Global Policy Forum

Conflicts and Poverty-Reduction Negotiations Slow HIPC Implementation

By Christina Katsouris

The heavily indebted poor countries (HIPC) initiative, designed to reduce the debt of the world's poorest countries, ran into problems in May when some creditors postponed further debt reduction for Uganda, the first country to qualify under the enhanced HIPC programme for additional relief. Some creditors are citing its armed conflict with Rwandan troops in the neighbouring Democratic Republic of Congo.

The postponement was imposed by the Paris Club of bilateral creditor governments but could also delay relief due from multilateral creditors. It is likely to fuel more criticism from anti-debt campaigners who argue that the Paris Club is reneging on HIPC terms for Uganda at a time when creditors are already behind schedule in approving debt relief for other countries. Creditors have so far announced only five new deals this year, far short of the 11 they had planned to approve by the April meetings of the World Bank and the International Monetary Fund (IMF).

In early May, the Bank and the Fund announced that Uganda had "fulfilled the conditions" for reaching completion - the point at which creditors are supposed to finalize writing off a country's debt stock under HIPC. The announcement called on creditors to waive a nominal $1.3 bn, or $656 mn in net present value (NPV), the discounted value of debt if it were repaid in a lump sum. Under normal circumstances, Uganda would have then met other creditors, including representatives of the 19-member Paris Club, and finalized arrangements for reducing its debt. However, the Club cancelled a mid-May meeting and has set no new date for discussions.

"Creditors are worried about the Ugandan government's involvement in conflict with Rwanda ... there are new tensions in this conflict," a Paris Club source told Africa Recovery. "Bilateral creditors are waiting for a clear assessment of the likely impact of the conflict."

Changing the rules?

Debt lobbyists have criticized the postponement, arguing that the Paris Club is changing the rules after Uganda fulfilled all HIPC's conditions. It has implemented the required macroeconomic reforms, put poverty reduction policies in place and instituted a transparent and democratic system for investing savings from debt relief.

"The Paris Club doesn't have the right to do this," says Mr. Tony Burden of Oxfam International. "Uganda has developed a national strategy with the participation of civil society. It has transparency, even on defence expenditure." The call for transparency is intended to ensure that all savings from debt relief are spent on poverty eradication.

The Paris Club believes that withholding debt relief could encourage Uganda to stop fighting. It fears that any escalation of the conflict would force the government to spend more on defence and put debt relief savings at risk. "It could be difficult to avoid funding a military build-up if the funds were released," a Scandinavian official told Africa Recovery. "We don't want to fuel armed conflict," noted another Paris Club source.

Others feel the creditors should use different means to restrain the conflict. "Uganda is heavily reliant on aid. Donors could use this to discourage further engagement," one debt lobbyist maintains.

Protracted delay by the Paris Club could put the World Bank and IMF in a difficult position. Having approved Uganda's completion, they are committed to reducing its debt stock, although technically they could withhold relief since HIPC requires the simultaneous participation of all creditors, according to a Washington source.

The delay by the Paris Club also reinforces concern over the time it will take other countries to get debt reduced under the enhanced HIPC. The programme was modified in September 1999 -- after its initial launch in 1996 -- in order to give faster relief to countries completing the required reforms. It also provides for deeper relief and should make more countries eligible for debt reduction. Some 40 countries could now potentially qualify, 32 of them in Africa. Under the original HIPC, a country's debt was considered "sustainable" at 200-240 per cent of exports or 280 per cent of fiscal revenues. In most cases, debt would have been reduced only after six years. First, countries had to implement structural adjustment policies for three years to reach a "decision point" when creditors approved the amount of debt that would be reduced at the completion of the process. To reach completion point, a country had to sustain the reforms for a further three years.

HIPC-2, as the enhanced initiative is known, lowered the sustainability ratio to 150 per cent of exports and 250 per cent of fiscal revenues and strengthened links between debt relief and poverty reduction. The enhanced plan requires countries to implement reforms for three years and to draw up democratically agreed poverty reduction strategy papers (PRSP) before reaching decision point.

Accent on poverty reduction

Debtors can now reach completion once they have implemented PRSPs and other specific macroeconomic policies for at least a year.

In theory, the fastest reformers should have their debt reduced more quickly than before. HIPC-2 also requires creditors to provide interim relief by reducing debt service (payments of interest and principle) between decision and completion. Bilateral creditors also agreed to write off up to 90 per cent of each country's debt, and more if necessary.

In late June, the IMF and World Bank deemed that Senegal, which had not been eligible under HIPC-1, now qualifies, since its debt is higher than both of the new sustainability ratios and its policy performance is considered satisfactory, including the drafting of an interim poverty reduction strategy paper. Although Senegal may not reach the completion point until the end of 2001, the World Bank agreed to begin providing interim debt relief this 1 July. The total HIPC-2 package following completion will reach around $800 mn.

