I. INTRODUCTION
1. The launch of the Heavily Indebted Poor Countries (HIPC) Initiative in the fall of 1996 represented a major departure from past practice in dealing with debt problems of developing countries; it focused on achieving overall external debt sustainability with comprehensive participation by all external creditors for the most heavily indebted countries with good track records. Since the fall of 1996, the eligibility of twelve HIPCs has been reviewed by the Boards of the Bank and Fund,1 and work is well underway in four additional countries. Seven countries have already qualified for debt-relief packages, and three more would be expected to qualify based on preliminary discussions. Debt relief totaling US$6 billion in nominal terms, or US$3 billion in net present value, has been committed to these countries. Assistance for two countries -- Uganda and Bolivia -- has already been released.2 2. As the implementation has progressed, there has been widespread interest in the issue of debt relief and possible changes to the Initiative among religious groups, non-governmental organizations, the media, international organizations, and governments.3 More recently, five G-7 governments have made proposals for changes to the Initiative that would be discussed at the Cologne Summit in June. The staffs of the Bank and Fund have prepared a technical note describing tentative costings of some illustrative changes to the Initiative in order to facilitate an informed discussion.4 This paper is intended to provide further information on the specific proposals which have been made, and to suggest some considerations for assessing them. 3. The paper is organized as follows. Section II summarizes the various proposals for changes that have been received from non-governmental organizations (NGOs) and other interested groups, and from member countries of the IMF and IDA. In general, these proposals seek to deliver deeper, broader, and faster debt reduction and to link debt relief more tightly to poverty reduction programs. Section III assesses these proposals. (The costs of alternative scenarios for debt relief and financing implications for creditors, especially multilateral institutions, will be set out in a supplement to this paper.) Issues for discussion are presented in the last section. |
II. PROPOSALS FOR CHANGING THE HIPC
INITIATIVE 4. This section describes the consultative process for gathering comments on the HIPC Initiative. It then goes on to summarize the comments and proposals themselves, taking in turn those from civil society, member governments, multilateral creditors, and other international organizations. A. The Consultative Process 5. In response to the call for a comprehensive HIPC Initiative review, and in light of the discussion of the HIPC Initiative expected at the Cologne Summit in June, a two-stage review process has been initiated. Phase 1 addresses concerns about, and modifications to, the current framework, including debt sustainability targets, timing of decision and completion points, and performance under economic and social reform programs. An extended timeframe for Phase 2 will allow for more in-depth consultations regarding the link between debt relief and social development. 6. The World Bank and IMF have posted on their websites a questionnaire asking the public for suggestions.5 In addition, the review process has included consultation meetings with members of the NGO community, religious groups, the media, governments, international organizations, and multilateral development banks. The HIPC websites at the World Bank and IMF have each been visited about 1,500 times per month in 1999. Participation in the consultation process has been widespread. To date Bank and Fund staff have received about 65 written comments and proposals for improvements to the framework. It is estimated that through eight consultation meetings for the 1999 review in Africa, Europe, North America and Latin America, an audience of more than 500 was reached, facilitating an open and constructive exchange of opinions (see Annex 2). 7. Along with these proposals, the review process itself has prompted considerable interaction among NGOs, and broadened the dialog on the HIPC Initiative issues with multilateral development banks (MDBs) and other international organizations. The accessibility of information through the websites and inclusion of civil society in the debate has brought about an open process that was appreciated by all involved. A set of documents submitted by NGOs, religious organizations, and international institutions will be circulated separately to the Boards. Summaries of the consultation meetings are under preparation by rapporteurs. |
B. Summary of Comments from Civil Society
8. There was a general acknowledgement by most commentators that the HIPC Initiative is a positive step forward towards a solution to unsustainable debt--primarily, in that it provides a comprehensive framework for debt relief from all creditors and aims to bring debts down to a sustainable level. However, most commentators expressed their disappointment with the depth of debt relief as well as with the pace of implementation, which, in their opinion, has been too slow. This point is often summarized as "too little, too late". 9. The objective of the HIPC Initiative was frequently considered to be too narrow. Some argue that the definition of debt sustainability should encompass the full range of development needs of the HIPCs. In the course of the discussions, it was observed that there is a strong desire to discuss broader issues of development, aid flows, and poverty reduction. 10. The HIPC Initiative and its ongoing consultations with civil society have been catalytic in facilitating a debate that goes beyond the confines of debt relief. The call for a broader and regular debate on development and poverty reduction with the Bank and the Fund has become increasingly pronounced, especially during the 1998 Lambeth conference of the Anglican Church and the Seton Hall conference6 as well as during the current consultations. 11. The linking of the HIPC Initiative with the broader development debate has raised, in virtually all meetings, concerns about the current state of development assistance. A number of the criticisms of the Initiative reflected disappointment with the general thrust of development policies. In this connection, commentators voiced concern over reduced aid flows (see Annex 1). Others would wish to see the HIPC Initiative used more to encourage poverty alleviation policies. |
12. Critiques of the Initiative reflect different perceptions of the rationale for debt
relief:
Proposals advocating a different approach 14. Some proposals advocate replacing the current framework in its entirety with another mechanism. The two principal proposals for changing the HIPC framework are (i) a "human development approach, and (ii) the introduction of international insolvency procedures." 15. Many external commentators have proposed that calculations of debt relief should be embedded in an overall framework of development and poverty alleviation. Some of these have suggested that sustainable development expenditures should be determined with sustainable debt service as a residual category. The most elaborate proposal in this area was received from the Catholic Fund for Overseas Development (CAFOD). CAFOD suggests a model called the "Human Development Approach" under which the resources required to finance basic needs and investments in productive capacity, would be subtracted from the country's revenue base, with debt-service payments limited to one-fifth of the remaining net revenue. Debt relief would be delivered immediately without performance criteria or track record requirements. Its aim, besides debt relief, is to help achieve the international development goal of halving poverty by the year 2015.7 By their estimate, at least ten countries would qualify for complete debt cancellation. |
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Jubilee 2000 is an umbrella organization bringing together a broad coalition of faith-based
organizations, NGOs, trade unions, press, and general public. It currently has campaigns
organized in most OECD countries, as well as in Africa and Latin America. Despite the broad
based nature of this coalition, Jubilee 2000 is unified in its objective for debt cancellation while
accepting that there will always be differences between individual campaigns and individuals
within campaigns. Jubilee does not prescribe for individual countries how debt settlements
should be worked out, believing that this should be worked out between the individual debtor
country and creditors, with civil society involvement.
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16. The proposal for establishing international insolvency procedures is motivated by the concern
that under current debt restructurings, creditors are playing a dual role as judge and interested
party. The Jubilee 2000 Coalition suggests a procedure that in their view would permit debtor
countries and creditors to negotiate on a more equal basis, say through an extension of Chapter 9
of the U.S. bankruptcy laws to international debts (see also Box 1).
