HIPC review submission (June 1999)

Halifax Initiative coalition submission to the 1999 Heavily Indebted Poor Country (HIPC) Debt Initiative Review and Consultation

  • Phase one
  • Phase two

Prepared by the Social justice Committee

Phase one - April 99

The Halifax Initiative is a Canadian national coalition of environment, social justice and faith groups concerned about the policies and practices of the international financial institutions.

The Halifax Initiative welcomes the 1999 HIPC Initiative Review process. The invitation to comment on the HIPC Initiative that has been extended to civil society representatives is a positive indicator of the willingness of the World Bank and IMF to incorporate our opinions in the policy process.

The Halifax Initiative has commented regularly on the HIPC Initiative process since its inception. Our press release on October 2, 1996 called the program "not so much a debt relief package as a means to continue harsh economic adjustment measures".

We went on to say the "meaningful debt relief requires a serious commitment by creditor nations and the multilateral institutions to cancel substantial amounts of debts owed by the poorest countries, which have by all accounts become unpayable".

Since that time, there is little to indicate that our assessment was inaccurate.

The capacity of the HIPC Initiative program to adequately address debt problems continues to be severely constrained by two aspects of the program that we criticized at the outset:

The HIPC Initiative is less a program of effective debt relief than it is a means of ensuring compliance with IMF-directed economic restructuring.

The resistance of the financial institutions to accept their role as responsible creditors, and move to debt cancellation. In the absence of cancellation, the HIPC Initiative is severely limited by resource constraints, that render the program substantially ineffective.

More specifically, these are our criticisms:

The time period. Completion of the debt relief process takes several years, the current model being six years of successful completion of structural adjustment requirements. This is a serious 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 does not include social indicators which reflect quality of life in a country, and "acceptable" levels of debt are those set by the Bank and IMF, and these remain 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. The use of the debt problem as a lever for opening economies to IMF/Bank-directed restructuring is inappropriate.

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: Debt service (in $US millions) 111.7 (1995) 131.2 (1996) 96.7 (1997) 108.5 (1998) 95.7 (1999) 96.9 (2000) 100.9 (2001)96.6 (2002) 100.2 (2003)

These targets are even less reflective of the country's real ability to pay, which is nowhere near $100 million, and historically has been at most about half that amount.

"In addition to your general views on the HIPC Initiative, we welcome in particular your views on the following specific questions:

"Debt Sustainability: Does the current HIPC Initiative framework achieve debt sustainability? Do you agree with the eligibility criteria and debt sustainability targets (both relating to present value and debt service)? If not, how should they be changed to meet the needs of poor, heavily indebted countries?"

Debt sustainability needs to be framed in the context of the development priorities of debtor countries. Neither eligibility criteria nor sustainability targets incorporate recognition of other social and environmental spending priorities.

Debt service targets should be made flexible, and have a role in national spending allocations that is secondary to social and environmental priorities. In other words, the level of debt service should not be pre-set in a fixed range, but flexible enough to be adjusted even lower given other budget priorities in a country.

"Fiscal Targets: Do you agree with the fiscal criteria and the thresholds for qualifying for the net Present value (NPV) of debt-to-fiscal target? If not, how should they be modified? How should domestic debt be treated under the HIPC Initiative?"

The inclusion of fiscal criteria was a positive first step in expanding the DSA process beyond debt/export ratio assumptions. However, it remains a conservative economic indicator which, in the absence of a broader analysis of social conditions and of government income and expenditures (which incorporates social and environmental spending priorities, as we have already noted) should not be assumed to complete the process of assessing "debt sustainability".

"Policy Link and Timing: Are there countries which should receive debt relief sooner than is scheduled? If so, why? What conditionality, length of track record and timing would you recommend for HIPC debt relief? How can we best ensure that the mix of resources provided-including balance of payments and budgetary support plus debt relief-promotes broad-based growth and development, is used effectively, and moral hazard is minimized?"

The problem of linking the HIPC Initiative to structural adjustment conditionality has already been made.

Here, the framing of the question betrays assumptions of exclusive IMF and World Bank control of the debt relief and development process. Who is considered to be included in "we"? Does "we" include civil society in debtor countries?

The Halifax Initiative supports the inclusion of informed popular participation in programs of social development. Civil society in debtor countries should have a bigger role in the process of debt reduction, and in the lending process in the future. The capacity for civil society in these countries should be strengthened, and active participation in the development policy process actively encouraged and supported.

