Over
the past several years, policymakers have come to realize that many
of the world's poorest countries cannot finance the debt that they
owe to other countries, multilateral lending institutions such as
the World Bank and the International Monetary Fund (IMF), and
private creditors. For many of these countries, this external debt
is over two times their gross domestic product (GDP), and servicing
the debt eats up a growing share of scarce foreign exchange and
government revenue. To meet this escalating burden, countries are
forced to allocate increasing portions of their budgets to debt
service. The result: Taxes or borrowings increase, other government
expenditures are cut, or there are arrears or default on debt or
interest.
In
1996, the IMF and the World Bank asked their member states to
support and fund a proposal known as the Heavily Indebted Poor
Country (HIPC) Initiative. The HIPC initiative outlines a plan to
relieve the excessive debt levels in 40 extremely poor countries.
The
Clinton Administration and many in Congress have embraced the HIPC
initiative eagerly. However, close examination reveals that the
initiative will not reduce the debt burdens in extremely poor
countries to levels at which these countries can be self-sufficient
and meet their debt obligations without depending on foreign
assistance.
Rather than supporting the flawed HIPC
program, Congress should alter it to better achieve debt reduction
in poor countries. Most proposals to "fix" the HIPC initiative
agree that at least some portion of debt must be forgiven;
differences center around the amount to be forgiven and the
timetable for relief. However, most of these proposals--including
the recent proposal put forth by the Group of Seven (G-7)
industrialized nations in Cologne, Germany--overlook the fact that
a key component of any solution to the problem of excessive debt is
preventing a return to unsustainable debt levels.
The
debt cycle can be stopped only through debt forgiveness along with
reductions in and eventual elimination of bilateral and
multilateral development assistance, which is the primary source
feeding the debt problem. Forgiveness of HIPC debt should be made
contingent upon agreement by the recipient country not to seek or
accept any future loan from the IMF, the World Bank, or other
multilateral lending institutions.
The HIPC Program
Begun in September 1996, the HIPC
initiative seeks to alleviate the debt burden of countries for
which the usual round of debt relief and economic aid has proved
insufficient. The IMF and the World Bank, which jointly oversee the
HIPC initiative, evaluate the ability of low-income countries to
service their debt after they have exhausted other debt relief
measures through the Paris Club
and multilateral lending institutions.
Criteria for Assistance. The IMF and the
World Bank established three criteria for HIPC assistance:
-
The country must be eligible for
concessional assistance, the primary requirement being a per capita
gross national product (GNP) equal to or less than $695;
-
The country's debt burden must be
"unsustainable" even after the country has exhausted all other
debt-relief options; and
-
The country must have established a track
record of adherence to IMF and World Bank conditionality.
After evaluation, 41 countries were deemed
eligible for HIPC assistance. Thirty-two had a GNP per capita of
$695 or less and a debt-to-exports ratio greater than 220 percent
or a debt-to-GNP ratio of more than 80 percent in 1993 (present
value terms). The remaining nine did not meet these criteria, but
were eligible for Paris Club concessional debt rescheduling.
Before receiving HIPC debt relief, these
countries must follow an economic reform program sanctioned by the
IMF and World Bank for three years and then establish a further
three-year track record of "good policy performance." The HIPC program has
granted exceptions to this six-year evaluation period on a
country-by-country basis. The length of the evaluation period came
under review during a recent assessment of the program after member
countries expressed their belief that debt relief should be
hastened.
How Creditors Share Debt
Relief.
The HIPC initiative is funded by contributions from multilateral
institutions and individual countries.
The program allocates the burden of debt relief among bilateral and
multilateral creditors on the basis of the amount of debt each is
owed after the heavily indebted countries have exhausted
traditional debt-relief measures. The creditors themselves decide
how to extend their share of the debt relief: through outright
forgiveness, rescheduling, or reduction of debt; by making the debt
service payments themselves; or by offering new loans to cover the
payment of old loans.
The
IMF and the World Bank have chosen not to forgive debt outright.
Instead, they have set up special accounts to make debt payments
for countries deemed eligible for HIPC assistance.
Specifically:
- The World Bank manages its share of
debt relief through a specially established HIPC Trust Fund. The
World Bank transfers income from the International Bank for
Reconstruction and Development (IBRD)--an internal organization
that lends to middle-income countries at profitable interest
rates--to the Trust Fund, which then repurchases or repays debt
that countries owe to the International Development Association
(IDA) branch of the World Bank.
The World Bank had transferred $850 million to the HIPC Trust Fund
as of February 1999 to cover its share of the program's costs. As
of that date, the Trust Fund had received an additional $450
million through pledges and donations from 19 countries to finance
the HIPC program.