This organization has also suggested that an independent arbitration panel be set up to
commission an audit of outstanding debt. This 'Debt Review Body' would also ask a debtor
government to prepare economic and social plans, and then hold open hearings to determine the
portion of the debt stock that is unpayable, given development needs. The results of the debt
work-out would be laid down in a "concordat" between the debtor country and its creditors. Its
implementation, including the enforcement of penalties for non-compliance, would be
administered by this review body. Proposals building upon the current framework 17. While subscribing to similar human development objectives, the majority of proposals build upon the current HIPC framework. Many commentators believe that amendments to one or more of the HIPC Initiative parameters are required if the Initiative is to fulfill its promise. These proposed amendments are aimed at (i) deepening debt relief, (ii) broadening relief to cover more countries, (iii) accelerating the delivery of debt relief, (iv) altering the conditions under which debt relief is provided and the linkage to development, (v) strengthening transparency and accountability, and (vi) mobilizing financing. Depth of debt relief 18. A number of proposals have been put forward to allow for deeper debt relief. These proposals have questioned the appropriateness of the parameters and their level in determining external debt sustainability. While recognizing the need for simple indicators to facilitate decision making as well as to ensure equitable treatment among countries, commentators felt that target ranges used for the NPV debt-to-export ratio were too high and/or the fiscal dimensions of the external debt problem were inadequately treated through the fiscal/openness window. The resulting levels of post-HIPC Initiative debt service were also considered to be too high in relation to either exports or government revenues. In particular, many groups in Africa and Latin America stressed that for debt relief to be meaningful, it needed to reduce the levels of debt service below those paid prior to the completion point; otherwise relief was seen as largely a book-keeping operation that did not free up additional resources for development. 19. A number of organizations (e.g., Eurodad) have argued that debt relief should be deep enough so that a country at the completion point would no longer require exceptional balance of payments support in the absence of short-term shocks. In reference to falling commodity prices, concern was expressed that the NPV debt-to-export target of 200 percent would likely be insufficient to "cushion" the country against an unanticipated and prolonged decline in export earnings.8 Uganda was often mentioned as a case in point where after the completion point the falling export revenues of coffee have contributed to a rise in the NPV debt-to-export ratio above 200 percent. Along with other proposals, Oxfam suggests lowering the debt-to-exports threshold to 150-200 percent and to 100-150 percent for debtors willing to commit 85-100 percent of debt relief to identified poverty reduction initiatives (Box 2). |
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Oxfam advocates minimum debt levels as follows:
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20. Many commentators have argued that debt relief needs to be deep enough to create sufficient
fiscal space to enable governments to adequately meet the budgetary costs of priority
development spending, especially for basic health and education. A number of commentators
have argued that the fiscal dimension is the most relevant one, given that governments have to
meet debt-service obligations out of their budgetary resources. While many commentators have
welcomed the inclusion of a fiscal indicator into the HIPC framework, it has been commonly
criticized for being overly restrictive. In particular the two qualifying thresholds (i.e., ratio of
exports to GDP of at least 40 percent and a ratio of revenues to GDP of at least 20 percent) are
seen to have been set with an objective mainly to limit access and costs, although many
commentators recognize the need to avoid moral hazard and for the debtor country to make a
sufficiently robust revenue effort. 21. Various proposals have been put forward to address these concerns. For example, Eurodad has proposed lowering the debt-to-revenue ratio under the fiscal/openness window to 200 percent as there is no empirically-based reason why this should be higher than the debt-to-exports ratio (Box 3). A number have argued to drop the exports-to-GDP threshold on the grounds that it is not relevant to the government's capacity to service debt and meet priority needs. The revenue-to-GDP threshold was thought to be too stringent as well, and some suggestions have been made to either lower the threshold to 10-15 percent or change it to a requirement that fiscal revenues not decline as a percent of GDP. Finally, it has been argued that macroeconomic performance, including fiscal targets are already being monitored in the context of Bank- and Fund-supported programs and that these provide the best framework for determining appropriate revenue targets on a case-by-case basis. The emphasis on the fiscal dimension of debt problems has been reinforced by the argument that many governments are also facing serious problems of domestic debt and debt service. |
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The European Network for Debt and Development (Eurodad) has focused on various aspects of debt relief including the link between debt sustainability and human development, the link to ESAF, and affordable debt service. A main theme has been their critique of the fiscal window. Their main criticisms of this window are as follows:
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22. A number of commentators have focused on debt-service indicators, both in relation to
exports, as in the current framework, but also in relation to revenue. They have argued that the
Initiative places too much emphasis on the debt overhang and reduction of debt stock, and too
little emphasis on the current burdens that debt service poses for governments. Consequently,
they have advocated that the ratios of debt service to exports and/or revenues should be central to
the debt sustainability analysis. In particular, it has been argued that a debt service-to-revenue
indicator should be added to the HIPC framework and that appropriate targets be set.
Recommended targets have been put forward in the context of the human development approach
advocated by CAFOD (see above) as well. In a similar vein, Eurodad advocates the use of a
"maximum affordable debt service approach", which would target debt service at 30 percent of
the amount of government revenues available for non-essential spending. A bill introduced in
the US Congress in early 1999 (by Congressman Leach) calls for debt-service levels that would
not exceed 10 percent of government revenues. With respect to debt service in relation to
exports, NGOs and religious organizations have referred to the London Agreement of 1953
regarding the debts of Germany, which resulted in debt service below 5 percent of exports. Breadth of debt relief 23. It is recognized that the methodological changes (the use of the average of three years' export, exclusion of workers remittances from the export base, and the addition of a fiscal window) introduced into the HIPC framework over the last two years have allowed more countries to qualify. Commentators view lower targets, as well as shortening of the performance period, as ways to expand eligibility to a considerably larger group of countries. Timing 24. Almost all commentators from civil society feel that HIPC relief takes too long given the urgent need for debt relief.9 The main arguments for quicker debt relief refer to debt as an impediment to increasing social expenditures. Concerns are raised that the poorest countries in the world have cut back social expenditures in priority areas to such an extent that they no longer can provide basic social services, citing, for example a deterioration in net primary school enrollment rates during the 1990s. 25. In assessing the current implementation of the HIPC Initiative, NGOs and religious organizations feel that the flexibility permitted under the framework in shortening the interim period has not sufficiently been exploited. Many commentators recommended that the completion points should have been collapsed with the decision points for the early cases such as Uganda and Bolivia, countries with track records dating back to the mid-1980s. They explain the additional track record in the interim period for these countries as a rigid interpretation of the framework. Many groups would favor a performance period of about three years although it is stressed that this performance period should encompass a different set of performance requirements than those currently pursued. 26. A further rationale given by religious groups is the call for debt relief related to the Jubilee year 2000 and the call for the forgiveness of debts before the new millennium. Various groups have been calling for a shortening of the waiting period, particularly in cases where countries are emerging from a post-conflict and post-catastrophe situation such as hurricane Mitch. It is argued that early debt relief could play a significant role in helping these countries overcome the devastation and begin the enormous task of rebuilding basic infrastructures and attending to the human suffering. 27. Another rationale of shorter track records is linked to the assessment of performance. Commentators vigorously question the link to adjustment programs supported by the IMF and the World Bank, and argue that greater weight should be placed on past policy performance. Since most HIPCs have met the entry requirement, they feel that there is no need to delay further the delivery of debt relief. In this regard they argue two points. First, since most creditors, i.e., commercial and bilateral creditors have been providing debt relief already outside of the HIPC framework, they do not accept that under this Initiative, countries need to wait. Similarly, many groups do not accept that there is a moral hazard problem in providing earlier debt relief. In this context, they assert that the international community will continue to support aid and reform programs well beyond the completion point, thus providing an incentive to utilize the debt relief effectively. |
