More than just debt relief needed for poorest nations

by Gumisai Mutume

Washington, 24 Oct 2000 (IPS) -- As the Bretton Woods institutions embark on the final leg of a fast-track programme to forgive some of the debts of the poorest nations, they have been reminded that they will have to do more for a wider poverty reduction strategy to succeed.

A one-day conference in Washington that brought together World Bank and International Monetary Fund (IMF) officials, academics and journalists this week heard that the enhanced Heavily Indebted Poor Countries (HIPC) initiative will do little to deal with growing poverty levels in developing countries.

While the enhanced HIPC initiative targets low-income nations, there are growing calls for another round of debt forgiveness to include middle-income countries, such as Ecuador.

The country’s foreign minister Heinz Moeller says Ecuador was on its “way to becoming an HIPC” last year when a financial crisis saw the economy shrink by 7.5 percent.

“External debt has to do with the fact that there is no real free trade ... some see free trade as a one-way road from North to South but not from South to North,” says Moeller, who wants the Bank and Fund to stop pushing the World Trade Organisation’s (WTO) agenda.

“We are fighting for market access of our bananas to the first world.  If the first world would stop subsidising its farmers, we would be in a position to avoid being an HIPC,” says Moeller.

A middle-income country, Ecuador is highly indebted but does not qualify for the HIPC initiative under present terms. Foreign debt makes up 162 percent of the country’s gross national product, says Moeller.

Moeller says debt forgiveness under HIPC “is not the only answer”, especially if it occurs under the current world trade system that continues to keep developing countries out of the prime markets of industrialised countries.

The HIPC initiative was created in 1996. Following a period of little action, it was reformulated last year with the intention of providing deeper, faster relief to 41 of the world’s poorest countries. So far some 10 countries have reached the qualification point, a figure the Bank and Fund say will reach 20 by year-end, freeing these countries of about $30 billion in debt.

But the ineffectiveness of the current debt relief package will soon be realised, notes the UN Conference on Trade and Development (UNCTAD), because it has pushed poorer countries to open up their markets with little reciprocal action from wealthier nations. Enhanced HIPC is sold together with IMF/World Bank structural adjustment programmes.

In its “Least Developed Countries (LDC) 2000 Report”, UNCTAD says LDCs only attracted four percent of long-term capital flows to developing countries last year, despite having liberalised their trade regimes further.

IMF data show that trade liberalisation has advanced further in the LDCs than in other developing countries. Out of 43 LDCs for which information is available, 37 percent have average import tariff rates of below 20 percent, coupled with no or minor non-tariff barriers.

Jo Marie Griesgraber of Oxfam US says debt relief alone under enhanced HIPC will not do the trick. In addition, rich countries have to pump in more aid and oversee long-term investment. “You can’t have quick and dirty investment, that’s not how development takes place,” says Griesgraber.

Official development assistance (ODA) to LDCs in real per capita terms has dropped by 45 percent since 1990 and is now back to the levels of the early 1970s. While private investment is rising, it is only targeted at a few of the poor countries.

Sceptics say HIPC relief will not only come too late and too slowly, but the magnitude of assistance is also too little for a durable exit from the debt problem and a transition to greater aid effectiveness. In Mauritania, for example, debt service payments due in 1997-1998 were 184 percent of total social expenditure. IMF figures show that payments due in 2000-2002 are projected to constitute 75 percent of social expenditure. Mauritania has qualified for HIPC.

IMF deputy managing director Stanley Fischer says that people should not be hasty in their judgements over the current HIPC initiative as it is still in its infancy. “We are at an extremely early stage of this process and all we have seen are just plans (for poverty alleviation) and some are very ambitious.”

Under enhanced HIPC, countries have to outline a poverty alleviation strategy in complex documents known as poverty reduction strategy papers before they can begin receiving assistance.

The last two decades have seen poor countries and their official creditor-donors locked in an “aid-and-debt trap” in which high debt levels have impeded effective aid and ineffective aid prevents a solution to the debt problem.

The Bank and IMF are now re-engineering the way they do business in poor countries by linking structural adjustment, debt relief and concessional lending to the formulation of what they term “nationally owned”, participatory poverty reduction strategies.