New debt deal on shaky ground

Stance of US Congress raises doubts about total funding for revised HIPC debt relief package

By Christina Katsouris

Late last September, governors of the International Monetary Fund (IMF) and World Bank approved changes to the heavily indebted poor countries (HIPC) initiative. This annual meeting in Washington of senior officials of creditor and debtor countries resulted in the promise of deeper and faster debt relief for more -- mostly African -- HIPC candidates, and a stronger focus on poverty reduction. But in mid-November, the US Congress refused to authorize $600 mn in US financing for the HIPC Trust Fund, one of the main vehicles for channeling debt relief. This could delay implementation of the new measures, or at the very worst, risks causing the whole deal to unravel.

There had been extensive horse-trading over the US budget. Congress approved $110 mn for President Bill Clinton's plan to write off 100 per cent of debts owed to the US by any country qualifying for HIPC relief. This goes further than most other bilateral creditors that have so far agreed to limit relief on HIPCs' bilateral commercial debt to around 90 per cent in most cases. Congress also approved gold sales by the IMF to finance part of the Fund's $2.3 bn contribution to debt relief.

Photo: IMF

But the rejection by Congress of President Clinton's request for the Trust Fund could have repercussions. That Trust Fund channels the contributions of all other multilateral institutions to HIPC debt relief. Mr. Clinton had pledged the $600 mn to top up the contributions of poorer multilateral banks -- notably, the African Development Bank -- unable to fund their share (see box 1 below).

According to analysts, some $7 bn may be needed in 2000 to cover debt relief deals. Recent pledges from major creditors had made this target attainable -- only $350 mn of financing still needed to be found. The Congressional decision has widened the financing gap to $950 mn. It may have also undermined the pledges of other creditors due to the interlocking nature of their commitments. This "burden-sharing" principle has been fundamental to the HIPC initiative. It binds all creditors in a series of bilateral and multilateral deals with debtor countries intended to reduce their total debt to "sustainable" levels.

Despite the setback, some debt lobbyists are not yet writing off the revised debt relief package. They say the very fact that the US Congress approved two of Mr. Clinton's three requests for debt relief, against competing claims ahead of an election year, demonstrates sizeable support for debt relief in the US legislature.

"There could be a supplemental appropriation early next year that would enable countries to get debt relief as they become eligible," Ms. Lydia Williams of Oxfam International told Africa Recovery. "We are confident that there is sufficient momentum behind HIPC for us to win on the third part of the deal." One sign of such momentum is the recent statement in support of HIPC by Mr. Pat Robertson, an influential leader among US religious conservatives.

There are also signs that the decision by Congress has not dampened the enthusiasm of other creditors. The UK government has been considering proposals to follow the Clinton plan to raise relief on bilateral commercial debt to 100 per cent. Other bilaterals and the World Bank remain fully committed to implementing HIPC-2.

The setback has nonetheless unnerved World Bank and IMF officials who aim to reach decisions on the eligibility for HIPC debt relief of at least 10 countries in 2000, eight of which are African. The schedule includes Ghana, Cameroon and Madagascar, which are expected to qualify by virtue of the lower targets set in the new package -- "HIPC-2" -- for debt "sustainability." Countries may now be eligible if their debt payments exceed 150 per cent of exports or 250 per cent of revenues in net present value terms (the sum of all future debt service obligations discounted at the market interest rate). The old package -- "HIPC-1" -- stipulated 200-250 per cent of exports and 280 per cent of revenues.
Preliminary analyses of debt "sustainability" have been completed for Tanzania and Mauritania, and work is under way on Chad, Zambia, Malawi and Guinea, officials say. Progress on Ethiopia and Guinea-Bissau has been delayed by armed conflict.

It is not clear how the current funding uncertainties will affect Benin and Senegal. In 1998, World Bank and IMF analyses concluded that their debt could be made "sustainable" through pre-HIPC relief mechanisms -- notably rescheduling and some cancellation of debts owed to the Paris Club of bilateral creditors.

Also due for review are Côte d'Ivoire, Burkina Faso and Mali. They were deemed eligible for HIPC-1 and concluded agreements on debt relief with their major creditors. Now, the amount of relief should be recalculated to reflect the new "sustainability" ratios of HIPC-2.

Mozambique and Uganda should qualify for additional and backdated relief on HIPC-2 terms, to supplement relief gained under HIPC-1. As the first African country to qualify for actual debt reduction on HIPC-1 terms in April 1998, Uganda welcomes the new deal. Before HIPC-1, "we were paying $160 mn a year" in debt service, says Mr. Emmanuel Tumusime Mutubile, Uganda's permanent secretary to the Treasury. Now, debt repayments would fall from $120 mn a year on HIPC-1 terms to around $40 mn under HIPC-2.

Uncertain funding for HIPC-2 The new deal will cost creditors around $27 bn to provide relief to 36 countries, roughly double the funding required for HIPC-1. Bilateral creditors are to contribute around $13.5 bn by writing off up to 90 per cent of commercial debt, and "more if necessary" to reduce each HIPC country's debt to "sustainable" levels. The IMF contribution to HIPC-2 is $2.3 bn, the World Bank's is $5.1 bn and that of other multilateral institutions is $6 bn. However, some regional institutions, including the African Development Bank, are not fully able to finance their share. Bilateral creditors and the IMF have agreed to put money into the HIPC Trust Fund to cover the shortfall. The HIPC-2 package aims to deliver debt relief sooner than under HIPC-1, which set a basic six-year time frame before actual debt reduction. Under HIPC-1, after being deemed eligible, a country would continue servicing its debts at old rates while successfully meeting performance targets during two successive periods of IMF monitoring under the enhanced structural adjustment facility (ESAF). The first three years would bring it to "decision point," when creditors set the final targets for "sustainable" debt. The second three years would bring a country to "completion point," when it would begin to get debt reduction. Now, HIPC-2 provides for "interim relief" that reduces debt service payments during the monitoring period. It also introduces "floating" completion points. Rather than a period of up to six years before actual debt reduction, the floating system in theory enables a debtor to qualify for debt reduction as soon as it has successfully implemented macroeconomic and poverty reduction policies agreed with the IMF and World Bank. Already, there are lessons to be learned from HIPC-1. One of these is that not all creditors are major industrialized countries. Uganda reports that Libya, India, Nigeria, Burundi, Pakistan and Iraq have refused to reschedule or reduce bilateral debt, arguing that they are not in a position to do so.

US debt cancellation plan pressures other creditors President Bill Clinton announced at the IMF/World Bank annual meetings last September that the US would cancel 100 per cent of concessional and commercial debts owed it by HIPC candidates. This amounts to $3.5 bn. The US would write off debt service as it becomes due beginning at the HIPC decision point, and provide full debt stock cancellation at completion point. Some observers said the precedent would help put pressure on other bilateral creditors to adopt comparable terms for HIPC countries. So far, it seems to be doing so. Japan has indicated that it is prepared to write off 100 per cent of aid credits, a policy already followed by the UK and some Nordic countries. However, the Japanese government seems to have added an important rider to its decision, stipulating that beneficiaries of such debt cancellation would not be eligible for new Japanese aid. This puts Ghana in a dilemma, as Japan is its largest bilateral donor. Ghana is now thought likely to decline HIPC assistance to avoid foregoing future Japanese aid. Malawi is expected to follow. The UK is considering proposals to write off up to 100 per cent of HIPC commercial obligations -- debts incurred mostly on export credits insured or funded by governments. Such a write-off would cost the UK £5.25 bn ($8.6 bn), which is more than double US claims.

*******