Voicing deep concerns, African finance ministers have called for more flexible application of the new Highly Indebted Poor Countries (HIPC) debt relief deal. They say "as many reforming African countries as possible" should have access to the HIPC package and urge the World Bank and International Monetary Fund (IMF) to make the six years of tough eligibility conditions shorter and less restrictive. The HIPC deal aims to reduce debts of eligible countries to "sustainable" levels.
At a 31 March-2 April conference in Addis Ababa, held by the UN Economic Commission for Africa (ECA), the ministers called for more rapid debt reduction for countries with a "demonstrated record of strong performance over a long period."
This was a reference to Uganda which, on 23 April, became the first country to get an HIPC deal (see page 10). Uganda welcomed the debt relief, which will come in April 1998. It had earlier expressed disappointment at not getting debt relief this year, despite assurances of a 1997 date by the Bank and Fund. Oxfam, a UK-based non-governmental organization, has charged that the Bank and Fund lack the political will to implement their own plan. Oxfam calculates that a one-year delay will cost Uganda $193 mn, or six times its public health spending. British parliamentarians of all parties in the Treasury Select Committee have in turn criticized the IMF for prevaricating on debt relief. The committee said on 12 March that the HIPC initiative was in danger of losing impetus and "must not be allowed to founder."
Against this background, debt and adjustment issues took centre-stage in Addis Ababa, although financial sector reform, capacity-building and capital market development were the other conference themes. Uganda took every opportunity to make its case, while the Bank deployed Vice Presidents for Africa Callisto Madavo and Jean-Louis Sarbib, and the IMF fielded Mr. A. Basu, its Africa Region Deputy Director. They brought messages of optimism and faith in Africa's progress and stressed the need for sustained policy reforms.
But the conference tone was already set when Ethiopian Deputy Prime Minister Kassu Illala, in his opening speech, expressed doubts about the HIPC initiative's conditionality and eligibility criteria. On behalf of Prime Minister Meles Zenawi, Mr. Illala said that in almost all African countries, excessive debt is hampering efforts to attract resources required for basic development needs.
Without flexible application, the initiative could end up "like the mountain that gave birth to a mouse," said ECA Executive Secretary K.Y. Amoako. It "could look good on paper" but not benefit deserving African countries "genuinely burdened by debt," he added, noting the plan's "failure to consider the fiscal burden of debt as a central variable in the debt sustainability analysis." He also questioned the two three-year periods of successful adjustment that enable eligible HIPCs to qualify for final debt reduction, and whether adequate and timely financing has been committed, especially by bilateral donors.
Illustrating the ECA push for new methods of work, the conference format broke with the tradition of long speeches and little discussion. Instead, there were lively sessions featuring presentations by small panels, sharp questions and comments from ministers, central bankers and senior officials, and detailed responses from panelists. This format, said Mr. Amoako, "exemplifies the new ECA, networking, showcasing African talent, facilitating substance, and helping Africa find new synergies."
Key session on debt relief
Uganda had wanted to bring a message of hope for a breakthrough to its fellow African countries "shackled by debt problems amidst widespread poverty," said Deputy Finance Minister Basoga Nsadhu, moderating the session on the HIPC initiative. But while the HIPC package is very welcome, some questions remain. These include the appropriateness of the eligibility criteria and whether the sustainability analyses give proper weight to vulnerability and other exogenous factors.
But for Mr. Jean-Louis Sarbib, the main issue was how to move forward, balancing divergent forces, to achieve a sustainable level of debt for the largest possible number of HIPCs. In a lucid presentation of the complex deal, he said the key achievement was that all creditors had agreed on a package for the totality of debt which provides an "exit strategy" from costly reschedulings and which also deals with the "moral hazard" of giving relief to potential backsliders by monitoring their performance over a number of years. The package would also preserve the Triple A rating of the multilateral financial institutions, said Mr. Sarbib, adding that in an era of dwindling resources, the HIPC deal would secure concessional funds that do not create new debt.
Only countries with per capita gross national product of $800 or less (known as "IDA-only" as they can borrow only from the World Bank's soft-loan arm, the International Development Association) with a track record of good adjustment are eligible for the deal. Only after "full use of existing mechanisms" could their debt be deemed unsustainable, and only then would HIPC relief kick in. There is no "predetermined list" of potential beneficiaries – the list published by the IMF last September "had caused problems" – and no country is in or out until its debt sustainability analysis has been endorsed by both Boards, Mr. Sarbib explained.
This vital debt sustainability analysis (DSA) is a tripartite exercise done by the Bank, the Fund and the country near the end of the first three-year period. Appropriate speed has to be balanced with "ownership": a country "must be fully behind the DSA," Mr. Sarbib insisted.
