Sovereign Debt at the Crossroads: Challenges and Proposals for Resolving the Third World Debt

Crisis
Chris Jochnick (ed.), Fraser A. Preston (ed.)

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Published: 2006 Online ISBN: 9780199783458 Print ISBN: 9780195168006

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CHAPTER

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2 Playing Games with African Lives: The G7 Debt Relief
Strategy and the Politics of Indi erence 
Fantu Cheru

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Published: April 2006

Abstract
This chapter examines the politics of policy reform in low-income Africa, and speci cally the double
standard applied by the creditor countries in dealing with the debts of middle-income Latin American
and low-income African countries. Whereas the Latin American debt was promptly dealt with by
Western creditors because of the risk it posed to the stability of the Western banking system, equal
attention was never given to the debt burden of the poorest African countries, whose debts were largely
owed to multilateral nancial institutions. Finally, the chapter examines the adequacy of the heavily
indebted poor countries (HIPC) initiative, which was introduced in 1996 to address the problem of debt
owed by low-income countries to the multilateral development banks.

Keywords: Africa, Latin America, creditors, debts, multilateral financial institutions

Subject: Economic Development and Growth, Macroeconomics and Monetary Economics
Collection: Oxford Scholarship Online
 Introduction

Since the 1980s, the international nancial institutions (IFIs) and Western creditor governments have
engaged in a self-deceptive and destructive game of managing the Third World debt problem from afar and
forcing unpopular economic policies down the throats of powerless countries in the belief that the bitter
medicine of macroeconomic adjustment would ultimately put those countries on a path to prosperity and
freedom from debt. Two decades later, however, many poor countries are in worse condition than when they
started implementing structural adjustment programs mandated by the IMF and World Bank. Structural
adjustment programs have failed to create a framework either for sustained economic recovery or for
enabling the poor to bene t from market reforms. The debt “hangover” has had a crippling e ect on the
achievement of human-development targets. This is particularly pronounced in sub-Saharan Africa, which

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has undergone two decades of adjustment without making a dent in the extreme level of human deprivation
(Mkandawire and Soludo 1999).

This chapter examines the politics of policy reform in low-income Africa and speci cally the double
standard applied by the creditor countries in dealing with the debts of middle-income Latin American and
low-income African countries. Whereas the Latin American debt was promptly dealt with by Western
creditors because of the risk it posed to the stability of the Western banking system, equal attention was
never given to the debt burden of the poorest African countries, whose debts were largely owed to the
multilateral nancial institutions. Finally, the chapter examines the adequacy of the heavily indebted poor
p. 36 countries (HIPC) initiative, which was introduced in 1996 to address the problem of debt owed by low-
income countries to the multilateral development banks. Although 26 countries have bene ted thus far
from HIPC debt relief, an analysis by the IMF and the World Bank concluded that the majority of countries will
nd themselves in worse condition after the “completion” point than when they entered the HIPC process. The net
present value (NPV) of the debt-to-exports ratio for the majority of HIPC countries could be above the 150%
threshold at their completion points (IMF/World Bank 2002b). There is clear evidence that the initiative is
not working and that a fundamentally di erent approach is needed to deal with poor countries' debt once
and for all.

African Debt: Mortgaging the Future

Africa's burden of foreign debt represents the single largest obstacle to the continent's development.
Although measurable in dollar terms, the debt burden takes its toll on human beings with a brutality that is
di cult to capture in words. For the majority of poor people in Africa, continued debt repayment means
increasingly inadequate diets, insu cient income to feed and educate children, and mounting susceptibility
to diseases. As long as African countries are forced to spend almost $15 billion (U.S.) per year repaying debts
to G8 governments and international nancial institutions, they will be unable to address their urgent
domestic needs. The constant outward ow of desperately needed resources undermines poverty-reduction
initiatives and cripples e orts to cope with the devastating impact of the HIV/AIDS crisis. Without freeing
the continent from the shackles of debt, it would be impossible to stem the spread of the pandemic on the
1
continent (Cheru 2002).

2
At the beginning of 1999, the total foreign debt owed by developing countries was $2 trillion (U.S.). The
regional distribution of this debt was as follows: $792 billion for Latin America; $340 billion for Africa (of
which $175 billion was owed by sub-Saharan Africa); and $972 billion for Asia (United Nations 2000: 276,
277). Yet, by most conventional indicators, such as the ratio of debt to gross national product (GNP), sub-
Saharan Africa's debt was the most burdensome at 133% of its GNP, compared with 41.4% for Latin America
and 28.2% for Asia. In terms of the ratio of external debt to exports, the gures are striking: 202% for Latin
 America; 340% for sub-Saharan Africa; and 121% for Asia (United Nations 2000: 279). In short, Africa is
considerably more “debt-stressed” than Latin America.

There is another important di erence between Latin American and African debt. Whereas most of Latin
America's debt is owed to commercial banks, a large proportion of African debt is owed to o cial donors.
For low-income countries (de ned by the World Bank as those with per capita GNP below $785 U.S.),
multilateral debt increased by some 544% between 1980 and 1997, from $24.1 billion to $155 billion, as
credit from other sources dried up and repayments mounted. Multilateral debt constitutes 33% of the long-
p. 37 term debt burden of the most impoverished countries (United Nations 1998: 167). For middle-income
countries, the corresponding percentage is 15%. Neither the IMF nor the World Bank is permitted, under
existing rules, to reschedule or write o debt, and repayment to both must be made in full.