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Performance requirements 28. During the review process, the discussion of the performance requirements has been one of the most contentious. While many groups accept the need for performance criteria, they criticize the content and the process of program design, with structural adjustment programs not seen as being prepared in a participatory environment. Many commentators criticized the IFIs for being insensitive to domestic political situations with which debtor governments are faced. Especially during the 1990s, when a nascent democratization process was taking hold in many HIPCs, concern was expressed that governments were often put unduly on the defensive by having to undertake major structural reforms too quickly and without due consultation. The lack of ownership and the arduous number of economic reforms have been topics attracting much debate. Many argue that greater ownership by debtor governments of macro targets and key reforms would improve the Initiative. The ownership issue, as well as a much more participatory and transparent process in devising the development strategies in these countries, is considered to be vital by these commentators. 29. Many groups were not against conditionality per se, but supported economic and social programs that are poverty-focused and have been prepared in a participatory manner. Suggestions were made that debt relief would need to be conditioned on the preparation of action plans for human development, as well as ensuring that the savings from debt relief would be utilized exclusively for poverty alleviation measures. These groups have proposed alternative performance criteria, in contrast to what they perceive as being rigid and non-transparent adjustment programs being supported by the Bretton Woods Institutions. ESAF conditionality is therefore considered as too tough or inappropriate, and it has been argued that this could be replaced with the use of simpler and more realistic macro targets to assess performance under the HIPC Initiative. 30. Many groups recommended that debt relief should be de-linked from ESAF compliance. In the consultation process, inter alia during the March 5 consultation meeting in London, Christian Aid suggested the use of floating conditionality for debt relief, analogous to the floating tranche approach being used in various World Bank adjustment programs. This would mean determining ex ante certain conditions to reach the completion point, eliminating the fixed time element. The concern by most groups that debt relief savings be channeled to the poor has led some of them to advocate that debt relief be conditioned even after the completion point on a transparent use of these debt-relief savings. These groups recommend that noncompliance with this goal be penalized. 31. It has been argued that the current link between debt relief and social sector development remains weak in the framework of the HIPC Initiative. While there is a consensus that efforts should be made to embed debt relief within an overall strategy towards achieving the social sector targets, there was less direction on how to achieve this. Oxfam has made a concrete proposal for establishing a Human Development Window, that would provide additional benefit to countries which make a credible commitment to target funds released from debt service to meeting these social sector needs. This topic will be the main focus of phase II, in which Bank and Fund staff will explore, with external input, ways of strengthening this link and will report back on this process before the annual meetings. Transparency and accountability 32. In all meetings, commentators expressed great concern about transparency and accountability in debt management issues. In view of past mistakes, where countries became indebted without any benefits to the general population, commentators recommended that information about new borrowing arrangements and debt restructurings be made public. In this context there were many calls for more involvement by civil society in the HIPC Initiative process. Several groups voiced their frustration about the lack of access to disaggregated data and the lack of cooperation shown by the creditor and debtor governments involved. In parallel to addressing transparency issues, commentators also called for increased openness in the DSA process, including the publication of preliminary HIPC Initiative documents. 33. Commentators considered accountability to be an issue for both debtors and creditors. With regard to debtor governments, it was advocated that periodic audits be undertaken into the proper use of borrowed funds. With regards to creditors, they should be held accountable for unsound lending practices such as those allegedly displayed by some export credit agencies. Commentators favored a debt strategy that minimizes external borrowing while maximizing grant financing. 34. With regard to the delivery of debt relief, many groups including Oxfam and some Jubilee 2000 members favor penalties for default on commitments by debtor governments to channel debt relief to the social sectors. Some have argued that the best way to avoid default would be close involvement of civil society in determining the use of debt relief for poverty alleviation and in monitoring spending in a transparent fashion. |
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Financing of debt relief 35. In discussing the cost of providing comprehensive debt relief and the financing modalities to achieve this, most groups considered this more a matter of political will than a lack of resources. The most popular reference was the willingness by the international community to provide massive emergency assistance (although not debt relief) to emerging market economies during the recent financial crisis. Another frequently made recommendation was the sale of gold by the IMF for financing the Fund's contribution to the HIPC Initiative, or for more general financing. Moreover, some groups advocate more funding for the HIPC Trust Fund by bilaterals.10 C. Proposals from IMF and IDA Members for Change
Creditor countries 36. Creditor countries have been supportive of the HIPC framework and have viewed it as a pathbreaking Initiative. In recent months, a number of bilateral creditors including most of the G-7, Ireland and Norway have made specific proposals to go further, emphasizing the need to strengthen the framework and the links between debt reduction and poverty alleviation. Among the G-7, a discussion on debt relief is foreseen at the Cologne Summit in June 1999. The proposals by G-7 countries are set out in Table 1 and Annex 4. 37. A degree of commonality appears to be emerging among the proposals of Canada, France, Germany, the United Kingdom, and the United States on some elements of additional assistance. All agree that bilateral creditors should provide debt relief above 80 percent in NPV terms on commercial claims, when this is necessary to achieve targets under the HIPC Initiative. All agree on the need for additional relief on ODA claims. None have proposed changes to the performance criteria in which track records are measured under Fund- and Bank-supported adjustment programs. Regarding the terms of the HIPC Initiative, three of the five proposals (Canada, Germany, United Kingdom) suggest a shortening of the performance period from six to three years, although it is not specified whether this shortening would reduce the first or second stage of the Initiative. Two (Canada, United Kingdom) explicitly propose to lower the debt sustainability targets. Two other countries (Germany, United States) propose flexibility in exceptional cases. On financing, all mention gold sales by the Fund, while four explicitly record their support for such sales (and two mention an amount of up to 10 million ounces). 38. Two other countries, Ireland and Norway, have also made proposals to accelerate debt relief. Ireland passed legislation for a major Third World debt relief package which includes plans for bilateral assistance for debt relief. It favors a reduction in both NPV and debt service eligibility criteria and targets under the HIPC Initiative, as well as a shortening of the track record, stressing however, that this should be done only in the context of a realistic and achievable national development plan. Norway set out the Norwegian Debt Relief Strategy in October, 1998, under which it intends to unilaterally forgive its export credit agency loans (Norway forgave all ODA loans in the 1980s) on a case-by-case basis once a country reaches the completion point under the HIPC Initiative or receives a stock-of-debt operation (Naples terms) from the Paris Club. It also intends to forgive unilaterally interest payments falling due (also on a case by case basis) during the interim period, i.e., between the decision and completion points. It called on all like-minded countries to consider doing the same and urged a more flexible approach to the HIPC Initiative, and to work to achieve equitable burden sharing in its financing. Table 1 |
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Debtor countries 39. Debtor countries have in general welcomed the framework of the HIPC Initiative, while also considering that it should be made more generous in view of the substantial difficulties they face in their development programs. Ministers of the African, Caribbean and Pacific Group of States (ACP) approved of the groundbreaking features of the HIPC Initiative, but considered it did not go far enough to provide deeper, broader, and speedier debt relief to ACP countries. ACP ministers recommended greater flexibility to increase the number of countries eligible for the HIPC Initiative, to provide stronger support, and to ensure the availability of debt relief in the initial decision stage. They saw a need to widen eligibility by lowering the thresholds (the debt-to-export ratio and the debt service ratio), shorten the time prior to delivery of assistance, and give greater recognition to the fiscal burden of debt. They also recommended specific proposals for those countries which find their domestic and external debt unsustainable but which now fall outside the present Initiative; and special treatment for post-conflict countries, landlocked states, and small and vulnerable island economies.11 40. In their October 1998 communiqué, the G-24 considered that debt workouts for HIPCs are slow and inadequate.12 G-24 ministers underlined the need for an expansion of the bilateral contributions, within the context of proportional burden sharing, so as to enable more countries to benefit from the Initiative. Noting that only two countries had reached their completion points, G-24 ministers urged the acceleration of the decision-making process under the Initiative, and called for more flexibility to allow for the shortening of interim period between the decision and completion points, and for the provision of sufficient assistance during the interim period. They also observed with distress that funding for the continuation of ESAF operations and for the HIPC Initiative still falls short of initially estimated requirements, even for the limited number of currently eligible countries, and urged consideration of further financing measures, including further contributions by the IMF from the ESAF Trust Reserve Account and the optimization of IMF reserves, including through gold sales. 41. The Executive Director at the IMF for a number of African countries, has provided a preliminary response to the request for comments in March 1999.13 In this view, the HIPC Initiative should be built on three pillars: simplicity, timeliness, and inclusiveness. The goal should be maximum relief to help the poorest countries fight poverty. The statement considers that the debt problem had a large dose of politics in the making, as in some part an unintended consequence of the cold war, and there is a need for a political solution. The present approach is seen as delivering too little too late, being too complex, and with too much emphasis on conditionality under IMF-supported programs (although some is needed to prevent "good money" from supporting bad policies). 42. It is suggested that a new strategy should consider: (i) setting a target date for resolution of the debt problem of poorest countries, preferably the millennium; (ii)setting much lower sustainability targets and thresholds with attention to terms of trade shocks, natural disasters, the country's development needs, the level of poverty, spending on social programs, and domestic debt burdens; (iii)devising an exit strategy for countries emerging from conflicts within the target date for bringing closure to the debt issue for the poorest countries; (iv)enhancing ESAF programs within a framework where debt relief supports public investment, effective public administration, improved access to health and education, and social safety nets; (v) and a broader measure of success of the reform effort reducing the importance attached to quantitative benchmarks and performance criteria, cognizant of the fact that debt relief is important to creating added degrees of freedom in helping to move the process of reform forward, and that it makes sense to grant more relief up-front and more flexibly in the context of an all-embracing definition of economic adjustment and reform. D. Multilateral Creditors
