UNIVERSITY OF PENNSYLVANIA - AFRICAN STUDIES CENTER
Africa: Debt Sustainability Update
Date distributed (ymd): 010504
Document reposted by APIC
Africa Policy Electronic Distribution List: an information service provided by AFRICA ACTION (incorporating the Africa Policy Information Center, The Africa Fund, and the American Committee on Africa). Find more information for action for Africa at http://www.africapolicy.org
Issue Areas: +economy/development+
This posting contains a news release and briefing note from Drop the Debt, reporting on a new World Bank / International Monetary Fund study on sustainability of the debts of the countries included in the two institutions' Heavily Indebted Poor Countries (HIPC) initiative, and a brief commentary by Africa Action director Salih Booker.
The April 20 report entitled "The Challenge of Maintaining Long- term External Debt Sustainability" acknowledged that even the countries receiving debt reductions under the programremain extremely vulnerable to adverse economic circumstances including reductions in export earnings or development assistance from the optimistic levels projected under HIPC sustainability analyses.
According to the cautious language of the report's executive summary:
"The paper notes that HIPCs are typically dependent upon a narrow export base which makes them vulnerable to externally induced shocks. Projections indicate that most HIPCs are likely to run negative resource balances for many years to come and will continue to need financing on concessional terms. Consequently, the paper examines the sensitivity of long-term debt sustainability to possible shortfalls in export revenues and less concessional financing than currently assumed in the debt sustainability analyses (DSAs). It concludes that while the lower debt service levels resulting from enhanced HIPC debt relief will provide a safety margin in the event of shortfalls in export revenues for these countries, the room for a significant deterioration without impacting long-term debt sustainability and poverty reduction is limited."
The posting also includes, at the end, a table of dependence on major exports for HIPC countries, presented in the World Bank study.
For additional background see:
AFRICA ACTION COMMENTARY
May 4, 2001
The data reported below by Drop the Debt from World Bank / IMF sources show that creditors' debt reduction efforts for African countries fall far short. Even within the restricted terms of debate within the international financial institutions themselves, the case for further debt reduction is irrefutable. When one adds in the broader context of the debt, outside a narrow financial accounting, it is clear that the balance of debt is from North to South rather than the reverse. More debt reduction is needed, but it is far from enough.
Africa Action strongly supports the call for 100% cancellation of the debts owed by African and other poor countries to the World Bank and the IMF, as a first step towards reducing the outward flow of financial resources that are desperately needed within Africa. The reasons are many, and more than sufficient to make the case: including the illegitimacy of debts incurred by the apartheid regime and other despotic governments, the liability of creditors' themselves for failures of policies that they imposed, and the fact that paying the debt competes directly with urgent investment in health, education and physical infrastructure.
Meeting in Abuja from April 25-27, African leaders adopted a target of devoting 15% of national budgets to HIV/AIDS and other public health needs, an increase from approximately 5% to 7%. There are many other prerequisites for reaching such a target and spending it effectively - including local political will, civil society pressure, additional international funding, and effective administration. But stopping the drain of debt payments to the rich international financial institutions is fundamental. And the need is for immediate action. The spring meetings of the World Bank and the IMF saw no such action. The next test will be the Genoa meeting in July of the G-7 rich countries.
- Salih Booker
23 April 2001
Egg on faces of HIPC architects as new report revealsthird world debt package failings
Drop the Debt news release
PO Box 5555 London,SE1 OWG UK
firstname.lastname@example.org,Tel: +44(0)20 7922 1111,+44(0)7970 175324
An embarrassing report from the World Bank and International Monetary Fundreleased over the weekend casts a dark shadow over their Heavily IndebtedPoor Countries (HIPC) initiative, showing little confidence that the controversialdebt package will provide an end to the debt crisis for the countries involved.
The paper "The Challenge of Maintaining Long-Term External Debt Sustainability" has finally emerged after a number of rewrites, and confirmsdebt campaigners' concerns that HIPC does not reduce debt to a low enoughlevel. It gives a renewed urgency to discussions on debt by the Group ofSeven (G7) finance ministers at the World Bank and IMF spring meetings inWashington DC on April 29, especially in light of the spreading HIV/AIDScrisis in Africa.