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O cials from the IMF, the World Bank, and the Group of Seven (G7) industrialized nations consistently
maintain the position that these debts can and must be repaid. To remedy the problem, they have advised
developing countries to increase their exports, reduce their imports, and implement a set of policy measures
called structural adjustment programs (SAP) under the watchful eyes of the IMF. They claimed that under
these conditions and assuming higher growth rates and stable interest rates worldwide, Third World
countries would eventually be able to work their way out of debt.

In return for agreeing to implement structural adjustment programs, the debts of many of these countries
have been rescheduled repeatedly. Between 1986 and 1996, for example, 178 debt-restructuring agreements
were concluded with o cial creditors of the Paris Club, and 55 separate debt-restructuring agreements had
been reached with commercial banks in the London Club. Of the 178 agreements with o cial creditors, 106
were with sub-Saharan African governments (United Nations 1997: 172). Nevertheless, these measures have
done little to ease the pressure of the debt burden. For example, about 40% of the long-term
nonconcessional debt African countries owed to the Paris Club at the end of 1988 represented interest
capitalized by Club rescheduling. Rescheduling is merely an “accounting ction” and does little to ease the
volume of debt that countries owe to o cial creditors. On the contrary, developing countries continue to
pay out more each year in debt service than they actually receive in o cial development assistance.

The Roots of Indebted Development

There are many reasons why African countries got themselves into debt that they cannot honor. It would be
wrong to put all blame solely on either the debtor governments or on creditor nations and institutions. It is
safe to say from the outset that the policies pursued by both creditors and debtors are responsible for
accentuating the economic and social crisis in Africa and that both must share the burden of adjustment
equally.

The widespread economic stagnation that Africa has experienced since the 1970s cannot be understood in
isolation from the export-led growth development strategy consistently encouraged by both multilateral
and bilateral donors since the early 1950s (Cheru 1989; Jamal 1993). Because development was assumed to
be synonymous with Westernization and urbanization, newly independent countries enthusiastically
embarked on “imitative” development strategies that emphasized both export promotion of primary
products and large-scale import-substitution industries. With revenues from export agriculture barely able
p. 38 to nance needed imports, African countries were urged to accept foreign loans to nance large-scale
infrastructure projects on the theory that these investments would help to kick-start their economies and
help them to “take o ” on their own toward industrialization and development. Higher levels of GNP
growth, it was said, would generate funds needed to repay the loans.
 On the contrary, the economies of the majority of African countries did not take o as a result of pursuing
these strategies. The overemphasis on primary export trade merely reinforced the inherited colonial
division of labor, further condemning these countries to be suppliers of raw materials to industrialized
nations while importing nished goods at much higher prices. Persistent declines in commodity prices did
not help. Many countries faced mounting competition from substitutes such as synthetics for cotton,
aluminum for copper, and corn syrup for sugar. Discriminatory tari s continued to grow, whereas market
access to African products remained limited. Neither commodity-price stabilization agreements nor
assistance in diversifying agricultural export bases has been forthcoming (Brown and Ti en 1992). To the
extent that the industrialized countries have prevented debtor nations from earning their way out of debt,
they must take some responsibility themselves for the Third World's inability to repay loans.

Two successive oil price hikes by the OPEC countries further aggravated the economic stagnation in the

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1970s. Unable to keep their economies productive because of mounting oil bills, many countries turned to
Western commercial banks and the multilateral institutions for more loans. But when the U.S. Federal
Reserve Bank adopted a tight monetary policy in 1979, real interest rates rose to historically high levels. For
debtor countries, this not only made new borrowing more expensive but also unexpectedly increased the
amount of interest they owed on their existing loans because much of this commercial borrowing was
originally contracted with oating interest rates. This was particularly true for the Latin American countries
that had borrowed heavily from commercial banks. It was in this environment of a credit squeeze that the
African countries became increasingly dependent on IMF and World Bank lending. As will be shown later,
this dependence on the multilateral institutions has had a tremendous impact on the capacity of African
countries to manage their economies independently.

Indebtedness was also aggravated by poor economic governance at the national level as corrupt and
unaccountable political elites, often supported by Western powers, let loose their predatory instincts and
indulged in corruption, abuse of o ce, and repression. Ill-conceived projects, scal imprudence, and
capital ight subsequently increased many countries' external debt burdens. The excesses of many corrupt
leaders, however, did not raise eyebrows as long as these puppet regimes faithfully served the foreign
policies of Western powers. The cruel irony is that the burden of paying for the extravagant mistakes of
powerful local elites and their external supporters falls on the shoulders of the poor, who are forced to
tighten their belts and eat less.

p. 39
Enter the IMF: He Who Controls the Purse Strings Calls the Tune

The growing importance of the IMF and the World Bank as creditors has made debt management less
exible. As more and more Third World countries ran into greater di culties servicing their huge loans,
pressure to adopt structural adjustment grew as a wide range of bilateral and multilateral donors insisted
upon economic reform as a condition for the disbursement of funds and for rescheduling the debt. By the
end of 1985, 12 of the 15 debtors designated as top-priority debtors—including Argentina, Mexico, and the
Philippines—had submitted to structural adjustment programs (Cavanagh et al. 1985). Over the next seven
years, structural adjustment loans (SALs) proliferated as the economies of more and more Third World
countries came under the surveillance and control of the World Bank and the IMF. Cooperation between the
two institutions was brought to a higher level with the establishment in 1988 of the structural adjustment
facility (SAF) to closely coordinate both institutions' surveillance and enforcement activities.