43. Written contributions to the HIPC review process have been received by the AfDB, the Asian Development Bank, the International Fund for Agricultural Development (IFAD) and the Central Bank for East African States (BCEAO) (Annex 5).14 The African Development Bank has commented specifically that it would be desirable for the Initiative to broaden the approach to debt sustainability to capture better the poverty and governance dimensions of debt problems. It called for deepening relief through lower debt sustainability targets and for shortening the performance period. At the same time they have stressed the importance of retaining the performance requirements as essential to ensure that debt relief is not wasted. Moreover, a condition controlling the timing and scope of any modification of the Initiative, in the view of the AfDB, is resource availability. 44. The AsDB expressed a view that the export based indicators do not take into account tradable goods sold at home. It suggested using a weighted average of the debt/output ratio and the debt/export ratio as an alternative target, including private and public debt. An alternative fiscal target could be the "sustainable primary balance", defined as the relief needed to keep the ratio of public sector debt to GDP constant. It was open to considering a shortening of the second stage or the elimination of the first and second stages, but pointed out its concern for the lack of performance criteria after the completion point. 45. The BCEAO also felt that the timetable should be shortened by collapsing the decision and completion points. It proposed a lowering of the various targets: the NPV of debt-to-exports to 100-150 percent, the debt service ratio to 10-15 percent, and the NPV debt to fiscal revenue target to 200 percent, while it also advocated a lowering of the fiscal thresholds. Domestic debt, social indicators and revenue effort should also be taken into account in determining sustainability. It suggested that savings from debt relief be channeled into a Special Fund for priority spending to be monitored by civil society. 46. IFAD is also concerned that there be a sufficient cushion to ensure debt sustainability, given uncertainties in projections. Debt relief funds should also be spent on rural development goals. Countries with particular vulnerabilities should have access to deeper debt relief, as should countries emerging from crises. There should also be a differentiation made between countries with a debt overhang problem and those with a short-term debt-servicing problem. IFAD is advocating a phased approach to debt relief that would provide some debt relief at each phase of policy reforms. The international community should ensure that debt relief is additional to aid, and in a similar vein calls for increased aid budgets. |
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E. International Organizations
47. The comments that staff has received during the course of the implementation as well as during the 1999 review process from international organizations like the UN Secretary General, as well as the Commonwealth Secretariat, have been critical. While welcoming the HIPC Initiative as a breakthrough, the reports issued by the UN Secretary General have criticized the Initiative as "disappointing" and "a very slow process."15 In addition he feels that the criteria and debt sustainability targets have not been sufficiently flexible and they recommended that consideration be given to applying debt sustainability targets below the current ranges. In addition the UN Secretary General considers that the performance period is too long, and has recommended that the interim period be shortened to one year. 48. During the consultation meetings in London and subsequently, the Commonwealth Secretary General strongly advocated the extension of the current HIPC Initiative so as to benefit a broader group of debtor countries on more generous terms and in a shorter time frame. Specifically for the very poor countries, he called for a complete and immediate write-off of external debt. With regards to financing, the Commonwealth Secretariat recommended that a quick agreement be reached on gold sales by the IMF. In line with their earlier policy stance, both the UN and the Commonwealth Secretariat would like to see a much closer link between the Initiative and poverty reduction programs, consistent with the International Development targets. The Secretariat also noted that they have been actively assisting governments in strengthening debt management capacity, and that this area could be further strengthened in cooperation with the UNCTAD and the IFIs. III. ASSESSING PROPOSALS FOR CHANGE
49. This section assesses the various proposals for change set out in the previous chapter and considers some of the implications for debtors and creditors. The initial section discusses some overall considerations to be taken into account when considering the proposals. The discussion of the proposals themselves is organized along the lines of the main elements of the Initiative where changes have been suggested: the depth of debt relief, its timing, performance requirements, and transparency and accountability. 50. Cost and financing considerations will also be important in deciding on any changes to the HIPC Initiative. In considering various proposals, it is important to keep in mind that financing for the current HIPC Initiative (even excluding costs for Liberia, Somalia, and Sudan) has yet to be fully secured, despite the exceptional measures taken by creditors. Most multilaterals are financing their participation in the Initiative on a pay-as-you-go basis. Staff are now in the process of preparing revised costing estimates, on the basis of new data, for some of the options for changing the HIPC Initiative. Revised cost estimates, together with likely country eligibility under various proposals, will be provided shortly. A. General Considerations
Debt sustainability and sustainable development 51. Many of the public comments that have been made about the HIPC Initiative reveal a perceived tension between sustainable development and debt sustainability. These are separate but linked concepts. The international official community has looked upon debt relief as one of several instruments available to assist poor countries, and has targeted the amount of debt relief to meet the objective of debt sustainability. This is one element of an overall effort to support sustainable development. Many commentators have focused on the costs that debt-servicing obligations impose on poor countries, and view debt relief as a way of removing that cost. Moral, ethical and religious arguments show a deep concern for the suffering of the poor in these countries, and any obstacle to alleviate this suffering is seen as immoral and inconsistent with religious teaching. It is important to note, though, that poverty reduction is a shared objective of the international community, and debt sustainability and sustainable development should be seen as complementary and not competing objectives. Role of debt relief and aid 52. Establishment of rapid and sustainable growth and poverty reduction are objectives of the international community. The first essential element of a strategy to pursue these aims is to ensure that an adequate policy environment exists. Debt relief is only one of the financing instruments, while the main instrument that the international community has used to mobilize resources to assist poor countries to address poverty is official aid.16 53. Some broad figures illustrate the importance of aid. Annual inflows of net official development assistance (ODA) to HIPCs in 1997 were US$16 billion (DAC data),17 about the same as the total cost-spread over a number of years-of the HIPC Initiative in 1998 present value terms. (Debt relief provided under traditional mechanisms would clearly increase this total substantially.) Furthermore, new inflows of ODA and other financing for HIPCs are, on average, twice as large as debt service paid, and for many countries (such as Ethiopia, Mozambique, Tanzania, and Uganda) this ratio is substantially higher. Total debt service paid by HIPCs in 1997 was US$8 billion (see Annex 1, Table 5). |
54. The discussion of debt sustainability vs. sustainable development needs to take into account
the differences in the ways aid and debt forgiveness can be used to finance poverty reducing
expenditures.
56. The HIPC Initiative was never intended nor expected to be sufficient to replace aid in the fight against poverty. Additionality has always been an objective. Indeed the guiding principles for the Initiative included the recognition that continued aid on concessional terms would be needed and should continue for HIPCs even following the attainment of debt sustainability. Replacing new aid by an equivalent amount of debt relief might achieve debt sustainability, but could be seen as a cruel hoax if it did so without providing any gain in resources available for poverty reduction. Establishment of formal bankruptcy procedures 57. The Boards of the Bank and Fund play a central role in deciding key questions regarding relief under the Initiative, including on eligibility, timing, and performance criteria, in consultation with debtors and creditors. The questions raised by some commentators on whether these arrangements place the institutions in a dual role as interested parties and judge has led some to advocate the establishment of a more formal bankruptcy procedure to cover HIPC debt, analogous to the Chapter 9 procedure in the U.S. covering local government. Such a procedure would be aimed at creating an independent authority for decisions on debt relief. There are, of course, important differences between local government debts (which are covered under Chapter 9) and sovereign debts owed to other countries and official institutions. In addition, most creditors are also providing new grants and other concessional resources to the debtors well in excess of the debt service due or paid. During the consultation meetings, there was recognition that the proposals for establishing international insolvency procedures raise many questions, including those related to the sovereignty of creditors and debtors, problems associated with the creation of a new international bureaucracy, the compatibility with the governance structures of MDBs and other creditors, and the comparative advantages in the efficiency of debt negotiations. The debate on these issues would likely be time-consuming and its outcome uncertain. In this light, these proposals were seen as likely to cause delays in providing debt relief for HIPC countries. |
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B. Depth of Debt Relief
The link to poverty reduction 58. The HIPC Initiative aims to provide debt relief that is sufficient to achieve debt sustainability within an overall program of sustainable development. The Initiative is aimed particularly at eliminating a stock problem--a debt overhang and thus removing an impediment to increased private investment. A stock reduction is equivalent to an irrevocable and certain stream of relief on future debt service. In this way the Initiative seeks to provide a robust exit from the process of repeated reschedulings. The amount of debt relief is determined based on targets defined such that a country is expected to be able to meet its current and future external debt-service obligations in full, without recourse to further debt relief, rescheduling, or arrears, and without unduly compromising growth. 59. Many of the comments that have been received about the HIPC Initiative argue explicitly or implicitly that the amount of debt relief should be determined on the basis of the need to fund key social and development services and thus to reduce poverty. These anti-poverty and debt sustainability objectives are not incompatible; the program context in which HIPC relief is granted is aimed at poverty reduction in the long run. The HIPC Initiative has emphasized the need to link debt reduction with effective long-term policies for economic and social development, including poverty alleviation. For this reason, social development criteria are developed jointly with country authorities and explicitly monitored under the HIPC Initiative. In particular, there is now an effort to strengthen the link between the programs monitored under the HIPC Initiative and the International Development goals developed by the OECD's Development Assistance Committee and endorsed by the United Nations for poverty reduction and social development by 2015. 