Latest HIPC Report Brings More Bad News for Poor Countries
By Romilly Greenhill, Jubilee Research
September 2002
1. Introduction
The World Bank and IMF's Heavily Indebted Poor Country (HIPC) initiative, started in 1996, has a stated aim of providing a 'lasting exit' to the debt sustainability problems of the poorest countries. However, the latest draft 'Status of Implementation Report' for the HIPC initiative [1], due to be released in time for the 2002 Annual Meetings of the Bank and Fund, suggests that the initiative is doing anything but.
In summary, the report shows that:
. Of the 19 countries originally expected to reach Completion Point by the end of this year, at least 11, or 60%, will fail to do so;
. The number of countries now expected to face unsustainable debt burdens at Completion Point is now 13, 3 more than expected in April 2002
. 13 out of the 20 'interim' period countries have gone off-track with their IMF programmes at some point, thus delaying debt cancellation and denying them interim debt service relief;
. Overall, even according to the narrow definitions of the World Bank and IMF, HIPC only appears to be working for between 7 and 10 countries out of the 42 included within the initiative;
. The IMF and World Bank have considered, but rejected, alternative proposals for debt relief on the grounds that they are 'unaffordable' and will create 'moral hazard' - both charges rejected by Jubilee Research.
In this briefing, which is an update of our paper released in April 2002 [2], we provide a full analysis of the latest Bank and Fund report - and make proposals for reform.
2. Limping through HIPC - will they ever make it?
In December 2000, there was a flurry of activity to get as many countries as possible to the so-called Decision Point under HIPC - the point at which debt relief is committed [3], and some interim relief provided. Under pressure from international Jubilee 2000 campaigners, the Bank and Fund were keen to demonstrate that they had met the millennium deadline for as many countries as possible.
Since then, however, the brakes on the HIPC initiative seem to have gone into over-drive. This year, only 2 countries, Ghana and Sierra Leone, have reached Decision Point, meaning that almost a third of the countries which need some assistance under HIPC have gained nothing so far from the initiative. This is despite the fact that the remaining countries are some of the poorest and most war-ravaged countries on earth.
And the 20 countries that are between Decision Point and Completion Point seem to be stuck in a permanent state of limbo. Over the past 9 months, only 2 countries have got to Completion Point, bringing the total number of countries which have seen any reduction in their stock of debt under HIPC up to 6 - or less than 16% of the total number deemed to need relief under HIPC [4]. According to the World Bank and IMF projections, at most 2 more countries - Benin and Mali - may reach Completion Point by the end of this year. This means that, of the 19 countries originally expected to reach Completion Point by December 2002, a maximum of 8 - or a little over 40% - will have done so. For many countries, progress towards Completion Point has been delayed by them going 'off-track' with their IMF programmes - an issue discussed further below. HIPCs appear to be resisting the IMF medicine, but are suffering the consequences.
3. Update on debt sustainability - more bad news
In the Spring of 2002, the World Bank and IMF released two reports [5] which confirmed the predictions of NGOs, including Jubilee Research, that HIPC countries would never reach the export growth targets set in the Decision Point documents. This would not be a problem if it were not for the fact that the amount of debt relief provided under HIPC is assessed using debt-to-export ratios - meaning that, the higher exports are expected to be, the lower the amount of debt cancellation needed. NGOs including Jubilee Research [6] have accused the IMF and World Bank of cynically using unrealistically high forecasts for export growth in order to limit the costs of debt cancellation for their own pockets.
To do them justice, it should be noted that creditor countries and institutions have agreed that some countries will need additional 'topping up' of relief at Completion Point in order to bring their debts down to sustainable levels, and have already provided such relief to Burkina Faso. At the G8 meeting in June 2002 in Kananaskis, Canada, G7 leaders committed - though have not yet delivered - an additional $1bn of debt relief, in nominal terms, for this purpose. But the criteria for providing such relief remain extremely narrow, and relief is only to be provided in 'exceptional cases [7].' According to the Bank and Fund, the costs of this additional relief will be between $0.4bn and $0.7bn, in NPV value terms.
