Going Beyond the HIPC Initiative: Another Pathway to Achieving Freedom from the Burden of Debt

Problems with the HIPC Initiative
The need to find another approach to the Third World debt problem has become more apparent in the time since the World Bank and the International Monetary Fund (IMF) launched their program of debt relief for the Heavily Indebted Poor Countries (HIPCs). This program, the HIPC Initiative, has been generally criticized for providing too little for too few countries, over too long a time period.

More specifically, the criticisms have been focused on:

The time period. Completion of the debt relief process could take years, the model being six years of successful completion of structural adjustment requirements. This is widely viewed as a serious weakness of the problem given the urgency of the situation for people in the poor countries that have debt problems.

Eligibility. The eligibility criteria uses macro-economic indicators, particularly debt-to-export ratios, to evaluate the capacity of a country to carry its debt load. This evaluative method has been expanded somewhat, with the inclusion of so-called fiscal indicators, which take into consideration the role of export earnings in gross domestic product. This method has been criticized because (1) it does not include social indicators which reflect quality of life in a country and (2) "acceptable" levels of debt are those set by the Bank and IMF, and they are very high.

Conditionality. Debt relief is conditional on the successful completion of years of strong structural adjustment programs. These programs have been criticized of themselves, and the use of the debt problem as a lever for opening economies to IMF/Bank-directed restructuring has been criticized considerably.

The concept of "debt sustainability". The World Bank and IMF are criticized for assuming that a certain level of debt service is acceptable for the poor countries, regardless of social conditions or the arguments that many debts are considered to have been fraudulently incurred or otherwise inappropriate for repayment.

The closed process. The Bank and the IMF are criticized for their almost exclusive control of the process. Eligibility and the amount of debt relief provided depend on the Debt Sustainability Analysis done by Bank and IMF staff, with little room for input by the government of the target country, and none at all by civil society.

The level of debt relief. There is serious concern about whether the level of debt relief that will be available through the HIPC Initiative will be sufficient to free up adequate resources for improvement in developmental sectors like health and education. For example, debt service for Mozambique for the years before and after HIPC Initiative action do not reflect a real improvement in the country?s situation:
Year 1995 1996 1997 1998 1998 2000 2001 2002 2003
Debt service (in $US millions) 111.7 131.2 96.7 108.5 95.7 96.9 100.9 96.6 100.2

A new, supplementary program of debt relief
Improving the effectiveness of debt relief for the poor countries will best be achieved if a way can be found to address these problems, either by improving the HIPC Initiative as it is now formulated, replacing it with a better program, or supplementing it in some way that can make the best of what the HIPC Initiative does provide.

This proposal takes the third approach, reasoning that replacing the HIPC Initiative with another program is not an option at this time. The HIPC Initiative was difficult enough to set up in its own right, and enjoys considerable support as it is. On the other hand, improvements to the HIPC Initiative are indeed desirable, and work to this end should not be slowed. However, the urgency of the debt situation for many countries, along with the other criticisms of the current program that are listed above (especially the problem of the time required for implementation), it is necessary to consider creating another program which moves efficiently, and with a reasonable expectation of success given a certain level of political will, to effective debt relief over the short term. Ideally, this new program should build on what has already been achieved with the establishment of the HIPC Initiative.

Another consideration is the extent to which debt relief either becomes part of, or supports in some way, the overall development strategy of a country. Since the need for debt relief is propelled by concern for the well-being of people in the poorest countries, it follows that debt relief should, where possible, be placed in the context of a broad development process.

The "ownership" of development programs has been the focus of concern, most recently expressed in the report on the IMF?s external evaluation of its Enhanced Structural Adjustment Facility:

"Many interviewees felt that the Fund too often simply imposed its will, was generally insensitive to genuine constraints on policy making and the pace of implementation, and was too quick to dismiss policy options favored by the government... At the bottom of all the concerns they reflect, is a feeling of a loss of control over the setting of the policy agenda in reform programs."

This report recommends, as so many people have argued in the past, that countries need to be able to formulate their own vision of development. A program of debt relief should be situated in the desire to see autonomous development programs cultivated at the national level, and not imposed by the international financial institutions.