60. One approach that has been suggested for strengthening the linkage between poverty reduction and the depth of debt relief is to provide for additional debt relief (beyond what would be recommended on debt sustainability grounds alone) in cases where there were additional or stronger efforts in the debtor country to address poverty reduction and social development. This is the approach of the proposals by Oxfam and others to introduce a "human development window" in the Initiative, which would establish lower targets where certain conditions were met. The debtor government would need to prepare a poverty action plan, involving the donor community and civil society in order to access to the deeper relief that would be available under the window. Those proposals have the advantage of potentially strengthening incentives and mobilizing additional resources for poverty reduction programs. However, as with other proposals, one would need to consider whether the resources released through deeper debt relief were additional to the aid resources that could have been expected to be available to fund a well-developed poverty action program; and whether deeper relief would be more effective than additional aid directed at priority sectors. 61. A related proposal to link the depth of debt relief more closely to poverty reduction (proposed by Eurodad and Zambian NGOs) is to vary the debt sustainability targets according to poverty need. This need would be evidenced, for example, by the extent to which poverty indicators for the debtor country were below the average for HIPCs. Implicitly, this proposal assumes that the financing needs of countries with especially low poverty indicators are greater. However, under this proposal there would be no linkage of the amount of additional debt relief to any direct assessment of financing needs. Nor would the use of the additional resources be linked to any specific programs of poverty reduction or arrangements for monitoring the use of the resources. Nonetheless, there may be room to give greater (or more explicit) weight to poverty and social indicators in setting targets for debt relief, either within the current ranges or lower ranges, if that were to be agreed. Debt sustainability targets and thresholds 62. Many of the specific proposals made by commentators for changing the debt targets call for modifying the level or application of the NPV debt-to-export ratio. In addition, recommendations have also been made for using alternative indicators, including the debt-service ratio, the fiscal ratio and the debt-service-to-revenue ratio. These are taken up in turn. NPV debt-to-exports ratio 63. The debt-to-export target ranges are based on experience gained in studies of a large number of countries which were considered likely to experience debt-servicing problems.19 The relevance of these studies has been questioned, on the grounds that HIPCs are poorer than most developing countries, are less able to absorb balance of payments or fiscal shocks, and may have larger relative needs for expenditure in the social sectors. A factor that at least partially offsets the relative fragility of HIPCs, however, is the large and relatively steady flow of concessional official assistance that most HIPCs receive. It is recognized, however, that the targets in the Initiative are necessarily judgmental rules of thumb, and should be viewed as representing a probability distribution of debt-servicing problems emerging rather than a discrete cutoff. 64. A number of commentators have also argued that the target ranges under the Initiative may not provide a sufficient safety cushion for debt sustainability, especially in light of recent developments. This view partly underpins the proposal to lower the target across the board, e.g., to 150 percent. Lowering the target would also likely broaden the access to HIPC Initiative debt relief. Two considerations relate to the margin of safety issue. First, the high concentration of primary commodities in the exports of HIPCs, and the recent declines and poorer outlook that have emerged for primary commodity prices underscore their high vulnerability. Second, the outlook for the availability of aid may be less favorable than earlier assumed in considering the appropriate target range for HIPCs. It may be too early to assess the impact on HIPCs of recent declining aid trends, but there appear to be good grounds for caution regarding the outlook for aid. While lower aid availability may provide a basis for considering deeper debt relief from a debt sustainability perspective, there are very real limits on the extent to which deeper debt relief can or should substitute for other aid resources, and whether more of one would simply lead to less of the other.20 65. Some have suggested that lower target ranges be considered in exceptional cases, for example in post-conflict or post-catastrophe situations. These situations clearly call for a coordinated response so that adequate resources are made available in a timely fashion to establish a base for reconstruction and development. Exceptional situations of catastrophe and/or recovery from conflict have tended to bring forth exceptional responses from the international community (for example, Hurricane Mitch--see Box 4).21 In terms of immediate financing, the response usually needs to focus on assuring adequate cash flow and on ensuring that debt service obligations do not constitute an obstacle to effective recovery efforts. More permanent relief, such as under the HIPC Initiative could also be considered keeping in mind that flexibility needs to be balanced against other considerations such as the desirability of a reasonably uniform standard and equitable treatment of recipients.22 |
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Hurricane Mitch was one of the strongest storms ever to hit Central America, resulting in nearly 10,000 deaths and unprecedented losses of infrastructure, crops, and property in two HIPC countries, Honduras and Nicaragua. In the context of broad international support for relief and reconstruction, creditors provided substantial debt service relief to ensure that debt payments were not an obstacle to such efforts.
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66. There is also a question about whether targets should be set at a single level, or vary over an
allowable range. Several proposals suggest an approach that would standardize the
target for debt sustainability at a uniform NPV debt-to-exports ratio such as 200 or 150 percent.
This would have the advantage of simplifying the decision-making involved in the HIPC process,
without necessarily compromising on the objective of debt sustainability that has been defined.
On the other hand, it would reduce flexibility to reflect special characteristics of each debtor
country. Debt-service-to-exports ratio 67. Some commentators have called for more explicit targeting of debt service levels with the aim that debt relief should result in an improved cash flow. It is asserted reducing debt service down to the levels currently being paid is merely recognition that such debts are "unpayable," and does not represent a real improvement over the current situation. However, to assume that current debt service levels represent an absolute ceiling of "payable" debts would seem to imply that there will be no future increase in debt servicing capacity. It may be more relevant, therefore, to consider the debt-service ratio. In the case of most HIPCs which have reached the decision point, this ratio remains well below the 20-25 percent targets established under the Initiative, and it has been on a declining path (see Annex 1, Chart 1). Some greater front-loading of relief could be provided with more tangible cash flow benefits in relation to current payment levels. Fiscal targets 68. Many commentators, including debtor governments, have focussed on the fiscal dimension of the debt problems, stressing that high levels of debt service reduce the ability of governments to meet priority needs. Deeper relief is cited as a way to create greater fiscal space. In this context, many have emphasized that debt relief is only effective to the extent that it yields a reduction in the cash-flow burden that debt service places on the budget. The concern with the fiscal dimension of debt problems has been recognized in part by using fiscal indicators in the vulnerability analysis. Further, the fiscal window was added to the framework out of concern that the export target range might not be sufficient to provide for debt sustainability from a fiscal perspective, in some particular circumstances. NPV of debt-to-revenue ratio 69. In this context, many have called for lowering the NPV debt-to-revenue target, noting that the current target levels do not have a firm analytical or empirical basis and that few countries qualify on fiscal grounds, even though the fiscal dimension of debt problems appears to be the most pressing. The choice of targets was based on assuring eligibility for the most deserving countries and containing the additional costs of the Initiative, while maintaining the overall primacy of the export criterion. The choice of a fixed target rather than a range was also informed by a desire to reduce the uncertainty regarding the additional costs of introducing the fiscal /openness window. 70. The issue has also been raised of whether the revenue-to-GDP threshold is too high or even necessary. The revenue-to-GDP threshold was introduced in part to address moral hazard concerns. Governments do have control over their revenue effort, and there was concern to avoid creating incentives for relaxing these efforts. To some degree, this concern could be addressed through the monitoring provided under the Fund- and Bank-supported program. Nevertheless, especially for very poor countries, the 20 percent threshold may be considered a high standard, owing to the difficulties associated with raising revenues and considering that the average revenue-to-GDP ratios for HIPCs is approximately 14 percent. 71. Similarly, many commentators have questioned the need to retain the export-to-GDP threshold requirement. It was introduced in part to maintain the primacy of export criteria within the Initiative, so that most countries would continue to qualify on the basis of the original export-based framework. In the context of reassessing whether there is scope to ease the targets and thresholds of the fiscal criteria to give greater weight to the fiscal constraints in assessing debt sustainability, there may be scope for a partial relaxation of this aim. 72. The thresholds and the debt-to-revenue targets do interact with one another. Concern over moral hazard regarding revenue mobilization could be addressed by introducing ranges for the debt-to-revenue ratio combined with a range for the revenue-to-GDP ratio. In this way countries with relatively high revenue efforts could benefit from lower target for debt to revenues, while conversely countries with lower revenue efforts which have room for greater future efforts could still qualify. In this case, the target would be based on a desired revenue level for the country, thereby preserving incentives to strengthen the revenue effort. 73. In the fiscal framework, which focuses on domestic budgetary constraints to debt servicing, treatment of domestic debt naturally becomes an issue. The HIPC Initiative provides assistance based on the amount of external public and publicly guaranteed debt, and thus does not include domestic debt in determining debt relief, although it could be added as a specific factor of vulnerability. Inclusion of domestic debt when considering the fiscal constraint has analytical merits, but its inclusion in calculating assistance requirements would likely necessitate comparable treatment of that debt by the domestic creditors concerned. In the absence of such treatment, external creditors are unlikely to provide additional debt relief calculated with respect to total debt (including domestic creditors). Any attempt to secure debt relief from domestic creditors would be disruptive, however, and could seriously undermine efforts to improve domestic banking systems and develop credit markets. |