However, Jubilee Research is alarmed that the World Bank and IMF have calculated the additional relief that will be required to bring debt burdens down to sustainable levels by looking at debt-to-export ratios after, rather than before, the additional debt cancellation promised by some bilateral creditors.
Why does this matter? It matters because, as a result of huge public pressure during the international Jubilee 2000 campaign, many creditor country governments, including all of the G7 countries, admirably committed themselves to cancelling 100% of the debts owed to them by the poorest countries. The G7 leaders did this because public pressure had made them recognise that the huge debt burdens faced by poor countries were undermining development in those countries, and contributing to further misery and poverty. Jubilee 2000 campaigners congratulated their leaders for their actions, and rightly praised themselves for a concrete outcome from their years of sustained campaigning.
Yet, now, it seems that this was all for nothing. For what is essentially happening is that the additional bilateral relief is simply substituting for relief that countries should have been receiving anyway under HIPC, had the export projections used been fair and realistic. In other words, in desperately poor countries such as Benin, Ethiopia, Guinea, Guinea-Bissau, Malawi, Niger, Senegal and Zambia - some of which are also facing severe food crises - additional bilateral relief is simply not additional, but is instead replacing relief that other creditors - including, of course, the World Bank and IMF - should be providing. And in the case of Chad, The Gambia, and Rwanda, the additional bilateral relief will still not bring them down to debt sustainability levels which even approach the HIPC targets. Instead, even including the additional bilateral cancellation, their debt to export ratios will be as high as 190%.
At Jubilee Research, we have re-calculated the additional relief that will be required, assuming that debt is brought down to 150% of exports before additional relief is considered - the only approach we believe to be justified. Unsurprisingly, the costs, and the number of countries needing extra relief, increase. On the basis of our calculations, shown in Table 2, we find that the number of countries likely to face unsustainable debt burdens at Completion Point increases from 10 to a possible 13. Worryingly, one of the countries included in the list is Sierra Leone, which only reached Decision Point in March 2002, by which point it was already clear that previous projections had been way off the mark. It seems that the World Bank and IMF have failed to learn from their mistakes.
As Table 2 shows, re-calculating the additional debt cancellation needed at Completion Point to bring debt-to-export ratios down to within 150% for all interim period countries shows that another $2.3-$2.8bn of debt cancellation, in net present value terms, would be needed. It is clear that the $1bn announced in the G8 summit in Kananaskis will only be a fraction of the additional resources needed - even to bring the interim HIPCs to within the inadequate levels of debt cancellation promised under HIPC. And of course, this does not even include the additional relief deserved by post-Completion Point countries such as Uganda [8], which can expect little extra relief despite their manifestly unsustainable debt burdens.
3. IMF programmes - Time to Blame the Teacher?
In May 2002, we reported that a total of 7 countries - The Gambia, Zambia, Malawi, Nicaragua, Guinea, Guinea-Bissau and Guyana - were facing suspension of interim relief from the IMF because of failure to stay 'on-track' with their IMF programmes [9].
Once again, the news from the latest 'Status of Implementation Report' is, if anything, even worse. Although Guinea has now re-started her IMF programme, as have Rwanda and Niger - who must presumably have gone 'off-track' since May 2002 - several other countries have fallen foul of the IMF's iron rod, including Sao Tome and Principe, Honduras, Senegal, and Madagascar. Some of these countries are taking the ominously named 'corrective measures' in order to build a track record of policy performance for resumption of an IMF programme, while others - Guinea-Bissau, Honduras, Senegal and Madagascar seem to be lost in no-man's land.
Going 'off-track' with IMF programmes not only delays countries from reaching Completion Point and results in the suspension of relief from the IMF. It can also mean total suspension of interim relief from the Paris Club - the informal group of bilateral creditors, including most of the rich industrialised nations. This is because, in order to receive debt relief through the Paris Club, countries must be on-track with their IMF programmes. Due to administrative bottlenecks in the Paris Club, countries do not always get treated by Paris Club creditors immediately after Decision Point. Countries which go off-track with the IMF soon after reaching Decision Point may never get to the Paris Club, and thus never receive the interim relief they deserve [10]. According to the IMF and World Bank report, this appears to have occurred for The Gambia, Nicaragua and Sao Tome and Principe - while Zambia also faced a severe delay in receiving Paris Club relief due to Paris Club inefficiencies.
