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From Washington to Koln: The struggle for debt relief

Tracing the struggle for debt relief from the launching of the Heavily Indebted Poor Countries (HIPC) Debt Initiative in September 1996 in Washington to the recent G-7 Summit at Cologne (Koln), Matthew Lockwood shows what a difference a mass, global movement makes. It was the Jubilee 2000, a worldwide mass movement, which compelled the G-7 governments to make the concessions which they finally made. And yet, as he warns, the long march towards a debt-free world has still a long way to go.


IN the autumn of 1996, to great fanfare from a handful of world leaders and the heads of the Washington institutions, the Heavily Indebted Poor Countries (HIPC) debt relief initiative was launched. In the summer of 1999, hundreds of thousands of people across the world, and on the streets of Koln where the heads of state of the Group of Seven (G7) leading industrial nations were meeting, were clamouring for the fundamental transformation of the HIPC Initiative to provide just and lasting debt relief which would help end world poverty. In those three years, the Jubilee 2000 campaign has grown from being a tiny group of individuals into a worldwide mass movement, concerned not only with debt but with justice and accountability.

The movement to do something about the debts owed by the peoples of countries in the South to the rich North has long roots going back to the 1970s. At the time of its launch, the HIPC Initiative was given a cautious welcome, because for the first time it drew in the multilateral creditors. However, it soon came to be seen as fundamentally flawed not only in its implementation, but also in its conception.

The HIPC Initiative - a critique

In the current situation, with major concessions on debt forced from world leaders by an effective global campaign, it is easy to forget how different things looked as recently as last year. In early 1998 officials from the World Bank and the IMF gathered in Paris to take stock of the HIPC Initiative, 16 months on from its launch in 1996. The mood was ebullient, with Bank and Fund staff congratulating each other on how far they had come from the bad old days when multilateral debt relief was unthinkable.

The immediate reason for their glee was the significant move at the end of January by the Paris Club of bilateral creditors towards a deal for Mozambique under the HIPC Initiative. Only a month previously, this had looked decidedly unlikely, and the fate of the Initiative was hanging in the balance. However, the Washington institutions had a more fundamental excuse for being happy. For the main beneficiaries of the debt relief plan at that point were definitely not the 41 impoverished countries on the HIPC list; rather, in the words of one of the Paris participants, the Initiative was there 'to protect the financial integrity of the international financial institutions'.

Unlike the largely commercial debt crisis of the 1980s, the background to the Initiative was a crisis of multilateral debt servicing. For many years, the poorest countries had been in arrears with their commercial and bilateral debt, but had continued to service the debts of the preferred creditors (which are the lenders of last resort, the multilaterals). But by the early 1990s, a number of countries began to face difficulties so deep that the conventional rolling over of debts could not deal with them and repayments of multilateral debt were threatened.

The HIPC Initiative was therefore very clearly about debt relief for clearing arrears, and avoiding arrears in the future - that is, debt sustainability pure and simple. This purpose was built into its design. When challenged about the origins of the 200-250% present value of debt-to-exports threshold for sustainability, chief Initiative manager Axel van Trotsenburg pointed to 'previous experience' in Latin America. A recent paper by other World Bank staff confirms that this 'rule of thumb' is based on evidence from Latin American and other developing countries that countries with debt-to-export ratios of under 200% tend to avoid rescheduling and arrears problems [S.Claessens et al, 'Analytical aspects of the debt problems of highly indebted poor countries' in Z.Iqbal and R.Kanbur, eds., External Finance for Low-Income Countries, IMF, Washington DC, 1997, p. 29].

This pattern is usually argued to be the product of 'debt overhang', so that in countries with 'too much' debt investors are put off by uncertainty about the country's ability to pay, or by the fear that the returns on their investments now will be taxed away in the future in order to pay off debt. Lower debt (i.e. under 200% present value of debt-to-exports) leads to higher investment, and therefore higher growth, allowing countries to keep on top of debt service. This is what Bank and Fund staff meant when they talked about debt sustainability and an 'exit' from the debt burden.