The basic philosophy of structural adjustment has been to persuade indebted countries to “export their way
out of the crisis” through closer integration into world markets while devoting less attention to the
expansion of public expenditures to boost production for domestic needs. The IMF calls this “demand
management.” It is meant to ensure that more of debtor nations' resources will be used to produce exports
 to be sold for dollars that can then be used to pay debts. Among the conditions typically required by the IMF
and the World Bank are the following (Kahn 1990; Mosley et al. 1991):

• Deep reduction or elimination of subsidies and price controls, which distort internal prices for a
number of goods and services;

• Drastic reduction of trade and exchange controls designed to protect the local economy from foreign
competition;

• High interest rates to ght in ation, promote savings, and allocate investment capital to the highest
bidders;

• Privatization of state-owned rms;

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• Reduction of the role of the state not only in the economy but also in the provision of social services
such as health, education, and social security;

• Indiscriminate export promotion through devaluation of the currency.

These policies are uniformly applied to all debtor countries requesting assistance from the IMF regardless of
the special circumstances of each country experiencing balance-of-payments di culties. Since the 1980s,
from Argentina to Ghana, state intervention in the economy has been drastically curtailed, protectionist
barriers to Northern imports have been largely eliminated, restrictions on foreign investment have been
lifted, and, through export- rst policies, internal economies have been more tightly integrated into the
capitalist world market.

The countries of sub-Saharan Africa have largely been turned into an IMF/World Bank “macroeconomic
p. 40 guinea pig” because their poor credit ratings make them largely dependent on resources from the
multilateral institutions. Out of the total of 47 countries in the region, 30 were implementing adjustment
programs in 1999 that were jointly administered by the World Bank and the IMF. Whereas the number of
IMF standby arrangements declined from a high of 132 in the 1981–85 period to 49 in 1996-98, the number
of enhanced structural adjustment facilities (ESAFs) grew from 18 in 1986–90 to a record high of 99 in
1991–95 and 96 in the 1996–98 period (IMF 1998: 87). A very high proportion of ESAFs were with the
countries of sub-Saharan Africa. Because most of these countries have very weak political structures, an
IMF-World Bank condominium has been imposed over them under the guise of providing aid. As a result,
these countries have ceded important parts of their sovereignty to the IMF and the World Bank
(Mkandawire and Soludo 1999; Cheru 1989).

Although it is generally true that some indebted African countries have witnessed varying degrees of growth
following reform, there are few countries where macroeconomic stability and policy-induced growth have
been consistent over the medium term (Killick 1991; Mkandawire and Soludo 1999). Demand-management
policies have had a regressive impact by reducing the amount of resources available to purchase necessary
imports, leading to severe import strangulation, depriving industry and agriculture of needed input.
Moreover, as indebted countries ooded the world market with their co ee, cocoa, and other goods, this
created a glut in the market and a precipitous decline in their earnings. Instead of graduating from debt,
indiscriminate market reform of liberalization and deregulation has taken these countries in the wrong
direction (Cheru 1989; UNECA 1991; Cornia et al. 1993). Investment in the productive sectors of the economy
has dwindled as resources have been shifted to service the mounting external debt.

More importantly, economic adjustment has been achieved on the back of the poor. Debt-servicing
requirements have diverted funds from the promotion and protection of human rights, as de ned in the
principal human rights treaties. Consequently, living standards for the majority of Africans have declined
(Weissman 1990). Increasing malnutrition, declining school enrollments, and rising unemployment and
 poverty threaten the social fabric of highly indebted poor countries (Cornia et al. 1987). Increasing
globalization and trade, which has pushed many poor countries to the margins of the world economy and
compelled an overreliance on unsustainable raw materials exports, compounds this situation
(Chossudovsky 1997). Reform has focused on satisfying the demands of external creditors for servicing debt
and has not adequately accounted for the domestic requirements of human-centered growth and
development.

The key weakness in IFIs' approach to economic reform has been the failure to recognize that structural
adjustment at the domestic level is meaningless without a corresponding adjustment at the global level.
E orts to reform economies at the national level have often been derailed by market failures at the global
level. Much more e ort by the international community will be required to establish a more propitious
trading and nancial climate within which debtor nations can hope to increase their exports and attract

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p. 41 various forms of nancing needed to achieve positive momentum in their economic development. In order
for trade to generate sustainable growth, however, there must be a more equitable trading relationship
between rich countries and African countries. Speci cally, ensuring fair prices for commodities and market
access to these products are of dominant importance. This requires structural changes in the eld of
primary commodity trade by giving the least developed countries better access to Northern markets,
encouraging more processing of their commodities before export, and extending the preferential treatment
now accorded them.

Indebtedness and the Human Crisis

The World Bank and the IMF have single-handedly managed the Third World debt crisis since the 1980s
without enough regard for the social and economic costs of macroeconomic adjustment. The dramatic
situations of heavily indebted countries a ected by war, natural disasters, and the HIV/AIDS pandemic have
not been given the special attention they deserve. In the social sector, debt servicing and the adjustment
policies pushed to free up foreign exchange needed to service the debt have worsened social welfare (Kanji
1995; Onimode 1989; Cheru 1999). The cuts mandated by adjustment have been indiscriminate, thereby
jeopardizing the following fundamental human rights:

• The right to food: There is convincing evidence demonstrating that nutritional levels decrease among
poor segments of the population as a result of the removal of food subsidies. Growing unemployment
has a similar result. The e ect of switching agricultural production, primarily from food crops for local
consumption to co ee, tobacco, or cotton destined for export markets, has resulted in a drastic decline
in food production, reduced nutritional levels, and increased malnutrition (Mukherjee 1994; Ziegler
2001).

