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Africa: Debt Update
Africa: Debt Update
Date distributed (ymd): 000921
Document reposted by APIC
+++++++++++++++++++++Document Profile+++++++++++++++++++++
Region: Continent-Wide
Issue Areas: +economy/development+
Summary Contents:
This posting contains excerpts from a press release by Oxfam
International with an analysis of the results of the Heavily
Indebted Poor Countries (HIPC) initiative to date, released in
advance of the IMF/World Bank meetings in Prague. Another posting
today contains a press release from the Africa Fund and statements
calling for debt cancellation from African-American religious
leaders and elected officials. For the full version of the Oxfam
press release and other related documents from Oxfam International,
see http://www.oxfam.org
+++++++++++++++++end profile++++++++++++++++++++++++++++++
HIPC leaves poor countries heavily in debt:
Oxfam International
18 September 2000
Oxfam International ([email protected]) is a network
of eleven aid agencies working in 120 countries throughout the
developing world: Oxfam America ([email protected]),
Oxfam-in-Belgium ([email protected]), Oxfam Canada
([email protected]), Oxfam Hong Kong ([email protected]), Community
Aid Abroad ([email protected]), Oxfam Great Britain
([email protected]), Oxfam New Zealand ([email protected]),
Intermon Spain ([email protected]), Oxfam Ireland
([email protected],[email protected]), Netherlands Organization
for International Development Cooperation (NOVIB) ([email protected]),
Oxfam Quebec ([email protected]).
Oxfam representatives are in Prague and available for interview or
comment: Seth Amgott From Czech Republic 0602 849 881 From abroad
+420 602 849 881 Arup Biswas From Czech Republic 0602 849 882 From
abroad +420 602 849 882
Heavily Indebted Poor Countries (HIPC) Initiative leaves poor
countries heavily in debt
Background
The Heavily Indebted Poor Countries (HIPC) Initiative will figure
prominently on the agenda of the IMF-World Bank annual meeting in
Prague from 19-26 September. Nine countries are currently receiving
debt relief under the Initiative. Current plans are for this number
to rise to 20 countries by the end of the year. The stated aim is
to leave heavily indebted countries with a sustainable debt
profile, and to provide resources for poverty reduction. IMF-World
Bank staff reports, prepared for the annual meeting, have cited
large financial gains for the HIPCs amounting to over $28bn.
Research carried out by Oxfam suggests these headline figures
grossly exaggerate the real benefits of the HIPC Initiative. In the
first in-depth analysis of the implications of the Initiative for
government finances, the research suggests that the annual budget
savings for most countries will be modest. Some countries -
including Senegal, Tanzania and Zambia - will emerge from the HIPC
debt relief process in the perverse position of paying more on debt
servicing. Debt repayments will continue to absorb a
disproportionately large share of government revenue, amounting to
more than 15 per cent in six countries, and to over 40 per cent in
Zambia, Cameroon and Malawi. All but three of the twelve countries
reviewed in the Oxfam research will continue to spend far more on
debt servicing than on health and primary education after they have
received debt relief.
The picture that emerges from the Oxfam research raises fundamental
questions about the adequacy of the enhanced HIPC Initiative. While
the Initiative will significantly reduce both the stock of
unpayable debt and the amount that countries would have to pay
without debt relief, it does not go far enough. Far deeper levels
of debt reduction are needed to leave governments with the capacity
to finance basic services. Oxfam recommends that a 10 per cent
ceiling should be set on the proportion of government revenue
allocated to debt servicing.
Part of the problem with the existing HIPC framework is its narrow
perspective on debt sustainability. Repayment capacity is currently
defined primarily in terms of the debt-to-export ratio. Oxfam wants
to see a more poverty-focussed approach to debt sustainability in
which human needs figure more prominently. It argues that more
weight should be attached to the budgetary burden of debt and the
diversion of public finances away from poverty reduction
initiatives.
