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Africa: Unions Call for Debt Cancellation
AfricaFocus Bulletin
Apr 12, 2005 (050412)
(Reposted from sources cited below)
Editor's Note
"In spite of positive rhetoric ... concrete actions [on new debt
relief] have been delayed from meeting to meeting, in part because
of disagreements between donor countries on the specific elements
of an expanded debt relief initiative." In a new statement released
in March, global unions joined other campaigners for debt cancellation in calling
on international financial institutions to stop delaying and act for full debt
cancellation for developing countries fighting poverty. But the
prospects for action at this week's meeting of the World Bank and
IMF remain uncertain.
In the World Bank's Global Monitoring Report released today, debt
relief does not even figure on the five-point agenda presented to
accelerate progress on achieving the Millennium Development goals
("country-owned" strategies, more private investment, more human
services delivery, more open trade, and more aid). See
http://www.worldbank.org/globalmonitoring
This AfricaFocus Bulletin contains the statement from a coalition
of global unions representing more than 145 million members in 154
countries. The statement not only calls for debt cancellation, but
contains specific critiques of conditions imposed by international
financial institutions. Also included below is the section on debt
relief from the World Bank's Global Monitoring Report 2005,
released on April 12.
The statement from global unions is in accord with the prevailing
consensus among African governments, civil society, debt
campaigners, and development analysts, calling for urgent action
for more debt cancellation. If the Bank's latest report is taken as
an indicator, however, neither the international financial
institutions nor the donor countries have yet absorbed the message.
In these circles, the assumption still seems to prevail that only
minor incremental adjustments in debt relief are required.
For a recent restatement of the critique of HIPC and call for full
debt cancellation, see the article by Demba Moussa Dembele, "G7
leaders and the debt trip to nowhere, " in the March 10 issue of
Pambazuka News (
http://www.pambazuka.org/index.php?issue=197).
For additional background on debt and the campaign for debt
cancellation, see http://www.africafocus.org/debtexp.php
For news on debt relief in Zambia, which recently became the latest
to gain approval of a package under the creditors' Heavily Indebted Poor
Countries (HIPC) program, see
http://www.africafocus.org/country/zambia_irin.php
and
http://www.africafocus.org/country/zambia_news.php
++++++++++++++++++++++end editor's note+++++++++++++++++++++++
Statement by Global Unions to the 2005 Spring Meetings of the IMF
and World Bank (Washington, 16-17 April 2005)
Global Unions International Confederation of Free Trade Unions
(ICFTU)
Global Union Federations (GUFS)
Trade Union Advisory Committee to the OECD (TUAC)
March 15, 2005
The ICFTU represents unions in 154 countries with a total of 145
million members. The ICFTU works closely with the Global Union
Federations (GUFs), representing workers in different sectors, and
with the TUAC. All the above organizations are on the Global Unions
web site: http://www.global-unions.org
Advancing the Global Call to Action Against Poverty
Statement by Global Unions to the 2005 Spring Meetings of the IMF
and World Bank (Washington, 16-17 April 2005)
Introduction
1. During the World Social Forum in Porto Alegre (26-31 January
2005), the ICFTU and other member organizations of Global Unions
joined with a wide-ranging alliance of groups to launch the Global
Call to Action Against Poverty Information on the Global Call for
Action Against Poverty can be found on GCAP's web site:
http://www.whiteband.org. The alliance is pledged to mobilize
support in favour of trade justice, debt cancellation, more and
better aid, and concerted efforts to reach the Millennium
Development Goals (MDGs). The Washington-based international
financial institutions (IFIs) have assumed major responsibilities
in designing partial debt relief initiatives, in channelling
development aid, and in creating national development plans whose
professed aims are to achieve the MDGs. That these efforts will not
be sufficient to reach the development goals has been demonstrated
by the World Bank's first Global Monitoring Report on the MDGs,
which concluded that, based on current trends, most MDGs will not
be met by most developing countries by the 2015 target date. Global
Unions urge the International Monetary Fund (IMF) and World Bank to
adopt the measures put forward in this statement in order that
their actions consistently contribute to the eradication of poverty
and the attainment of the MDGs, as advocated by the Global Call to
Action Against Poverty.