- The IMF has established an escrow
account for special grants to finance its share of the HIPC
initiative and has financed this account through donations from
member countries and through the transfer of funds from the
Enhanced Structural Adjustment Facility Trust Reserve Account. (The
ESAF is a concessionary lending mechanism.) Member states also have
proposed supplementing this effort by selling IMF gold reserves.
The money from the escrow account will be used to cover service
payments on debt owed to the IMF. As of February 1999, the IMF had
allocated $520 million to this fund.
Current Status.
As of February 1999, 12 countries had been evaluated under the
HIPC initiative; of these, seven received promises of HIPC
assistance. On May 14, 1999, the IMF
and World Bank announced that the latest HIPC debt relief package,
worth $410 million, will go to Guyana.
Shortcomings of HIPC
The
IMF and World Bank are correct: The debt burden of many countries
is unsustainable for reasons that include lack of structural
reforms, poor debt management, and deterioration of trade
conditions in many HIPC countries. But the problem is exacerbated
by imprudent credit policies of bilateral and multilateral lending
institutions.
The
debt burden on HIPC countries has increased despite numerous
efforts to address that burden through traditional means, such as
rescheduling debt and exchanging market-interest debt for
concessionary debt. According to the U.S. General Accounting Office
(GAO), HIPC countries have nearly doubled their average external
debt from $122 billion between 1983 and 1985 to $221 billion
between 1993 and 1995. In most cases, this
rise in indebtedness has outstripped economic and export growth,
making debt service increasingly difficult and forcing many of
these countries into arrears or into default on debt or
interest.
However, the HIPC initiative is not the
answer to the debt problem in low-income countries. The initiative
falls short in several ways:
- HIPC does not significantly reduce debt in
low-income countries.
Even if the HIPC initiative received full support from member
states, was fully funded, and was used for all 40 eligible
countries, it would not solve the debt crisis in low-income
countries. As the IMF notes, "assistance under the HIPC Initiative
is estimated to reduce debt service due in the period following the
completion point by 18 percent (within a wide range)." However,
results so far have shown that "in comparison to the debt service
paid prior to HIPC debt relief, the reduction is about 2 percent on
average, within a wide range, and some countries are expected to
experience an increase in debt service due even after HIPC
assistance." The bottom line is that
the HIPC initiative does not solve the debt problem in low-income
countries: At best, it offers only token relief; at worst, it
increases the debt service burden on the very countries it purports
to help.
The international development committee of
the British House of Commons charged that the HIPC initiative was
at risk of being a "rearrangement of accounts," and correctly observed
that the initiative failed to provide a permanent solution to the
HIPC debt problem. Unfortunately, this is consistent with past IMF
and World Bank lending practice. Multilateral lending agencies like
the World Bank and IMF have been rearranging accounts for years to
disguise their ineffective lending. Countries unable to service
existing debt burdens are given new loans. The World Bank and IMF
are spared the embarrassment of explaining a technical default, but
the countries have defaulted nonetheless. For private lenders, such
practices would mean serious trouble with regulators. For multilateral
lenders, they are business as usual.
- HIPC will not make low-income countries
self-sufficient in debt management.
The stated purpose of the HIPC program is to make the debt burdens
of eligible countries "sustainable." An IMF pamphlet defines
sustainable debt as meeting "current and future external
debt-service obligations in full, without recourse to debt relief,
rescheduling of debts, or the accumulation of arrears, and without
unduly compromising growth."
Noticeably absent is any reference to foreign assistance.
The HIPC program is designed in a way that
leaves beneficiaries highly dependent on foreign assistance to meet
payments on the debt they still owe after receiving relief. In
fact, the level of debt relief offered through the HIPC initiative
is based on the assumption that foreign assistance will continue
indefinitely. Under the initiative, countries cannot achieve
self-sufficiency because HIPC debt relief is "sustainable" only as
long as those countries continue to receive new flows of foreign
assistance.
However, even assertions of
"sustainability" are doubtful. Estimates of the sustainability of
post-HIPC debt are based on an assumption that exports in eligible
countries will grow at a steady, high rate. The historical record
indicates otherwise: These countries often have had poor export
growth and large fluctuations in the rate from year to year.
For example, for the six countries that
had been approved for aid through the HIPC program as of August
1998, estimates of future growth in exports averaged 75 percent
greater than the actual average over the most recent ten-year
period for which records are available. Specifically, annual export
growth averaged 4.5 percent in those countries between 1985 and
1995, while the HIPC program assumes that an average annual export
growth of 7.8 percent is needed for the debt of those countries to
be sustainable. Every country but one
is projected to have export growth at least 39 percent greater than
its previous ten-year average. For Uganda, the estimate exceeds the
historical average by 2,800 percent. Clearly, the export growth
estimates that form the basis of the HIPC program are overly
optimistic and probably unattainable for most countries.