As a group, the heavily indebted countries suffer from some of the
deepest and most pervasive levels of poverty in the developing
world. Over half of the population lives below the $1-a-day poverty
line, one-in-six children die before the age of five from
poverty-related diseases, and almost 50 million children are not in
school. To demand that governments in these countries spend more on
debt servicing than on the basic health and education needs of
their citizens is economically irrational, morally unacceptable,
and at variance with the HIPC Initiative's proclaimed goals of
providing a poverty-focussed debt relief framework.
The enhanced HIPC Initiative
The enhanced HIPC Initiative adopted by the Boards of the IMF-World
Bank at the 1999 annual meeting, following the Group of Seven
summit in Cologne, aimed at accelerating and deepening debt relief.
Under the reformed framework, which marked a step forward, the
threshold targets for net present value of debt-to-exports has been
lowered to 150 per cent.
Much has been made by the World Bank, the IMF and the wider
creditor community of the generosity of the new HIPC Initiative.
Headline figures suggest that the amount of debt relief provided to
a group of 32 countries will double to $28bn (in net present value
terms), reducing the average debt-to-export ratio by 41 per cent to
138 per cent at decision point, and to less than 100 per cent by
2005.
Comparing post-HIPC Initiative debt servicing with the amount that
countries would have to pay in the absence of debt relief points to
significant benefits. For the nine countries expected to have
reached decision point, total debt service relief amounts to $9.1bn
- three times the amount projected under the original HIPC
Initiative. This figure will rise to $20bn if the target of debt
relief for 20 countries by the end of the year is achieved.
Documents prepared for the annual meeting in 2000 highlight
dramatic improvements in the debt profile of the HIPCs. The
debt/GDP ration is projected to fall from 47 per cent to 28 per
cent, and the debt service ratio from 15 per cent to 9 per cent.
Scheduled debt payments will fall by $800m.
Such indicators have been used to present a positive picture of the
enhanced HIPC Initiative, notably for media consumption.
Unfortunately, they tell only part of the story. In particular,
they fail to capture the impact of debt relief on government
revenue and budgets. Despite repeated requests from non-government
organisations IMF-World Bank staff have failed to provide any
assessment of the proportion of government finance that will be
diverted to debt servicing after debt relief. ...
The debt relief deficit
In an attempt to assess the real implications of the HIPC
Initiative for government budgets, Oxfam has analysed post-HIPC
debt service projections for 13 countries. Eight of these countries
have reached their decision point and benefit from assistance under
the enhanced HIPC framework. Another four are expected to received
enhanced HIPC support this year. The potential budgets effects of
debt relief were captured by taking the average annual level of
debt repayment projected for the three years after countries reach
decision point. This figure was then compared with government
revenue in the decision point year.
The findings suggest that the benefits of the HIPC Initiative in
terms of reduced debt servicing will be significant for a small
group of countries, negligible for a larger group, and non-existent
for several:
- Increased debt servicing for three countries. Zambia, Tanzania
and Senegal all face an increase in debt service payments. The
largest increase will be in Senegal, where debt service payments
will almost double to $171m, reflecting the large pre-HIPC
Initiative gap between scheduled and actual payments. In Zambia an
increase in repayment to the IMF will raise annual debt servicing
by $75m, or one-third.
- Limited benefits for four countries. Debt service payments will
fall by less than 20 per cent for Burkina Faso, Honduras, Guinea,
Malawi, and Mauritania.
- Significant savings for five countries. Debt servicing will fall
by 30 per cent or more for Bolivia, Cameroon, Mozambique, Rwanda
and Uganda.
One of the aims of the HIPC Initiative is to release resources that
could be used to reduce poverty from debt servicing. Given the
limits imposed on revenue raising capacity by low average incomes,
and the huge scale of unmet basic needs, this is an important
objective.
