WEED-Statement on the Cologne Initiative of the German Federal Government

In this commentary on the German Government's recent proposal for additional debt relief for the poorest countries, Walter Eberlei (Kindernothilfe) and Barbara Unmuessig (WEED - President) maintain that the Cologne Initiative, while constituting a step in the right direction, not only is insufficient in terms of the extent of relief proposed but also adopts an unquestioning stance towards structural adjustment programmes.

A. Introduction

In co-operation with the Federal Ministry of Finance, the Federal Ministry for Economics and Technology and the Foreign Office, the Federal Ministry for Economic Co-operation and Development (BMZ) has presented a proposal for a debt relief initiative. This proposal - to be discussed at the Summit of the Heads of State and Government of the G8 countries due to be held in Cologne in June 1999 - has been published in the Financial Times (January 1st, 1999). In this article, Federal Chancellor Gerhard Schr”der called the Cologne Initiative a radical programme for debt relief that will initiate sustainable development in the Highly Indebted Poor Countries. In the following, we want to take a closer look at the proposal and evaluate if this will be the case.

According to the Federal Government, the programme is based on "proposals presented by NGOs in the past"¹. This is highly exaggerated. Although the Cologne Initiative contains some elements that we appreciate, we think it is not sufficient to mark a new beginning for the Heavily Indebted Poor Countries both regarding quantity (i.e. the extent of relief) and quality (holding on to the controversial structural adjustment programmes). Despite some new and positive aspects, the debt initiative does not go much further than the current international crisis management towards the Heavily Indebted Poor Countries. Therefore, we are going to propose a number of improvements which the G8 countries should be able to discuss and agree on.

B. The Federal Republic of Germany and the Highly Indebted Poor Countries (HIPC)

Germany is one of the biggest creditors of the 41 HIPC. The total debts (public and private) of the HIPC countries to the Northern creditors amount to more than US$ 200 billion. At the end of 1997, Germany claims an estimated amount of 15.5 billion DM from the HIPC countries. The biggest share, 11.5 billion, comes from export guarantees, followed by 2.7 billion DM from bilateral financial co-operation and 1.3 billion DM from claims taken over from the former GDR. This equals approx. 10% of all claims of bilateral creditors towards these countries.

The Federal Government also takes responsibility for multilateral debts. Germany is the third biggest capital share- holder of the World Bank. Together with Japan, Germany is second after the U.S. in quotas to the IMF.

A credible debt initiative of the German Government has to refer to both the bilateral and the multilateral responsibility towards the HIPC countries. We welcome the intention of the German Government to invite the G8 countries to agree on a consensus on how to treat these countries. That means that the new German Government has a different approach towards the problem than the old Government with its obstructive attitude. With these measures, the Federal Government joins the position of other big creditor countries such as Great Britain and France, which have been pushing the HIPC initiative for years - for example, regarding the time frame - and which have bilaterally made financial contributions to the HIPC Trust Fund.

The Cologne Debt Initiative, however, is solely based on the World Bank/HIPC initiative launched over the past two years and intends to co-ordinate debt relief from bilateral financial co- operation on a multilateral level. That means that the German Government does not use its bilateral scope of action to its fullest extent. The Federal Government has to assure before the summit, that it will implement its proposal, even if the G8 countries will not pass a common resolution at the summit.

It is indispensable to improve the proposal regarding the bilateral relief from claims of the former GDR towards the poorest countries. The proposed relief from financial co- operation stays clearly behind the relief that the old German Government had granted six African countries in 1988/89: at that time 3 billion DM had been relieved bilaterally, i.e. without further multilateral resolution.

C. The "7-step programme"

In the following, we will comment on the programme step by step. We are referring to the main statements of the note published by the Federal Ministry of Finance, the Federal Ministry for Economic Co-operation and Development, the Federal Foreign Office and the Federal Ministry for Economics and Technology in January of 1999.

1. Acceleration of the HIPC process
"The interim period up to debt relief should be shortened so that the countries qualifying for inclusion can benefit from debt cancellation as early as possible. Thus the hitherto envisaged period of six years should be reduced to three years .... All qualifying countries should be able to obtain assurance on the extent and timing of their debt relief by the year 2000."

Commentary:
We welcome the intention to shorten the time period. This is absolutely necessary. What we criticize, however, is that debt relief will still be linked to the implementation of structural adjustment programmes. This can only be accepted if the German Government is going to initiate and implement reform of the SAPs according to ecological and social standards, as announced in the "coalition treaty"². We reject a link to the existing structural adjustment programmes. NGOs from all over the world have been repeatedly calling for the separation of SAPs from the HIPC initiative. The decision on relief until the year 2000 is a positive step because it creates a reliable time frame for the countries concerned.