- HIPC glosses over IMF and World Bank
debt even though both organizations are primary creditors of
low-income countries.
The IMF and the World Bank are less than forthright about their
role in creating the unsustainable debt problem. The evidence shows
that, for most HIPC-eligible countries, IMF and World Bank
assistance is a key component of their massive debt burdens. For 29
of the 40 HIPC countries, IMF and World Bank assistance totals more
than one-fifth of total government debt. Of these countries, six
owed a majority of their government debt to the IMF and World Bank.
(See Table 1.)
Instead of alleviating the debt burden of
these countries by stimulating economic growth or providing
financial relief, multilateral assistance has aggravated the
problem by increasing an already unsustainable development burden.
Indeed, HIPC countries are becoming ever more indebted to these
organizations. For example, IMF and World Bank debt owed by the
HIPC countries increased from $43.95 billion in 1996, when the HIPC
initiative was originally proposed, to $48.6 billion at the end of
February 1999--a jump of 10.6 percent.
According to the GAO, these organizations
will not forgive debt outright because of a "belief that forgiving
or reducing debt would diminish assurances of repayment on new
lending and, in some cases, hurt their credit ratings." In other words,
the IMF and the World Bank are unwilling to accept responsibility
for past errors by forgiving loans and reforming lending practices
that are in large part responsible for "unsustainable" debt burdens
in HIPC countries because doing so might harm their ability to
pursue those activities in the future.
Instead of working to solve the debt
crisis in many low-income countries by acknowledging their role in
low-income debt problems, forgiving debt, and restricting future
assistance, the IMF, the World Bank, and other multilateral lending
institutions argue that additional assistance is the solution.
This
is incorrect. The bottom line is that the HIPC proposal is not a
solution to poor-country debt problems. It is an empty proposal
that orchestrates a token reduction in debt, ensuring that
countries will remain dependent on foreign assistance for the
foreseeable future.
HOW CONGRESS CAN MAKE THE PROGRAM
WORK
Congress and the Clinton Administration
are right to be concerned over the debt in extremely poor
countries. In many cases, the debt burden of low-income countries
exceeds their ability to service it. However, the HIPC initiative
as designed by the IMF and World Bank, and as championed in
Congress and by the Administration, will not address the problem
adequately.
To
its credit, the Clinton Administration has identified some of the
shortcomings of the HIPC initiative. It recommends increasing debt
relief in the early stages of the program, forgiving and reducing
bilateral loans, and providing "at least 90 percent of new
development assistance on a grant basis to countries eligible for
debt reduction." The G-7 countries
also have reiterated their support for greater relief on an
accelerated timetable, and have urged that the funds saved from
reduced debt service by poor-country governments be allocated to
education and wealth programs and to poverty reduction.
Unfortunately, however, even though the
Administration correctly identifies the role of international
development assistance in causing poor-country debt problems, its
remedy is to create an international welfare system of grants. This
would largely prevent an accumulation of debt from international
assistance, but it would do so at the cost of all free-market
incentives to reform. Countries would be assured of a costless and
unending source of funds regardless of what economic policies they
pursued. Under such a system, few economic reforms would be
implemented, and the poorest countries would be relegated to
perpetual poverty.Likewise,
the G-7 countries would have HIPC countries channel savings from
reduced debt service into government health, education, and poverty
reduction programs rather than lower the tax burden on their
citizens--which likely would have more real impact.
Congress should increase the amount and
speed of debt relief. However, it should correct the flaw in
proposals advanced by the President and others that overlook the
counterproductive role of bilateral and multilateral lending in
fueling the debt crisis in many countries. To put a permanent end
to the debt crisis in the HIPC countries, Congress should:
- Forgive bilateral debt owed to the
United States by the HIPC countries and encourage other members of
the Organization for Economic Cooperation and Development (OECD) to
do the same.
The HIPC initiative tacitly admits that many very poor countries
cannot repay the debt they have accumulated and simultaneously
achieve the economic growth necessary to escape perpetual poverty.
Although the HIPC initiative would address part of this debt
burden--albeit only a portion and within a time frame that
undermines the benefits of the relief--the debt remaining is still
very high in relation to the economic wealth of the countries under
consideration. The U.S. and other members of the OECD, as the
primary sources of bilateral foreign assistance, can aid the relief
effort by forgiving all bilateral debt owed by these countries.
Congress should supplement this debt forgiveness by significantly
reducing and eventually eliminating bilateral development
assistance to avoid future repetition of debt accumulation.