New initiatives for debt cancellation and improved development
assistance
2. Global Unions and their affiliates have been advocating more
generous debt relief and its expansion to a greater number of
countries for many years. Affiliated trade union organizations in
some low-income indebted countries have witnessed the beneficial
impact of partial debt relief received through the Heavily Indebted
Poor Countries (HIPC) programme and have joined other organizations
in calling for full debt cancellation so that governments can
further expand public services that are essential to attaining the
MDGs. Global Unions' affiliates in industrialized countries have
lobbied their governments to support full debt cancellation and to
allocate the public funds necessary to finance additional resources
for low-income countries, including for debt relief. The IFIs' own
HIPC progress reports, which have shown that debt levels have
remained unsustainable even for countries having received full HIPC
assistance, have amply demonstrated the need for expanded debt
relief. However the trade union movement has been disappointed
that, in spite of positive rhetoric at the last several IFI
biannual meetings, concrete actions have been delayed from meeting
to meeting, in part because of disagreements between donor
countries on the specific elements of an expanded debt relief
initiative.
3. Recent statements by the G7 countries expressing support in
principle for up to 100 per cent debt cancellation have been
encouraging. However Global Unions believe that the new initiative
must not be limited by the constraints of the HIPC programme, which
severely restrict the number of countries considered eligible for
debt relief. For example, despite being the poorest country in the
western hemisphere, Haiti has been excluded from consideration for
debt relief because its level of indebtedness has not met HIPC
parameters. As a result, the almost bankrupt Haitian administration
was forced to make a payment to the World Bank of $52.6 million in
January 2005 in order to become eligible for a new Bank lending
programme.
4. Global Unions believe that an important new debt cancellation
initiative must be adopted in 2005. This can be financed by a
re-evaluation of IMF gold stocks, some transfer of resources from
the IBRD (the Bank's non-concessionary lending arm), and additional
contributions from industrialized-country development budgets.
Global Unions' affiliates in industrialized countries have
campaigned jointly with other organizations in favour of increased
development aid. These campaigns have already had positive results
in some countries. However trade unions will continue their
campaigns as long as the 0.7 percent official development
assistance target is not reached. Debt relief should be extended to
all low-income countries respecting human rights that have a
shortfall of resources to meet the MDGs. It should consist of 100
per cent cancellation of debt owed to the IFIs, not be dependent on
structural adjustment conditionality, and not reduce concessionary
assistance from the IFIs or other international assistance. Global
Unions furthermore support new mechanisms to increase financial
flows to developing countries, such as those included in the joint
Brazilian-French-Chilean-Spanish initiative, and also endorse the
British proposal for an International Finance Facility (IFF). In
the medium term, new forms of international taxation should be
implemented to avoid a shortfall in aid as IFF loans become
repayable.
5. As regards another category of highly indebted country
middle-income developing countries whose debt is owed principally
to private creditors the prolonged crisis concerning Argentina's
economic collapse, default, and arduous debt restructuring
negotiation constitute ample proof that another way must be found
to restructure unsustainable debts. Global Unions welcomed the
IMF's initiatives at the beginning of the decade to create a
Sovereign Debt Restructuring Mechanism, though we were critical of
various aspects of the proposal, some of which concerned the Fund's
own role in applying the mechanism. The manner in which the IMF
intervened on numerous occasions in Argentina's recent debt
restructuring procedures by attempting to pressure the government
to increase its offer to private creditors, even though a strong
majority of the latter ultimately accepted the terms proposed by
the government, raises the question of whether the Fund can
realistically be counted on to act as a neutral broker, let alone
in the interests of the indebted country.
6. Argentina's difficulties with the IMF have not yet come to an
end, since the Fund must still approve conditions for extending
payments of monies owed to it. Argentina is understandably
reluctant to allow the Fund to impose yet another structural reform
programme in spite of the Fund's claims that such a programme is
necessary for Argentina to achieve a sustained growth path. The
last time that Argentina attempted to abide by an IMF structural
reform programme, the country's GDP shrunk by 21 per cent (between
1998 and 2002 in real terms, according to IMF data). Global Unions
reiterate their support for a fair and transparent debt
restructuring mechanism, so as to facilitate the restructuring of
unsustainable debts owed largely to private creditors, and to
prevent or control the spread of international financial crises. In
addition, the IMF should adopt a less restrictive form of
contingent credit facility, support closer coordination of major
currencies, and encourage the adoption of measures such as capital
controls and the Tobin tax to limit speculative capital movements.