• The right to education: Article 26 of the Universal Declaration of Human Rights declares that all people
have the right to education. The Convention of the Rights of the Child has also established the right to
early development and education. Thanks to extraordinary e orts during the 1960s and 1970s, the
percentage of children completing at least four years of primary education reached 50% or more in
almost all developing countries. But since the 1980s, increasing debt and consequent implementation
of structural adjustment programs has led many governments to freeze or cut educational spending
(Oxfam 1999; Tomasevski 1995). Primary schooling has often su ered disproportionately, and there
was signi cant slippage in sub-Saharan Africa. The percentage of 6–11-year-olds enrolled in school
dropped from a high of 55% in 1979 to 45% in 1995 (UNESCO 1996; Oxfam 1999).

• The right to health: Health is one of the fundamental human rights embodied in Article 25 of the 1948
Universal Declaration of Human Rights. The goal of “Health for All by the Year 2000” agreed upon in
the Alma Alta Declaration has been severely undermined by cutbacks in government health budgets as
p. 42 social and development objectives have been superseded by nancial imperatives (Cornia et al. 1987;
WHO 2001). The imposition of “user fees” for primary health care drove large numbers of people away
from public health services, contributing to increased rates of sexually transmitted diseases. Moreover,
cutbacks in the public sector helped send health professionals to the private sector or abroad and
reduced investments in health-care delivery systems (Turshnet 1994).

In the face of widespread public criticism, however, the World Bank and the IMF insist that structural
adjustment programs not only are working but are also a necessary element of long-term transformation.
In early 1994, the Bank released a progress report on Africa, Adjustment in Africa: Reform, Results and the
Road Ahead, to defend its failed policy of structural adjustment (World Bank 1994). By manipulating
selective data from cross-country analyses, and without revealing the fact that the Bank's own economists
objected to the report's conclusion, the Bank claimed that African countries that implemented structural

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adjustment programs in the 1980s experienced greater positive growth than those that did not. Two years
earlier, a draft World Bank study stated, “World Bank adjustment lending has not signi cantly a ected
growth and has contributed to a statistically signi cant drop in investment ratios” (World Bank 1992: 37).
Of the six countries the Bank put forward as adjustment “successes”—Ghana, Tanzania, The Gambia,
Burkina Faso, Nigeria, and Zimbabwe—four had deteriorating rates of investment and two had negative
GDP growth rates during their respective adjustment periods.

A similar verdict was delivered on the ine ectiveness of the IMF's enhanced structural adjustment facility
(ESAF) in a report prepared by a team of external evaluators hired by the IMF's executive board in 1996
(Botchwey et al. 1998). The evaluation team concluded that although ESAF-supported economic reforms
generally have positive e ects on growth and income distribution, they also entail temporary costs for
certain segments of the population.

The in exibility of the IMF and the World Bank on macroeconomic conditionalities put undue pressure on
countries where high HIV/AIDS prevalence is wiping out decades of development (UNAIDS/World Bank
2001). In addition, debt servicing often absorbs well over one-quarter of African countries' limited
government revenues, crowding out critical public investment in human development. Throughout sub-
Saharan Africa, health systems are collapsing for lack of medicines, schools have no books, and universities
su er from a debilitating lack of library and laboratory facilities. Even the so-called African “success”
cases, such as Ghana and Uganda, are basically being held a oat for demonstration purposes by continuing
aid in ows.

Creditor Strategy: A Decade of Complacency

The indi erence of Western creditor governments to the plight of poor people in low-income indebted
countries was clearly evident in the piecemeal approach adopted by the G7 governments since 1987.
p. 43 Successive debt-relief initiatives introduced by the G7 governments with great fanfare have done little
more than apply ill-conceived, short-term palliatives to what is arguably the most intractable obstacle to
3
Africa's recovery. The G7 debt-reduction initiatives were set and reset arbitrarily rather than on the basis
of a serious assessment of the needs of each country.

The reason for this arbitrary approach is not di cult to gure out. For 25 years, the guiding principle of
o cial debt relief has been to do the minimum necessary to avert default but never enough to solve the debt
crisis. A mixture of debt relief and repeated rescheduling operations has so far prevented extensive default
on Africa's debt. Indeed, between 1987 and 1996, there were 166 debt-restructuring agreements with
o cial creditors in the Paris Club, of which 96 cases involved African countries (United Nations 1998: 172).
Although these debt-restructuring initiatives helped to reduce some debt, their overall impact on reducing
the debt burden of poor countries was negligible, as these proposals gave considerable latitude to
 participating creditor countries to take the strategy that was least costly to them. The HIPC initiative,
though presented as a major break from past practices, is guided by the same logic of damage control.

A good illustration of this point is the “Toronto terms” introduced during the G7 Toronto meeting in 1989.
The creditor nations agreed on a “menu” of options for rescheduling nonconcessional debt. These included
the following options for creditors:

1. Cancel 33% of debt service covered by the agreement and reschedule the rest with a 14-year maturity
and 8-year grace period;

2. Reduce interest rates by 3.5 percentage points or 50%, whichever is less, and reschedule the debt with
a 14-year maturity and 8-year grace period;

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3. Extend the grace period to 14 years and the maturity to 25 years. In addition, aid debt will be
rescheduled over 25 years with a 14-year grace period at existing concessional interest rates.