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Debt-service-to-fiscal revenue ratio 74. One possibility would be to consider the fiscal dimensions of debt in a more complete budgetary context. A direct assessment of the fiscal dimension of debt problems might provide a clearer picture of the need for debt relief, the contribution that debt relief could make to fiscal management, and the potential uses to which the resources released through debt relief could be put. It could also be used to support more explicit monitoring of the impact of debt relief in terms of public expenditures. However, in considering the fiscal sustainability of debt and the fiscal space for social spending, it is also important to consider the revenue effort the government is making. In addition, expenditure policies (including overall spending, its sectoral composition) and other dimensions of financing such as domestic borrowing, the availability of grant financing, new external borrowing, and debt restructuring are important in assessing whether debt service is a significant obstacle to development in a particular case. 75. Some commentators have also suggested introducing targets for the ratio of debt-service-to-revenue. If the fiscal dimension were given greater weight, it would be logical to introduce a check on whether the debt stock reductions would be translated into a profile of debt service that was reasonable in relation to the debtor government's own resources. Determining the level to set for such a target would be more difficult, as no strong basis has been developed for a particular target that would represent sustainability. Again, the capacity to service debt from a fiscal perspective depends on the full budgetary context, and revenues alone may provide an incomplete picture. 76. Some proposals explicitly focus on the role of poverty reduction funding needs in determining the amounts of debt relief on fiscal grounds. There would be a number of practical concerns in implementing such an approach given the divergent conceptions of the role of the state in HIPCs, and the various means through which social services are delivered--including outside of the budget by NGOs. The CAFOD proposal may be difficult to implement in light of the need to design a 10-15 year forward budgeting approach on which basis donors and creditors would need to commit themselves over the same period of time. CAFOD's proposal also needs to take into consideration the role of foreign aid in funding social programs, which has been substantial. 77. A number of commentators have also focussed on the desirability of immediate cash flow relief. They have suggested front-loading debt relief to achieve these results. While there is no doubt of the relevance of considering the immediate impact of debt relief on debtor country budgets, the appropriate time profile of providing a given amount of debt relief needs to be assessed in context. In particular there are risks of full front loading. Front-loading all the debt relief in the early years could undermine the durable underpinning of social spending that could potentially be provided by debt stock reduction. Sustainable funding sources are needed for sustainable social spending. Another caution about very strong front-loading is that it could leave a problematic profile of debt service obligations later on, with a large increase in payments needed once the front-loading period expires. Breadth of debt relief 78. A number of proposals have urged a broadening of eligibility for the HIPC Initiative. An appropriate policy environment remains the essential ingredient to reduce poverty, and the first priority of efforts to assist HIPCs should be to encourage adoption of such policies. The HIPC Initiative provides debt relief in a framework which gives incentives for countries to adopt and maintain such policies, through the requirement that countries complete a track record of satisfactory performance under ESAF- and IDA-supported programs. Given this role of the HIPC Initiative, there is a benefit to ensuring that country eligibility is broad, while at the same time ensuring that strong incentives remain to encourage countries to maintain an appropriate policy environment. C. Timing of Debt Relief: Incentives for an Appropriate Policy
Environment
79. There has been widespread agreement that debt relief should be provided in a context of sound policies that will promote development and poverty reduction. This concern underpins the requirement under the HIPC Initiative that countries demonstrate a track record of satisfactory performance before debt relief is committed and provided. Many commentators have questioned, however, whether the length of the required track record is too long, and whether it is appropriately linked to the nature and strength of policies and reforms. This section addresses some of the issues in this debate. 80. Many commentators have suggested that the track record requirement does not adequately reflect the need for urgency in providing debt relief. The need for urgent action to address poverty-funding needs is a mutual concern. The question is how to balance the need to mobilize resources today with the need to ensure that permanent debt relief-unconditional after the completion point-is provided in a context that will enable the resources released through debt relief to be used efficiently over the medium term. Cash-flow problems can be addressed through quick disbursing assistance as well as debt-service relief. Debt stock reduction can then be delivered later when institutional capacity for longer-term poverty reduction is better developed. 81. A specific proposal on timing is the call through the Jubilee 2000 campaign and others for debt cancellation by the year 2000. While there is no economic rationale for using this single date for debt reduction, the idea has been an enormously powerful rallying tool in re-energizing public interest in the poorest countries, and has mobilized public opinion especially in industrialized (creditor) countries. In view of the relative marginalization of HIPCs in the global economy and longer-term trends of declining interest in official assistance for development, this is in many respects a welcome development. However, there could be significant drawbacks from generalized debt relief as of the year 2000 insofar as debt relief would be provided to countries where there is little commitment to undertake the necessary economic and social reforms, with good intentions being frustrated by continued inefficiency in using the savings from debt relief properly. The waste of public aid has been one of the main factors contributing to the shrinkage of the public and political constituency for aid, and a similar reaction could set in for debt relief. Similarly, focusing on a specific year--which may not be appropriate for all countries--may cause disappointed expectations, and could ultimately weaken the constituency of concern for assisting low-income countries. 82. The length of the track record is necessarily judgmental, but the stakes are high. A longer track record gives correspondingly greater assurance that the country has developed an ingrained culture of macroeconomic stability and reform, and thus that debt relief will be used as part of an effective program of poverty reduction. In the absence of an established record of adequate governance, policies or institutions, there are substantial risks that the resources freed through debt relief may not contribute to sustainable development and poverty reduction, but could be wasted or underpin corruption. While there can be no guarantees of the use of permanent debt relief once granted, some safeguard against moral hazard may be provided to the extent that assistance from donors after the completion point is allocated and disbursed on the basis of the quality of economic and social development programs. |
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83. While acknowledging the need for debt relief to be conditioned on a track record, a number
of commentators have called for a shortening of the six-year period required under the
Initiative. This could be done either through a shortening of the period prior to the decision
point, or though a shortening of the interim period between decision and completion points, or a
combination of both. Shortening the period before a decision point would have the advantage of
responding to calls for faster commitment of debt relief and accelerating the discussions in the
debtor country of the programs that debt relief would support. It would make clear the creditor
community's willingness to provide exceptional debt relief, give the debtor country a light at the
end of the tunnel, and thus a strong incentive to perform. On the other hand, shortening (or
eliminating as some suggested) the track record required before the decision point would increase
the risks that program would be derailed during the second stage, as ownership and commitment
might be less well established. Shortening the second stage would allow for commitments of
debt relief at the decision point to be based on a more solid foundation, but would require a
longer wait before debt relief could be committed. Shortening the track record time period thus
would involve a balancing of evaluating past performance and forward-looking conditionality.
Another consideration is the timing of assistance for countries with some established track record
but which have not yet reached the decision point. For this group, shortening the second stage
would tend to advance delivery of assistance more than if the first stage were shortened. 84. A related consideration is the tension between the depth of a reform program and the length of time it is pursued. Some countries have chosen more and some less gradual approaches to implementing strong programs. Some have been able to implement elements of their programs faster than expected, while others have encountered delays. One possible option would be to determine track records based on the perceived strength of past efforts and the program ahead. However, such an approach would require difficult cross-country comparisons of the relative strength of ESAF- and IDA-supported programs which may be hard to do equitably. Comparisons of performance that would be required under a flexible application of shortening are also difficult and can lend themselves to suspicions about unfairness. Thus, there appears to be a trade-off between a flexible approach and a universally applied shortening. A flexible approach would allow the Boards to consider each case on its merits, but is more difficult in terms of uniformity of treatment and public perceptions. A universally applied shortening has the advantages of transparency and simplicity (and possibly speed) of decision-making, but could favor countries with weaker performance. 85. An alternative to specifying the interim period performance requirement in terms of length of time would be to do so in terms of policy actions that would be undertaken, subject to the continued pursuit of a sound macroeconomic policy framework. Such an approach to structural, and especially social development program undertakings would empower the government of the country to affect the length of the interim period, depending on how quickly it was in a position to implement the key elements of the program, possibly advancing or delaying debt relief. While this approach could possibly create greater uncertainty about the timing of debt relief, it would give incentives to take measures quickly, and be aimed at supporting the development of ownership. A similar approach has been followed with some success by the World Bank in some of its adjustment lending operations in recent years through the use of "floating tranches". In the context of the HIPC Initiative, this approach would necessitate identifying those key elements which would adequately represent overall progress. One part of this would be demonstration of satisfactory macroeconomic performance, as monitored under the ESAF, and thus a certain period of track record would be needed. Further, a fixed date would need to be set to determine the amount of assistance.23 86. The linkage between the length of the necessary track record and delivery of HIPC assistance need not be complete. Bilateral creditors already provide some HIPC Initiative assistance during the interim period between the decision and completion points, by increasing the concessionality of flow reschedulings of eligible debt from 67 to 80 percent (from Naples to Lyon terms) for countries which have not yet received a stock-of-debt operation.24 To the extent that greater emphasis could be given to providing early cash flow relief, for example to help fund accelerated social development programs, there may be a case for greater interim relief including possibly from multilateral institutions. Such assistance could facilitate gearing the timing of the interim period better to the optimal pace of reforms, fostering ownership, by bringing greater cash flow neutrality between different completion points. It would also evidence multilateral institutions' commitment to participate earlier along with bilateral creditors. Such a policy would not substantially affect the overall amount of assistance provided, but would advance some cash flow assistance, and similarly would require an earlier financing of multilateral assistance for HIPCs. Conversely, it would reduce relief later on.25 D. Performance Links