Political compromise

The original HIPC range was of course a political compromise - the most that the creditors were prepared to accept at the time. In relation to the real problem, it was simply too high and too arbitrary. First of all, the story from Latin America and other developing countries says that the threshold lies at around 200%. The Initiative has been delivering deals for most countries at slightly above that level, but at 225% for Bolivia. A less conservative and safer, approach would be aiming unambiguously at somewhat below 200%. The second point is simply that HIPCs are not middle-income Latin American countries. Most of them are very poor African countries with rudimentary infrastructure and poorly educated workforces. The idea that debt overhang will work in the same way in Burkina Faso and in Mexico is dubious, if not laughable. What is striking (and surprising, given the resources at their disposal) is that the Bank and the Fund have not produced any serious investigations of the relationships between reduced debt levels and higher investment for the HIPCs (as opposed to for Brady Plan countries). The detailed debt sustainability analyses done for individual countries make assumptions about growth and investment, but these are not rooted in any reality. Rule of thumb rules.

Equally arbitrary and politically driven were the fiscal targets introduced under pressure from the French, really designed to ensure the inclusion of their former colonies in West Africa. Countries whose exports were more than 40% of gross domestic product (GDP) and whose government revenue was greater than 20% of GDP, would have their debt reduced to 280% of revenue.

The final, and perhaps most important, aspect of the HIPC Initiative is the macroeconomic and structural conditionality attached to it by the IMF. Long criticised by groups in the South for increasing poverty, the notorious ESAF (Enhanced Structural Adjustment Facility) programmes had also emerged poorly in internal and external reviews commissioned by the IMF, as well as being criticised for being ineffective by independent academics. Nevertheless, the IMF is deeply attached to ESAF as its primary tool for introducing neo-liberal orthodoxy - from trade liberalisation to privatisation - to the poorest countries.

The Fund also saw large debts, especially debts to the multilateral institutions, as an instrument for keeping the pressure on countries to reform. Not wanting to lose this instrument, the Fund saw an opportunity in the new ideas about debt relief and switched tactics, now attaching a longer and in some cases more stringent reform package to relief. Like some of the other creditors, for the Fund, the HIPC Initiative was not about poverty reduction, or even debt sustainability, but about liberalising reforms. The major reason for the slowing down of the HIPC Initiative has been the IMF judging that countries are not reforming quickly enough.

Despite the claims made - mostly by the World Bank - from the very start of the HIPC Initiative, it was transparently obvious that it offered the creditors a lot more than it did the people of the poor, heavily indebted countries themselves. Most HIPCs are paying nowhere near what they should be, so that most of the debt reduction they might receive under the Initiative would go to eliminating the gap between scheduled and actual debt service. Despite the demands of campaigners for more information, it was not until April 1999 that data was published by the Fund and the Bank showing how true this was.

Under the original HIPC Initiative, Mozambique was to get about $1.5 billion wiped off its debt of $3.7 billion, but over the last three years it has been paying less than one-third of its scheduled debt service. Net gain in terms of government revenue actually freed up for poverty reduction would be small, if not non-existent. In the first year of its operation for Uganda, the Initiative reduced actual debt service by only about $40 million, or about $2 per Ugandan.

The Jubilee 2000 movement

The complacency of the creditors was shattered totally by the events of the May 1998 G7 summit in Birmingham. It was not immediately obvious that this was so, because the finance ministers and their premiers had not anticipated the depth of feeling on the issue, or the scale of mobilisation, with an estimated 70,000 people forming a human chain in Birmingham. With G7 positions prepared weeks in advance, the summit produced no response to the day's events. However, this was the beginning of a series of developments over the next year which were to transform the debate on debt.

In the autumn, the UK government blasted the Fund and Bank for producing a totally inadequate report on the HIPC, and called for a fundamental review, with input from a wide range of organisations. By early 1999, G7 creditor governments began to line up with ever more generous-sounding plans to augment the HIPC Initiative. By June 1999, this led to new recommendations in Koln. However, the movement of the creditors has been due almost entirely to the Jubilee 2000 campaign. In April, a spokesperson from the World Bank called it 'one of the most effective global lobbying campaigns I have ever seen'.

With 122 member organisations in the UK coalition alone, and coalitions in almost 50 countries worldwide, the Jubilee 2000 movement is genuinely global. In the week leading up to the Koln summit, there were coordinated events in 26 countries, from Angola to Bangladesh to France. The campaign brings together peasants marching in Mozambique and pop stars lobbying Bill Clinton. To date, 17 million signatures have been collected calling for the Jubilee debt relief demand.

The campaign has not been simply about debt relief. In the North it has encompassed a wider range of issues, including macroeconomic conditionality and aid. It has also been one of the first global campaigns in the South, where accountability of governments in public expenditure has emerged as one of the key issues.

However, the nub of the campaign has been Jubilee 2000's call for the cancellation of the unpayable debts of the world's poorest countries by the year 2000. Two key ideas have emerged as central to the concept of 'unpayable': poverty reduction and justice.

