Saturday, August 28, 2004

Debt Relief

Heavily Indebted Poor Countries: A Quest for Debt Relief
If you have a look at the complete world history, the precedents (of the current debt crisis) are bad. From Solon, the first statesman to tackle the problem of alleviating the debt problem in the 6th century BC, down to our own day and age, the crises have generally found their end in one or more of those three calamities that are inflation, bankruptcy or war.
- Michel Camdessus (former IMF managing director) 1986, 469.
The current debt crisis in the developing world is one of the most severe in recent history. Its severity is compounded by the fact that unlike previous crisis, this one not only affects about a sixth of the worlds population, it is also likely to have far reaching ramifications around the world. In this new world order of globalization the goings on in one country have an impact in other parts of the world, long gone are the days that nations were isolated and suffered alone, the interconnectedness of today’s world means all will be affected one way or another. This realization should precipitate a concerted effort by all to resolve the debt crisis and in the process outline long-term solutions to ensure that debt crises become a thing of the past.

The year 2000 was designated as the year of the Jubilee.[1] The year when the developed world was to come together and cancel all the debt owed by the third world. Though 100% remission was not accomplished, the Group of 7 industrialized countries did agree to cancel $ 100 billion owed to them by the Heavily Indebted Poor Countries (HIPCs). A group of 41 countries that are considered to be the poorest - 33 of them African - in the world and having a heavy debt burden. In this paper I intend to articulate and illustrate the debt crisis in greater detail; from the amount owed, causes of the crisis and the consequences of the crisis. I will then look at the two competing viewpoints on how to solve the crisis: one articulated by Jubilee 2000 and the HIPC initiative by the WB and IMF. I look into their histories, aims, methods of achieving their goals, and their positive and negative attributes. In the latter part of the paper I will identify other ideas on solving the debt crisis and articulate my views on this most pressing of issues. It is my sincere hope that this paper will shed light on the issue of debt relief. My principal focus will be on the effect that the debt crisis has had on Africa and solutions that could be used in Africa and by extension the remaining 7 members of the HIPC club.
In order for a country to be designated as a HIPC, it must fulfill two criteria: it must have a GNP of under $855 per person and debts equivalent to 18 months of export revenue (150% of export revenue). This criterion was outlined by the WB and has been used as the base of the debt relief debate. 41 countries are currently classified as HIPCs, they are:Angola, Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Comoros, Congo, Côte d'Ivoire, Democratic Republic of the Congo, Ethiopia, Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Kenya, Lao PDR, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Myanmar, Nicaragua, Niger, Rwanda, São Tomé and Príncipe, Senegal, Sierra Leone, Somalia, Sudan, Tanzania, Togo, Uganda, Vietnam, and Zambia.[2] 80% of the above countries are also classified as part of the United Nations Development Program (UNDP) lowest category of human development. This classification is based on: having a life expectancy of 40-50; less that 50% literacy and less than 50% of the population have access to education.[3]
The debt that these countries owe can be divided into three categories:
Private/commercial debt - owed to banks and private investors - $ 30.8 billion. Bilateral debt - owed to individual countries - $156 billion and multilateral debt - owed to financial institutions such as the IMF and WB - $135 billion.[4] The latter two forms can also be referred to as official debt. Most of Africa’s debt is owed
to the official lenders. The total debt - owed by the HIPCs - is equal to $422 billion. This may not be a large amount, but considering that the combined GNP of the HIPCs is $157.5 billion and a debt per person equal to $380[5], this is a substantial amount of debt.
“The fact that so much of today’s staggering debt was irresponsible lent and irresponsibly borrowed would matter less if the consequences of the folly were falling on its perpetrators…” James P. Grant, Executive director of UNICEF.[6]
This gives an inkling as to the causes and history of the current debt crisis. This crisis has its roots in the cold war system. West and East fought over the control of the African continent. Each tried to entice and prop up puppet governments to ensure that the other had no hegemony in Africa. This led massive aid flowing into Africa, the two warring factions did not worry about repayment, the only cared about having an extra vote at the U.N and contracts for its industries[7] (to construct some of the audacious and uneconomical projects initiated by the dictators of Africa at the time).