Debt campaigners have long argued that the 150% debt-to-exports levelunderpinning the HIPC initiative is based on precarious projections of exportgrowth. For the 22 countries to get HIPC relief so far, the World Bank and IMFuse predictions for export growth of above 6 per cent.
This report admits for the first time that original export growth predictions were overly optimistic. The report shows how if exports grow more realistically at an average of 4.2%, in line with 1990 - 1999 levels, debt levels will have risen above the declared "sustainability threshold" to 160 per cent by 2005, reaching around 180 per cent by 2015.
Three of these countries, Bolivia, Malawi and Niger, will not reach the 150 per cent threshold in the first place because of export growth rate volatility.
Three further countries (Burkina Faso, Rwanda and Tanzania) are not predicted to reach the 150 per cent level until the medium term,because of anticipated new borrowing.
Even for countries that do reach the 150% level, the World Bank and IMFacknowledge that the HIV/AIDS emergency in many African HIPCs will meanthat debt levels will soon rise: "Longer-term growth prospects can beundermined by natural disasters, war, or health threats such as the AIDSepidemicin such cases, in the absence of adequate grant financing,external indebtedness may need to rise to accommodate the financing ofreconstruction and rehabilitation."
Despite the overwhelming evidence presented in the World Bank/IMF paperthat HIPC is not delivering sustainable debt levels, the IMF and World Bank donot consider the case for further debt cancellation. Instead they focus only onsolutions through economic growth and policy reform, while also examiningthe importance of future financing patterns. While these are crucial to longterm debt sustainability, Drop the Debt emphasizes that the starting pointmust be to make debt repayments affordable now.
"The bad news is that the HIPC initiative is yet again failing to meet its statedobjectives. The good news is that the IMF, World Bank and their shareholdershave the resources to cancel 100% of the debts these institutions are owed bythe poorest countries. HIV/AIDS is compounding the failures of HIPC andmaking delay more costly and inexcusable. This week we will see whether theIMF and the World Bank are more interested in saving cash or saving lives."
In light of this report Drop the Debt calls for the following urgent steps to betaken at the Spring Meetings:
* The G7 Finance Ministers to agree to direct the IMF and World Bank to cancel 100% of the outstanding debts owed them by HIPC nations
* In light of the HIV/AIDS crisis, more countries such as Nigeria should be considered for deeper multilateral and bilateral debt cancellation
* Arbitrary debt sustainability ratios need to be replaced by criteriawhich put development financing needs first
* Urgent adoption by all creditors of UK Chancellor Gordon Brown's proposed Trust Fund for countries which have not yet reached decision point so that debt repayments can be returned in the future.
The report was launched at a Drop the Debt/Oxfam conference and discussed by a panel including Adam Lerrick, Carnegie-Mellon University, Adrian Lovett, Drop the Debt, JoMarie Griesgraber Oxfam,Edith Ssampala, Ugandan Ambassador to the US, representatives fromthe IMF and World Bank ,and Maurice Fitzpatrick, Chantrey Vellacott.
For more information:
Jamie Drummond/Lucy Matthew +44 (0) 961 346 334 in WashingtonDC Jamie Shor +1 -202 293 1001
Notes for editors:
1. "The Challenge of Maintaining Long-Term External
Debt Sustainability," April 20, 2001, by the World
Bank and IMF can be downloaded from the World Bank
2. So far, the HIPC initiative is reducing debt service payments for22 countries by just one-quarter on average, leaving the majority ofcountries spending more on debt than they currently spend on health. Only one country, Uganda, has had actual debt cancellation.