Justice is the issue which most people understand most easily. If loans were made irresponsibly, over the heads of the public in both creditor and debtor countries, by unaccountable bodies such as export credit agencies, why should the poor of the world now be having to pay the price? Some loans were made for arms. Loans were made to dictators or, like Mozambique's loans, to fight wars against odious regimes. Even outside these circumstances, many loans have led to no development benefits at all. Of a sample of 18 World Bank-funded projects in the agricultural sector in Tanzania between 1967 and 1986, 12 produced negative rates of return [TASOET/Christian Aid, 'Debt without development: the World Bank in Tanzania', 1999]. The World Bank's own internal Operations and Evaluations Department rates only two-thirds of its loan-financed projects as 'satisfactory', and external reviews are much harsher.

Equally, history is full of examples of very generous debt relief for large countries in the West which are now creditors. These debt cancellation precedents are not only positively luxurious compared to the HIPC Initiative, they are also transparently political in nature. For instance, the now infamous 1953 London Agreement reducing Germany's debt to the UK and other creditors was reached through a fear of a repetition of Hitler's rise to power.

The other issue central to the campaign is poverty reduction. Debt relief alone will not deliver an end to poverty; it is a much-needed step, but not sufficient on its own. Many of the rich country governments are beginning to realise the growing pressure for eradicating world poverty, given momentum by the eve of the new Millennium in the Christian calendar. Most of them, along with the Washington institutions, have adopted development targets formulated in 1996 by the Organisation for Economic Cooperation and Development (OECD). However, they have been slow to make any real effort to see the role of debt relief in these aims.

While the World Bank and other creditors have tried to argue that the HIPC Initiative was about tackling poverty, it was always clear that a debt relief plan to help address poverty would have to be much more radical. While the World Bank and development ministries of creditor nations consistently failed to analyse the link between debt and poverty, research by the African Economics Research Consortium points to the need for much lower debt ratios than the HIPC Initiative offered [I.Elbadawi, B.Ndulu and N.Ndung'u, 'Debt overhang and economic growth in Sub-Saharan Africa' in Z. Iqbal and R. Kanbur, eds., External Finance for Low-Income Countries, IMF, 1997, p. 70]. Debt relief for poverty reduction will have to make serious reductions in actual debt service flowing out of government coffers. And many campaigning groups in the South have also made accountability of their own leaders in the use of debt relief resources a major focus. Jubilee 2000 has always pointed out that the very poorest countries cannot really afford to pay any debt service, at least in the near future, and Christian Aid has recently called for a debt service moratorium for some countries, similar to that declared for Honduras and Nicaragua in the wake of Hurricane Mitch.

G7 proposals in 1999

As the Jubilee 2000 campaign gathered pace, G7 and other rich country leaders began to bid for public popularity with new debt relief proposals. In February the UK Chancellor of the Exchequer Gordon Brown called for a shorter period of IMF conditionality and lower debt-to-export and debt-to-revenue ratios. He claimed that the deal would be worth $50 billion. This is about $29 billion in present value terms, compared with the $12.5-billion cost of the HIPC Initiative.

Almost immediately, the new German government announced their plan, backed up with a personal statement from the new Chancellor Gerhard Schršder. The German plan also recommended faster relief, and the option of deeper cancellation of debts owed to bilateral creditors.

March saw the Canadians and French weigh in. Canada's plan was for a new debt-to-exports target of 150%, cutting the six-year track record of conditionality to three years, adding Haiti and Malawi to the list of HIPCs, and perhaps most radically, the promise of unilateral action by Canada for a total write-off of its bilateral debt, if the rest of the main creditors refused to do so.

Not to be outdone, Belgium and Japan also pitched in, with plans for quicker relief, deeper relief on fiscal grounds, and in the latter's case, accepting the writing-off of outstanding aid loans, which had been agreed in principle as long ago as the late 1970s.

Finally, the USA also made its move, indicating some support for quicker relief and advertising a headline figure of $100 billion worth of debt write-off.

Behind the public pronouncements, there was considerable political manoeuvring going on, with the more conservative forces of the French, Japanese and the IMF resisting much movement on timing and conditionality, and some disagreement on side issues such as sales of part of the IMF's gold reserves to finance its contributions.

In the event, the recommendations contained in the finance ministers' communique at the Koln G7 summit reflected, as always, the political compromise. There was support for reducing the debt-to-exports ratio to 150%, and a little movement on the debt-to-revenue ratio. The recommendation on timing was a fudge, with relief starting after three years instead of six, but still reversible for another three years, thus keeping IMF control over the whole period. The whole deal was estimated to be worth $27 billion in present value terms, with another $20 billion of aid loans in nominal terms to be written off.