87. A few commentators have argued that there should be no performance requirements for a country to receive debt relief. Calls for complete and unconditional debt cancellation for poor countries would be in this category. Such a position would maximize debt relief; however it would also call into question the legitimacy of borrowing per se, and could severely hamper the future access of debtors to needed finance. Others (e.g., CAFOD) have argued that there should be no ex ante performance conditions, but that debt relief should be tailored to a country's capacity to pay after meeting essential social expenditures. The absence of performance conditions could provide the greatest assurance that debt relief wold be delivered, but it would provide the least assurance that the resources made available would contribute to poverty reduction and growth or that there would be accountability for the way in which resources were used. 88. Most consider performance linkages an essential feature of any debt relief program. A number, especially in the official community, see performance under Bank- and Fund-supported programs as critical. However, a number of groups have questioned the content and focus of the performance criteria under the Initiative. There have also been many views expressed about the institutional arrangements and processes for determining performance criteria and for monitoring performance. 89. Concerns by a number of groups about the content of adjustment programs, as imposing austerity conditions that are inimical to poverty reduction and growth, have been long-standing and go beyond the scope of the Initiative. Such questions were considered in the recent internal and external reviews of the ESAF. The internal review found that ESAF-supported policies have contributed to stronger growth in the countries. The external evaluation also endorsed the fundamental view that macroeconomic stabilization and structural reforms of the type supported by ESAF have positive effects on growth and income distribution in low-income countries.26 90. Many groups have also advocated a greater poverty focus in the performance criteria. An innovation of the Initiative was to introduce social development performance criteria based on a country's own development program, along with macroeconomic and structural criteria. Nevertheless, most HIPCs have not yet developed comprehensive strategies for poverty reduction and social development that include financing considerations. The question of how best to support more comprehensive poverty reduction strategies and integrate them with the performance criteria for debt relief under the Initiative has been discussed repeatedly. The OECD/DAC has developed a set of performance areas for developing countries (Box 5). Comments on the poverty linkage are being explicitly sought for Phase II of the HIPC Review. It bears repeating that the Bank and Fund will continue to pursue the goals of sustainable growth and poverty alleviation in the context of their overall assistance strategies. |
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In the context of reaching the social targets for poverty, education, health, gender equality, and environment set for 2015, the OECD Development Assistance Committee has developed a set of policies that are considered essential for developing country partners. They are:
Source: Shaping the 21st Century: The Contribution of Development Cooperation, OECD, May 1996. |
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91. One approach to enhancing the poverty focus of performance criteria that has already been
frequently mentioned is to have a poverty action framework or plan--developed with
wide participation of civil society--as a major performance benchmark. It could be envisaged
that such a plan, for HIPC purposes, would include (i) an outline of how the country would reach
specific social targets, e.g. by 2015; (ii) the roles and participation of all relevant groups and
stakeholders in implementing the plan; (iii) an indicative costing and financing plan that would
indicate the role of debt relief and other funding; and (iv) a monitoring plan for all involved
groups. Some have advocated that such a plan be the main performance criterion, in the context
of satisfactory performance in pursuing macroeconomic and structural reforms. Such an
approach could energize and develop broader support for poverty reduction programs, using the
visibility of debt relief to mobilize efforts. However, to be meaningful, such a plan would need
to be developed in the context of realistic financing and assessment of implementation.
Moreover, to be effective adequate time would need to be allowed for such plans to be
developed, which might not be consistent with accelerated debt relief. 92. A common theme to the comments from NGOs is the need for the performance criteria for debt relief to be developed with broad-based participation and local ownership. The value of securing ownership through participation has been well established, and a broadening of participation at early stages is being systematically included in the development of programs supported by the World Bank. The changes being introduced in the Fund in response to the ESAF reviews also reflect recognition that greater national ownership of policies would help encourage sustained reforms (Box 6). At the same time, consultations undertaken by international institutions must be based on, and cannot substitute for, broad-based consultation by governments with civil society on major public programs. |
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It was recognized in the ESAF reviews that progress has been uneven among ESAF-eligible countries. With sustained implementation critical to success, the internal review found that all too often the record of policy implementation was not adequate to the task. As a result, the IMF's Executive Board has approved a number of proposals to strengthen the ESAF. To summarize some key areas of change:
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93. To provide more durable or secure linkage between debt relief and social development,
some commentators have advocated conditionality after the release of HIPC assistance,
considering that further direct checks should be placed on the appropriate use of the released
funds. The current framework requires a track record of adjustment only in the period prior to
the completion point. However, even for good performers, it is well known that not every dollar
of debt relief is spent on poverty alleviation, and there are always risks of a reversal of policies
and changes in expenditure plans. On the other hand, a check against wasteful use of debt relief
is provided through ongoing aid relationships that HIPCs would be expected to continue for
many years after the completion point. 94. An alternative would be to subject the flow of debt relief, and thus the release of budgetary resources for other purposes, to a process which ensured that resources were being allocated according to a pre-agreed plan. For instance, debt service subject to relief could be paid into a special account, with funds released from this account according to conditions. Staff has reservations about the practicality of seeking to apply conditions on the release of debt relief after the completion point. There is a risk that this would entail difficult judgements about the delivery of debt relief, possibly outside of the Fund's and Bank's normal program frameworks. It would also inevitably involve a difficult coordination exercise among creditors. On a more fundamental level, a mechanism to interrupt debt relief after the completion point would raise questions about whether the debt overhang had been permanently addressed, and could raise concerns among private investors that debt service payments might be increased in the future. 95. Questions have also been raised regarding the instruments used for performance monitoring. Eurodad and others have argued that linking HIPC assistance to ESAF programs exposes the delivery of assistance to delays beyond the planned decision and completion points. The internal ESAF Review found that only one-quarter of SAF and ESAF programs since 1986 were completed without a significant delay. In response the Fund Board approved changes to the review to improve the content and ownership of programs which are intended to reduce implementation delays. Among a number of changes, future ESAF loans will be structured as a single, three-year arrangement with six-monthly or quarterly test dates throughout and with a one-year limit on extensions, replacing the earlier structure of three annual arrangements, each with a single test date and with unlimited scope for delays between arrangements. 96. Finally, program interruptions represent underlying problems. Of the three countries scheduled to reach completion points by now, two--Uganda and Bolivia--reached them as scheduled. In the third, Guyana, the completion point has been delayed because a substantial deterioration in the fiscal position threatened the macroeconomic underpinnings of the authorities' reform program. In the view of the staff, a delay is warranted if understandings need to be reached on policies to bring programs back on track. Program delays can also occur for other reasons, including delays in implementing other structural reforms, governance issues, and military conflict (which has delayed the decision point for Guinea-Bissau and Ethiopia). E. Transparency and Accountability
97. The desirability of better mechanisms to ensure transparency and accountability on debt-related issues has been a common theme among many commentators. One set of questions relates to the transparency and accountability of the HIPC Initiative process itself. To facilitate public review of the decisions taken, the Boards of the Bank and Fund have agreed to publish the decision point and completion point documents for each case shortly after the Boards review them. These documents are currently all available on the Bank and Fund Websites. Some have suggested that preliminary HIPC documents should also be made available publicly, and consideration could be given to doing so, though these documents are used as a basis for consultations among creditors and may be more sensitive. It is also recognized that there is a tension between the need for confidentiality to facilitate decision-making, and the desirability of disclosure of the basis of decisions for which governments should be held accountable. 98. There has also been considerable interest in promoting greater transparency and accountability among debtor governments. It is often observed that many debt problems might have been avoided had there been more public disclosure or debate about the borrowing activities of governments in the past and the use of the proceeds of loans. Consequently, there have been calls for borrowing decisions in the future to be subject to approval by parliaments or other representative public bodies and for full disclosure about borrowing activities. Promoting strengthened debt management has been a part of the Initiative from the beginning, and greater support could be given to opening up borrowing decisions, along with public audits, to encourage sound borrowing policies. 99. Greater transparency and accountability of creditors has also been advocated. Most of the debt of HIPCs is owed to governments and official institutions. While much of the information on official claims may be publicly available, it may not be available in a form that is comparable across creditors or easily accessible to the public in creditors and debtor countries. There may be scope therefore for considering ways to improve the availability of information on official lending to HIPCs. |