The DSA is the basis for the "decision point" at the end of the third year when creditors decide how much debt relief will be needed at the end of the sixth year, known as the "completion point." This second three-year period aims to ensure that the "budget space" provided by debt relief is applied to economic management and social development. A country starting a Bank/Fund programme in January 1997 would reach decision point in 1999, and completion point in 2002. If it already has a track record – hypothetically as far back as 1991 – then the decision point could be in 1997 and an earlier completion point is "even possible," Mr. Sarbib said.
IDA grants may be given between decision and completion points, like a "down payment" that would "help keep all our eyes on the prize." Each creditor is responsible for its share of debt relief, and the bilaterals have so far put $43 mn into the HIPC Trust Fund, Mr. Sarbib reported.
The African Development Bank's initial contribution to the HIPC package is through the soft-loan African Development Fund (ADF), said ADB Vice-President Ferhat Lounes. For the 1997-99 period, it is setting up a supplementary financing mechanism, similar to the World Bank's Fifth Dimension facility, to help deserving countries service debts contracted on harder terms from the ADB. Estimating HIPC debt to the ADB at $872 mn in net present value and $1.3 bn in nominal terms, Mr. Lounes said ADB relief will be disbursed in the 1997-2003 period. The resources will come from ADB net revenue and from writing off bad ADF loans. But the ADB/ADF Boards are considering various options to fill a financing gap.
IMF participation is through its enhanced structural adjustment facility (ESAF), but special IMF funding will only come at completion point, said Mr. Basu. Just this past February did the IMF Board lift the previous country limit of two consecutive ESAFs – usually three years each – and set up an innovative Trust for Special ESAF Operations which will make grants or interest-free, 10 to 20-year loans with a grace period of between five-and-a-half and 10 years. He said most ESAF operations for HIPCs would involve grants paid into escrow accounts to cover debt-service payments. The IMF Board also decided on early transfers from the ESAF Reserve Account to a Special Disbursement Account to get funds quickly to the first HIPC beneficiaries. But not all creditors have agreed to this.
How, when and how much?
Is there really enough money for a potentially growing number of HIPC beneficiaries, and besides the World Bank's initial promise of $500 mn for the HIPC Trust Fund, how much are the IMF and bilateral creditors providing asked Sudan's Central Bank Governor Abdulla Hasan Ahmed.
Tanzania's Planning (and acting Finance) Minister Daniel Yona said that six years of meeting tough performance criteria are just too long. The Bank and Fund's "traditional overcautiousness" explains why many of their programmes are not successful and why the HIPC initiative could fail, Mr. Yona said. Some governments have "behaved well for one or two years" but the critical external "helping hand" is just not there. The Paris Club has cancelled "at most, one-eighth of our total debt" but Tanzania spends 40 per cent of its budget on debt service, 40 per cent on wages and salaries, leaving little for social services, Mr. Yona said, urging prompt help to maintain the pace of reform.
Why is there no reference to the level of internal debt in the basic HIPC hypotheses, asked Mr. Emmanuel Nana, Chief of Cabinet in the Central Bank of West African States (BCEAO), pointing to the influence of internal debt on savings and on investment. To spur growth, he noted, investment is meant to rise to some 25-30 per cent of gross domestic product. He feared that the tough criteria may prevent the poorest HIPCs from getting even the little sums of relief they need. This stands in stark contrast to the immediate response and huge sums mobilized in 1996 to bail out Mexico, even without a proper economic programme.
Speakers from Sierra Leone and Guinea both pointed to the problem of using the total value of exports in the analysis of debt sustainability. They said that the major exports of some countries go through joint ventures with foreign firms. These firms make foreign payments and also transfer profits. Only export revenue actually accruing to the government should be considered rather than the total value of exports, they argued.
Among other pertinent interventions, a Burkina Faso delegate reported some signs of withdrawal of bilateral support at the prospect of a country getting an HIPC deal. Uganda asked what categories of debt qualify and if there are cutoff dates. Another speaker asked if any of the first nine eligible HIPCs would benefit before the year 2000, adding that "as politicians, we have to advise our governments." Wishing that the question of adequate money for all eligible HIPCs was the only problem, Mr. Sarbib said it would not be easy to raise more resources. On the analysis of export revenue in the DSA, he gave strong assurances that such questions as the public share of export revenue will be answered during the case-by-case examination of the composition of exports. In Burkina Faso's case, the inclusion of workers' remittances as export revenue had put the country's debt burden in the "sustainable" category. Weak data on the remittances led to their subsequent exclusion and radically changed Burkina's debt profile. "You must make your case forcefully and we will listen... But we must also listen to our Board members," Mr. Sarbib said.