An end to privatization and structural reform conditionality
7. In a report published last year on Reforming Insfrastructure,
the World Bank spoke of the IFIs' previously exaggerated enthusiasm
for privatization as a solution for various problems and
characterized their pro-privatization stance as "irrational
exuberance". Constructive self-criticism is a positive trait, on
condition that it leads to correction of the identified misconduct,
which in this case was an unjustified bias in favour of
privatization and against public sector solutions. Unfortunately,
various IMF and World Bank policy documents, both on the
international and country level, still show a strong bias against
public provision. One example of this is to be found in the
approach called "Output-Based Aid", which the Bank has developed to
promote the effective use of public funds for delivery of
infrastructure services. While there is no reason given why public
services delivered by public providers could not be evaluated on
the basis of the outputs actually delivered, Bank publications
specify that the government must "delegate service delivery to a
third party under contract". Consistent with this approach, several
recent World Bank Country Assistance Strategies (CAS) have stated
that loans will require contracting public infrastructure services
out to private sector firms. The April 2004 CAS for Costa Rica, for
example, stipulates that World Bank financial support requires that
water and sanitation services must be "transferred to specialized
private operators" while "greater private sector involvement" will
also be demanded in order to obtain loans for other services.
8. In the case of the IMF, a number of recent Article IV
Consultation and other surveillance reports, such as those for
Algeria and Nigeria (both February 2005) recommend an accelerated
pace of privatization, even while recognizing the social costs. A
January 2005 IMF/WB Joint Staff Assessment of Kenya's Poverty
Reduction Strategy Paper (PRSP) berates the Kenyan government for
not giving more emphasis to privatization in the country's PRSP
implementation report. Other IMF reports have reminded governments
of privatization conditionality, such as Nicaragua's obligation to
introduce a partially privatized pension system in order to benefit
from full HIPC benefits. The IMF's November 2004 PRGF Review for
Nicaragua states that "the public sector deficit was expected to
widen by 1.2 per cent of GDP a year as a result of the start of
private pension funds (because of lower contributions)", but the
Fund sees no reason against proceeding even if the increased
deficit could be used as a pretext to reduce other government
services. The latest World Bank CAS for Serbia and Montenegro
(November 2004) advises the government that it must take measures
to reform its pension system "with a view to introducing second and
third [privatized] pillars". Such a prescription is surprising in
view of the Bank's latest enunciation of its pension reform policy,
Old-Age Income Support in the 21st Century: An International
Perspective on Pension Systems and Reform, February 2005. This
policy document claims that the Bank has adopted a more flexible
approach on pension reform and no longer imposes its classic
three-pillar privatization model, which has had many negative
impacts on workers and retirees, on women in particular.
9. A recent British government policy document, Rethinking
Conditionality (DFID, March 2005), notes that IFI and other donor
conditionality on issues such as privatization and trade
liberalization have frequently had negative social impacts; have
been forced on developing countries "regardless of whether these
were in the countries' best interests"; and have prevented poor
countries from incorporating lessons from successful development
models, notably in East Asia. The British policy paper states that
suspension of assistance, which is sometimes carried out by the IMF
for misdemeanours as slight as temporarily going "off target" from
budget expenditure guidelines, should only occur in three
circumstances: violation of human rights, corruption, and diversion
of aid to unintended purposes such as military expenditures. Global
Unions endorse the call for a substantial reduction of conditions
placed on loans and grants, and in particular the elimination of
structural conditionality that imposes measures of doubtful benefit
to receiving countries, such as service privatization and trade and
investment liberalization. Global Unions will continue to argue for
a strong public sector, particularly in vital services areas, and
to defend the interests of workers adversely affected by
privatization. The World Bank and IMF should carry through on their
commitments to give the same attention to funding of improvement
and modernization of services under public control as under private
control, and to undertake proper consultation of workers affected
by privatization and restructuring.