3. Under the original HIPC initiative announced in 1996, the main sustainability threshold reduced debt-to-exports to 200 - 250 per cent. An internal World Bank paper in 1998 showed that the fluctuation in coffee prices had offset any gains from HIPC debt relief in Uganda. After pressure from debt campaigners, the G7 announced the 'enhanced' HIPC which reduced the threshold to 150 per cent of debt-to-exports on the grounds that exogenous shocks could potentially undermine the impact of HIPC, and that more resources were needed for poverty reduction. No logical or intellectual argument was given for choosing 150 per cent.
4. Drop the Debt is calling for a New Deal on Debt for the poorest countries, including 100 per cent cancellation from the World Bank and IMF. A new report "Reality Check: the need for deeper debt cancellation and the fight against HIV/AIDS" contains an independent audit of World Bank and IMF accounts which showthey can afford to cover the costs without damaging their ability to function. See the full report [http://www.dropthedebt.org].
23 April 2001
HIPC INITIATIVE OFFERS "NO GUARANTEE AGAINSTFUTURE DEBT PROBLEMS", WORLD BANK & IMFADMIT
A Drop the Debt briefing note
On April 10, 2001, Drop the Debt launched a new report, Reality Check,focusing on the impact of the Heavily Indebted Poor Countries (HIPC) initiative to date and calling for a New Deal on Debt, including the cancellationby the World Bank and IMF of 100 per cent of the debts owed to them by thepoorest countries. Part of the case for deeper cancellation set out in thereport was that the debt reduction delivered by the HIPC initiative does not reduce debts to a genuinely sustainable level, raising fears that the oldproblems of unsustainable debt will quickly recur. Now, days before the WorldBank & IMF Spring meetings in Washington, DC (April 26-30), the twoinstitutions have released an internal paper, "The Challenge of MaintainingLong-Term External Debt Sustainability," which raises deep concerns aboutdebt sustainability after the HIPC initiative and demolishes the notion that theHIPC initiative adequately deals with the problem.
This briefing note sets out the key relevant points in the paper.
HIPC does not deliver a lasting exit from debt problems, contrary to its statedintention
The paper describes the HIPC initiative process of bringing the valueof outstanding debt down to a particular level and admits that"reducing debt to that level at a single point in time is no guarantee against future debt problems. To assess long-termdebt sustainability, the focus of attention must shift away from this single debt indicator to a more complex and comprehensive view of the development process in which policies, institutions, exogenous factors and debt management play an integral role over time." (9) Itreiterates later: "HIPC debt relief alone does not ensure long-term debt sustainability" (24), offering only that "the HIPC initiative provides a good basis for these countries to exit from rescheduling." (2) This stands in marked contrast to earlier claims bycreditors that the HIPC initiative would itself provide a "lasting exit"from debt problems.
The debts of three countries (Bolivia, Malawi and Niger) fail even toreach the 150 per cent debt-to-exports ratio required under the HIPC initiative. (51)
The future sustainability of debt is highly vulnerable to over-optimisticprojections, external 'shocks' and changing circumstances, including theHIV/AIDS emergency
The paper acknowledges that the HIV/AIDS emergency is likely to increase debt levels in the most affected African countries: "longer-term growth prospects can be undermined by natural disasters, war, or health threats such as the AIDS epidemic affecting many of the HIPCs, particularly several decision point cases such as Malawi, Rwanda, and Zambia. In such cases, in the absence of adequate grant financing, external indebtedness (and the NPV-of-debt to exports ratio) may need to rise to accommodatethe financing of reconstruction and rehabilitation." (20)
The paper states: "The susceptibility of a country to external shocks,although not a separate factor, has important implications fordisruptions in repayment capacity." (13)
"Debt repayment capacity of HIPCs is projected to strengthen only gradually even after HIPC debt relief." (39)