Proposed program
A proposed program is very briefly outlined here, followed by a discussion of the reasoning behind the different aspects of the program. This "Autonomous Development Process" attempts to locate debt relief within a developmental context, as a way of addressing some of the shortcomings of the HIPC Initiative. Placing debt relief in this kind of context allows for a broader inclusion of factors that feed into the discussions on eligibility, conditionality, the level of debt relief , and other aspects of the HIPC Initiative that have been found to be insufficient for effective debt relief treatment.

The process that is proposed would include these elements:

Any IDA-only country could apply for an immediate reduction in its debt service requirements, following the design and presentation of a comprehensive development and poverty reduction plan by its government.

The development and poverty reduction plan would be autonomous, prepared by the officials of a country or their designates. Debt service targets would be set in the context of the development strategy, as opposed to a fixed, pre-determined concept of economic indicator relationships.

Short-term reduction in debt service could be achieved primarily through rescheduling - setting the debt back a few years. The program would not provide a reduction in the total debt outstanding, but rather the purpose would be to provide relief from debt service requirements until comprehensive debt reduction can be achieved, with the longer-term goal of removing completely the burden of debt from the poorest countries.

The process would thus proceed in this way:
1- Formation and presentation of a national development strategy by country officials

2- Approval of development plan

3- Immediate reduction in debt service

4- World Bank/IMF Debt Sustainability Analysis and Other mechanisms to eliminate debt

5- HIPC Initiative implementation

The approach suggested in this proposed program answers several concerns:

Speed. Reduction in debt service would be immediate. Since relief would not wait for a full Debt Sustainability Analysis and follow-up HIPC Initiative negotiations, the only time delay should come as a result of failure, on a country's part, to provide the development strategy.

Eligibility. The program allows a move beyond the strict macroeconomic criteria to an eligibility platform based on poverty concerns. A shift to the IDA classification would provide assurance that the final objective of these debt relief programs is an improvement in the condition of life for people in the poor countries. As it is, IDA countries are already eligible to apply for relief through the HIPC Initiative.

Number of countries affected. This program could provide debt relief to more countries than would be successful HIPC Initiative applicants.

Ownership and conditionality. The onus is on the country to come up with a development strategy. The evaluation and acceptance of a proposed development plan would have to be done in an open manner, with public access to any documents and proceedings, if there is to be an assurance of real ownership by the country, and by its citizens.

The assumption of responsibility by a national government for comprehensive economic development planning should also provide for a higher likelihood of success in the completion of economic restructuring necessary to satisfy the IMF and World Bank requirements for the HIPC Initiative.

Resource concerns. There continues to be lingering concern about the resources required to finance the HIPC Initiative. This program would not require write-offs up front. Actual debt reduction would come over time, as countries are assessed under the HIPC Initiative case-by-case approach. In other words, relief from the symptoms of a debt problem would be achieved over the short term, but addressing the problems of the debt itself, in the context of a comprehensive development strategy, would come over the medium and long terms.

The concept of "debt sustainability". The formation of a comprehensive development strategy could allow for the establishment of debt service levels that are appropriate for a country?s economy in the context of the demands that are placed upon it, both in the present tense and in terms of future considerations. A strict debt service-to-export ratio may not be the best indicator to use, given what might be required for the successful implementation of a development plan.

Improving the HIPC Initiative. The implementation of this program would not preclude any improvements to the HIPC Initiative, which should still be part of the debate in the time ahead. It should be expected that lessons learned from the implementation of this program would be helpful in this process, however, so that the HIPC Initiative could be expected to improve and be more efficiently applied in the future.

Finally, it must be assumed that developing countries will need access to resources to produce autonomous development programs. There is a role for countries like Canada, which have shown strong support in the past for country-based initiatives. The provision of financial support and development expertise can, for example, be done in cooperation with other, like-minded countries through an "Autonomous Development Process" fund, which could pool resources that could be accessed by countries interested in formulating a poverty reduction program.

Document prepared by Derek MacCuish, Social Justice Committee of Montreal