Need to correct IFIs' push for labour law deregulation
10. Even though a specialized intergovernmental body, the
International Labour Organization, exists to establish
international labour standards and provide expert advice to
countries on labour issues, a growing number of IFI country-level
reports include recommendations on labour markets questions. A
recent examination of Article IV Consultation reports produced by
the Fund over a four-month period (November 2004-February 2005)
found that 80 per cent of them included recommendations on labour
issues. These ranged from comments on the need to reduce labour
market "rigidities" in Mexico and Pakistan, to increase labour
market "flexibility" in Korea, and to reform the collective
bargaining system in Spain. In the case of Germany, close to one
third of the November 2004 Article IV report deals with the Fund's
recommendations for instituting further reforms in the legal
framework for collective bargaining, facilitating dismissal of
workers, and making "deeper cuts" to pensions and health care.
Ironically, other sections of the Fund's report for Germany note
that the benefit cuts already made, combined with stagnant wages,
have undermined consumer confidence and are the principal
explanation for a sluggish economy and increasing unemployment.
11. Most World Bank CAS, as well as other country-level reports,
also advise governments to attack identified problems of labour
market "rigidities" or "inflexibility". Some recent examples are
the CAS for Bosnia (August 2004) and India (September 2004) and the
PRSP Joint Staff Assessment for Kenya (January 2005). The CAS for
these countries and several others announce ongoing World Bank
research for formulating changes to the countries' labour
legislation. While trade unions are frequently engaged in national
dialogues in view of modernizing national labour legislation, they
have been very critical of the fact that the Bank's main input to
national labour reforms has been based on the simplistic premise
that any kind of labour regulation, other than those strictly
limited to the core labour standards, is inherently bad for
development and should be removed. In September 2004 the Bank made
public country-by-country Labour Market Flexibility Indexes,
calculated on the basis of indicators such as maximum hours rules,
minimum wages, and protections against dismissal. Through the Doing
Business publication and specific country reports, the Bank invites
governments to make their countries more "investment friendly" by
dismantling the above standards, as well as numerous other forms of
worker protection.
12. Confronted by the impact of globalization and economic
restructuring on national labour markets, trade unions have lobbied
governments to put in place or expand social protection measures so
as to better protect workers and their families in case of job loss
or other eventualities that could lead to sudden reduction of
income, and to ensure that women workers have a full opportunity to
benefit from employment. While the Bank has agreed in principle
with these proposals, on a country level the Bank frequently
discourages such initiatives or even works to undermine those
social protection programmes that exist. For example, in Bulgaria
a country which is scheduled to join the European Union in 2007
the World Bank country team informed an international trade union
delegation that the Bank was encouraging the government to cut back
unemployment benefits because the programme allowed for "leakage to
the non-poor". The Bank thus ignored the fact that, by definition,
unemployment benefits are an income-maintenance rather than a
strictly targeted anti-poverty programme, and that they have an
important role to play in well-functioning labour markets as
workers move from one job to the next. Similar attacks on income
maintenance schemes intended to protect dismissed workers are
underway in other countries under the guise of "targeting the most
needy". In Kenya, the IMF/WB Joint Staff Assessment of the PRSP
discourages the government from going forward with a compulsory
national health insurance scheme.
13. Global Unions believe that the IMF and World Bank should
encourage and assist countries to develop and maintain
comprehensive social protection programmes. These should include
old-age pensions, unemployment benefits, child support, maternity,
and sickness and injury benefits. Furthermore, the IMF and World
Bank must support labour market policies that underline the
importance of decent work, that is, policies for maximizing
employment creation within a framework of properly implemented
labour laws that recognize workers' rights to earn an adequate
income, work in safe conditions, combat discrimination, and be
protected from abuse, with full application of the ILO's core
labour standards. Trade unions need to be fully consulted on
proposed amendments to labour legislation.