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IV. ISSUES FOR DISCUSSION
100. This paper has provided information on a broad range of proposals to change the HIPC Initiative which have been advanced by civil society, international organizations, and member governments of the World Bank and IMF staff. Many of these proposals were received as part of the consultation process undertaken by the Fund and Bank staff. These proposals are diverse, reflecting the different perspectives of their authors, but coalesce around key themes involving proposals to provide deeper, earlier, and broader debt relief, with many considering this as warranted on poverty reduction grounds. 101. A number of general trade-offs are evident in considering changes to the Initiative. Some general trade-offs are: (1) Within a given financing envelope, there is a choice of whether to aim at providing relief to a broader group of countries, or relatively more relief to a smaller group. The application of new terms to countries which have already reached the decision and completion points will need to be considered in this respect. (2) Advancing the availability of debt relief, whether through stock reduction or interim flow relief or both, would release resources earlier for needed social programs, while the framework to minimize the chance that the resources would be wasted would need to be considered. (3) Increasing the flexibility of standards would allow consideration of each country's own special circumstances, while a more rules-based approach would be simpler to implement equitably. (4) Adding new elements to the Initiative may allow key concerns to be addressed, but some proposals may increase the complexity of the Initiative. 102. In order to facilitate the Boards' discussions of the many proposals described in this paper, Executive Directors may wish to comment on the following broad issues. 103. The broad objectives and framework of debt relief: Directors' comments on the various proposals to increase the poverty focus of the Initiative are welcomed. Do Directors consider that the amount of debt relief should be focused on providing robust debt sustainability? Should there be a specific link between the amount of assistance under the Initiative and poverty reduction, and, if so, in what form? How do Directors view the roles of aid and debt relief in helping to finance anti-poverty efforts? 104. The depth and breadth of debt relief: Do Directors consider that in general there is a case to provide deeper debt relief, whether on grounds of providing a greater cushion for debt sustainability or for further poverty reduction? If so, would Directors favor reducing the NPV of debt-to-exports target? Would Directors favor easing the NPV of debt-to-fiscal revenue target and/or the export-to-GDP and revenue-to-GDP thresholds? Should there be specific provisions (lower targets) for the poorest HIPCs, post-disaster countries, or those emerging from conflict? 105. The timing of debt relief: Would Directors favor a shortening of the six-year track record requirement, or do they see the current requirement as necessary to ensure that a culture of reform has taken hold? If a shortening were agreed, should it be reflected in shortening the first or second stage; should the requirement be uniform, or subject to flexibility--recognizing that such judgements might often be exceedingly difficult in practical terms? In the context of a three-year second stage, do Directors consider that interim assistance in terms of debt service relief should be provided by multilaterals in general, and by the Bank and Fund in particular? 106. Policy links: Do Directors wish to consider changing the way performance is monitored under the Initiative, now met through satisfactory performance under ESAF- and IDA-supported programs? If so, how should progress in macroeconomic, structural, and social policy be measured? An alternative to setting ESAF- and IDA-linked performance requirements would be to release debt relief without pre-specified time requirements but instead when pre-specified reform conditions were met--the floating tranche idea. Do Directors wish to pursue this idea? Do Directors consider that further performance requirements should be attached after the completion point to the use of resources released through debt relief? 107. Costs and financing: While this paper does not aim at assessing financing constraints or making specific proposals in this area, Directors are invited to comment on the financing constraints for multilateral creditors--particularly the Bank and Fund--involved in increasing debt relief. 108. Bilateral initiatives: Directors may wish to comment on the various proposals for more action by all creditors on a concerted basis involving: (i) ODA cancellation or zero debt service on ODA for a generation; and (ii) greater bilateral debt reduction above the current 80 percent limit on eligible debt under Lyon terms? Do Directors favor concerted action on future commercial lending to HIPCs, and on the terms of future provision of aid? |
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1 These are Benin, Bolivia, Burkina Faso, Côte d'Ivoire, Ethiopia, Guyana, Guinea-Bissau, Mali, Mauritania, Mozambique, Senegal, and Uganda. 2 See Annex 1 for a fuller description of progress to date and related trends in resource flows. 3 In the summer of 1998 the Boards of the IMF and IDA reviewed progress under the HIPC Initiative during its first two years. See The Initiative for Heavily Indebted Poor Countries--Review and Outlook, (EBS/98/152 and IDA/SecM98-480, August 25, 1998), and Summing Up by the Acting Chairman of the IMF (Buff/98/88). The Development Committee called for another review of the Initiative to occur as early as 1999. 4 HIPC Initiative--Tentative Costing of Illustrative Alternatives to the HIPC Initiative Framework, (EBD/99/32 and IDA/R99-19, February 16, 1999). 5 See /external/np/hipc/Review.htm at the IMF website and http://www.worldbank.org/html/extdr/hipc/99review.htm at the World Bank website. 6 The Conference on "The Ethical Dimensions of International Debt," co-sponsored by the U.S. Catholic Conference, Seton Hall University, and the Pontifical Council for Justice and Peace, October 1998. 7 The international development goals are set out in OECD/DAC, 1996, Shaping the 21st Century: The Contribution of Development Cooperation, Paris. 8 See also U.S. General Accounting Office, Report to the Chairman, Subcommittee on International Economic Policy, Export and Trade Promotion, Committee on Foreign Relations, U.S. Senate "Developing Countries: Status of the Heavily Indebted Poor Countries Debt Relief Initiative," September 1998. 9 The current framework is built upon a three-year track record for eligibility plus another three-year interim period between the decision and completion points (although this has been shortened in most cases). 10 A coalition of faith-based organizations in the United States has proposed that the U.S. government make a substantial contribution to the HIPC Trust Fund, commensurate with the financing needs of an expanded HIPC Initiative. 11 Declaration of the Conference of ACP Ministers of Finance on Monetary and Financial Issues, July 6, 1998. 12 Intergovermental Group of 24 on International Monetary Affairs Communique, October 3, 1998. 13 Mr. Morais is Executive Director at the IMF for Angola, Botswana, Burundi, Eritrea, Ethiopia, The Gambia, Kenya, Lesotho, Liberia, Malawi, Mozambique, Namibia, Nigeria, Sierra Leone, South Africa, Swaziland, Tanzania, Uganda, Zambia, and Zimbabwe. 14 Several other MDBs have actively participated in one or more of the consultation meetings. They include the IDB, CABEI, CAF, and the CDB. A number of regional multilateral creditors, while supporting the goal of increased assistance under the HIPC Initiative, stressed that it should not put into question the financial stability of the regional multilaterals (consultation meeting in Honduras, March 23, 1999). 15 Report of the UN Secretary General to the Security Council "The causes of Conflict and the promotion of Durable Peace and Sustainable Development in Africa," United Nations, April 16, page 22. Report by the Secretary General "Debt situation of the developing country as of mid-1988," (A/53/373) September 11, 1998, page 7. 16 The dialog on how to strengthen the link between poverty reduction and debt relief in the programs supported through the HIPC Initiative is expected to continue on the basis of the second round of consultations, with responses to be received by mid-June, 1999. 17 1998 Development Co-operation Report: Efforts and Policies of the Members of the Development Assistance Committee, OECD, Paris, February 1999, as reported on website. Some debt relief is included in the ODA data. 18 There is a growing interest in providing overall budget support to governments which have strong social programs in place. The approaches include sector-wide programs, but also fast-disbursing budget support credits. Debt relief could play a similar role to budget support-type loans if tied to an overall poverty-reduction strategy and expenditure framework. 19 See "Analytical Aspects of the Debt Problems of Heavily Indebted Poor Countries," by S. Claessens, E. Detriagache, R. Kanbur, and P. Wickham, in External Finance for Low-Income Countries, Z. Iqbal and R. Kanbur, eds., IMF, 1997. 20 However, deep debt relief might ultimately substitute to some extent for other forms of exceptional balance of payments finance. 21 In this context, Canada and the U.S. underscored the importance of debt relief in the aftermath of Hurricane Mitch. 22 Two papers outline possible World Bank policy responses with respect to post-conflict countries (SecM98-729, September 1, 1998) and IDAR98-146, September 24, 1998. A paper discussing IMF policy with respect to post-conflict countries--particularly those with substantial arrears--was recently circulated to the Board (EBS/99/46, March 19, 1999). 23 In principle, assistance could be based on any date before the completion point. If the debt sustainability target date were set to be the decision point, then the amount of debt relief would be neutral with respect to the completion point. 24 The World Bank also provides interim measures during this period, by providing IDA grants in place of IDA credits for HIPCs meeting certain eligibility criteria. This reduces the stock of debt by an amount equal to the concessional element of the replaced IDA credits However, the cash flow impact of these measures mostly occurs much later, when the debt service on these IDA credits would have been due. 25 The IMF Executive Board discussed the possibility of providing interim assistance in September 1988, and concluded as follows: "While several Directors thought that the balance of arguments was in favor of the Fund providing some interim special HIPC assistance, the majority of Directors endorsed the staff's view that the Fund already has sufficient instruments in place for the interim period, and thus were not in favor of more formal interim assistance by the Fund. In this connection, some Directors observed that because of uncertain financing prospects, it would be inappropriate now to make any commitment to interim financing." Summing Up by the Acting Chairman, The Initiative for Heavily Indebted Poor Countries-Review and Outlook, Buff/98/88, September 18, 1998. 26 See "External Evaluation of the ESAF," Report by a Group of Independent Experts, IMF, 1998; "Economic Growth" by Robert J. Barro and Xavier Sala-i-Martin (New York: McGraw-Hill, 1995). Other studies on the link between policy reforms, growth and income distribution include "Aid, Policies, and Growth," by Craig Burnside and Daniel Dollar (Policy Research Working Paper No. 1777), World Bank, 1997;"Economic Reform and the Poor in Africa by David E. Sahn, ed., (Oxford: Clarendon Press, 1996). |