The narrow range of exports of most HIPCs, a feature of these countries' economies under the IMF-driven programs of the last two decades, leaves them "exceptionally vulnerable to external shocks" and the consequent impact on debt sustainability. (26)
The paper states: " projected NPV debt-to-export ratios are only useful insofar as the assumptions underlying them are reasonably realistic and prudent." (Appendix I) If export performance is only slightly more modest than assumed under HIPC, the impact on debt levels will be significant. If exports continue to grow at the 4.2 percent per annum rate experience in the 1990s, rather than the growthrates projected in the HIPC calculations (over 6 per cent), countrieswill on average fail ever to reach the 150 per cent debt-to-exportsratio targeted under HIPC - in fact, their debts will steadily rise toaround 180 per cent by 2017. (57)
Debt sustainability may need to be reviewed for individual countriesas early as 'completion point' under the HIPC initiative: "The currentframework allows for the consideration of additional assistance atthe completion point if a broad assessment of a country's debtsustainability shows that exogenous elements have caused afundamental change in a country's economic circumstances. It isenvisaged that this provision would only need to be invoked inexceptional circumstances." (65)
The scale of debt reduction under the HIPC initiative has nothing to do with anassessment how much is needed to fight poverty
The paper ends the claim that the amount of HIPC debt relief is linked to funds needed to reduce poverty. It admits that the definition of debt sustainability under the initiative is "quite narrowfrom a development perspective", and does not "measure the adequacy of public resources to address priority development programs". (12)
Drop the Debt's view
Despite the overwhelming evidence presented in the paper that HIPC is notdelivering sustainable debt levels, the IMF and World Bank do not consider thecase for further debt cancellation. Instead they focus only on solutions througheconomic growth and policy while also examining the importance of futurefinancing patterns. While these are crucial to long term debt sustainability, the starting point must be to make debt repayments affordable now.
Adrian Lovett, Director of Drop the Debt, said: "We take no satisfaction fromthe revelation that World Bank assessment shows campaigners were right allalong. The HIPC initiative does not deliver a sustainable level of debt.
"Their internal report fails to draw the logical conclusion, however: that the firststep to real debt sustainability lies in getting existing debt down to a trulyaffordable level. That means the World Bank and IMF must do what the G7have done and cancel 100 per cent of the debts they are owed by the poorestcountries. Independent research has shown that they can afford to do this without jeopardizing their ability to function. The G7 finance ministers mustgive deeper debt cancellation for the poorest countries their urgent attention atthe IMF and World Bank meetings this week."
Table from World Bank
HIPC Country Dependence on main exports
[view in courier font]
Country** GNP/Capita (US $) ** Main product ** % of exports (main product) ** % of exports three main products
Benin ** 380 ** Cotton ** 84 ** 94
Bolivia ** 1010 ** Soybeans ** 12 ** 33
Burkina Faso ** 240 ** Cotton ** 39 ** 55
Cameroon ** 580 ** Oil ** 27 ** 47
Gambia, The ** 340 ** Groundnuts ** 10 ** 13
Guinea ** 510 ** Bauxite ** 37 ** 58
Guinea-Bissau ** 160 ** Cashew ** 69 ** 79
Guyana ** 760 ** Sugar ** 21 ** 49
Honduras ** 760 ** Coffee ** 22 ** 46
Madagascar ** 250 ** Coffee ** 12 ** 26
Malawi ** 190 ** Tobacco ** 61 ** 75
Mali ** 240 ** Cotton ** 47 ** 75
Mauritania ** 380 ** Fish ** 54 ** 94
Mozambique ** 230 ** Prawns ** 15 ** 24
Nicaragua ** 430 ** Coffee ** 14 ** 27
Niger ** 190 ** Uranium ** 51 ** 69
Rwanda ** 250 ** Coffee ** 43 ** 72
Principe ** 270 ** Cocoa ** 78 ** 79
Senegal ** 510 ** Fish ** 27 ** 51
Tanzania ** 240 ** Coffee ** 20 ** 40
Uganda ** 320 ** Coffee ** 56 ** 63
Zambia ** 320 ** Copper ** 48 ** 67
Simple average ** 389 ** ** 39 ** 56
Weighted average ** ** 30 ** 50
Message-Id: <200105041421.KAA14126@server.africapolicy.org> From: "APIC" <email@example.com> Date: Fri, 4 May 2001 11:17:40 -0500 Subject: Africa: Debt Sustainability Update
Editor: Ali B. Ali-Dinar
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