The Koln summit recommendations - an appraisal

What does the new deal mean? It is undoubtedly true that the global Jubilee 2000 campaign has forced the creditors to recommend a debt deal which is significantly deeper, and faster in a sense. It will offer debt relief to countries previously excluded, such as Ghana. Seen in this light, it is a major campaign success.

However, in many other ways, the Koln deal is simply an extension of what was already there - and not a very big extension at that. The debt ratios announced by the finance ministers remain as arbitrary as ever. The new initiative is still about debt sustainability, not attacking poverty. The communique, with its proposal of an 'initiative...to enhance the prospects for a robust and lasting exit for qualifying countries from recurrent debt problems', makes that clear. The controlling hand of the IMF through the role of ESAF, is just as central, and some campaigners see the IMF as being an even stronger presence in the new deal than before. The commitment to additional money is about $16 billion in present value terms. This is dwarfed by the usual comparisons with the arms trade, or money spent on stabilising the global financial system. More tellingly perhaps, it is less than the $24-billion decline in aid budgets over the last decade, and is a tiny proportion of the projected US federal budget surplus for 2000-2009 of some $2,930 billion. With figures like these, it is hard to believe the politicians' claim that this is the most that can be afforded.

Most of all, it will still leave the world's poorest indebted countries gasping for financial breath. The example of Tanzania makes clear why.

Tanzania's debt in mid-1997 was $7.9 billion. Nominal debt service was $475 million, but the actual paid was lower, at just above $200 million. Under the current HIPC Initiative, Tanzania would qualify for a debt reduction from $4.4 billion to $1.6 billion in present value terms. The average debt service flow would be in the region of $160 million a year, compared with the $200 million-odd actually paid in 1996-7. Neither the current HIPC Initiative nor the Koln recommendation would offer Tanzania extra relief on fiscal grounds. The latter would leave Tanzania with a debt burden (in nominal terms) of $2 billion, with corresponding average annual debt service flows of around $120 million.

What does this mean in human terms? According to a just-completed study commissioned by the UK aid ministry of whether the OECD global poverty reduction targets are attainable in Tanzania, 'debt servicing is a considerable burden' and 'Debt management will continue to be a problem area, and prospects for growth are likely to be substantially improved if the country is able to benefit from both rescheduling and cancelling of debt.'

To attain universal primary education, the report says that enrolment rates in Tanzania will have to increase by over 5% a year for the next 17 years, which means 'either a substantial real increase in resources going into education or a reallocation from the tertiary and secondary levels to primary education.' In 1997/8, according to the report, per capita spending on education was about $8 per capita. Total government spending on education in 1997/8 was about $230 million. To finance 5% growth in this expenditure (assuming a 1:1 ratio between spending and increasing enrolments) over just three years will cost an extra $75 million.

On health, the report notes that to meet the target on infant mortality would require accelerating the downward trend, and that the target for maternal mortality is 'unlikely to be met'. The World Bank estimates the cost of a basic health package at $16 per head, whereas in 1996/7 Tanzania spent an estimated $2.5 per head. This left a financing gap of some $400 million per year currently, still bigger than the reductions in debt service discussed above.

In this context, an annual saving of $80 million from reduced debt service, while welcome, will come nowhere near reaching Tanzania's fiscal needs. Aid to Tanzania is falling. It is clear that for countries like Tanzania, a moratorium of debt service, as well as more generous debt stock reduction, is needed.

Conclusion

The long march towards a debt-free future is at a halfway stage. An enormous amount has been achieved. The Jubilee 2000 campaign, with its many coalitions worldwide, has shown the power of mass action and global reach. We have discovered our own strength. But new strength is now needed to finish the job.

The HIPC Initiative offered a new framework for debt relief, but had nothing to do with the poverty of the many, and everything to do with an accounting exercise for the benefit of the creditors. The campaign has succeeded in getting poverty into the agenda, and in forcing world leaders to expand the Initiative. But the Koln recommendations still fall short of a blueprint for debt relief for poverty reduction and still emphasise IMF reforms. Furthermore, they are currently still recommendations, not concrete actions. Today, almost three years after the launch of the Initiative, only three countries - Uganda, Bolivia and Mozambique - have received any relief. Much remains to be done. (Third World Resurgence No. 107, July 1999)

Matthew Lockwood is the head of International Policy, Christian Aid.

 


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