Options 1 and 2 involved an immediate cost to creditor governments and immediate relief to the debtor.
Option 3 merely increased debt stock and future debt service as deferred interest payments were capitalized
and added to the total debt stock.

The less-than-generous options provided by the G7 governments to the poorest countries in Africa stand in
stark contrast with the treatment of the massive debts owed by the Latin American debtors to commercial
banks. Both the 1985 Baker Plan and the 1989 Brady Plan represented swift reactions to the threat posed to
4
the Western banking system by the magnitude of debts owed by Latin American borrowers. Both plans tried
in general to use an aggressive strategy, employing measures to induce commercial banks to rewrite
existing contracts to exchange debt either for secured liquid assets on better terms or for cash. For example,
the Brady Plan made it possible to replace a portion of outstanding debt with “Brady bonds” having a lower
face value and a longer repayment schedule (Browne 1999; Cavanagh et al. 1985).

p. 44 Finally, the various G7 proposals (i.e., Toronto, Trinidad, and Naples terms) gave paltry attention to the
debt owed by low-income African countries to multilateral development banks. For most of the world's
impoverished countries, multilateral debt looms larger than other debts because the G7 industrialized
countries have given the IMF and the World Bank the status of “preferred creditors.” For many African
countries, debt servicing to the IMF and the World Bank accounts for 36% of total debt-service payments.
Because of the preferred creditor status of these two institutions, payments of multilateral debt take priority
over private and bilateral debt. Borrowing governments have special incentives to stay current with their
multilateral debts because they do not want to jeopardize their access to more concessional forms of nance
needed to support recovery.

The HIPC Initiative: Old Wine in a New Bottle?

In October 1996, as a result of many years of persistent campaigning by a global coalition of NGOs and civil
society organizations, the IMF and World Bank nally conceded the need to address the issue of poor-
country debt owed to them and they approved the HIPC initiative. The ostensible aim of the program is to
make the debt burden of the poorest and most indebted countries “sustainable.” The IMF and the World
Bank initially identi ed 41 countries as possible candidates for debt relief under the HIPC initiative. In total,
they owed $221 billion (U.S.) in 1998, about $61 billion of which (roughly 26% of the total debt stock) was
owed to the multilateral nancial institutions (GAO 1998: 123–28; United Nations 1998: 167).

Once a country is deemed eligible, it must demonstrate a commitment to “sound economic policies”—the
5
IFIs' usual euphemism for SAPs—to receive debt relief. Under the original HIPC program, a country could
 not obtain bene ts until it completed six consecutive years of implementation of the Fund's ESAF. The rst
stage entails a rescheduling of debt-servicing obligations to Paris Club countries on Naples terms. At the
end of that period, the debtor may be accorded up to a two-thirds reduction of debt. At this point, a decision
can be made on whether the second stage is needed. Eligibility criteria for the second stage of the initiatives,
which could reduce debt-servicing obligations up to 80% (13 percentage points beyond that accorded under
Naples terms), is much higher, and relief is granted on a case-by-case basis.

By 1999, however, the limitations of the HIPC initiative's ability to lighten the debt burden of poor countries
became clear. By the spring of 1999, only three countries had become eligible for actual debt relief: Uganda
and Bolivia, in April and September 1998, respectively, and Mozambique in mid-1999. Although eight
others—Mali, Cote d'Ivoire, Benin, Honduras, Senegal, Tanzania, Guyana, and Burkina Faso—had reached
their “decision point” and had assistance committed to them by the end of 1999, they represented only a

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small proportion of the total initially targeted (IMF 1998: 66). The stringent quali cation criteria (see
table 2.1) simply excluded many deserving indebted countries from requesting debt relief.
p. 45

Table 2.1 HIPC's changing criteria

HIPC-1 HIPC-2

Debt sustainability ratios

Debt/exports 200–250% 150%

Debt/revenues 280% 250%

GDP-related ratios

Exports/GDP 40% 30%

Revenues/GDP 20% 15%

Time until actual relief 6 years Uncertain

Sources: IMF, World Bank.

Moreover, the original HIPC initiative simply did not take into account human development and poverty-
eradication issues in the debt-sustainability analysis. Nor did the initiative take into account the special
circumstances of many poor countries that are confronted with a wide-scale humanitarian crisis caused by
the e ects of war and genocide (for example, Sierra Leone and Rwanda), natural disasters (for example,
Hurricane Mitch in Honduras and Nicaragua), and health emergencies such as the HIV/AIDS pandemic in
Africa (Nyamugasira 1999; Cheru and Figueredo 2000). These disasters are wiping out decades of
development advances.
 The Enhanced HIPC Initiative

Barely two years had passed since the introduction of the HIPC initiative when the IMF and the World Bank
conceded in the spring of 1999 that the HIPC initiative had major shortcomings and agreed that there was a
need for more substantive steps to address the debt problem of low-income countries. Reacting to this, the
G7 leaders announced from Cologne in June 1999 a major debt-reduction initiative aimed at improving the
HIPC initiative. A total of $90 billion (U.S.) was promised for 33 countries, with the cost to creditors (net
present value) at $27 billion (World Bank 1999; Oxfam and UNICEF 1999: 15). Shortly thereafter, the original
HIPC initiative was revamped to provide three key enhancements:

1. Deeper and broader relief: Debt sustainability thresholds were lowered from 250% in the original

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framework to 150%, thus providing more debt relief (table 2.2). Also, more countries became eligible
for debt relief as a result of the relaxation of the stringent quali cation criteria.