2. Maximum utilization of the scope for relief
"It must be ensured that debt relief granted within the framework of the HIPC initiative does in fact lead to a lasting solution to the debt problem. Therefore the threshold and target figure for indebtedness in all future cases should be generally set at 200 % of export with some flexibility in exceptional cases."

Commentary:
We doubt that the HIPC initiative in its existing frame will lead to a sustainable solution of the debt problem because it acts in a scenario of crisis that only generates little debt relief. It does, however, enable debtor countries to pay their debt service payments. With 200 %, the German Government goes to the lowest limit possible within the existing HIPC frame for the relation of debt to income from exports (200 to 250 %). Nevertheless, 200 % is still too high. This rate - supposed to determine the debt sustainability of a country - was fixed according to estimations based on the experience with Latin American fast-developing nations in the eighties. However, their historical situation cannot be compared with the present situation of the poorest countries. The indicators for debt sustainability of HIPC countries are still very arbitrary. According to the latest estimations of the World Bank, the poorest countries are severely affected by international financial crises. Their chances of economic growth continue to go down drastically because income from exports is dropping constantly. Therefore, it is not enough to hold on to the debt indicator of the relation of income from exports to debt level. The Federal Government should press for including (world) economical, environmental and social aspects into the analysis and evaluation of the debt sustainability of the poorest countries. This regulation should not be restricted to future debt relief, but should also apply to countries that have received final debt relief within the HIPC initiative (e.g. Uganda), and that should be re-evaluated.

3. Total cancellation of commercial debt by Paris Club in exceptional cases
"Some countries... may be expected in exceptionally difficult situations to require more extensive debt cancellation .... . Up to 100 % of commercial debt should be cancelled in the case of these countries if it appears necessary within the framework of the financial calculations of the World Bank and the IMF."

Commentary:
By demanding 100%, the Cologne Initiative is breaking a taboo and we highly appreciate this. We also welcome the intention for a multilateral agreement. Especially with the support of the progressive governments of France and Great Britain, we see a chance that the obstructionists in the Club (Japan and the U.S.) might be motivated to join multilaterally co-ordinated action. The term "in exceptional cases" has to be erased, though. The Paris Club acts on a case-by-case basis anyway.

The German Government has to commit itself to make sure that "100%" really means a complete cancellation of debt. This means that "small print", but decisive conditions of the Paris Club (e.g. the cut-off date) have to be altered as in the past they meant that a nominal 67% relief was in fact only a relief of 20-25 %.

The German Government has to confirm that it will strive for a complete cancellation in any case, even if the Paris Club refuses to do so. That means that it has to work out a bilateral programme in case the Cologne Initiative is going to fail. This applies especially to the claims of the former GDR towards some of the poorest countries. NGOs have been asking for a cancellation of these claims for years. Also, the German Foreign Office has pressed for a fast solution for the problem of the ex-GDR claims in 1993 ("Guidelines of Accra"). It is a severe flaw of the Cologne Initiative that these claims are not mentioned at all.

4. Total cancellation of debts from official development aid in the Paris Club
"... Servicing the debts incurred from loans under official development aid can itself prove an impediment to development for the highly-indebted poorest countries. To eliminate this impediment we propose a multilaterally agreed approach providing for a mandatory complete cancellation in the Paris Club of debts from official development aid for those highly- indebted poor countries qualifying for assistance under the HIPC debt initiative. ..."

Commentary:
The German Government has announced that it is going to cancel the debts from bilateral financial co-operation of five countries, altogether amounting to approx. 1.5 billion DM. The five countries are Bolivia, Cote d'Ivoire, Guyana, Nicaragua and Honduras³. We appreciate this decision because a debt relief will definitely ease the financial burden of these countries. Nevertheless, we disapprove of the limitation of a relief to countries qualifying for HIPC. According to the creditors, so far only 20 of the 41 HIPC countries qualify. That means that almost half of the HIPC countries cannot expect a debt cancellation because their debt burden is considered to be "sustainable" according to the existing criteria. Apart from the five countries mentioned before, 11 other countries have debts from financial co-operation with the German Government amounting to 1 billion DM. The government is checking a bilateral relief of debt from financial co-operation in the case of Madagascar, but apart from that, countries such as Vietnam, Laos or Ghana should be included into the evaluation as well. We, too, think that the funds released by debt relief should be used for measures promoting development. The question, though, is how this can be controlled.

5. Resources for the World Bank Trust Fund
"The financing of the contribution to the HIPC initiative to be made by multilateral creditors must be assured. Summit countries are under an obligation to contribute to full financing of the HIPC initiative by participating in the HIPC initiative trust fund. Germany will make a contribution to this in 1999."

