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Speed debt relief, delink HIPC and PRSP

by Chakravarthi Raghavan

Geneva, 27 Mar 2001 -- The debt relief to poor countries under the Heavily Indebted Poor Country programme should be delinked from the Poverty Reduction Strategy Programme (PRSP) processes of the IMF and the World Bank and debt relief speeded up to eligible indebted countries, an Independent Expert has suggested in a report to the UN Human Rights Commission (HRC).

Highlighting the failure of the HIPC initiative to deliver debt relief so far, and the ‘disconnect’ between the macro-economic policies drawn up by countries to please the IMF and the World Bank, and their poverty reduction strategies, the report (E/CN.4/2001/56) by the Independent Expert, Mr.Fantu Cheru, calls on the creditor countries and institutions to “revisit the whole issue once again”, and among others end the “exclusive role” of the IMF and the World Bank as overseers of the poverty reduction programme, and bring into the process other UN agencies such as UNDP, UNICEF, UNCTAD and ILO.

The SAPs, under the IMF/World Bank guidance began in mid-1980s, and the liberalization of markets they called for resulted in delays in growth.  In September 1987, the IMF introduced its Enhanced Structural Adjustment Facility (ESAF), and in November 1999 this was replaced by the Poverty Reduction and Growth Facility (PRGF) which, the expert points out, is merely a financing facility funded by donors to clear up debts owed by HIPC governments to the Fund.

The Independent Expert has called for the abolition of the PRGF, and for a serious dialogue to be undertaken on how to integrate macro-economic policy issues with broader social development goals.

The IMF should be  asked to clear debts owed to it through gold sales or revaluation, rather than voluntary contributions of bilateral donors. The bilateral resources going to PRGF should instead go to fund additional bilateral debt relief, increased bilateral aid mor funding of a targeted programme - such as combatting HIV/AIDS, girls’ education or post-conflict reconstruction and rehabilitation in HIPC countries.

Other recommendations in the report include:  renewal of efforts, as recommended in the UN Secretary- General’s report, for new rounds of talks for a lasting solution to the crushing debt burden of poor countries, and with a clear commitment for write-off with no conditions, and  serious dialogue involving Third World debtor governments, multilateral financial institutions and social movements on how to integrate macro-economic policy issues with broader social development goals.

The Cheru report arises from the decision of the HRC in 2000 to create the mandate of the independent expert on the effects of structural adjustment policies (SAPs) and foreign debt on the full enjoyment of all human rights, particularly economic, social and cultural rights. In creating this mandate, the HRC ended the earlier separate mandates of the independent expert on SAPs and full enjoyment of human rights and of the Special Rapporteur (Reinaldo Figueredo) on foreign debt and full enjoyment of economic, social and cultural rights.

Advocating the delinking of the HIPC debt relief from the PRSP process, Cheru says that ‘real ownership’ of the poverty reduction framework can only happen if the threat of ‘conditionality’ is removed by the IMF and the World Bank “from the backs of vulnerable governments”.

Linking debt relief to PRSP removes the ‘autonomy’ of countries to come up with a framework that clearly makes an explicit connection between macro-economic policies and poverty reduction goals. This requires time, research and exhaustive consultation with broad sectors of each country’s population.

“The only condition (for debt relief) should be that countries receiving debt relief establish an independent entity, like Uganda’s Poverty Reduction Action Plan, to channel freed resources towards social development. Such an entity - preferably an independent non-government body - will manage the fund...(and) must follow important rules governing financial control, performance monitoring and evaluation systems to ensure that the Government will not be able to draw funds from the debt relief fund for other unproductive purposes.  A steering committee of representatives of NGOs, the Government and donor community shall oversee the management of the independent entity to ensure financial and programmatic accountability.”

The report notes that at the launch of the enhanced HIPC (HIPC-II) at the 1999 G-.7 Cologne Summit, a total of $90 billion in debt service was promised for 33 poor counties, with the cost to creditor nations estimated at just $27 billion (owing to heavy discounting of the loans and advantages of purchasing the debt now, instead of allowing accrual of interest over the length of the loan).

By the time of the Prague IMF/World Bank meeting (2000), however there was little substantive progress  on debt relief under the Cologne initiative. The G-7 governments had fallen short on the pledge at Cologne to forgive the debts of at least 20 nations by 2000. The incremental, step-by-step approach had delivered some relief only to nine countries, and had failed to provide relief at the pace and to the extent required.