In summary, as Table 1 shows, a total of 13 of the 20 'interim' period countries have at some point faced problems with their IMF programmes, while at least 8 countries are apparently still off-track.
Of course, the IMF would charge that failure to fulfil IMF conditionalities is the fault of the countries concerned. They would argue that countries need to demonstrate 'sound' macroeconomic management and a commitment to reform in order to benefit from relief.
If a country goes off-track, this clearly demonstrates their inability to manage their budget and economy properly, and thus implies that they do not 'deserve' relief.
Jubilee Research and other NGOs involved in the international Jubilee 2000 campaign have long argued that countries receiving relief should demonstrate that it will be put to
good use, with proper monitoring and accountability to local civil society. But the question remains: who should determine whether a country is or is not able to spend debt relief resources effectively: local civil society organisations or economic technocrats based in Washington? Moreover, many of the conditionalities imposed by the IMF do not apply to the ability of governments to spend debt relief money effectively - often, they concern entirely unrelated 'structural' issues, such as privatisation. Indeed, in a recent report by Jubilee Research, we showed that many of the 'dissenting' countries have substantially increased their spending on education and health as a result of the interim relief they have so far received through the HIPC initiative [11].
When one child in a class of 20 fails an exam, we feel inclined to blame the child for not learning their lesson well. But when 13 children in that class fail, we are inclined to blame the teacher. IMF programmes are simply failing in HIPC countries, and the charge that this is due to incompetent leadership and corruption simply does not hold water. It is time for the IMF to re-think their policies - and to stop withholding the debt relief that is due.
4. No Alternative?
As Table 1 shows, the HIPC initiative is, at present, showing a pass rate of somewhere between 18% and 26% [12], even according to its own stated goals. With such a dismally low success rate, it comes as no surprise that the Bank and Fund have expressed a willingness to consider alternative proposals. For the first time, the Bank and Fund 'Status of Implementation Report' includes consideration of various different proposals for debt relief, including those put forward by NGOs such as Jubilee Research and EURODAD, and academics such as Jeffrey Sachs and Nancy Birdsall.
The Bank and Fund consider three such proposals:
1. The suggestion to link debt relief to the Millennium Development Goals, determined by an independent review panel with representatives of both creditor and debt nations. This is the proposal which most closely matches the proposals of Jubilee Research for a 'Jubilee Framework' for resolving international debt crises [13]. Under the Jubilee Framework, debtor countries would be able to make representations to an independent review panel on the amount of debt cancellation that would be needed to meet the internationally agreed Millennium Development Goals. As the Bank and Fund acknowledge, 'this would likely be complete debt cancellation plus increased foreign assistance [14].' Oddly, however, the Bank and Fund reject this proposal on the grounds that 'there are no reliable estimates of the cost of scaling up debt relief to achieve the MDGs [15].' This is despite the fact that several large UN agencies have produced papers costing the majority of the MDGs [16], which have been used by a number of NGOs, including Jubilee Research, to demonstrate the extent of debt cancellation required [17]. It also neglects the fact that work is currently on-going in the United Nations Development Programme (UNDP) to provide detailed, country by country, costings of the MDG resource requirements [18].
2. Linking debt relief to particular levels of debt service. This proposal would entail limiting debt service to a particular proportion of revenues, possibly with different limits set for different groups of countries - for example IDA and non-IDA only countries, or countries facing a 'health emergency' and other countries. This proposal has been put forward by, amongst others, African leaders in the New Economic Partnership for Africa's Development [19] (NEPAD), and the US Congress [20].
3. Deepening and broadening debt relief. According to this proposal, debt relief should be provided to countries outside of the HIPC initiative, many of whom face similar debt problems to the HIPC countries. Some of the countries listed by the Bank and Fund are also those which Jubilee Research has urged should be considered for greater debt cancellation, such as Nigeria [21], Pakistan [22] and Indonesia [23].
