debt servicing with the amount that countries would have to pay in the absence of debt relief points to significant benefits. For the nine countries expected to have reached decision point, total debt service relief amounts to $9.1bn - three times the amount projected under the original HIPC Initiative. This figure will rise to $20bn if the target of debt relief for 20 countries by the end of the year is achieved.
Documents prepared for the annual meeting in 2000 highlight dramatic improvements in the debt profile of the HIPCs. The debt/GDP ration is projected to fall from 47 per cent to 28 per cent, and the debt service ratio from 15 per cent to 9 per cent. Scheduled debt payments will fall by $800m.
Such indicators have been used to present a positive picture of the enhanced HIPC Initiative, notably for media consumption. Unfortunately, they tell only part of the story. In particular, they fail to capture the impact of debt relief on government revenue and budgets. Despite repeated requests from non-government organisations IMF-World Bank staff have failed to provide any assessment of the proportion of government finance that will be diverted to debt servicing after debt relief.
The debt relief deficit
In an attempt to assess the real implications of the HIPC Initiative for government budgets, Oxfam has analysed post-HIPC debt service projections for 13 countries. Eight of these countries have reached their decision point and benefit from assistance under the enhanced HIPC framework. Another four are expected to received enhanced HIPC support this year. The potential budgets effects of debt relief were captured by taking the average annual level of debt repayment projected for the three years after countries reach decision point. This figure was then compared with government revenue in the decision point year.
The findings suggest that the benefits of the HIPC Initiative in terms of reduced debt servicing will be significant for a small group of countries, negligible for a larger group, and non- existent for several:
* Increased debt servicing for three countries. Zambia, Tanzania and Senegal
all face an increase in debt service payments. The largest increase will be in
Senegal, where debt service payments will almost double to $171m, reflecting the
large pre-HIPC Initiative gap between scheduled and actual payments. In Zambia
an increase in repayment to the
IMF will raise annual debt servicing by $75m, or one-third.
* Limited benefits for four countries. Debt service payments will fall by less than 20 per cent for Burkina Faso, Honduras, Guinea, Malawi, and Mauritania.
* Significant savings for five countries. Debt servicing will fall by 30 per cent or more for Bolivia, Cameroon, Mozambique, Rwanda and Uganda.
One of the aims of the HIPC Initiative is to release resources that could be used to reduce poverty from debt servicing. Given the limits imposed on revenue raising capacity by low average incomes, and the huge scale of unmet basic needs, this is an important objective.
The data derived from the Oxfam research strongly suggests that unsustainable
debt will remain a formidable obstacle to poverty reduction efforts. Debt
servicing will continue to absorb a large share of government revenue in most
countries, amounting to * 40 per cent of total revenue in Zambia * 25-35 per
cent of the total in Cameroon, Guinea, Senegal and Malawi
* 15-20 per cent in Honduras, Mozambique, Tanzania and Mauritania * 13-14 per
cent in Burkina Faso and Mauritania
Implications for public investment in basic services and human development
The limited budget savings provided through enhanced HIPC Initiative debt relief means that some of the world's poorest countries will continue to transfer far more to their creditors, than they are able to invest in basic services.
In summary
* there are eight countries in which debt service payments will exceed the budgets for health and education
* in five of these countries (Zambia, Tanzania, Senegal, Mauritania and Cameroon) debt repayments will exceed the combined health and education budgets after debt relief.
It is difficult to square these public-spending outcomes with a genuine commitment to a poverty-focussed debt initiative on the part of the donor community. As a group, the heavily indebted countries are massively off track for achieving the human development targets set for 2015. These include the halving of extreme poverty, universal primary education, and a two-thirds reduction in child mortality. If current trends continue, each of these targets will be missed by a wide margin.
The prospective scenario for individual heavily-indebted countries underlines the enormous human development costs implicit in the debt service projections summarised above.
Wider problems
Inadequate levels of debt relief is just one of the problems associated with the HIPC Initiative. Despite repeated pledges from creditors, the pace of implementation remains far too slow. There are also growing concerns about gaps in the Initiative.
There are several reasons for the slow pace of implementation. In some cases,
unrealistic conditions have been set under the IMF programmes that eligible
countries must comply with in order to receive debt relief. In Honduras, for
instance, debt relief has been held up because of IMF insistence on more rapid
progress in the country's privatisation programme. In other cases, weak
management appears to have been
responsible. Malawi could have received debt relief in May had IMF and World
Bank staff completed their debt sustainability analysis earlier. The delay may
cost Malawi around $50m in interim debt relief, if it enters HIPC in November as
planned.
Several countries potentially eligible for debt relief are affected by
conflict. Earlier this year the British Chancellor Gordon Brown outlined an
initiative aimed at using debt relief as an incentive for peace and
reconstruction. The recent cease-fire in the war between Ethiopia and Eritrea
provides an important opportunity for the creditor community to put this
commitment into practice. Failure to provide Ethiopia with debt
relief will leave the government facing chronic public financing
problems. Scheduled debt service payments amount to 60 per cent of export
earnings.
HIPC initiative eligibility currently extends to a group of around 40 low-income countries. That group does not include Nigeria, which is Africa's largest debtor. Nor does it include chronically indebted lower-middle-income countries such as Jamaica. The next phase of HIPC reform needs to develop strategies for extending the debt relief remit to other countries where unsustainable debt threatens poverty reduction efforts.