The data derived from the Oxfam research strongly suggests that
unsustainable debt will remain a formidable obstacle to poverty
reduction efforts. Debt servicing will continue to absorb a large
share of government revenue in most countries, amounting to
- 40 per cent of total revenue in Zambia
- 25-35 per cent of the total in Cameroon, Guinea, Senegal and
Malawi
- 15-20 per cent in Honduras, Mozambique, Tanzania and Mauritania
- 13-14 per cent in Burkina Faso and Mauritania
Implications for public investment in basic services and human
development
The limited budget savings provided through enhanced HIPC
Initiative debt relief means that some of the world's poorest
countries will continue to transfer far more to their creditors,
than they are able to invest in basic services. ...
[In summary]
- there are eight countries in which debt service payments will
exceed the budgets for health and education
- in five of these countries (Zambia, Tanzania, Senegal, Mauritania
and Cameroon) debt repayments will exceed the combined health and
education budgets after debt relief.
It is difficult to square these public-spending outcomes with a
genuine commitment to a poverty-focussed debt initiative on the
part of the donor community. As a group, the heavily indebted
countries are massively off track for achieving the human
development targets set for 2015. These include the halving of
extreme poverty, universal primary education, and a two-thirds
reduction in child mortality. If current trends continue, each of
these targets will be missed by a wide margin. ...
The prospective scenario for individual heavily-indebted countries
underlines the enormous human development costs implicit in the
debt service projections summarised above.
Burkina Faso. Under the HIPC Initiative, Burkina Faso will continue
to allocate around 13 per cent of government revenue to debt
servicing, or around $40m per annum. This amount may appear small
from the industrialised world. But in a country where almost one in
four children die before the age of five from poverty-related
diseases, spending on debt will represent double the spending on
health. Debt servicing will also exceed the education budget, even
though Burkina Faso has among the world's lowest school enrolment
and adult literacy rates. Fewer than a quarter of girls attend
school.
Zambia. In the three years after HIPC debt relief Zambia will be
allocating around 40 per cent of government revenue to debt
servicing - one of the highest levels in the world. These resources
are urgently needed for investment in poverty reduction. Zambia is
one of the countries worst affected by HIV/AIDs. Nearly 13 per cent
of children are orphans (the highest rate in the world), and child
mortality rates are rising. During the 1990s the proportion of
children suffering from chronic malnutrition has risen from 39 per
cent to 53 per cent. As in other HIPC countries, poor health and
education indicators are linked to wider patterns of deprivation,
with over half of the population living below the extreme poverty
line.
Senegal. The newly elected government has committed itself to
ambitious reforms in health and education as part of a renewed
national commitment to poverty reduction. However, its capacity to
deliver on the commitments made will be compromised by foreign debt
servicing. Average debt repayment will be equivalent to double the
combined health and primary education budgets. There is now a real
danger that debt servicing will undermine the Quality Education for
All programme that aims to achieve universal primary school
enrolment by 2008. Although aid flows will partially compensate for
debt servicing, development assistance for education will represent
less than half of government debt repayments.
Malawi. One of the few HIPC countries to have made rapid progress
in education: expenditure on education has doubled as a proportion
of GDP to 5 per cent, with a major redistribution in favour of
primary schools. Free education was introduced in 1994, leading to
an increase in enrolment of around 3 million by 1997. Health
spending has also increased. Despite these positive budget trends,
Malawi faces immense problems. There is an urgent need to improve
the quality of education and to increase the rate of transition to
secondary school. Several key health indicators - such as infant
mortality - have stagnated, partly as a consequence of HIV/AIDs.
Almost 5 million people live below the poverty line. With foreign
debt absorbing around one-quarter of revenue, government capacity
to address these problems will inevitably be curtailed.
Tanzania. Having entered the HIPC Initiative this year, Tanzania
will continue to allocate over one quarter of government revenue to
debt servicing for the next three years. This represents more than
public spending on health and primary education in a country with
over 2 million children out of school, and with 186,000 under-five
child deaths each year.