Measures to make IFI operations consistent with core labour
standards
14. On the theme of the core labour standards Core labour standards
are internationally-agreed fundamental human rights for all
workers, irrespective of countries' level of development, that are
defined by the ILO conventions that cover freedom of association
and the right to collective bargaining (ILO Conventions 87 and 98);
the elimination of discrimination in respect of employment and
occupation (ILO Conventions 100 and 111); the elimination of all
forms of forced or compulsory labour (ILO Conventions 29 and 105);
and the effective abolition of child labour, including its worst
forms (ILO Conventions 138 and 182). (CLS), trade unions have
welcomed the World Bank's recognition of their positive development
impact and the agreement to promote them when the Bank deals with
labour issues. Global Unions have encouraged the Bank to go beyond
rhetorical support and to ensure that the Bank's own operations are
consistent with the standards. An important step was taken by IFC
management in 2004 in their proposal to include the principles of
the CLS as "performance requirements" for all IFC loans. These new
safeguard standards are currently under consultation. Global Unions
have recommended that the standards make direct reference to the
relevant ILO conventions and also include clearer mechanisms for
implementation and enforcement. Global Unions will make further
representations to the IFC on these matters.
15. The other divisions of the World Bank group, as well as the
IMF, should also take measures to ensure that, at the very least,
the projects and programmes that they fund do not violate CLS.
Global Unions have called to the attention of the Bank instances of
violation of CLS in Bank-funded infrastructure projects, and in
March 2004 the International Federation of Building and Woodworkers
submitted detailed proposals for including labour standards in the
Bank's procurement contracts. One year later, the Bank has yet to
respond to these proposals. The report of the World Commission on
the Social Dimension of Globalization emphasized that all IFI
policies must support, and must not undermine, compliance with CLS.
Global Unions support the requirement to include all four core
labour standards in IFC loans as a standard safeguard. CLS should
also be included as obligatory clauses in the standard bidding
document for World Bank procurement as well as in other Bank loan
agreements, and the Bank must make certain that its projects and
operations provide safe working conditions and decent wages.
Likewise the IMF, which frequently dispenses advice on
labour-related issues, must ensure that its policy recommendations
are consistent with CLS and other ILO conventions that the country
has ratified.
Genuine country ownership of Poverty Reduction Strategy Papers
16. Since the Poverty Reduction Strategy Papers (PRSP) approach was
introduced in 1999, trade unions in the PRSP countries have worked
to overcome many obstacles to their participation, including
instances in early PRSPs of unions being excluded from
consultations. Following campaigns by Global Unions and national
affiliates, an increasing number of unions have been invited to
participate, as documented in the World Bank's Trade Union
Participation in the PRSP Process (August 2004). However, with a
small number of exceptions, positions put forward by unions are not
reflected in finalized PRSPs, most notably recommendations with
regards to employment creation and labour conditions, despite the
obvious importance of these issues for poverty reduction. In
addition, proposals of unions and many other civil society
organizations on macroeconomic and structural policy choices are
frequently ignored in the final PRSP, something that was confirmed
last year in assessments prepared by the World Bank's OED and the
IMF's IEO, and also in a joint IMF/WB Concept Note: 2005 PRS Review
(February 2005).
17. Meetings have been planned in April 2005 between the IFIs and
trade unions and other civil society organizations in the framework
of the review of the PRSP process that is currently underway.
Unions will highlight the fact that, when given the opportunity to
do so, they will take part in national PRSP processes to the extent
that their participation has an impact. In countries where trade
union proposals on employment, labour and structural policies have
been completely ignored or superseded by IFI loan conditions,
unions question the usefulness of continuing to take part in the
process. Genuine country ownership means that countries are allowed
to develop policy option in PRSPs that incorporate broadly shared
national priorities, which can be expressed through civil society
and also through national parliaments. Parliaments must be given an
opportunity to debate on and adopt the PRSP. The IMF and World Bank
must encourage borrowing countries to develop policy options in
PRSPs that truly reflect national priorities to reduce poverty,
rather than standard IFI prescriptions to prioritize
market-oriented economic liberalization. A requirement for civil
society recommendations to be taken up seriously needs to become a
part of the IFIs' approach to attaining the MDGs in countries
implementing PRSPs.