"Financing. Do you have any suggestions for the financing of any additional cost arising from changes in the HIPC framework? Given current aid budgets, should resources be diverted from less indebted poor countries to finance debt relief for HIPCs? Should aid budgets be increased to finance additional debt relief for HIPCs? What if this is not possible?"

The financing of the HIPC Initiative will continue to be a problem so long as the IFIs insist on repayment in full. In the absence of some form of write-down of debt, the resource demands of the HIPC Initiative will act as a brake on implementation, and limit the depth of available reduction. The program will be inadequate to the real task of reducing debt service to levels at which it no longer impedes social progress.

The current structure of the HIPC Initiative has resulted in a competition for resources, between borrowing countries and within creditor countries as debt reduction programs compete with allocations to development assistance, since resources are finite

The protection of the credit status of the World Bank and IMF should not have priority over resolving the debt problem. It is essential that unpayable debts be recognized as such, so the debtor countries can move more swiftly to recovery.

The Halifax Initiative has resisted accepting the assumptions behind the "debt vs. aid" dilemma, arguing instead that some form of debt cancellation must come into play. We also ask that other forms of debt reduction be considered, such as shifting values into local currencies or in other ways compensating for the effects of devaluation, or converting debt into development or environment credits in ways that support national governments' development priorities.

Phase two - August 99

Once again, the Halifax Initiative welcomes the opportunity to provide input to the 1999 HIPC Review Consultation Process, Phase II. This process has been a positive one in that it has been quite open and public, with the Perspectives on the Current Framework and Options for Change (Options) document publicly available, as was the compilation of submissions. The overview and analysis provided in Options is a helpful and encouraging summary and commentary on the HIPC Initiative. The effort to listen to voices from the South through formal consultations is also positive.

The encouraging aspects of the process appear especially favourable when contrasted with those of its listless cousin, the reform of ESAF. We hope that progress in establishing genuine dialogue will continue, with special emphasis on improving the involvement of civil society in the South.

To this end, we ask that adequate public consultation in the South be energetically pursued. We also ask that the capacity for civil society representatives to participate in policy discussions, whether in Washington or elsewhere, be assured. The Halifax Initiative respectfully submits the following comments for consideration, as follow up to our submission to Phase I.

Consultations with the South

The involvement of representatives of debtor country civil society in discussions on the HIPC Initiative has to be strengthened. For example, only three of eight consultations during Phase I of this process were held outside Europe and North America. Consultations with representatives of the World Bank and the IMF, at appropriate levels of responsibility in their organizations, should be available to people in the regions affected. Similarly, civil society representatives should have support in their efforts to participate in the policy dialogue as it takes place in Europe and North America.

Link to poverty reduction

The Halifax Initiative coalition is concerned that the debate about "using the HIPC Initiative to encourage poverty alleviation policies" risks encouraging a misguided effort that is beyond the scope of the program, even if we allow that this may be with good intentions. There is a link between debt relief and social sector development, certainly. We have consistently argued that social policy considerations should be factored into the eligibility criteria. The HIPC Initiative should not be regarded as a tool for social development, but can best be used, as it was supposedly originally envisioned, as an addition to development assistance and other efforts to assure social well-being, particularly for those living in poverty, and environmental protection.

Acceptance of these considerations should not imply expectations of the HIPC Initiative that are beyond its scope. Specifically, the HIPC Initiative is not an appropriate tool for accomplishing precise social development objectives. These are most appropriately determined by legitimate policy processes in the country concerned. Following eligibility determination based primarily on human development indicators and current government expenditure on debt servicing, debt relief should be immediate and take place in the context of substantial dialogue on development priorities. Debt relief should be provided quickly and effectively to all HIPC countries in the absence of egregious violation of human rights, including social and economic rights, or nonrepresentational government. Learning from the Evaluation of the ESAF, as well as the priniciples of the Comprehensive Development Framework, country (government and civil society) ownership over conditions is key to their successful implementation.


It is accepted that debt savings should be channelled to the poor. There are two factors to consider here. 1. Will there be extra resources available at the Completion Point? 2. What are appropriate and effective ways of channelling these to the poor?

In its present form, the HIPC Initiative does not significantly reduce actual debt serviced, and most countries in the program can expect their scheduled debt service to increase substantially even after the Completion Point. The program must be made more effective so that resources do, in fact, become available.