The report examines the pace of progress on debt relief since 1999, and in a critical review of  the PRSP process, based on a careful analysis of 9 of 19 interim poverty strategy papers (I-PRSP) presented to the Fund and the Bank as of September 2000 - the 9 I-PRSPs are from Africa; while a tenth, that for Honduras has also been cursorily reviewed. At the time of the writing of the expert’s report, there were only 3 fully completed PRSPs - those of Uganda, Burkina Faso and Bolivia - all of which too Cheru has examined.

Describing the HIPC as a case of “Emperor without Clothes”, the independent expert says HIPC-II is experiencing a number of problems, the critical one being finance. Both bilateral and multilateral creditors were expected to provide the estimated …$28 billion (in net present value terms) to finance the debt relief programme.

Of this amount, four multilateral creditors - the IMF, World Bank, the African Development Bank (ADB) and the Inter-American Development Bank (IDB) were expected to provide about $14 billion, bilateral creditors about $13.2 billion and commercial creditors the rest. The commitments from bilateral creditors have mostly come from the Paris Club creditors, most of whom have written off significant amounts of bilateral debt, beyond their assistance to HIPC. But debt owed to non-Paris club creditors remain on the books.

The lack of resources to fund HIPC-II has become a growing concern to the IMF and World Bank that preside over the process. The IMF has expressed reservations over participating in the process beyond 2000, unless additional resources are released from the money raised by gold revaluation (now invested in a long-term account). Many creditors, multilateral and smaller bilaterals are having difficulty in securing the funding needed to cover their share of financing the HIPC Trust Fund.

The main reason for the deflated expectations about financing the HIPC initiative is due to the “politics of budget appropriations”. The G-7 Heads can promise debt relief during annual meetings, but it is their legislative bodies that must decide on appropriating funds, and adds to budgetary costs.

The rules governing IDB and ADB have ceilings on the amount of resources that could be allocated for debt relief. The ADB, for example, has pledged to grant debt relief of $2.2 billion out of a total outstanding claim of $10.2 billion from 29 African countries. The ADB is to contribute out of its own resources $370 million and the balance has to come from outside. Similarly, the IDB has pledged debt relief of $1.1 billion out of  a total debt claim of $3.8 billion, and can allocate only $180 million from its own resources.

The IDB’s failure resulted in holding up the IMF interim assistance to Honduras, and there could be similar problems about bilateral debt relief too, if their legislative bodies hold up funding.

“The combination of inadequate resources and slow progress on the part of HIPC governments to implement agreed-upon reforms amounts to a prescription of no relief at the end of the tunnel,” says Cheru, and is among the reasons for delinking the HIPC and PRSP process.

Also, in addition to the 4 main multilateral institutions, there are some smaller ones - such as the Kampala-based East Africa Development Bank and the Tegucigalpa-based Central American Bank for Economic Integration. While such regional institutions support the debt initiative, they are unwilling to fully fund their own contributions from internal resources, since this would threaten their financial integrity. Hence the HIPC Trust Fund will remain severely under-funded unless the G-7 agree to fund the entire debt relief initiative through sale of IMF gold and a small portion of the profit of the World Bank.

[But with the Bank’s profits otherwise earmarked to finance the International Development Agency, this would really mean the debt relief for HIPC being funded by other poorer developing countries who get funds from the IDA, as the Dutch Cooperation Minister pointed out early in March at UNCTAD.]

The HIPC also does not address the issue of debts owed to non-Paris club creditors, but which have not been rescheduled or services for a long time.

The debt sustainability ratio for the HIPC countries is misleading, since their BOP reserve accounts include amounts not paid out to non-Paris Club creditors.

There is also the problem of intra-HIPC debts - for e.g. Tanzania’s exposure as a credit to Uganda, and of Costa Rica and Guatemala which have loans outstanding to Nicaragua.

Cheru sees the PRSP as a “new form of structural adjustment”. The I-PRSP is intended to be a road map to full PRSP, and a bridge between long-term PRSP objectives and a country’s short-term needs for financing and debt relief, and paving the way for a country to qualify for tis ‘decision point’, followed by interim support from the IMF’s PRGF. Under the enhanced HIPC framework, the ‘completion point’ is an additional point of leverage to influence policies. Most countries are required to complete at least a year of performance after full PRSP to qualify for debt stock reduction.

In preparing the PRSP, governments are expected to show clearly the links between macro-economic policies and agreed international social development goals to be reached by 2015. The I-PRSP document is also to articulate the proposed use of incremental resources for poverty reduction and contains the government’s commitment to poverty reduction and main elements of its poverty strategy; commitments to a timeline and consultative process by which full PRSP will be formulated with the IMF, the Bank, and other creditors and donors; and a 3-year macro-economic framework and policy matrix, focussing on reducing poverty through faster growth.