Democratization of development strategies and IFI governance
structures
18. The IFIs have given much emphasis in recent years to the
importance of country ownership over policy choices, whether
through the PRSP process or other instruments. As the IFIs have
stated to be one of the aims of the PRSP process, this should
entail taking the policy choices out of the exclusive hands of the
finance ministry or the executive, and allowing the government as
a whole and national parliaments to have their say. Unfortunately,
the Bank and Fund frequently do not live up to the "country
ownership" rhetoric when it comes to formulating lending
agreements. For example, beginning in 2002 the IMF has pressured
Zambia's executive to renege both on the country's PRSP and
decisions of the national parliament by including specific
privatization conditions in PRGF loans, even after the PRSP and
parliament had rejected these measures. The World Bank's latest CAS
for Costa Rica (April 2004) contains the surprising stipulation
that "conditions agreed with the Executive related to key reforms
should be strictly under the control of the Executive and not
dependent upon Congress approval". Rather than objecting to
parliamentary control over national development strategies, the
IFIs should, in the spirit of true country ownership, encourage
countries to make development plans and lending agreements with the
IFIs subject to parliamentary approval.
19. The issue of democratic control over development decisions is
also frequently raised with regards to the IFIs' own outdated
governance structures, where developing countries are severely
under-represented. Recently, the ICFTU joined with a number of
other civil society organizations to object to the most visible
demonstration of the democratic deficits at the IFIs, namely the
selection process for the top positions in the IMF and World Bank.
The non-transparent manner in which the managing director of the
IMF and president of the World Bank are chosen, and the unwritten
convention which reserves the decision to one country or a specific
group of countries, are in flagrant contradiction with the IFIs'
demands on borrowing country governments that they operate in a
transparent and accountable fashion. Global Unions call on the IMF
and World Bank to establish transparent and accountable processes
for the selection of the heads of the institutions, and move
forward on proposals to improve the representation of developing
countries on the executive boards of the IFIs.
Conclusions
20. Trade unions have committed themselves to the achievement of
the Millennium Development Goals and to the Global Call to Action
Against Poverty in order to mobilize support, jointly with other
organizations, in specific areas that are vitally important to
poverty reduction. The IMF and World Bank have key roles to play in
launching an expanded debt cancellation initiative in 2005, which
will be one of the major instruments for making substantial
progress in poverty reduction in heavily indebted countries, as
well as other measures to increase financial flows to low-income
countries. The IFIs should take steps to eliminate highly
constraining structural adjustment conditionality, to permit
genuine country ownership of national development strategies, to
make their operations consistent with core labour standards, and to
democratize their governance structures. In addition, the IFIs
should ensure a greater degree of consistency with other
international organizations by implementing the recommendations of
the World Commission on the Social Dimension of Globalization in
its call for increased coherence between the IMF, World Bank, WTO,
ILO and other relevant UN bodies, including through policy
coherence initiatives.
World Bank
Global Monitoring Report 2005
http://www.worldbank.org/globalmonitoring
[pages 180-184]
Debt Relief
Most debt relief to low-income countries has occurred under the
aegis of the HIPC initiative, including the enhanced version of the
initiative introduced in 1999. But donor assistance for debt relief
involves more than one-time reductions in developing countries'
debt levels it also requires ensuring that countries have the
capacity and ability to ensure that debt remains at sustainable
levels. In addition, recent proposals have suggested that donors
introduce new approaches and programs to ease debt.
Progress on the HIPC Initiative
For heavily indebted poor countries, debt relief is crucial to
create the fiscal space for much needed increases in spending to
promote growth and reduce poverty. Overall, substantial progress
has been made in implementing the enhanced HIPC initiative. By
March 2005, 27 HIPCs more than two-thirds of the 38 countries that
potentially qualify for assistance under the initiative, and
accounting for about two-thirds of total expected debt relief in
net present value terms had reached their decision points and were
receiving relief. Of these, 15 had also reached their completion
points when creditors provide the full amount of debt relief
committed at the decision points on an irrevocable basis.
Progress on reaching completion points increased in 2004, and three
more countries are expected to reach their completion points by
mid-2005. For many of the 12 countries in the interim stage between
decision and completion points, maintaining macroeconomic stability
remains a challenge. Although a number of countries are on track
with respect to their macroeconomic programs, others that have
experienced difficulties in program implementation are pursuing the
policy measures needed to bring their economic programs back on
track.67 Most of the countries in the interim stage have finalized
their PRSs and are making good progress in implementing them.
Of the 11 countries that have not reached their decision points, 2
are making significant progress and are expected to reach their
decision points in 2005. For the others, significant challenges
remain: These countries have been affected by domestic conflicts
and have protracted arrears to various creditors, which has
complicated the design and implementation of reform programs.
