In February 2000, Bolivia and Uganda became the first countries
to qualify for debt reduction under an improved package for the
world's most heavily indebted poor countries (HIPCs). Also in
February, the World Bank and International Monetary Fund (IMF)
approved a deal for Mauritania, promising debt relief once it
reaches the macroeconomic targets. It must also draw up an approved
poverty reduction strategy paper (PRSP). This is a key condition
of the enhanced HIPC terms. In a related development, the United
Kingdom and Germany confirmed their intention to write off 100
per cent of the export credit debts of countries that complete
their HIPC programmes (see box below).
The heavily indebted poor countries often spend more on external debt payments than on health or education.
Photo: © UNICEF / Douglas Clement (ref # 2728/89)
Launched in 1996 by the IMF and World Bank, the original initiative (HIPC-1) aimed to reduce to "sustainable" levels the external debts of the world's poorest countries. Of the 41 countries initially listed by the IMF and World Bank as candidates for the deal, 33 were African. In 1998, Uganda and Bolivia became the first countries to qualify for full HIPC treatment involving actual debt reduction. With only five other countries signed on for HIPC treatment as the new millennium approached, the Group of Eight major creditor countries agreed in June 1999 to enable faster qualification by more countries for more substantial debt relief.
This followed an increasingly vigorous international campaign in favour of debt cancellation led by Jubilee 2000, a coalition of non-governmental organizations and prominent individuals. It contrasted the largely "unrepayable debts" with the often desperate social and economic conditions in these countries.
Finance ministers of the major creditors agreed on an enhanced
HIPC package (HIPC-2) in September 1999 which relaxed the strict
criteria for eligibility and made a clearer link between debt
relief and poverty reduction. The PRSP is a central condition
for securing debt relief under HIPC-2. It aims for more effective
coordination of debt relief, creditor aid and approved changes
in national economic and poverty reduction policies. Some also
regard the PRSP as a mechanism to democratize this process because
creditors require civil society to participate with governments
in formulating the PRSPs.
Jubilee 2000 has welcomed this link and the participatory process. However, it observes that the creditors' list of actual or potential HIPCs is now down to 24 countries and that the new PRSP criterion "appears to have delayed further the delivery of debt relief."
In the case of Uganda, the terms it got under HIPC-1 are bringing it $374 mn in debt relief. Under HIPC-2 terms, Uganda stands to gain additional debt relief of $700 mn in net present value (NPV, the discounted market value of debt if repaid in one lump sum). Over the next 38 years, the IMF calculates, the deal will cut Uganda's debt-service payments by $2 bn in nominal terms, or $1 bn in NPV terms. However, the gains from HIPC-2 will start to take effect only after Uganda has finalized its PRSP and has had it endorsed by the Bank and IMF, perhaps in May.Bilateral creditors will provide half of Uganda's relief under HIPC's burden-sharing rules. The World Bank will write off some $357 mn through its soft-loan arm, the International Development Association (IDA), and IMF relief will total $91 mn, all in NPV terms. Other multilateral institutions will account for most of the balance, with the African Development Bank's portion of Uganda's package funded by bilateral creditors through the HIPC Trust Fund. The Trust Fund is the mechanism through which governments will supplement or cover the outlays of poorer multilateral institutions unable to provide their share of relief.
In
Mauritania's case, while it qualifies for some immediate reduction
in debt-service payments under HIPC-2 guidelines, it will get
actual reduction of debt stock only when it reaches certain macroeconomic
targets, draws up a satisfactory PRSP and implements this for
one year. Mauritania qualified due to severe fiscal stress --
in 1998, its ratio of external debt to government revenue was
363 per cent and its debt-to-export ratio around 266 per cent.
The deal will reduce Mauritania's debt by $622 mn in NPV, or about
40 per cent of its total debt at the end of 1998. Debt-service
payments could also fall by $1.1 bn in nominal terms over the
next 40 years, and around $36 mn annually in the first 10 years.
Despite delays in securing a $600 mn US contribution to HIPC-2, prospects for implementing the new package appear slightly better than before. Other creditors, who have the right to withdraw funds and pledges if the US fails to pay its share, remain committed. Most also expect that the US Congress -- which refused to authorize the Clinton government's request for HIPC funding late last year -- will approve the funds towards the end of this year, World Bank sources told Africa Recovery. Signaling this confidence, the Bank, which oversees the HIPC Trust Fund, has retained the US pledge on its list.
HIPC-2 guidelines require creditors to commit their debt relief in full when countries reach "decision point" (when a country qualifies for a timetable of policy monitoring), and also to lower the debt-service payments due between decision point and "completion point" (when actual debt reduction begins).
The
IMF and World Bank appear confident that creditors are ready for
any African countries that may reach decision or completion point
this year. However, they do not rule out longer-term difficulties
if new pledges are not forthcoming. For now, it appears unlikely
that many on the 24-country list will progress to the point of
needing debt-relief commitments this year. The IMF acknowledges
that cases have fallen behind even the most recent schedule. Also,
the PRSPs could take quite some time to draw up, given the extensive
work required to consult and involve local civil society.
Published in December, the latest available schedule showed pre-flood Mozambique approaching its HIPC-2 decision point in June 2000. The IMF expected decisions before April on newly qualified Tanzania and on Benin and Senegal, which failed to qualify under the tougher HIPC-1 criteria but could qualify under HIPC-2. Countries due to reach decision point between April and June include Burkina Faso, Mali and Côte d'Ivoire. Like Uganda, they qualified for HIPC-1 relief and qualify for additional relief calculated on HIPC-2 criteria. Cameroon and Guinea-Bissau could in turn reach decision point before July. However, the December 1999 coup d'état in Côte d'Ivoire and the only recently ended conflict in Guinea-Bissau suggest delays.
UK and Germany to write off HIPC trade debtsIn late December, the UK, which already writes off the development aid debt of least developed countries, confirmed plans to cancel all the trade debts owed to it by countries completing HIPC programmes. These debts arise from trade credits insured by the UK government's Export Credits Guarantee Department (ECGD) and could be converted into grants. The debts amount to around $3 bn, according to ECGD calculations. This includes $2.5 bn of debt incurred before the cut-off date (when a country had its first rescheduling of bilateral debt by the Paris Club) and some $475 mn in post-cut-off-date debt incurred by 31 December 1999. UK officials estimate that write-offs would be around $1 bn. However, it is not clear whether or not this amount includes Ghana, which alone accounts for some $396 mn of the post-cut-off-date debt. Ghana declined consideration for HIPC treatment because, some say, it would otherwise have to forego new aid from Japan, its biggest aid provider. Germany's plan, announced in January by development minister Heidemarie Wieczorek-Zeul, also includes writing off trade and aid credits for the world's 30 poorest countries, including borrowers graduating through the HIPC process. German officials say their plan will cancel debt worth some $5 bn. Germany's total claims on the poorest countries are estimated at $6.1 bn. State of the HIPC Trust FundSo far donors have allocated $326 mn, led by the Netherlands, which has put up more than $100 mn and earmarked a further $88 mn. Current pledges total $1.6 bn, from the European Union (over $700 mn), the US ($600 mn), the UK ($200 mn), Germany ($80 mn) and Italy ($70 mn). Canada has also made a formal pledge, but has yet to state the amount. The World Bank says several other countries have informally indicated that they intend to contribute to the Trust Fund but have yet to make formal commitments. |
