"Two steps forward, one step back"

Presentation by Derek MacCuish, program coordinator, Social Justice Committee, Montreal, and policy analyst, Halifax Initiative Coalition

Forum: Debt after the Cologne Initiative, hosted by the North-South Institute, Ottawa
23 June 1999

The Cologne Initiative is an interesting, and sometimes puzzling, set of G7 policy guidelines for reduction of Third World debt.

Part of why it is so interesting is that there has been a shift in the kind of language used to discuss debt relief, a moving away from discussion of debt and the sustainability of HIPC country situations only in terms of macroeconomic statistics. Now, debt sustainability is determined by basic economic indicators of the health of a national economy, through debt to export ratios, later supplemented by what is called the fiscal indicators.

The Cologne Initiative considers debt reduction in a human development context to a much greater extent than what we have seen in the improvements in the HIPC Initiative to date.

The priority that is placed on social spending needs as a rational for reducing debt service demands, coupled with the recognition that the process for achieving social progress must be authored at the national level, with effective civil society participation, reflects an understanding of development issues that has been absent from HIPC Initiative discussions in the past. The Cologne documents include specific references to building debt relief on what is referred to as an "enhanced framework for poverty reduction," with a "deepening sense of ownership with governments and citizens", and "consultations with broader segments of civil society".

The rhetoric of IFI involvement in debt relief is changing for the better.

When the program began in 1996, NGOs were asked not to demand too much of the HIPC Initiative, and were presented with the argument that putting human development objectives and the use of social indicators into the program would be placing a burden on it that it could not bear.

Now it seems that there is a significant re-orientation that is being asked of the World Bank and IMF, and a need to see debt relief less as an instrument of economic stabilization but as an obstacle to social improvement.

So, one of the intriguing things to consider is the extent to which this does or does not represent a shift in the paradigm of how debt relief is regarded.

NGOs, particularly those in the South, are quite suspicious of the rhetoric, and wonder how it will be matched with actions on the part of the IFIs.

The HIPC Initiative remains strongly linked to the IMF?s ESAF program of economic reform. Shortening the ESAF restructuring period that is required for debt reductions to three years from six was not accepted by the G7. Instead we have compromise proposal with a "floating" completion point, which will apparently allow the shortening of the second period, following the Decision Point, based on a country?s efforts on poverty reduction.

NGOs in indebted poor countries remain unhappy with the ESAF conditionality that is still to be part of the HIPC Initiative. This comes out of the long history of frustration with structural adjustment programs as they have been implemented in the past. Criticism of these programs resonates in discussions of the HIPC Initiative.

For NGOs in the South, the IMF has little or no credibility, and is regarded with substantial distrust. The Fund is generally considered to be using the HIPC Initiative as a means to extend its control over national economies.

The next few months leading to the IMF/World Bank annual meetings in September will provide some of the evidence we need that there has indeed been a change in how debt relief is considered. The international financial institutions have been asked to come up with concrete proposals on how to get several objectives accomplished These include:

• designing an "enhanced framework for poverty reduction," including adapting Policy Framework Papers and the reform of ESAF to support poverty reduction plans
• accelerating the program so that three quarters of eligible countries should be at the decision point by the year 2000
• focussing the HIPC Initiative more on debt service, to alleviate the cash-flow burden more quickly
• identifying and exploiting "innovative" approaches to maximizing the resources of the development banks for debt relief.

If the IFIs move on these points with energy and goodwill, they will begin to answer some of the main criticisms of the HIPC Initiative, namely that it is tied to ESAF conditionality and that the concept of "debt sustainability" is related to ensuring continuing debt payments and not to a dire social situation. It will be quite interesting to see how well they respond in the coming weeks and months to what is being asked of them.
If there is a shift in the program to match the rhetoric of the Cologne statements, it could be a new beginning for debt relief efforts, as social priorities take their proper place as the main objective.