A year-end sprint for debt relief

Ten more African countries qualify under HIPC initiative

By Christina Katsouris

In a race against the clock, debt officials at the International Monetary Fund (IMF) and World Bank made a last-ditch push to meet their target of approving debt relief for a score of the world’s poorest countries by the end of 2000. By meeting the goal, they succeeded in staving off some of the mounting criticism of their Heavily Indebted Poor Countries (HIPC) initiative.

In addition to concerns about the strict conditions attached to debt relief under the initiative, many critics had cited its slow and cumbersome process. Just a few months earlier, at the September 2000 meeting of the IMF and World Bank boards of governors in Prague, only 10 potentially eligible HIPC countries actually had qualified for debt reduction. There was considerable skepticism as to whether the creditors would reach the 20-country target set in 1999 when they "enhanced" the original HIPC scheme.

Cameroon, a new HIPC qualifier, is a major timber exporter. But uncertain commodity prices may affect the real impact of debt relief in the coming years. Photo: UNICEF/Dannielle B. Hayes

At HIPC’s initial launch in 1996, the overall goal was to reduce the debt stock of up to 41 debt-distressed countries, including 33 in Africa. The initial scheme had such disappointing results in its first two years of operation that debt lobbyists pressured creditors to reform HIPC in 1999, to deepen relief and enable more countries to qualify faster.

In a bid to strengthen the credibility of HIPC, the IMF and World Bank further streamlined conditions for approving relief at the Prague meeting, in order to provide debt relief faster (see Africa Recovery, October 2000). Their main objective was to get as many countries as possible to the "decision point," the stage at which creditors approve actual debt reduction, provided further reforms are undertaken. The decision point is an important milestone because it entitles a country to "interim" debt relief, which can substantially reduce debt service payments until a country reaches "completion point" when creditors fully write off the debt stocks covered under the initiative.

From Prague until the end of the year, the IMF and Bank agreed that an additional 12 countries had met the requirements for "decision points," including 10 in Africa: Cameroon, the Gambia, Guinea, Guinea-Bissau, Madagas-car, Malawi, Niger, Rwanda, São Tomé and Príncipe, and Zambia.

These deals raised the number of countries now qualifying under HIPC to 22, of which 18 are in Africa. Those qualifying earlier included Benin, Burkina Faso, Mali, Mauritania, Mozambique, Senegal, Tanzania, and Uganda. The agreements, which include additional debt relief for countries which had qualified under the earlier version of HIPC, increased the amount of debt that would be written off to $14.3 bn in net present value (npv) terms — the value of the debt if it were repaid in a lump sum today.

Zambian deal

Among the newly qualifying African countries, Zambia’s deal was by far the largest. Approved in early December, this will reduce the country’s debt by almost $2.5 bn in npv terms.

Zambia had posed a particularly serious threat to HIPC’s credibility. Initially, it appeared that the country would pay more debt service in 2001 — its first year of interim assistance — than it paid in 2000. IMF projections at mid-year calculated that with normal interim HIPC assistance, Zambia’s debt service payments would rise to $225 mn from the $136 mn projected for 2000. This was mainly because the decision point coincided with the end of a long grace period on the payment of arrears which Zambia owes to the IMF.

In November, the IMF agreed to bend the rules and provide more debt relief for Zambia earlier than normal HIPC conditions allow. The IMF now says this should reduce debt service payments below outlays in 2000, but did not specify by how much. More recent calculations by Zambian Finance Minister Katele Kaumba, which differ from those of the IMF, project debt service at $140 mn in 2001, compared with $160 mn in 2000.

More potential candidates

Several more African countries are slated for possible decision points in early 2001, including Ethiopia, Chad and Côte d’Ivoire. Another 12 countries — nine in Africa — are some way off from getting any form of debt relief. Sudan, Somalia and the Democratic Republic of Congo, for example, do not have a working relationship with the international financial institutions. Others, such as Sierra Leone, have had their economic reform efforts stalled or set back by ongoing civil conflict.

In yet other cases, Ghana has declined HIPC relief on the grounds that a debt write-down would compromise development assistance from Japan. Kenya and Angola are not eligible because their debt can be reduced to levels deemed "sustainable" through other debt relief mechanisms.

Making a difference?

While the debt deals for the first 20 countries would appear to save debtors a substantial amount of money, critics argue that HIPC still does not go far enough to make a material difference to debtors (see boxes). The IMF moved to counter such arguments in late November, with data* showing the impact of debt relief on the first 11 countries approved under the enhanced HIPC, nine in Africa (see table). Since these IMF projections are based on optimistic assumptions about future export values — and actual commodity prices have sometimes fallen short of those assumptions — the Fund’s projections on the real impact of debt relief should be treated with caution.

The Fund data shows that the earliest qualifiers, Uganda and Mozambique, which reached completion point under the original HIPC in 1999, have seen sharp falls in outlays for debt service, reflecting the fact that both countries have had debt stocks reduced. Uganda’s payments fell from $110 mn in 1998 to $48 mn in 2000, while Mozambique’s fell from $104 mn to $50 mn during the same period. More importantly, the ratio of debt servicing to export earnings of both countries declined substantially. Mozambique’s ratio fell from 19 per cent in 1998 to 9 per cent in 2000, and should fall further after it reaches completion under the enhanced HIPC. Uganda’s ratio declined from 16 per cent to 5 per cent.

Countries receiving interim debt service relief on the basis of decision points reached in 2000 also will pay less than they did in the previous three years. Cameroon’s payments will fall from $312 mn in 2000 to $226 mn in 2001, Benin’s from $63 mn to $46 mn and Mali’s from $88 mn to $64 mn. The relief will make less of a difference to Tanzania, where payments will fall by only $12 mn, to $142 mn.

Significantly, however, the Fund projections also show that for six of the nine African countries cited, debt service payments will rise again by 2005, although to levels below outlays before their decision points. The worst case is Uganda, where debt service is scheduled to rise to $103 mn in 2005.

Some economists argue that the more important measures for these countries would be their future debt service ratios. The IMF data suggests that seven of the nine African countries will pay less debt service relative to income over the same period. For example, Benin’s ratio is projected to fall from 17 per cent of exports in 2000 to 6 per cent in 2005, while Mali’s is expected to halve to 7 per cent over the same period. Again, whether these ratios actually will be borne out depends on the accuracy of the Fund’s assumptions about world market prices for the commodities that Africa exports.

* The Impact of Debt Reduction under the HIPC Initiative on External Debt Service and Social Expenditures, IMF, November 2000.

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