2. Faster relief: A number of creditors began to provide interim debt relief immediately so that decision-
point countries could reach the completion point faster; Britain, Norway, Sweden, and Australia
p. 46 agreed to cancel 100% of their bilateral debts, and Canada announced that it would apply a
moratorium on debt repayments from 11 countries in Africa and Latin America.

3. A Stronger link between debt relief and poverty reduction: The new version of HIPC seeks to ensure that
debt relief will e ectively reduce poverty. Countries wishing to apply for debt relief are required to
prepare a poverty reduction strategy paper (PRSP). The PRSPs are to be country-driven; prepared and
developed transparently with the broad participation of civil society, key donors, and other relevant
international nancial institutions; and linked clearly with agreed international development goals.
The PRSP, which would be updated regularly, would in essence become the basic framework that
would be used to guide World Bank/IMF lending operations to poor countries in the future.

Table 2.2 Total debt stock reduction under HIPC I (millions of U.S. dollars)

Country Total nominal debt relief Reduction in debt stock (NPV terms) Total debt relief (NPV terms)

Uganda 650 20% 347

Bolivia 760 13% 448

Burkina Faso 200 14% 115

Guyana 410 25% 256

Cote d'Ivoire 800 6% 345

Mozambique 3,700 57% 1,700

Mali 250 10% 128

Source: HIPC Initiative Consultation Meeting: Background Materials, IMF/World Bank, March 1999. Updates on Guyana and
Mozambique from IMF press releases dated 14 May 1999 and 30 June 1999, respectively.

One signi cant aspect of the enhanced HIPC initiative is the decision to place poverty reduction at the heart
of the initiative. Countries start out initially by preparing an interim poverty reduction strategy paper (I-
PRSP). The I-PRSP is intended as a road map to preparing a full PRSP and as a bridge between the long-term
 PRSP objectives and a country's short-term needs for nancing and debt relief. The I-PRSP paves the way
for the country to reach its “decision point,” which is followed by an interim support (or a loan) to the
government from the IMF's poverty reduction and growth facility, formerly called the ESAF (Cheru 2000).
Thereafter, countries are expected to formulate a full PRSP in consultation with all societal actors. The full
PRSP must clearly show the links between macroeconomic policies and agreed international social
6
development goals to be reached by 2015.

Eligibility for debt relief is conditioned upon “good performance” in the implementation of an IMF program
for a period of three years. Having reached the “decision point” after the rst three years of good economic
7
p. 47 performance, each country must then demonstrate that its debt servicing is unsustainable. If the country
nally quali es for relief after reaching this “decision point,” its debt servicing is brought down to what is
deemed, within the terms of the initiative, to be a sustainable level, but only after reaching the “completion

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point,” or after a further three-year waiting period. So far, only eight countries have completed the process:
8
Uganda, Bolivia, Burkina Faso, Guyana, Mauritania, Tanzania, Mali, and Mozambique. This less-than-
generous arrangement still leaves the country de ecting a sizable portion of its scarce foreign-exchange
earnings into debt servicing for an inde nite period of time.

Although the emphasis on strengthening the link between debt relief and poverty reduction represents a
tremendous step forward in the tortured history of debt relief for poor countries, the enhanced HIPC, like its
predecessor, is caught up in a complex web of excessive and stringent IMF and World Bank policy
prescriptions, or conditions. A study by the UN Economic Commission for Africa (UNECA) concluded that
progress in aligning donor procedures to support the implementation of poverty-reduction strategies in
Africa has not lived up to expectations: Donor conditions have not decreased, reporting requirements have
not been harmonized, and donor funding remains unpredictable (UNECA 2003). Moreover, the envisioned
debt relief has been neither su ciently deep nor su ciently broad; nor has debt relief been delivered at the
pace required to address the pressing needs of many African countries.

The Limitations of the HIPC Initiative

As of July 2002, 26 countries bene ted from debt relief under the enhanced HIPC initiative, of which seven
have reached the completion point. The seven include Bolivia, Guyana, Burkina Faso, Mauritania,
Mozambique, Tanzania, and Uganda. These seven have received debt relief amounting to $7.5 billion (U.S.)
in NPV terms (equivalent to $13 billion in nominal terms). The remaining 20 (19) countries received interim
relief when they reached decision points in the amount of $17 billion in NPV terms (or $27 billion in nominal
terms). Twelve additional countries with substantial arrears problems that are in need of signi cant relief
are yet to be considered, as these countries are mostly con ict-a ected. To provide the opportunity for
these countries to qualify for HIPC relief, it is proposed to extend the sunset clause of the initiative by
another two years to the end of 2004 (IMF/World Bank 2002a).