This would not really have been a problem had the money been used to develop Africa, however, a large quantity of the money ended up in Swiss bank accounts, or was squandered on lavish and wholly unrealistic project (“white elephants”), such as expensive dams and development of cars such as the Nyayo car in Kenya. The dictators also implemented anti-business policies such as: price controls, consumer subsidies, import controls and low producer prices. This limited the ability for the growth of business and therefore, the expansion of economies. These African malaise are a symptom of a greater problem. After the end of colonialism, African administration was left in the hands of inept and inexperienced policy makers; this has been one of the greatest problems for Africa and to some extent still exists today (except that professionals are leaving Africa for greener pastures in the West). The constant civil strife and conflict that persists in Africa has also precipitated this exodus and things do not seem to be looking up.
Africa has also borne the brunt of several natural calamities from drought to famine and floods, if it’s a calamity Africa has probably experienced it. This combined by the low levels of economic growth led to increased borrowing to ameliorate the conditions. The situation has been exacerbated by the fact that Africa has a limited variety of goods to export - the main exports are coffee, tea and cocoa - the prices of these goods fluctuate greatly and have fallen since the 1970’s and African income had fallen with them. The trade barriers placed on African goods by the developed world have further compounded the issue of exports. This further served to limit earnings, which have had to be supplemented by borrowing. This borrowing has been at higher interest and shorter maturity especially after the end of the cold war: the rate was 3.7% and a maturity of 7 years in 1970, this increased to 10% with a maturity of 4 years in 1987.[8]
The consequences of the debt crisis, have hit Africa hard. According to Economist Daniel Cohen at the Organization for Economic co-operation and Development (OECD), only 31% of the debt owed by HIPCs can be repaid. This is equal to $131 billion, the other $291 billion can not be recovered.[9] Africa pays a total of $14.5 billion each year to service debt. Debt that can never be repaid. This puts a great strain on the resources of many countries and it is no wonder that a number of countries spend more on debt servicing than on social service like healthcare, education and clean water. For example, Tanzania was forced to re-introduce school fees and scale down its universal education program due to debt service.[10] In addition, governments are forced to borrow more in order to pay for debt servicing: from 1999 - 2002, Kenya spent 52% of its GNP on servicing debt[11] With such debt burdens its no wonder Africa is in such dire straits. Debt burdens impede development, by limiting government social expenditures and foreign investment is limited by bad - or no - credit ratings. Moreover, African countries are forced to accept severe conditonality in order to receive aid. This has included liberalization of markets and retrenchment of civil service workers. This has further hindered growth by limiting the growth of industry and causing higher unemployment. This fosters ill will towards the creditors and is an impediment to the effective resolution of the debt crisis.
The realization that something needs to be done has led to the formulation of two principal solutions to the debt crisis. In 1996 the IMF and World Bank came up with the HIPC initiative, in 1999 it was enhanced (to hasten the speed of debt relief delivery), currently 26 countries have benefited from some debt relief. The principal aims of this program are to: Provide special assistance to HIPCs that pursue IMF and WB supported adjustment programs; co-ordination of international financial efforts to reduce debt to sustainable levels; provision of concessional financing for HIPCs while the progress through the debt relief process; eradication of poverty through the creation of Poverty Reduction Strategy Papers (PRSP); enhance accountability and good governance among the HIPCs through conditionality and eradicate 45% of the HIPCs debt.[12]
In order for debt relief to be initiated, a country has to accomplish a number of tasks: create a PRSP or and interim PRSP (IPRSP); maintain a consistent track record of implementation of structural adjustment; upon this the board of the IMF decides on whether the countries debt is sustainable ( below 150% of export earnings), this is referred to as the decision point. Upon this, the country must maintain a good track record for a number of years and then reach the completion point where multilateral and bilateral donors reduce debt to a sustainable level.