The sunset clause of the HIPC initiative has been extended by two
years to the end of 2006, with its application ring-fenced to poor
countries with unsustainable external debt based on end-2004 data.
All IDA-only and Poverty Reduction and Growth Facility
(PRGF)-eligible countries that have not benefited from HIPC debt
relief and whose external indebtedness (based on end-2004 data)
exceeds the enhanced initiative's thresholds after the assumed full
application of traditional debt relief are potentially eligible for
the initiative. World Bank and IMF staff are preparing a
preliminary list of countries that meet this criterion for
consideration by the institutions' boards in August 2005. As now,
countries would receive debt relief based on the level of debt at
the time of reaching the decision point.
HIPC relief is projected to substantially lower debt stocks and
debt service ratios for most HIPCs that have reached their decision
points. Net present values of debt stocks in the 27 HIPCs that
reached their decision points by mid-March 2005 are projected to
decline by about two-thirds once they reach their completion
points. HIPCs in the interim period have benefited from debt relief
from the Paris Club as well as from several multilateral creditors.
Ratios of debt service to exports and to fiscal revenues for the 27
countries that have reached their decision or completion points are
estimated to have fallen from an average of 16 percent and 24
percent in 1998 9 to 7 percent and 12 percent in 2004, respectively
(table 5.4). The near-term debt service ratios of these countries
are below the average for non-HIPC low-income countries.
Debt relief under the HIPC initiative has helped countries increase
poverty-reducing spending. In the 27 countries that have reached
the decision point, such spending rose from an average of 6.4
percent of GDP in 1999 to 7.9 percent in 2004 about four times the
amount spent on debt service.68 In absolute terms, poverty-reducing
spending is estimated to have increased from nearly $6.0 billion in
1999 to $10.5 billion in 2004, and is projected to increase to
$14.5 billion in 2007 (see table 5.4).
Although creditor participation has improved, some non Paris Club
bilateral and commercial creditors have not committed to providing
HIPC relief. Most of the costs attributable to bilateral creditors
continue to be borne by members of the Paris Club. Commercial
creditors represent less than 5 percent of the net present value
cost of relief, in part because of measures by the Debt Reduction
Facility for IDA-only countries that have reduced the stock of
commercial debt in HIPCs. Moral suasion remains the principal
measure for encouraging participation and discouraging litigation
by remaining commercial creditors. With respect to multilateral
debt, 23 of the 31 multilateral creditors have indicated their
intent to participate in the initiative, representing more than 99
percent of the total debt relief required.
A key premise of the HIPC initiative is that debt relief should be
additional to other forms of external financing assistance. An
important issue is whether countries receiving HIPC debt relief are
receiving additional resources, or whether debt relief crowds out
other aid flows. Merely observing the size of flows does not
provide conclusive evidence of additionality, as there is no way of
knowing how much aid countries would have received without the HIPC
initiative. There are also substantial difficulties in measurement
because different donors account for debt relief in different ways.
Debt relief is sometimes explicit, such as through grants for debt
relief, and sometimes implicit, such as through debt service
reductions.
The August 2004 HIPC status report, based on updates of debt stock
and debt service indicators in post completion point countries,
found that the net present value of debt ratios had climbed since
the completion points.69 Most of the increase was due to interest
and exchange rate changes, while high exports had significantly
lowered debt ratios. Debt service ratios for these countries had
also increased but remained close to 10 percent on average. While
the low level was due to HIPC debt relief and the high
concessionality of new debt, the average change masked important
differences between countries. Medium-term projections generally
pointed to stable or declining trends in debt and debt service
ratios. The review indicated that notwithstanding HIPCs' high
vulnerability to shocks, sound economic policies and close
monitoring using the proposed debt sustainability framework for
low-income countries (see below) would help prevent the reemergence
of unsustainable debt.
Debt Sustainability
Continued measures are needed by HIPCs and by creditors to ensure
that debt sustainability is maintained after completion points,
just as similar measures are needed for other lowincome countries.
The Boards of the IMF and World Bank have endorsed key elements of
a proposed debt sustainability framework for low-income countries
aimed at supporting these countries' efforts to achieve the MDGs
without creating future debt problems and keeping countries that
have received debt relief under the HIPC initiative on a
sustainable track. In guiding future financing decisions, the
framework rests on three pillars:
- An assessment of debt sustainability guided by indicative
country-specific debt burden thresholds related to the quality of
their policies and institutions.