Concerns have been raised about the cost
of total bilateral debt forgiveness, but these fears are overblown.
Total debt owed to the United States by the HIPC countries is $6.8
billion--an amount roughly equivalent to annual U.S. expenditures
on economic assistance. However, the actual cost of this debt
forgiveness to American taxpayers would be minimal, as the
repayment of most of this debt is unlikely and the
balance would be offset through reduction in bilateral development
assistance.
-
Advocate cancellation of all debt
owed by a HIPC-eligible country to the IMF, the World Bank, or any
other multilateral lending institution if that country agrees not
to seek or accept future assistance from the IMF or any other
multilateral lending institution.
Subsidized loans from the IMF and other multilateral
lending institutions form a substantial portion--and sometimes a
majority--of low-income country debt. Any credible effort to
alleviate that debt must include a means of forgiving it. The best
way for Congress to support low-income debt relief is by expressing
this policy in legislation and requiring that the U.S.
representatives at the IMF and other multilateral lending
agencies
-
Present public, written notification of
this position to their respective institutions;
-
Demand a recorded vote in these
institutions on the policy of full debt forgiveness in return for
forfeiture of future assistance; and
-
Report the results of this vote to
Congress.
-
Ensure the cooperation of the IMF, the
World Bank, and other multilateral lending institutions in
forgiving poor-country debt.
Congress should create incentives for the IMF and other
multilateral lending institutions to eliminate unsustainable debt
burdens in poor countries by restricting the disbursement of funds
currently authorized for the IMF and any multilateral lending
institution until
-
Those institutions publicly issue a
written statement of their support for and adoption of a policy to
cancel the debts of HIPC countries that agree not to seek or accept
any future assistance, and
-
Congress is convinced that those
institutions have cancelled outstanding debt for every HIPC
country, and also has received a letter signed by the debt relief
recipient and the lending institution stating that all debt has
been forgiven, completely and irrevocably, and that the country has
agreed not to seek or accept any future loan from the IMF or other
multilateral lending institutions.
- Authorize the U.S. Treasury to purchase
and cancel the external debts of HIPC-eligible countries that agree
not to seek or accept future loans from the IMF or any other
multilateral lending institution.
If the IMF or other multilateral lending institutions have not
forgiven the debts of HIPC-eligible countries within one year of
the adoption of this policy, Congress should direct the Treasury to
purchase and cancel the debt owed by HIPC countries to those
institutions. This action, which should be financed through
reductions in callable capital authorized for the IMF or the
multilateral lending institutions, would allow the U.S. to support
debt relief even if those institutions were reluctant to forgive
existing debt or opposed the cessation of future assistance.
If
implemented by the United States, OECD member states, and the
multilateral lending institutions, this policy not only would
provide substantial debt relief to the countries in the HIPC
program, but also would prevent them from accumulating
unsustainable debt through foreign assistance in the future. The
restriction on official credit would provide a strong incentive for
low-income countries to adopt the economic reforms necessary to
secure private-sector credit and investment.
This
policy would lessen the possibility that these countries will
assume unsustainable debt in the future. Private creditors and
investors have a greater incentive to ensure that the borrowing
countries can meet their debt obligations than do the multilateral
or bilateral lending agencies or institutions, because the
viability of their investments or loan portfolios depends on
reliable returns and repayment.
In addition to increasing the likelihood that the level of debt
will not exceed a country's ability to service it, this strategy
provides ancillary benefits to poor countries. For example, private
investment generally yields greater economic benefits than official
(bilateral or multilateral) investment, and economic policies that
attract private-sector creditors also create the best environment
for long-term, sustainable economic growth.
CONCLUSION
The
HIPC initiative is flawed and will not eliminate poor-country debt
problems; it will not even make poor countries self-sufficient in
handling their debt burdens. In reality, the HIPC initiative is a
mirage that offers poor countries token relief while perpetuating
their dependence on bilateral and multilateral assistance.
The
poor-country debt crisis is real, however, and Congress should take
action to solve the problem. A long-term solution requires total
forgiveness of existing bilateral and multilateral debt, which is
unlikely to be repaid in any event, but it also must end the debt
cycle by eliminating bilateral and multilateral assistance.
Congress should take steps to implement the policies that are
necessary to solve poor-country debt problems and encourage the
economic policies that attract private-sector credit and investment
and have proven the best means of achieving long-term, sustainable
economic growth.
Brett
D. Schaefer is Jay Kingham Fellow in International
Regulatory Affairs and Denise H. Froning is a former Research
Assistant in the Kathryn and Shelby Cullom Davis International
Studies Center at The Heritage Foundation.