The HIPC initiative has a number of positive attributes: it substantially reduces debt service payments - by as much as 20%; brings about an increase social service spending (after reduction of debt service); conditions ensure effective use of relief received, for social services; helps create conditions that are conducive to economic development ( by liberalization of the economy and an emphasis on good governance); helps begin the process of poverty eradication; and gives concessional[13] aid for the implementation of the PRSP.
However, A number of problems do emerge. The IMF and WB have been very optimistic in their projection of economic growth for the HIPCs. They predict a growth rate of 6%, way above the current level and that of 2.5% projected by other organizations.[14] According to the GAO they have also been overly optimistic about the export earnings of the HIPCs. HIPCs - as early articulated - rely on primary products (coffee, tea, cocoa) for export earnings, these are very fickle markets and prices have a tendency to fluctuate and more often then not, to the negative. According to the GAO, IMF projections need to be more on the conservative end of things. In addition, the formulation of comprehensive PRSPs may be compromised by a country’s urge to get relief. This problem may also be worsened by the participation of the civil society that may not necessarily know macroeconomic principles. It would also be very expensive to co-ordinate meetings and formulation of PRSPs. It is also noted that the provision of concessional aid is likely to increase debt in the long run and the debt relief provisions may not be commensurate to the amount needed to implement the PRSPs.
According to the Jubilee research group, the HIPC initiative is bound to fail if creditors do not live up to their promise of providing $100 billion in debt relief. In addition, the process of gaining relief is said to be too long and costly to be effective in the long run.[15] A further limitation of the HIPC initiative is its limited scope, it fails to include countries such as Nigeria, which have substantial debts and debt service payments. It is also worth noting that the 150% requirement is also quite high; considering the fact that West Germany’s creditors after World War II set sustainable debt at 3.5% of export earnings.[16] Regardless of its limitations, the HIPC initiative is looked upon as a step in the right direction, but many believe more can be done.
Those who believe more can be done, find solace in the Jubilee framework. The Jubilee framework was the brainchild of a number of students at the University of Keele in England. They wanted to have a new kind of poverty eradication scheme and a debt reduction for poor countries. The framework calls for a one-time debt cancellation, as was articulated in Leviticus 25 and Deuteronomy 15 in the Bible. The proponents of this believe in reversing the net flow of money, which currently favors the creditors. The framework also calls for an emphasis on poverty reduction (and is partly responsible for the PRSP, requirement in the HIPC initiative. In addition, Jubilee calls for the formation of a international system of bankruptcy that would allow insolvent countries to seek protection from creditors.
The bankruptcy law envisioned would give the debtor authority on whether to regard their debts as unsustainable and gives them the option of filing for bankruptcy. The U.N would then call and ad hoc committee of 3 judges (one from each side and another agreed upon by the creditor and debtor), the committee would listen to arguments on both sides and decide what the right course of action would be.[17] This argument is currently being discussed at the IMF. The framework also calls for short-term solutions to debt the crisis: cancellation of all debt; the creation of a special fund, under strict trusteeship to ensure that relief is used effectively.[18] The conversion of multilateral loans into grants, as the current Bush administration has proposed (50% conversion of all concessional loans into grants).[19] The participation of the civil society in policy formulation, for greater transparency. The opening up of creditor markets to debtor goods and allowing debtors pay in their own currencies and not to utilize scarce foreign exchange reserves.[20] A prime example of this would be the Africa Growth and Opportunity Act (AGOA) in the U.S.A. That opens U.S markets to African goods. And reduced interest rates for concessional loans and any future loans.