Commentary:
With the announcement of a bilateral contribution to the HIPC Trust Fund, the Federal Government does away with a severe failing of the old Government. Together with the U.S., Germany was the only G7 country that did not make a single contribution to the different funds. The financial equipment of the HIPC Trust Fund, though, will be the decisive factor for the acceleration and extension of the HIPC initiative as proposed by the German Government. The amount promised by the German Government (50 Mio. DM) is a modest contribution considering the sums needed (US$8.2 billion, without the extension and acceleration of the HIPC initiative) and considering the fact that Germany is one of the biggest creditors. Nevertheless, compared to other G7 countries, the German contribution will mark a clear progress. The implementation and effectiveness of the Cologne Initiative will definitely depend on the financial contributions by the German Government and other G7 countries.

6. Safeguarding the IMF contribution to the HIPC initiative
"The IMF must be enabled to make its full contribution to the HIPC initiative and to continue to provide financial assistance to the poorest countries. The question of sale of part of the IMF gold should remain under review. Capital resources required in the short term for the continuation of the ESAF should be made available bilaterally; Germany is prepared to participate in this."

Commentary:
We disapprove of the connection of the HIPC initiative with the traditional structural adjustment programmes. The internal and external evaluations of the ESAF programmes have resulted in severe criticism: three-quarters of all ESAF programmes failed because the targets were too high and they were not accepted in the debtor countries. The ESAF programmes definitely need to be revised thoroughly and not only in respect to the financing of ESAF. Apart from that, the proposal of the German Government contradicts the coalition treaty, which promotes a new generation of SAPs.

The IMF has enough financial reserves (gold reserves) of its own to finance debt reliefs. In 1998, the IMF agreed to sell 5% of the gold reserves to support the debt initiative. The revision proposed by the German Government is a step in the right direction. We still think that the German Government should press for selling the gold reserves to finance debt relief for the poorest countries. If the World Bank, the IMF and other multilateral creditors decide to follow the quota of the Paris Club, that is an 80-100 % relief, the HIPC initiative will finally lead to a substantial relief, but will be much more expensive, too.

7. New credit and financing arrangements
"In the case of countries that have qualified under the HIPC initiative and have been granted lasting rescheduling, summit countries support new credit and financing arrangements serving in particular to improve the debt service capability of such countries. This relates principally to projects increasing a country's capacity of exports and to earn foreign exchange. .... "

Commentary:
Here we clearly see the limits of the HIPC initiative. It rather aims at restoring the debt service capability than at achieving an extensive debt cancellation. Furthermore this part provokes a number of questions, among others the question why the red-green Government obviously holds on to the neo-liberal model of a far-reaching integration of the poorest countries into the world market (earning foreign currency). No word is mentioned by the Government of any alternatives to this model, which definitely has failed to prove effective for the poorest countries.

At this point, the Government also should have signalized if in the future Germany is going to offer financial co-operation to HIPC countries on the basis of credits or - as with the Least Developed Countries - if the Government will switch to a financial co-operation based on grants, which would be more desirable and more effective. Furthermore, the Cologne Initiative should also contain a proposal for an international insolvency agreement, which could help to find a new and equal base for international debt management.

Conclusion:

The Cologne Initiative certainly contains important elements and we consider it a step in the right direction. However, it definitely is neither a radical plan for debt relief nor does it initiate sustainable development. In order to play a leading role in international debt politics, the German Government consequently has to:

• promote extensive debt relief

• press for structural reform on a multilateral level.

It is indispensable to improve the Cologne Initiative regarding these aspects. Otherwise, it will be just another lost chance for a decisive breakthrough in the debt crisis of the poorest countries.

Endnotes

1. Note of the Federal Ministry for Economic Co-operation and Development, January 18th, 1999.

2. After the elections on September 19th, 1998, the Social Democratic Party and the Green Party led coalition talks to agree on a common political strategy and a number of political reform projects. The results of these talks are written down in the so-called coalition treaty. This treaty also contains very general statements in favour of a reform of the German debt politics, reform of the German export credit guarantees and a reform of the structural adjustment programmes.

3. According to a note of the Federal Ministry for Economic Co-operation and Development from January 18th, 1999.

For more information, contact Walter Eberlei, Kindernothilfe, Tel.:0049-203-7789 109; or Barbara Unmuessig, WEED, Tel.: 0049- 228-766 1321, E-mail:  weed@weedbonn.org.

WEED (World Economy, Ecology & Development) is an NGO which strives for fundamental restructuring of the present pattern of North-South relations and for radical improvement of living conditions in the developing countries. It can be reached at Bertha-von-Suttner-Platz 13, D-53111 Bonn, Germany; tel: 0049- 228-766130; fax: 0049-228-696470; e-mail: weed@weedbonn.org ; Internet: www.weedbonn.org.