Six years is an infinity for politicians, Mr. Sarbib agreed, but the HIPC package is "a real breakthrough," he said, recalling that "some of us were not allowed to utter the words ‘multilateral debt relief' not so long ago."
The HIPC initiative covers public and publicly guaranteed debt, he explained, noting, for Sudan's benefit, that only private debt is discounted; there is no secondary market for publicly guaranteed debt and it retains its face value. To Guinea's concern over its debt to Russia, Mr. Sarbib mentioned the talks under way on Russia's contribution to debt relief at completion point. The impact of debt payments on the budget, a widespread African concern, is also being discussed, particularly in assessing country vulnerability.
Mr. Sarbib assured Uganda that Bank/Fund staff had made a strong case on its behalf, the Boards had listened, and had advanced the decision point, but the word on the completion point had not yet come down. Mr. Amoako observed that a one or two-year delay in reaching completion point could mean less relief for Uganda. Mr. Sarbib agreed this was true in that a more distant completion point means less debt to repay and less relief needed.
The exact usage of the Bank's HIPC Trust Fund is yet to be decided, Mr. Sarbib said, but the intention is to use IDA grants as quickly as possible. He stressed that any hesitancy on his part is due to an "excess, not a lack, of transparency." He just did not have all the answers and "we are learning by doing." Mr. Basoga Nsadhu of Uganda heartily supported this Bank acknowledgement of room for improvement and that "we are all students."
Issues of multilateral finance
The working sessions began with presentations by the World Bank, ADB and IMF on the role of multilateral financial institutions in Africa's growth and development. Panelists for other sessions included Dr. Chris Stals, South African Reserve Bank governor, Mr. Nana of BCEAO, and Dr. Benno Ndulu, African Economic Research Consortium Executive Director, on financial sector reform; Mr. John Ross, Vice President of New York Bay Associates, and Dr. A. Maruping, governor of Lesotho's Central Bank, on building and using African capacity for debt management; and Dr. Lemma Senbet, University of Maryland, Mr. Arnold Ekpe, Chief Executive Officer of ECOBANK, and Mr. George Akamiokhor, Director-General of Nigeria's Securities and Exchange Commission, on capital market development and the role of information technology.
Africa is looking better, said Mr. Madavo, its output up from 0.9 per cent in 1994 to 5.6 per cent in 1996 and 31 countries now with positive per capita growth. These gains are fragile and reforms have to be deepened and accelerated, but there is no reason why Africa should not set ambitious growth targets of 8 or 9 per cent.
The Bank's first principle in Africa is to support the new-style political leadership and foster ownership of economic reform. The Bank, Mr. Madavo said, "can't enforce or buy reform in Africa" but must support Africa's own efforts to achieve progress in all areas, including regional integration and human resource development. "The Bank can't go it alone," he declared, stressing the importance of partnership and citing the Bank's major role in the UN System-wide Special Initiative on Africa.
Despite some problems, the Bank's International Development Association (IDA) maintains its critical role by disbursing each year some $2.5 bn of concessional loans to Africa, not to mention the $5 bn raised through the Special Programme of Assistance for Africa (SPA-4) for the next four years. But undisbursed IDA funds now stand at some $8.5 bn due to implementation problems in some of the 500-odd projects under way in Africa.
Among the comments from the audience, Zambia's Finance Minister Roland Penza urged the Bank to take a much keener interest in such problematic areas as public sector reform and retrenchments. Mr. Madavo agreed there are few examples of successful public sector reform, and agreed on the need to "look again" at policy in this area.
There is always routine support for regional integration, noted Mr. Boubacar Ba, Deputy Executive Secretary (Economic Affairs) of the Economic Community of West African States (ECOWAS). But regional structures are inadequately financed and multilatera l development banks are so oriented towards individual states that the latter need the banks' assent to contribute to some regional programmes. Will the multilateral banks get closer in concrete ways to regional structures in the short term?
The World Bank has not felt it possesses the right instruments, Mr. Madavo said. Using the example of the Maputo Corridor, he wondered if the Bank should make a loan to South Africa and a credit to Mozambique. The Bank is open to ideas, particularly from staff of the regional organizations, "so let's worry together" about how to proceed, he said.
On resource mobilization, Mr. Basu said unnecessary tax hikes prompt more tax evasion. It is better, he said, to improve collection, limit exemptions and shift resources from low priority areas "to those on which the multilaterals have been insisting, such as health and education."