Unfortunately, having considered these proposals, the Bank and Fund reject them out of hand. The main reason appears to be the that they 'would result in higher overall debt relief to HIPCs, and [thus] would clearly lead to higher costs for creditors [24].' [emphasis added.] The Bank and Fund are concerned that even the current HIPC initiative is not fully financed, with a shortfall of between $750m- $800m in the HIPC Trust Fund [25] at present.
The obvious response to these concerns is that the World Bank should simply cut more deeply into their own reserves. Independent research by accountants Chantrey Vellacott DFK last year offered proposals that would release more than $30bn of resources to fund deeper World Bank and IMF debt cancellation [26]. Back of envelope calculations suggest that this would almost cover the World Bank and IMF's contribution to total debt cancellation for the HIPC countries [27].
As a secondary excuse, the Bank and Fund wheel out the tired old 'moral hazard' arguments, namely that 'additional debt reduction to further limit debt-service [would] raise the issue of moral hazard and could provide the wrong incentives to HIPCs: to the extent that losses in export earnings or reductions in revenues would be compensated by increased debt relief, countries will have little or no incentive to increase and/or diversify their exports, improve revenue collection, and to pursue economic policies consistent with these goals [28].' Quite why the Bank and Fund expect countries to deliberately limit their exports and revenues and thus maintain their populations in the poverty in which they are currently mired, simply for the sake of some additional debt relief, is a mystery. Furthermore, given that the current debt sustainability indicators are already based on export performance, one might expect that countries would have a greater incentive to 'deliberately' hold back their export performance under the current HIPC initiative than under a proposal based on, say, the resources needed to meet the Millennium Development Goals.
Finally, the IMF and World Bank appear to be again reversing to their 'blame the victim' mentality - a mentality that was already very much in evidence in the spring of this year, when they wrote that 'the growth of...exports...to a large extent reflects a country's economic policies [29].' They only indirectly admit that countries export performance is being limited by chronic price declines in their key commodities, by the fact that trade liberalisation under structural adjustment programmes has prevented poor countries from moving away from their dependence on primary commodities [30], by northern protectionism, and by the global reach of multinational corporations. [31] The IMF's ideological lens makes it impossible for them to see that global economic structures are doing everything they can to prevent poor countries from escaping their current predicament.
5. Conclusion
One cannot really blame creditor institutions. After all, it would be slightly too much to ask rich creditor countries and institutions to voluntarily dig deeper into their own pockets in order to provide the relief which poor countries deserve. When creditors hold control over how much relief should be provided, by which countries, and under which mechanism, why should they 'voluntarily' provide more relief?
This is why Jubilee Research is calling for a way of dealing with sovereign debt crises [32]. The failure of HIPC is, as already noted, no surprise to seasoned NGOs working on debt. Indeed, we predicted it more than a year ago. This is why we are calling for a new process, based on independent arbitration, the protection of the human rights of debtors - however poor they may be - and the application of justice and reason. Until we have a new process - or Jubilee Framework for international insolvency - we can expect no better.
Table 1: Who is HIPC Working For? The Latest Bank and Fund Assessment
Country Status of IMF programme Sustainable Debt at Completion Point? Conclusion: Is HIPC Working?