Wider problems
Inadequate levels of debt relief is just one of the problems
associated with the HIPC Initiative. Despite repeated pledges from
creditors, the pace of implementation remains far too slow. There
are also growing concerns about gaps in the Initiative.
There are several reasons for the slow pace of implementation. In
some cases, unrealistic conditions have been set under the IMF
programmes that eligible countries must comply with in order to
receive debt relief. In Honduras, for instance, debt relief has
been held up because of IMF insistence on more rapid progress in
the country's privatisation programme. In other cases, weak
management appears to have been responsible. Malawi could have
received debt relief in May had IMF and World Bank staff completed
their debt sustainability analysis earlier. The delay may cost
Malawi around $50m in interim debt relief, if it enters HIPC in
November as planned.
Several countries potentially eligible for debt relief are affected
by conflict. Earlier this year the British Chancellor Gordon Brown
outlined an initiative aimed at using debt relief as an incentive
for peace and reconstruction. The recent cease-fire in the war
between Ethiopia and Eritrea provides an important opportunity for
the creditor community to put this commitment into practice.
Failure to provide Ethiopia with debt relief will leave the
government facing chronic public financing problems. Scheduled debt
service payments amount to 60 per cent of export earnings.
HIPC initiative eligibility currently extends to a group of around
40 low-income countries. That group does not include Nigeria, which
is Africa's largest debtor. Nor does it include chronically
indebted lower-middle-income countries such as Jamaica. The next
phase of HIPC reform needs to develop strategies for extending the
debt relief remit to other countries where unsustainable debt
threatens poverty reduction efforts.
An agenda for reform
The enhanced HIPC Initiative is failing to realise its potential.
Urgent reforms are needed to deliver on the commitments made by
creditors to provide a permanent exit from the debt crisis. Failure
to act will undermine efforts to link debt relief to national
poverty reduction efforts.
During the annual IMF-World Bank meeting in Prague Oxfam is calling
for:
- A new approach to debt sustainability. It is fundamentally
unacceptable for countries suffering widespread extreme poverty to
spend more on debt servicing than they invest in the health and
education of their citizens. No country emerging from the HIPC
Initiative should be required to allocate an amount equivalent to
more than 10 per cent of revenue to debt servicing. IMF-World Bank
debt sustainability analyses should include projections for the
amount of government revenue to be allocated to debt servicing.
- Immediate debt relief to countries which commit to a 'Poverty
Fund' in the Interim Poverty Reduction Strategy Paper (PRSP): There
is an urgent need to accelerate implementation of the HIPC
initiative, and to strengthen the linkage between debt relief and
poverty reduction. Current approaches have become unduly
bureaucratic, causing delay in the provision of debt relief. New
approaches to eligibility are urgently needed. At the decision
point governments should be broadly on-track with their
macro-economic programmes. But the key requirement for entry into
HIPC should be the development of a poverty action fund, detailing
how debt relief finance will be allocated to poverty reduction
initiatives. Implementation of the fund would be monitored by
government, civil society and donors. Obvious priority areas would
include health, education, rural roads, water supply and employment
generation programmes. Such an action fund was pioneered in Uganda,
where a Poverty Action Fund helped to finance Universal Primary
Education, basic health and rural feeder-road programmes. The use
of debt relief to eliminate charges for basic education and health
is one option with potentially large human development returns.
- Immediate and generous debt relief for Ethiopia. There is now a
real opportunity for using debt relief to underpin the peace in
Ethiopia. Having already been assessed under the original HIPC
Initiative framework, Ethiopia should immediately be reassessed and
provided with debt relief geared towards poverty reduction.
- The extension of the HIPC framework. IMF-World Bank staff should
review the debt sustainability of countries such as Nigeria and
Jamaica not covered by the existing HIPC framework, but facing
chronic debt problems.
This material is being reposted for wider distribution by the
Africa Policy Information Center (APIC). APIC provides
accessible information and analysis in order to promote U.S.
and international policies toward Africa that advance economic,
political and social justice and the full spectrum of human rights.
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