Eco-nomics

CANCELLING MULTILATERAL DEBT

The response of the World Bank and the IMF to the debt crisis was the Heavily Indebted Poor Countries (HIPC) Initiative of 1996, revised in 1999. The ostensible aim of the program is to determine which countries have "unsustainable" burdens, then to caucus with each country's creditors to reduce the debt across the board until it is "sustainable." The program seeks to ensure that countries do not run up "unsustainable" debts again by insisting that beneficiaries demonstrate a proven commitment to "sound economic policies"--the IFIs' usual euphemism for SAPs.

To qualify for HIPC, a country must complete three years under an IMF-designed SAP. Even after that hurdle, the country must fulfill a further three years bound by another SAP before relief on multilateral debt is granted. At that time, all creditors will give matching relief to reduce the country's debt to a "sustainable" level. The new version of HIPC allows for the granting of relief as soon as the debtor country completes its first SAP, though the debt can be reinstated if the second SAP is not fulfilled to the IMF's satisfaction. The cruel paradox here is that countries in desperate need of debt relief so they can begin to direct resources to social sectors are required to first demonstrate their willingness to make things worse by depriving their people of health care, food subsidies, and education.

The new version of HIPC seeks to ensure that debt relief will effectively reduce poverty through the Poverty Reduction and Growth Facility (PRGF), the new name given in September 1999 to the IMF's Enhanced Structural Adjustment Facility (ESAF). The IMF claims that the new program relies on government and civil society to come up with their economic programs and that the primary goal of the programs will be poverty reduction. But civil society organizations in Uganda and Tanzania, two of the first countries to embark on the PRGF, report that the IMF still expects to provide the basic economic framework, with civil society filling in some details and signing off.

There are indications that the PRGF will simply become an additional stumbling block; for example, the U.S. government's dissatisfaction with Mozambique's and Uganda's Poverty Reduction Strategy Papers has delayed their debt relief packages. The PRGF is widely viewed as both a cynical public relations ploy and an expansion of the IMF's power, since, at Washington's insistence, the IMF now claims the right to oversee poverty programs.

There are other problems with HIPC's complex formulas. "Debt sustainability" basically means how much a country can repay without going broke. In many cases, countries are not paying all their debt servicing bills because they simply haven't got the money. But the definition of "sustainability" is a harsh one: a debt-to-export ratio of 150%, meaning that a country's outstanding debt is one and a half times a large as annual exports. In practice, this means about 15% of a country's annual export income flows out of the country in the form of debt payments (capital plus interest).

Outright debt cancellation--the only humane solution to the most impoverished countries' debt crises--would undermine the policy leverage now exercised by the IFIs. The absence of debt burdens would make countries more creditworthy and thus less dependent on the IFIs' conditioned loans. In the wake of Hurricane Mitch's devastation in Central America, Treasury Department officials gave "loss of leverage" as their reason for refusing to consider comprehensive debt cancellation for Nicaragua and Honduras. President Clinton's September 1999 pledge of 100% forgiveness of bilateral debts owed the U.S. by the most impoverished countries was important for breaking that taboo. But it appears that his offer will be made only to countries graduating from HIPC and committed to ongoing structural adjustment.


Sources for More Information

50 Years Is Enough: U.S. Network for Global Economic Justice
Email: wb50years@igc.org Website: http://www.50years.org/

European Network on Debt and Development (EURODAD)
Email: eurodad@agoranet.be Website: http://www.oneworld.org/eurodad/

Friends of the Earth-U.S.
Email: foedc@igc.org Website: http://www.foe.org/

Jubilee 2000 International Coalition
Email: mail@jubilee20000uk.org Website: http://www.jubilee2000uk.org/

Jubilee 2000/USA
Email: coord@j2000usa.org Website: http://www.j2000usa.org/

Christian Aid U.K.
website: http://www.christian-aid.org.uk/

International Monetary Fund
http://www.imf.org/

Jubilee South
http://www.jubileesouth.net/

Kunibert Raffer (personal web page of this expert on insolvency and governmental debt) http://mailbox.univie.ac.at/~a4411maj/

U.S. Treasury Department
http://www.treas.gov/

World Bank
http://www.worldbank.org/


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