New report reveals third world debt package failings
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With kind permission from Drop the Debt1 a news release, titled,
Egg on faces of HIPC architects as new report reveals third world debt package failings, April 23 2001, has been reposted here. You can also see the article at their web site: http://www.dropthedebt.org/press/sustainability2304.shtml2.
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Egg on faces of HIPC architects as new report reveals third world debt package failings
An embarrassing report from the World Bank and International Monetary Fund released over the weekend casts a dark shadow over their Heavily Indebted Poor Countries (HIPC) initiative, showing little confidence that the controversial debt 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 confirms debt campaigners' concerns that HIPC does not reduce debt to a low enough level. It gives a renewed urgency to discussions on debt by the Group of Seven (G7) finance ministers at the World Bank and IMF spring meetings in Washington DC on April 29, especially in light of the spreading HIV/AIDS crisis in Africa.
Debt campaigners have long argued that the 150% debt-to-exports level underpinning the HIPC initiative is based on precarious projections of export growth. For the 22 countries to get HIPC relief so far, the World Bank and IMF use 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 IMF acknowledge that the HIV/AIDS emergency in many African HIPCs will mean that debt levels will soon rise: "Longer-term growth prospects can be undermined by natural disasters, war, or health threats such as the AIDS epidemic... in such cases, in the absence of adequate grant financing, external indebtedness may need to rise to accommodate the financing of reconstruction and rehabilitation."
Despite the overwhelming evidence presented in the World Bank/IMF paper that HIPC is not delivering sustainable debt levels, the IMF and World Bank do not consider the case for further debt cancellation. Instead they focus only on solutions through economic growth and policy reform, while also examining the importance of future financing patterns. While these are crucial to long term debt sustainability, Drop the Debt emphasizes that the starting point must be to make debt repayments affordable now.
"The bad news is that the HIPC initiative is yet again failing to meet its stated objectives. The good news is that the IMF, World Bank and their shareholders have the resources to cancel 100% of the debts these institutions are owed by the poorest countries. HIV/AIDS is compounding the failures of HIPC and making delay more costly and inexcusable. This week we will see whether the IMF 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 be taken 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 criteria which 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 from the IMF and World Bank, and Maurice Fitzpatrick, Chantrey Vellacott.
For more information: Jamie Drummond/Lucy Matthew in Washington DC +44 (0) 961 346 334 Jamie Shor +1 -202 293 1001
Notes for editors:
- 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 website3
- So far, the HIPC initiative is reducing debt service payments for 22 countries by just one-quarter on average, leaving the majority of countries spending more on debt than they currently spend on health. Only one country, Uganda, has had actual debt cancellation.
- 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.
- 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 show they can afford to cover the costs without damaging their ability to function. See the the full report here4
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