Countries that received debt relief under HIPC-1 now also must devise and implement poverty reduction strategies in order to obtain additional relief under HIPC-2. So far, only Uganda has reached the completion point under the enhanced HIPC, after having $347 mn written off under HIPC-1 in April 1998.

Mozambique had $1.7 bn in debt waived under HIPC-1 in June 1999. It reached decision point under HIPC-2 in April 2000, entitling it to a further $254 mn in relief once it has finalized and implemented its poverty reduction strategy for at least a year. This will take some time since the government only recently began its dialogue with civil society.

Tanzania reached decision point in April when creditors announced plans to write off $2 bn in NPV terms, the largest deal so far, to reduce the country's debt by 40 per cent. Tanzania also has some way to go before completing its poverty reduction strategy. President Benjamin Mkapa anticipates, "Full debt relief will only be possible after 18 months. If we do it properly, a final decision will be made and we will receive full debt relief."

The World Bank admits that the requirement for poverty reduction is delaying relief. "The principal reason [for the delays] is the effort being put into the poverty reduction strategy papers," said World Bank President James Wolfensohn during the Bank's April meeting. "Governments are engaged in a consultative process with the people of those countries to see how they are going to use the funding that is saved. That is what is holding things up."

Mr. Wolfensohn said the Bank would discuss the problem with HIPC finance ministers, but stressed that it was nonetheless worth persisting with the strategies. "It is better to have a good poverty reduction strategy and one that is socially purposeful." Some debt lobbyists agree that time should be invested in perfecting the strategies, but say that maximum interim debt relief should be given between the decision and completion points. "We would prefer creditors to allow a country to pay debt service as if the debt stocks had been cancelled before they are actually cancelled on completion," says one.

In other cases, relief has been delayed by conflict situations. Rwanda was originally scheduled for a decision in the final quarter of 2000, but action is likely to be postponed because of conflict with neighbours. Ethiopia was one of the first countries to be considered for a HIPC deal back in 1996, but has not moved forward because of its war with Eritrea.

Other countries have fallen behind schedule because they have not implemented the necessary reforms. Mali was due to complete under HIPC-1 this year but could be delayed for these reasons. Burkina Faso is scheduled to reach completion point under HIPC-1 this year. Both countries will qualify under the original HIPC, before moving on to HIPC-2 so as get some relief before having to complete the poverty reduction papers for HIPC-2. Benin, Cameroon, Chad, Guinea, Guinea-Bissau, Malawi and Zambia are scheduled to reach a decision point over the next few months.

Funding pressures

Debt lobbyists plan to press creditors to abandon HIPC's current formula for calculating relief, in order to increase the amount of debt reduction. "Debt relief should be calculated on the basis of how much is needed to achieve specific poverty reduction targets rather than on pre-determined debt to export and fiscal ratios," says Mr. Mark Farmener of Christian Aid. Many lobbyists plan to promote this new approach in July when the Group of 7 (US, UK, France, Germany, Japan, Canada and Italy) has its next summit in Japan.

It could prove an uphill task. Most bilateral creditors believe that they have done enough. The G7 has in principle agreed to write off 100 per cent of bilateral debt, although some of these packages may not be as generous as they appear. France and Japan, the largest bilateral creditors, have slipped caveats into their terms. According to Secretary of State for Trade Franí§ois Huwart, France will write off 100 per cent of debt through "refinancing by gifts" of debt due to France. "In practice, countries will repay the amounts due and France will then proceed to give them gifts of a corresponding amount in order to finance projects."

Some see this as a novel variant of "tied aid," in which assistance is designed to boost a donor's domestic industries and services. However, French officials claim it will encourage participation and transparency. Projects will be chosen in collaboration with governments and local non-governmental organizations and the system will force governments to show how money saved through debt relief is spent. Japan has indicated that it will curtail further development assistance for countries choosing to have Japanese aid debt written off, prompting Ghana, which relies heavily on Japanese assistance, to consider rejecting a HIPC deal.

Some creditors, such as the UK, have already agreed to waive 100 per cent of debt service for each HIPC country between the decision and completion points. Many may also supplement the contributions of poorer multilateral institutions, such as the African Development Bank, to enable them to provide their share of debt relief. According to the World Bank, bilateral creditors now have committed $2.4 bn to the HIPC Trust Fund. "We now have enough pledges in the Trust Fund to move ahead on the 20 countries we hope to approve by the end of the year," a World Bank spokesman told Africa Recovery. The largest pledges are from the US ($600 mn), the UK ($280 mn), Germany ($252 mn) and France ($199 mn).

Some pledges, as in the case of the US contribution, will take time to convert into debt relief. After the US Congress agreed to appropriate about $70 mn in June, creditors seem resigned to accepting that it will vote funding on an "as-needed" basis, rather than in annual $200 mn tranches as they had hoped. However, NGOs worry that such US foot-dragging could jeopardize the overall initiative. Nevertheless, World Bank officials remain hopeful that creditors will be able to convert their pledges to actual debt relief in time to meet the needs of African HIPCs.

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