Completion Point Countries
Bolivia [33] N/A Possibly Yes
Burkina Faso N/A Yes Yes
Mozambique N/A Yes Yes
Mauritania N/A Yes Yes
Tanzania N/A Yes Yes
Uganda N/A No No
Decision Point Countries
Benin On-track No No
Cameroon On-track Yes Yes
Chad On-track No No
Ethiopia On-track No No
The Gambia Reported 'off-track' in Spring 2002. No mention in latest 'Status of Implementation' report No No
Ghana On-track Yes Yes
Guinea Off-track in Spring 2002, IMF programme now resumed Possibly Possibly
Guinea-Bissau Off-track in Spring 2002; remains off-track No No
Guyana Off-track in Spring 2002, now taking 'corrective measures' but still off-track. Yes No
Honduras Was off-track prior to Spring 2002; apparently was on-track for a period but now off-track. Yes No
Madagascar On-track in Spring 2002; now off-track Yes No
Malawi Off-track in Spring 2002, now taking 'corrective measures' but still off-track No No
Mali On-track Yes Yes
Nicaragua Off-track in Spring 2002, now taking 'corrective measures' but still off-track Possibly No
Niger No mention in Spring 2002 report, but apparently off-track at some point; now on-track No No
Rwanda Off-track in Spring 2002; now on-track No No
Sao Tome and Principe Apparently on-track in Spring 2002, now off-track but taking 'corrective measures' Yes No
Senegal Apparently on-track in Spring 2002; now off-track No No
Sierra Leone On-track Possibly Possibly
Zambia Off-track in Spring 2002; now apparently on-track but not mentioned in the latest 'Status of Implementation' report. No No
Table 2: Additional Debt Cancellation Required at Completion Point
Country Debt-to-export ratio predicated at DP Revised debt-to-export ratio Additional debt cancellation needed
Lower range Upper range Upper range Lower range
Benin 148 169 183 57 90
Cameroon 116 109 130 -1149 -478
Chad 210 210 250 177 248
Ethiopia 174 160 186 113 347
The Gambia 145 163 175 23 41
Ghana 83 83 84 0 0
Guinea 134 147 153 -26 22
Guinea-Bissau 119 163 169 10 14
Guyana 77 93 104 -395 -286
Honduras 95 117 118 -892 -848
Madagascar 137 103 113 -1004 -733
Malawi 181 191 191 213 213
Mali 150 134 136 -143 -122
Nicaragua 128 149 161 -14 103
Niger 185 179 188 94 117
Rwanda 197 192 211 70 93
Sao Tome & Principe 146 139 150 -3 0
Senegal 143 202 203 660 672
Sierra Leone 142 142 153 -14 5
Zambia 161 231 234 835 856
TOTAL 2253 2821
Note: revised debt-to-export ratios and hence additional debt cancellation required are calculated before additional bilateral debt cancellation
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Footnotes
[1] HIPC Initiative: Status of Implementation, August 16th 2002. We have based our analysis on a draft of the report in order to be able to present our findings to the World Bank and IMF Annual Meetings. An updated analysis will be provided once the final Status of Implementation Report is released.
[2] See 'New World Bank Reports Confirm that the HIPC Initiative is Failing', available on the Jubilee Research website at http://www.jubileeresearch.org/hipc/hipc_news/hipc290402.htm
[3] For an explanation of the stages involved in the HIPC initiative, see 'What is the HIPC initiative?' available on the Jubilee Research website at http://www.jubileeresearch.org/hipc/what_is_hipc.htm
[4] Of the total of 42 countries eligible for HIPC, 4 (Kenya, Angola, Vietnam and Yemen) are already deemed to have sustainable levels of debt after traditional debt cancellation.
[5] See 'Heavily Indebted Poor Countries Initiative - Status of Implementation', March 2002, and 'The Enhanced HIPC Initiative and the Achievement of Long Term External Debt Sustainability' March 27th 2002
[6] See the Jubilee Plus (the former name for Jubilee Research) report 'HIPC - flogging a dead process' available at http://www.jubileeresearch.org/analysis/reports/deadHIPC.pdf
[7] HIPC Status of Implementation Report August 2002, page 33.
[8] In Spring 2002, the World Bank and IMF admitted that Uganda, the first country to reach Completion Point under the enhanced HIPC initiative, is expected to have a debt-to-export ratio of 250% over the next two years - more than 100 percentage points above the 150% target.
[9] See 'Seven HIPCs currently being denied interim relief by the IMF' by Jubilee Research at NEF, May 2002, available at http://www.jubileeresearch.org/hipc/hipc_news/imf170502.htm
[10] It should be noted that creditors such as the UK have assured is that they do not bill any countries for debt service payments after Decision Point, whether or not there has been a Paris Club treatment.