The Halifax Initiative has repeatedly called for a de-linking of debt reduction from IMF/Bank defined performance targets. We support the position of civil society in the South that resources that may become available be directed to social and environmental protection. This does not mean that debt reduction should be withheld pending IMF-directed performance benchmarks. We would argue that policy dialogue with government and civil society, and not policy prescriptions is an essential feature of any debt relief program.

Primary responsibility for channelling resources should rest with national governments. Effective and efficient use of these resources assumes local ownership of the process, the same argument that was put forward by the external ESAF review report and in the Comprehensive Development Framework. Honest partnership with donors and creditors is, of course, to be encouraged so that additional resource support can be provided to governments with demonstrated commitment to social welfare and the healthy participation of civil society.

The obligations of creditors

The Halifax Initiative is concerned that there is no recognition of the role of creditor financial institutions in the debt crisis. The financing of dictatorships, projects with minimal oversight, flagrant theft and otherwise odious use of funds is conveniently overlooked, as is the assumption of commercial loans by the public institutions that we are now addressing.

Why has this abuse of the lending process been ignored in the HIPC Initiative? The lending institutions must adapt guidelines of transparency, accountability, and monitoring of use of loans.

Their failure to do so makes them accountable for loans that can now be considered unpayable.

Resource constraints

The Halifax Initiative considers that the assessment of finance constraints for multilateral creditors has been inadequate. These institutions should make a realistic assessment of the viability of the loans outstanding. If these loans are not viable without indue human suffering, the appropriate reconfiguration of accounts should take place. In the circumstances, to do otherwise is a cowardly abuse of authority and an offense to our common humanity. The Halifax Initiative holds that the impact on the financial institutions should take a distant back seat to concern for the most vulnerable on our earth.

This being understood, one of the impediments to debt write downs by the IFIs is said to be the impact this might have on their debt rating by the markets. Reputations and ratings are a function of several factors - of which a write down for the poorest countries is only one. Here are some reasons to be sceptical of a direct and one way link between debt write downs for the poorest countries in the world and the ratings of the IFIs.

1. At the outset we should understand that while the WB participates in tapping private financial markets, the IMF does not. So a credit rating per se is not an issue for the IMF. Indeed, the thrust of the advice, including from some of its most powerful shareholders, has been to use more effectively its gold reserves (for example) to write down debt.

2. To quote Chandra Hardy"The perception of weakness in the Bank's portfolio is more likely to arise out of evaluations such as the Wapenhans report - which found over one-third of the Bank's $140 billion in projects [this was in 1992] to be failing - than on the need to provide debt relief under exceptional circumstances to borrowers which can never repay the debt." (From International Monetary and Financial Issues For the 1990s... Vol.7) Moreover, participation in the large scale and troubled rescue packages for Russia, Brazil and several South East Asian countries is likely to do more harm to the Bank's reputation and credit rating than a write down for its relatively small and long standing non-performing portfolio in a few poor countries.

3. IFIs such as the Caribbean Development Bank and the African Development Bank, who have much smaller and more concentrated portfolios than the WB, also enjoy triple-A ratings. Each institution, the AfDB more so than the CDB, have been through crises during their history. An implication of this fact is that given the guarantee of callable capital that the WB enjoys from its shareholder governments, it would take a significant change in the size and quality of its portfolio before the markets downgrade the WB's credit rating.

4. The WB is a large borrower in good financial condition. As such, it can choose when and where to borrow to lower costs. It maintains a liquid asset portfolio of approximately $20 billion, and given the scale of its operations, can use different sorts of financial instruments and methods to lower its borrowing costs. Currency and interest-rate risks are for the most part passed on to borrowers. By the WB's own calculations in 1994, a loss in preferred credit status could lead to an increase of between 10 and 50 basis points in the cost of funds. Using the upper estimate, the increase in borrowing cost would be $500 million for all IBRD borrowers. This is not a trivial amount, but it would be spread among a large number of borrowers who are either in a position to pay or to not borrow from the WB.

5. Using an analogy from national financial systems and organized bankruptcy procedures, there are several instances where writing down what are clearly non-performing loans leads to a stronger not weaker perception of the institution among market players.

Under the circumstances, the probability of a write down of some poor country debt alone leading to a down graded credit rating for the WB is negligible. This is not to say that the WB's portfolio is rock solid or that there is no possibility of a down grade, but weaknesses in the portfolio arise from elsewhere in the WB's operations.

External review

The Halifax Initiative supports the idea of an independent external review of the HIPC Initiative process.

Prepared by the Social Justice Committee and submitted to the World Bank and IMF on behalf of the Halifax Initiative coalition.