A number of advantages are clear if this framework is implemented: new markets would open up for global investment. Once countries are no longer bankrupt, then commerce can be more fluid and globalization would flourish. The debt cycle would be destroyed; more money would be available for social service expenditure; and the creation of international bankruptcy law would limit the impact countries defaulting on loans. However, there is a downside to this proposal. The debt cancellation may be open to abuse by countries that do not reform; debt cancellation does not necessarily mean that borrowing would cease and would increase in order to implement poverty reduction schemes. Elimination of debt would lead creditors to doubt that aid would be repaid and as a result creditors would scale back aid to all countries; the elimination of dept service payments would close an essential source of multilateral aid finance and this would cripple organizations like the IMF and WB.[21]
Other solutions that may be viable are: the need for African countries to become self sufficient food producers, this would limit the reliance on aid to finance consumption. It would also be wise for Africa to get rid of its blame the West mentality, accept its mistakes and look for African oriented solutions, instead of waiting for IMF and WB conditions. I believe that Africa needs to reform on its own and not to rely on others to solve all its problems. The acceptance of democracy and transparency would be a nice place to start. Governments should also strive to ensure that conditions are ripe for the growth of business: this could be achieved through liberalization of state firms, reduction of taxes, simplicity of business regulations and a investment in human capital.[22]
The ability to entice direct foreign aid would be one sure way of ensuring growth, and all should be done to ensure that conditions are ripe for investors:
Clear statements are required from the government of the in which private investment, particularly foreign investment, is considered desirable: governments must also provide an appropriate legal framework for encouraging those investments. Expeditious approval procedures and consistency in policies relating to the private sector are essential. [23]
There is also a need for the West to focus technology on to issues affecting Africa. It would be wise to research and develop vaccines for AIDS, Malaria and Tuberculosis, which are the three main killers in Africa. Vaccines should also be mad readily available and if possible property rights on public goods like vaccines or genetically modified food should be modified. It would also be wise for developed nations to increase funding to various organizations (WHO, WFP, FAO and UNDP), in order to give Africa and the rest of the 3rd world a chance to survive in today’s world.[24]
Numerous solutions exist to solve the current debt crisis. I believe that a combination of various factors would be most effective. For one debt relief (at least 75%) is needed, countries should not have to pay for the sins of previous regimes, but full debt relief would probably foster a habit of pleading for total forgiveness of all arrears owed in the international market. Africans also have to take the initiative, for far too long Africa has towed the line of the West, it is about time that Africa found solutions that are unique to her. By relying so much on the West, Africa is now perceived to be a basket case, a continent beyond redemption, it is important for Africa to reform herself on her terms and not those of the IMF. By initiating policies that would lead to sustainable growth, Africa can eventually drag itself out of the morass that is debt. Economic growth is the ultimate debt relief.

[1] In biblical terms, the Jubilee provision (for the remission of all debts) is found in Leviticus 25 and to occur every 49 years.
[2] International Monetary Fund, Debt Relief under the Heavily Indebted Poor Countries (HIPCs) Initiative. A fact sheet. (IMF: April 2003)
[3] David M. Roodman, Still Waiting for the Jubilee: Pragmatic Solutions for the Third World Debt Crisis ( World Watch Institute, 2001), 23
[4] Ibid.
[5] Ibid.
[6] Roodman, 30.
[7] Roodman, 43
[8] Karamo N. Sonko, Debt, Development and Equity in Africa ( Lanham: University Press of America, 1993), 8.
[9] Roodman, 25.
[10] Roodman, 35.
[11] “Campaign to cancel public debt launched,” East African Standard, 14 April 2003.
[12] IMF (Debt).
[13] Aid at interest rates below market value.
[14] General Accounting Office, Challenges confronting debt relief and IMF lending to poor countries (United States General Accounting Office,2001), 2.
[15] Jubilee Research, Creditors Failing the World’s Poor, (London: Jubilee Research, 2003)
[16] Roodman, 59.
[17] Ann Pettifor, Resolving International Debt Crises - the Jubilee framework for International Insolvency (London: New Economics Foundation, 2002), 22.
[18] Dent Martin and Peters Bill, Poverty and Debt in the Third World: Confronting a Global Crisis (Research Institute for the Study of Conflict and Terrorism, 1998), 12
[19] GAO, (Abstract).
[20] Sonko, 115.
[21] 100% debt cancellation? A Response from the IMF and WB (IMF and WB, 2001), 1-3
[22] “Is Debt the Opiate of the Third World?” Daily Nation on the web, April 16 2003.
[23] Rupert Pennant-Rea, The African Burden (New York Priority Press Publications, 1986), 39.
[24] Jubilee Research, Helping the World’s Poor (London: Jubilee Research, 2003).