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HIPC won’t give permanent exit from debt, says GAO

by Chakravarthi Raghavan

Geneva, 5 July 2000 -- The US General Accounting Office, which investigates and provides findings to the Congress, has said that the enhanced HIPC (Highly-Indebted Poor Countries) Initiative is unlikely to provide recipients with a lasting exit from their debt problems, unless they achieved strong and sustained economic growth.

The report by the GAO (a US civil service machinery), “Developing Countries - Debt Relief Initiative for Poor Countries Faces Challenges”, (GAO/NSIAD-00-161 at www.gao.gov), has made no explicit policy recommendations, given the extremely politicised nature of the subject researched. It however makes several important assessments on whether the enhanced HIPC is likely to free up resources for poverty reduction, on the linkages between debt relief and poverty reduction, through the PRSP, and the problems in financing the initiative.

On the enhanced HIPC Initiative and resources for poverty reduction, the GAO report says that the initiative is unlikely to provide recipients with a lasting exit from their debt problems, unless they achieve strong and sustained economic growth.

This assessment is based on the assumption that countries will, after having received HIPC debt relief, continue to borrow in the same fashion as beforehand, in order to allow the ‘freed up’ resource from debt relief to be used for poverty reduction efforts.

Currently, the Bank and Fund assume that future economic growth rate and future level of borrowing will remain as predicted. As a result, future levels of government expenditure on poverty reduction can be increased by the same amount as the reduction in debt servicing levels following debt relief.

But continuing with existing borrowing patterns implies, however, a future build-up of debt. Countries would only be able to pay off these future liabilities -  and thus permanently exit their debt problems - if they achieve consistently strong economic growth.

But the report suggests that the World Bank and IMF projections of strong sustained economic growth for the HIPCs may be optimistic, given the vulnerability of these countries to external shocks, such as volatility in commodity prices.

For  example, the report points out, the Bank and Fund projections for Honduras, Nicaragua, Tanzania and Uganda are for export earnings growth of at least 9.1 percent a year on average for over twenty years.

Sustaining such growth levels consistently over 20 years may be difficult, the GAO report suggests.

If this be the case, the report concludes, then the amount of revenue generated through economic growth would be reduced.

And this could have one of several impacts. Countries may then require further loans to help pay off old loans, further debt cancellation, or they may fall into arrears.

Another alternative would be to adjust to the lower level of export earnings by reducing imports, lowering domestic spending, and raising tax revenues (or a combination of these).

However, the report points out, these actions would probably further reduce economic growth rates and reduce further expenditure on poverty reduction.

Eurodad, the European NGO network involved in debt issues, commenting on this notes that the GAO's analysis was neither new nor controversial, but helped put the spotlight on a subject that has so far received little attention: that HIPCs will only be able to ‘free up’ resources for poverty reduction programmes if they continue to borrow at the same rate as they have in the past. If a country chose to reduce its volume of net borrowing by the same amount as debt relief received through the HIPC Initiative, then no resources would be freed up.

There are essentially four factors that determine what the ‘poverty dividend’ from the HIPC Initiative would be for any country, according to Eurodad. These are: the amount of debt relief granted, the future economic growth rate, the future level of borrowing and future government policies (e.g.levels of expenditure on poverty reduction)

However, as the GAO report points out, if economic growth rate is not maintained at the high rates predicted (and, for example, recent projections of the incremental economic impact of AIDS in Africa might be one of several reasons), then there would be fewer revenues for future debt servicing.

Comments Eurodad: one option then is to increase the level of future borrowing. Another is to maintain borrowing at the same rate, but to cut expenditure on poverty reduction and other government programmes, or to raise tax rates.

The other obvious scenario, the European NGO network points out, is the one that the GAO report was not allowed to detail: deeper debt relief.

If more HIPC debt is cancelled, then more of the income generated from future economic growth can be spent on poverty reducing expenditures, or avoiding further borrowing if economic growth rates falter.

“Deeper debt relief is the unwritten conclusion of the first section of the report,” adds Eurodad.

On the linkages between debt relief and poverty reduction, the GAO report's conclusion is simpler, as there are fewer economic variables to contend with.

The report points out that many actions are needed to reduce poverty, given its high incidence and its numerous and diverse causes. As a result, a successful poverty strategy has to include many factors: good economic policies, good governance, participation, measures targeted at the specific causes of poverty and so forth.

As a result, preparing poverty strategy is time-consuming and resource-heavy. There is thus a tension between the time taken to draw up a successful PRSP and the desire for rapid debt relief.

The report summarises some of the arguments on both sides for whether or not the interim PRSP is an adequate solution to this problem, but concludes that as long the HIPC Initiative links debt relief to PRSPs, this tension is likely to continue.

The GAO conclusion thus adds a degree of backing to those who question the current umbilical linkage between the HIPC Initiative and the PRSP.

On the problems of financing the initiative, the GAO report points out that many multilaterals and smaller bilateral creditors are having problems financing their contributions to the HIPC Initiative. It notes that the larger bilateral creditors are key to the success of the Initiative, but that they too face challenges in ensuring that bilateral debt relief is additional to making contributions to help debt relief by multilaterals.

These difficulties, the GAO report concludes, could undermine the success of the Initiative, as debt relief is supposed to be additional to other development assistance.-SUNS4703

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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