The matrix is basically a list of policy conclusions. In the case of Tanzania’s PRSP, there are some 114.

An examination of eight I-PRSPs and one full PRSP from Africa, shows great unevenness in the quality of the documents. Cheru comments that among other things:

·        the quality of poverty reduction strategies and level of civil society participation are being compromised by the unrealistic time-frame set for meeting the initiative;

·        there is an excessive number of policy prescriptions or conditions;

Tanzania’s policy-matrix for 2000-2002, appended to its I-PRSP by the Fund and the Bank, list approximately 157 policies that the government must implement over this period. In addition, there are more than 20 policy conditions linked to debt relief, 10 linked to the World Bank’s Country Assistance Strategy,  and additional conditions linked to IMF-Bank financed structural adjustment loans.

Benin’s has about 111 conditions. How the debt relief will be used is barely touched upon in the PRSP, except for a statement that priority will be given to social services in allocating external assistance.

“In terms of issue emphasis, all nine emphasize the importance of growth for poverty reduction, but they all fail to demonstrate the links between the two,”Cheru says. All nine also emphasize importance of transparency, fiscal accountability and improving access of poor to public services. “Yet, all the papers are silent on how transparency and accountability can be achieved when ‘kleptocratic’ elites preside over the implementation of poverty strategy frameworks.”

Underscoring the ‘policy disconnect’ between poverty reduction and macro-economic goals, the report says that in the majority of countries examined, the broad macro-economic objectives are inconsistent with poverty reduction goals - a conclusion similar to that in a recent report of the US General Accounting Office.

The reason for such a disconnect, Cheru says, is due to the unequal power relations between indebted countries and the institutions managing the HIPC process. The countries have tried to reach too much into the minds of the IMF and the Bank, and the governments try to make their PRSP meet the lending criteria of the IMF and the Bank, “thus putting too much emphasis on macro-economic considerations, fiscal reform and privatisation measures to placate these powerful institutions, without thinking through how such policies impact on poverty reduction and in what context.”

The decision by debtors to placate the IMF and Bank is both political and financial, since eligibility for debt relief is conditioned upon ‘good performance’ in implementing Fund/Bank policies. While countries should be encouraged and supported to adopt sensible policies that make good economic and political sense, IMF- supported programmes remain stringent, inflexible and in some instances very punitive, leaving little room for countries to manoeuvre.

The ESAF and their reincarnated PRGF remain firmly focussed on macro-economic and financial concerns, with no indication of how PRSPs complemented macro-economic emphasis of  PRGF.

“What the architects of HIPC initiative have failed to realize is that it was the failure of two decades of SAPs to help countries ‘export their way out of the crisis’, and their inability to service debts and the social erosion that followed that gave the impetus for the HIPC initiative.

“Increasing malnutrition, falling school enrolments and rising unemployment have been attributed to the policies of structural adjustment. Yet these same institutions continue to prescribe the same medicine as a condition for debt relief, dismissing the overwhelming evidence that SAPs have increased poverty.”

Citing the cases of a number of African countries, the report says that countries like Tanzania, Seneghal and Zambia will emerge from the HIPC process, paying more on debt servicing.

Dubbing the figures about debt ‘sustainability’ ratio as ‘bogus indicators’, the report says that inadequate debt relief is just one of the problems with the HIPC-II initiative. “Unrealistic IMF conditions” for countries to get debt relief is “the second most pernicious problem”.

For the enhanced HIPC to be successful, “it must avoid excessive conditionality, especially so long as little evidence exists of the success of programmatic conditionality in reducing poverty.” Countries facing major humanitarian crisis need increased flexibility. Time factor was also critical. “In the face of mass poverty and humanitarian and health emergencies, there is no time to wait for evaluation of 3-year implementation of conditionalities to each completion point before countries can obtain full relief.”

There is also a need to delink debt relief from the whole PRSP process. The G-7 governments effectively set the agenda for the Bretton Woods Institutions, which very much serve the interests of its key shareholders. Given that the IMF and the World Bank do not have a monopoly of knowledge about economic development and social policy, “despite their posturing to the contrary”, the G-7 governments are as much to blame for continuing to prescribe faulty diagnosis to indebted countries as the Fund and the Bank. And in this regard, the role of the US Treasury cannot be under-estimated.-SUNS4864

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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