- A standardized, forward-looking analysis of debt and
debt-service dynamics under a baseline scenario and in the face of
plausible shocks.
- An appropriate borrowing (and lending) strategy that contains
the risk of debt distress.
Building on initial Board discussions of the proposed framework in
early 2004, and further considerations in September 2004, Bank and
IMF staff are preparing a follow-up paper that attempts to resolve
outstanding issues on the indicative debt burden thresholds, the
interaction of the framework with the HIPC initiative, and the
modalities for Bank-IMF collaboration in deriving common
assessments of debt sustainability. It needs to be stressed,
however, that debt sustainability is not only a resource flow
issue. It also depends on increasing growth, diversifying exports,
expanding access to global markets, and mitigating the effects of
exogenous shocks.
IDA financial support to poor countries will now take systematic
account of their vulnerability to debt. Debt sustainability will be
the primary determinant of the grant and credit mix in IDA14, and
the joint debt sustainability framework for low- income countries
will form the analytical basis to link debt sustainability and
grant eligibility.71 Countries facing the toughest debt problems
most of them in Sub-Saharan Africa will get all their support in
the form of grants, while countries less burdened by debt will
receive IDA's highly concessional long-term loans, or in a few
cases a mix of grants and loans. The resulting share of grants in
IDA support over the next three years is expected to be about 30
percent.
Proposals for Additional Debt Relief
Some G-7 members have proposed mechanisms for additional debt
relief (box 5.7). Further debt relief holds the promise of yielding
additional development financing beyond what could be forthcoming
in the form of additional gross flows, given the broad political
support for debt relief. It could also reduce the remaining debt
overhang and ease pressures to provide new aid to refinance
existing debt service obligations (so-called defensive lending),
enabling a more effective policy dialogue between donors and debtor
countries. Debt relief also has the advantage that, to the extent
that it is committed irrevocably up front, it can provide aid in a
predictable and easy to use form.
There is a danger, however, that further debt relief might instead
result in a diversion of resources that would have gone to
increased direct aid flows. Furthermore, relative to the
alternative of higher new aid flows, debt relief has a number of
potential disadvantages. First, it allocates resources according to
existing debt stocks rather than need or policy performance, and so
may prove inconsistent with the principle of allocating assistance
to countries where it would be most effective. Second, debt relief
may reduce the scope for linking assistance to the maintenance of
good policies, to the extent that an irrevocable commitment to debt
relief is made upfront. Third, it may create expectations of
further relief in the future, increasing the moral hazard
associated with any subsequent lending and hindering the
development of a credit culture. This could prompt creditors to
reduce net lending in the future.
Any new debt relief initiative would leave an unfinished agenda.
Further debt relief is inevitably only a small part of a broader
agenda that involves stronger policies in developing countries,
more and better- targeted development assistance, and a supportive
international environment for growth.
BOX 5.7 Proposals for additional debt relief- moving beyond HIPC
Members of the G-7 have put forward a number of proposals for
further debt relief beyond the enhanced HIPC initiative. Different
motivations drive these proposals. Some proposals reflect a desire
to provide additional resources to help low-income countries
achieve the MDGs. Others see further debt reduction as a way of
increasing the scope for new lending - under the proposed World
Bank-IMF debt-sustainability framework - to low-income countries
with relatively strong policies, to facilitate the development of
a credit culture. Still others aim to eliminate the need for
defensive lending and perpetual debt relief for HIPCs.
Motivations apart, the proposals differ importantly along several
lines, including the scope and modality of debt relief, the
conditionality to be applied, and the source or sources of
financing. Differences include:
- Whether eligibility for relief should be restricted to HIPCs or
be available to all low-income countries.
- Which institutions' debt should be relieved.
- What percentage of eligible debt should be relieved.
- Whether relief should take the form of reductions in debt stocks
or debt service payments.
- The strictness of conditionality.
- How debt relief by international financial institutions will be
financed - for example, with contributions from bilateral donors or
by the institutions themselves. Some G-7 members have proposed
that the IMF sell some of its gold reserves to cover its debt
relief.
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