[11] In our recent report, 'Relief Works - African proposals for debt cancellation and why debt relief works' we showed that Guinea-Bissau, Madagascar, Malawi, Niger, and Rwanda, have all increased spending on education and health substantially as a result of reduced debt service payments, despite being 'off-track' with IMF programmers at some point. The report is available at http://www.jubileeresearch.org/analysis/reports/deadHIPC.pdf
[12] As Table 1 shows, HIPC appears to be working - according to its own criteria - for somewhere between 7 and 10 countries, of which 3-5 have not even reached Completion Point yet. According to the Bank and Fund, a total of 38 countries will need relief under HIPC, hence the range 18%-26%
[13] See 'Chapter 9/11? Resolving international debt crises - the Jubilee Framework for international insolvency' by Jubilee Research at NEF, February 2002, available at http://www.jubileeresearch.org/analysis/reports/deadHIPC.pdf
[14] HIPC Status of Implementation Report, 16th August 2002, page 91.
[15] Ibid, page 35.
[16] See for example 'Is EFA affordable? Estimating the Global Minimum cost of 'Education for All' UNICEF Innocenti Working Paper no.87; and the Report of the Global Commission on Macroeconomics and Health.
[17] See 'The Unbreakable Link - Debt Relief and the Millennium Development Goals' by Jubilee Research at NEF, available at http://www.jubileeresearch.org/analysis/reports/unbreakable_link.pdf ; and 'Putting Poverty Reduction First: Why a poverty approach to debt sustainability must be adopted' Eurodad, October 2001.
[18] See, for example, 'Financing the Development Goals' An analysis of Tanzania, Cameroon, Malawi, Uganda and the Philippines by the United Nations Development Programme (UNDP.)
[19] For a detailed elaboration and assessment of the financial impact of the NEPAD proposal 'Relief Works' op.cit
[20] See 'US Congress Introduces a Bill to Change the HIPC Criteria' May 2002
[21] See 'Drops of Oil in a Sea of Poverty' by Jubilee Plus (the former name for Jubilee Research), September 2001, available at http://www.jubileeresearch.org/analysis/reports/Nigeria.pdf
[22] See 'Jubilee Plus Calls for HIPC Treatment for Pakistan', December 2001
[23] See Joint NGO Statement on the Paris Club for Indonesia, April 2002
[24] HIPC Status of Implementation Report, August 2002, page 93.
[25] The HIPC Trust Fund is paid into by bilateral donors in order to cover the costs of multilateral debt relief which cannot be met through the multilateral organisations own resources.
[26] See 'Reality Check - The Need for Deeper Debt Cancellation in the Fight Against HIV/AIDS' by Drop the Debt, April 2001.
[27] As of 2000, the World Bank and IMF were owed $53.7bn by the 42 HIPC countries, in nominal terms. According to the HIPC Status of Implementation Report Table 2, the World Bank and IMF account for 29.5% of the relief due to be granted under HIPC, excluding sustainable cases and conflict countries. Total debt relief under HIPC in nominal terms for the other 34 countries is estimated at $56bn, implying that the World Bank and IMF will be cancelling $16.5bn in total in nominal terms, implying that another $37.2bn must been cancelled.
[28] HIPC Status of Implementation Report August 2002, page 93.
[29] IMF/IDA 'The Enhanced HIPC Initiative and the Achievement of Long Term External Debt Sustainability' page 23.
[30] For more details, see 'New World Bank Reports Confirm that the HIPC Initiative is Failing' op.cit.
[31] See 'Mugged - Poverty in your Coffee Cup' by Oxfam, September 2002.
[32] See 'Chapter 9/11?' op.cit.
[33] In the Spring 2002 Status of Implementation Report, the IMF and World Bank stated that Bolivia was expected to have debt service ratio (i.e. the ratio of debt service to exports) or more than 19% of exports by 2003 thus throwing her debt sustainability into question. The latest report lowers this projection to 14-15% of exports. It is not clear what the basis of this revised projection is, and this is not discussed in the report.
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