The $24.5 billion (U.S.) of debt cancelation delivered so far is no small change by any stretch of the
imagination, but it is not enough. Debt relief is making a real di erence to the lives of ordinary people. Two-
thirds of resources released are being spent on health and education, with most of the remainder being used
for HIV/AIDS, water supplies, roads, and governance reforms. For example, the Ugandan government has
disbursed resources released from debt relief to its districts to improve education. School management
committees monitor expenditures, the quality of education, and student test results. In concrete terms, the
program to provide free primary education has in a short period of time doubled the school enrolment rate
p. 48 (Cheru 2001). In Mozambique, resources released through debt relief have been channeled into various
areas, all vital to sustaining development. The budgets for health, education, agriculture, infrastructure,
and employment training have all bene ted.
 Despite evidence that debt relief can save lives, neither the original HIPC initiative nor the “enhanced”
version introduced in 1999 has succeeded in resolving Africa's debt crisis. The envisioned debt relief has
been neither su ciently deep nor su ciently broad (Cheru 2000). The rst 26 countries to qualify for HIPC
are still spending more on debt servicing than on health care. In a surprisingly candid admission, both the
World Bank and the IMF released two documents in time for the spring 2002 meeting that concluded that
the HIPC initiative is failing (IMF/World Bank 2002a and 2002b), stating:

• Over half of the HIPCs are spending more than 15% of their government revenue on debt servicing. The
medium- to long-term projections of debt-service requirements for a large number of HIPCs are
alarming.

• Of the ve countries already at the completion point, at least two of them—Uganda and Burkina Faso—

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do not have sustainable levels of debt according to the HIPC criteria. This will bring to 13 the number of
countries expected to face unsustainable debt burdens at the completion point. In the case of Uganda,
this is the third time that the country has exceeded its debt sustainability after reaching completion
points, mainly because of the collapse in co ee prices.

• In one case, Burkina Faso, the joint board of the IMF/World Bank approved raising assistance to bring
that country's NPV debt to 150% of exports at the completion point. Although this was considered an
exceptional measure by the IFIs, other countries that had gone through the completion point and still
show NPV of debt-to-export ratios in excess of the sustainability threshold might be granted increased
assistance.

• Of the 20 countries that are currently between the decision point and completion point under the
Initiative, at least 8–10 (60%) will have annual debt-service payments due in 2003–05 that will be
higher than their annual debt-service payments in 1998–2000. These countries include Benin, Chad,
Ethiopia, The Gambia, Guinea-Bissau, Malawi, Niger, Rwanda, Senegal, and Zambia (IMF/World Bank
2002b: 25). Thirteen of the 20 countries had their PRGF program suspended because of a failure to stay
on track with IMF programs. Suspension delays debt cancelation and denies countries interim service
relief. Among the countries in this group was Ghana, once the darling of the IMF.

• There have even been delays in providing interim debt-service relief for some countries that are
entitled to this relief and are “on track” with IMF programs. The HIPC initiative appears to be working
only for 7 to 10 countries out of the 42 included within the initiative. Part of the reason for the delay in
granting relief has to do with the inadequacy of the HIPC trust fund. It is currently estimated that the
p. 49 nancing required to support debt relief for the 34 HIPCs that have already reached their decision
points will fully exhaust the resources mobilized to date and will leave a potential funding gap of up to
$800 million (U.S.) (IMF/World Bank 2002a: 17). In this context, in June 2002, the G8 members agreed
9
to fund their share of the shortfall, recognizing that it will be up to $1 billion.

One of the principal factors explaining the failure of the HIPC initiative has to do with the unrealistic
projections of debt sustainability, which is calculated by comparing total debt in NPV terms to a country's
total exports. If a country can pay its debt from its export earnings without going broke, then it is assumed
to have “sustainable” debt. When the total stock of debt is more than one and one-half times the value of
exports, the country is deemed to have an “unsustainable” level of debt.

Unfortunately, the optimistic export projections that the World Bank and the IMF use to determine
sustainability have not materialized. For example, for the rst 24 HIPCs to reach their decision points, the
average growth in exports for 2001 was projected to be 11.6%. This gure bears little resemblance to the
historical performance of the HIPC countries. Since 1965, annual export growth for low-income countries
has been less than one-third of this level. It therefore comes as no surprise that the actual export growth for
these 24 countries during 2001 was less than half the World Bank's projected level at 5.1% (IMF and World
Bank 2002b: 8). For several countries that had a worsened NPV of debt-to-export ratio in 2001, the majority
of the deterioration in the NPV of debt-to-export ratio was the result of lower exports (IMF and World Bank,
2002a: 24). A similar conclusion was made in an independent evaluation undertaken by the U.S. General
Accounting O ce (GAO). The GAO report, which analyzed debt sustainability for 10 African countries, found
that only 2 of the 10 countries would have sustainable debt levels if these countries' exports were to grow at
rates consistent with their historical levels (GAO 2002: 6).

Much of the shortfall in exports has been caused by dramatic decreases in commodity prices over 2000–01,
particularly for co ee and cotton, which fell by 60% and 10%, respectively. As a result of this shortfall, the
average ratio of debt to exports in 2001 for 24 HIPC countries is now estimated to have been a staggering
280%, almost twice the level deemed “sustainable” (see table 2.3 by the World Bank and the IMF. Even the
four countries that have already passed the completion point are estimated to have an NPV of debt-to-

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export ratio of 156% (IMF/World Bank 2002a: 10).
 Table 2.3 Debt sustainability ratio (NPV/Exports) for selected HIPCs (a er additional bilateral debt forgiveness)

Decision point projection Spring 2002 projections Updated projections

Benin 138 148–154 158–170

Chad 188 188–219 188–224

Ethiopia 149 164–186 137–159

The Gambia 153 162–177 162–174

Guinea-Bissau 107 147–152 147–152

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Malawi 156 158–165 165–166

Niger 164 144–148 159–167

Rwanda 185 161–171 180–198

Senegal 112 157–158 158–159

Zambia 106 151–154 152–154

Cameroon 101 99–112 95–113

Ghana 82 — 82–83

Guinea 123 139–141 135–140

Guyana 57 68–76 69–77

Honduras 74 90–91 91–92

Madagascar 101 75–81 76–83

Mali 143 139–140 128–130

Nicaragua 93 108–117 108–117

Sao Tome and Principe 139 124–140 132–143

Sierra Leone 139 — 139–150

Source: IMF, Heavily Indebted Poor Countries Initiative: Status of Implementation, 21 September 2002, p. 10, Table 4.

