Where the Heavily Indebted Poor Country (HIPC) Initiative for debt cancellation is failing.

The HIPC Initiative debt relief program does not achieve its main objective: a permanent exit from the burden of debt. The international community's main debt relief effort has serious problems in too many important aspects:

• Debt relief payments by countries that have completed the program, and by countries with programs underway, continue to be a substantial drain on their economies, stunting efforts at productive development.
• The program is slow, producing only eight graduates of more than forty candidates since it was launched in 1996.
• It is laden with conditions, primarily generic economic reform programs that have failed to produce economic growth results while failing to shield the vulnerable.

No exit for indebted, impoverished countries

The continued drop in commodity market prices and the global economic downturn, coming on top of over-optimistic IMF projections of economic growth, has contributed to a worsening outlook for indebted countries. This holds true also for those that have received debt relief, to the extent that their promised "exit" from the debt crisis is not materializing.

Delays in implementing the HIPC Initiative program means that most eligible countries still have a substantial drain on their budget. This crowds out spending in more productive areas and discourages investment, while encouraging high-cost short term borrowing.

The delays mean a reduced probability of achieving the exit originally targeted. As the "cut off" date for the debts that are eligible for treatment recedes into the past, new borrowing drives countries' indebtedness to higher levels.

The role of the World Bank, as the main creditor to impoverished countries, is substantial in both older debts and new lending. The Bank has refused to consider the full cancellation that is the common position in wealthy countries. It is also engaged in actively promoting new borrowing throughout the Third World, without adequate oversight or accountability to the people who will inherit the debts created.

Delays and conditions

Every country seeking debt relief must comply with an IMF-directed program of economic restructuring. This usually includes cuts to spending, the sale of state enterprises to private owners, and layoffs in the public service.

Honduras is stalled in the HIPC Initiative in large part because the financial institutions judge that the government is paying teachers too much. Senegal's delays relate largely to public spending and the slow process of privatizing its peanut production. Guyana is delayed in large part because the government wasn't cutting public spending and restructuring its sugar, mining, and public utilities - through privatization or private-sector management contracts and worker layoffs - quickly enough.

Of the twenty countries eligible for relief, up to half have been regularly off-track with their adjustment programs and thus are not making progress to the "Completion Point" and full treatment. (1) 

Resources

The World Bank and IMF argue that they does not have the resources necessary to write off the debts of the poorest countries without imperiling its operations and credit rating. The argument is summed up in the September 2002 edition IMF magazine IMF Survey:

Total debt cancellation would imperil the funds that multilateral creditors would have for future lending and would come at the expense of resources available to other developing countries, some of which are equally poor but have less external debt. Over 80 percent of the world's poor live in countries that are not HIPCs. For the IMF, total debt cancellation would exhaust the resources that finance the Reduction and Growth Facility (PRGF) and the HIPC Initiative, and the IMF would have to stop providing concessional support to its poorest members. [Emphasis added]

Reluctance to consider full cancellation of multilateral debt is due more to political and ideological factors than economic. This sometimes results in positions that are apparently illogical, as in one argument presented in the paragraph above, that debt cancellation would mean less funding for debt relief.

There is a reluctance to consider full resources of the institutions, especially of the World Bank, the largest single creditor to impoverished countries. A glance at the finances of the Bank is sufficient to indicate that the argument of resource constraints should be questioned.

From the World Bank Annual Report 2002:

 Conclusions

The failure to provide the exit from the burden of debt that was the stated objective of the HIPC Initiative is due to inadequate slow delivery to eligible countries. This in turn is due in large part to delays associated with required economic reform programs that most observers would agree are difficult to implement, and that many agree are inappropriate given local contexts.

The reluctance of the World Bank to provide relief on a par with bilateral creditors is a contributing factor to both delays and depth of relief. Full use of World Bank resources would assist in accelerating the program and allow greater prospects of achieving the exit that is desired.

What has HIPC debt relief meant? The Uganda case.

Uganda was the first country to complete the HIPC Initiative, and subsequently received treatment via the "enhanced" program which provides deeper relief. The country continues to struggle with high levels of debt, with yearly payments to average a projected $US87 million for the next ten years. Payments will then increase steadily after 2010 as current loans become due.

Even with full treatment, Uganda paid US$45 million wealthy countries and multilateral creditors like the World Bank in 2000/2001. An IMF/ World Bank assessment in August 2002 considers that "Uganda's debt sustainability situation is expected to deteriorate further over the near term." (2)

The World Bank now provides statistical information that makes it easier to see what these payments are for. (3) Uganda is scheduled to make payments to the World Bank totalling US$17.97 million,.for example, in the first four months of 2003.

A close look at one of these payments gives a sense of what the loans originally were for, and why they should have been cancelled years.

Payment due World Bank 15 February 2003. (4)

Of this payment, over half - $1.53 million - is for a 1982 structural adjustment loan by the World Bank. (5) (Over $276 thousand of the payment on this loan is for charges. As the table indicates, one third of the payments due are in charges.)

There was no lasting benefit of this loan for the people of Uganda. The structural adjustment program "fell apart in 1985 as a result of the spending pressures brought on by the civil war and the limited commitment of the political leadership. By 1986 few signs of this adjustment program remained," according to a report by the World Bank Operations Evaluation Department. (6)

The loan was made to the Obote regime, whose security forces had one of the world's worst human rights records, laying waste to a substantial section of the country. (Obote ruled until July 1985, when he was replaced by a military government.)

1. The Completion Point is the final stage in the HIPC Initiative process, awarded by the World Bank and IMF to countries that have complied with economic restructuring programs. At this point, debt relief sufficient to make the country's debt burden "sustainable" (as judged by the IMF and World Bank) is provided. IMF and International Development Association. "Uganda: Updated Debt Sustainability Analysis and Assessment of Public External Debt Management Capacity." Washington, 26 Aug. 2002. See the World Bank web site, www.worldbank.org: Home> Countries > Lending > Estimated Debt Service. http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ ,,menuPK:180465~pagePK:169597~piPK:169631~targetSubmitPK:169646~theSitePK:136917,00.htmlWorld Bank website accessed 18/12/2002: Home> Countries > Lending > Estimated Debt Service> Uganda http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/0,,menuPK:177682~page... World Bank website accessed 18/12/2002: Home> Countries > Lending > Estimated Debt Service> Uganda http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/0,,menuPK:177682~page... and Home> Projects> Project Details > Reconstruction Program Project (2) http://www4.worldbank.org/sprojects/Project.asp?pid=P002907 World Bank Operations Evaluation Department. Précis. "Post-Conflict Reconstruction: Uganda. Case Study Summary." Washington. No. 171, Summer 1998.

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