Je rey Sachs argues that debt reduction for the HIPCs should not be based on arbitrary criteria such as a
150% debt-to-exports ratio but rather on a systematic assessment of each country's needs for debt
reduction and increased foreign assistance measured against explicit development objectives (Sachs 2002).
Sachs argues that the correct starting point for assessing needs should be the targets enshrined in the
Millennium Development Goals (MDGs), a set of eight major goals and 18 intermediate targets endorsed by
all UN members in September 2000.

p. 50 A serious commitment to addressing Africa's development challenges must begin by releasing the continent from
debt bondage. Many of the HIPCs currently service their debts at the cost of widespread malnutrition,
premature death, excessive morbidity, and reduced prospects for economic growth. If the resources devoted
 to debt service were freed up and successfully redirected toward basic human needs, there could be
signi cant improvements in human welfare. A 2001 study indicated that both the World Bank and the IMF
hold su cient wealth on their own balance sheets to absorb the full cost of multilateral debt cancelation
from their internal resources. An audit of these institutions by two independent accounting rms in Britain
revealed that the World Bank and the IMF could write o all of the debts of the world's poorest countries
from their own assets without negatively impacting their credit rating or their ability to function (Drop the
Debt 2001). Unfortunately, the World Bank and the IMF continue to maintain the position that outright debt
cancelation is a nancial impossibility because it would critically undermine their future operations, and
such an action could create a moral hazard and encourage other debtor countries not to honor their
commitments to them.

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p. 51
Conclusions

The HIPC initiative has failed to resolve Africa's debt crisis. Instead, it has left many developing countries
committing scarce resources to debt servicing instead of meeting the needs of their people. The reason for
the failure of the initiative is that it is designed by creditors and controlled by creditors. Creditors have the
power to de ne who gets what, when, and how. Even by its own measure, the HIPC initiative is not reducing
debt to levels described by the World Bank as “sustainable.” As shown in table 2.1, the majority of countries
will nd themselves in worse condition after the completion point than when they rst entered the process.
Moreover, the HIPC initiative obfuscates the illegitimacy of most of this debt. Tinkering with the HIPC
initiative is a shell game. Tying debt relief to conditions determined by creditors undermines African
priorities and initiatives and a ords creditors an inordinate degree of control over the running of African
countries. Preservation of that in uence and control is a far more important factor in the G8 approach to
debt policy than recovery of the funds loaned.

Debt relief alone is not going to place desperate African countries on a sound economic footing to enable
them to e ectively address the debilitating e ect of poverty and the HIV/AIDS pandemic. Adequate and
predictable funding from the international community is critical to expanding treatment and prevention
programs over the long term. During the UN Special Session on HIV/AIDS in summer 2001, UN Secretary-
General Ko Annan proposed the establishment of a global HIV/AIDS trust fund of $7–10 billion (U.S.) a
year to assist in the struggle against HIV/AIDS worldwide. So far, the response from the international
community has been very disappointing when compared with the international response against terrorism
following the tragic events of September 11, 2001, that killed innocent citizens in New York and Washington,
DC. The indi erence toward African lives must be challenged and exposed if we are to create a just world
order where human rights and human dignity take precedence over corporate rights and creditors' greed.

If the richest creditor nations and institutions are serious about confronting the worst plague in human
history, they must stop the charade, cancel Africa's debt, and remove the major economic obstacle to
African e orts to ght AIDS (Booker and Minter 2001; Dakar Manifesto 2000).

Notes

Notes
1. Booker, S., Forgive the Debt to the Dying Millions, Los Angeles Times, 24 June 2001: M.5.

2. According to Article 22 of the Universal Declaration of Human Rights, every one is “entitled to realization through national
e orts and international cooperation, of the economic, social and cultural rights indispensable for his dignity.” In poor
indebted countries, this condition o en is not fulfilled.
p. 52 3. These included the “Naples terms” which were designed to provide 67% debt stock reduction, and the “Trinidad
terms” of reducing debt stock by two-thirds instead of the 50% provided for under the “enhanced Toronto terms.”

4. Named a er the architects of the plans, U.S. Treasury Secretary James Baker and Nicholas Brady.

5. Sustainability is defined as the ability “to meet current and future external debt service obligations in full without recourse
to debt relief, rescheduling of debt or the accumulation of arrears, and without unduly compromising growth.”

6. The MDGs are quantified goals for poverty alleviation, reduction of hunger, reduction of disease burden, and other targets,
mostly for the year 2015.

7. The enhanced HIPC initiative stipulates that, in order to qualify for relief, a country must have a debt-to-exports ratio of
150% and debt-to-export ratio of 250% or more combined with tax-to-GDP and exports-to-GDP ratios of at least 15% and
30%, respectively.

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8. Statement by the Group of Eight (G8) countries in Birmingham, UK, on African debt (www.birmingham.g8summit.gov.uk).

9. See The Kananaskis Summit Chair's summary, “The 2002 Summit,” Kananaskis, Canada (www.g8.gc.ca/kan
docs/chairsumary-e.asp).
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