Reality Check: the need for deeper debt cancellation

With kind permission from Drop the Debt1 a news release, titled, Reality Check: the need for deeper debt cancellation and the fight against HIV/AIDS, dated April 2001 has been reposted here. You can also see the article at their web site:

Reality Check: the need for deeper debt cancellation and the fight against HIV/AIDS

A report by Drop the Debt, April 2001

Incorporating independent studies by accountants Chantrey Vellacott DFK and Subhrendu Chatterji

Download PDF files of the full report and annexes for printing:

  • Full Report3 (Adobe PDF)
  • Annex 1: Full Report of Chantrey Vellacott DFK4 (Adobe PDF)
  • Annex 2: Report of Subhrendu Chatterji5 (Adobe PDF)

On this page:

  1. Statement by Kofi A Annan, Secretary General of the United Nations
  2. Key findings
  3. 1. Introduction
  4. 2. Taking stock. The HIPC initiative judged
  5. 3. Making a difference. Where the money is being spent
  6. 4. The case for more...
  7. 5. The independent view. How the World Bank and IMF can afford to do more
  8. 6. The New Deal on Debt

Statement by Kofi A Annan, Secretary General of the United Nations

"The Jubilee 2000 movement to cancel the debts of the poorest countries was an inspiration to us all. But its work did not finish with the Jubilee Year. We should all be grateful that it is carrying on in the short term as "Drop the Debt", and broadening its agenda. I particularly applaud the movement's decision, together with our friends at Oxfam, to hold this conference on the links between debt relief and the fight against poverty and HIV/AIDS.

At last year's Millennium Summit, world leaders gave themselves till 2015 to cut by half the proportion of the world's people living in extreme poverty -and to halt, and begin to reverse, the spread of HIV/AIDS. They rightly perceived these two issues to be connected. It is in poor countries, particularly those in Africa, that the pandemic has spread furthest and fastest, to the point where it has become in itself the most formidable development challenge of our time. Great progress has been made, in recent months, in reducing the price at which HIV/AIDS medicines are offered to the least developed countries. But drugs can only work if they form part of a comprehensive approach, which runs from voluntary counselling and testing to home- and community-based care, and simple treatments for opportunistic infections. And, of course, our highest priority must still be to ensure that fewer people become infected with HIV in the first place.

None of these things can be achieved without spending a lot more money on healthcare. And yet, despite a promising start in the HIPC Initiative, even the poorest countries which qualify for debt cancellation still spend less on healthcare than they do on repaying debts.

In the Millennium Declaration, world leaders called for all the bilateral debts of the least developed countries to be cancelled, in return for their making demonstrable commitments to poverty reduction. And they promised to deal "comprehensively and effectively" with the debt problems of low- and middle-income countries.

Those pledges must be fulfilled, and promptly, if there is to be any hope of reaching the 2015 targets."

Kofi A Annan, Secretary General of the United Nations, 10 April 2001

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Key findings

The Heavily Indebted Poor Countries (HIPC) initiative fails to meet the challenge of significant debt cancellation

  • Average annual debt payments by the 22 countries which have begun to receive some debt relief are being reduced by a mere 27 per cent - or an aggregate $735 million per year
  • This leaves these 22 countries still spending more repaying debts than they currently spend on healthcare
  • The G7 countries have all promised to write off virtually all the debts owed by HIPCs; the IMF and World Bank will reduce debts owed to them by less than half
  • Zambia and Niger both face increased debt service payments after qualifying for HIPC

The World Bank and IMF are the biggest remaining creditors to the poorest countries and independent accountants have confirmed they could write off 100 per cent of the debts of Heavily Indebted Poor Countries without impeding their ability to function

  • After HIPC debt reduction, the 22 countries will owe more to the World Bank and IMF than to the next 17 biggest creditors put together
  • The cost of going beyond the HIPC initiative to provide 100 per cent cancellation for these 22 countries will be $215 million per year for the World Bank and $287 million for the IMF; to extend it to all HIPCs would cost a further $138 million and $81 million respectively
  • Independent research by accountants Chantrey Vellacott DFK offers proposals that would release more than $30 billion of resources to fund deeper World Bank / IMF debt cancellation
  • Chantrey Vellacott state that if their proposals were followed, the World Bank and IMF could cancel 100 per cent of the debts owed to them by HIPCs without jeopardizing the ability of the World Bank and the IMF to carry out their overall functions
  • The IMF can write off its debts to the HIPC countries, according to Chantrey Vellacott, by using the earning capacity of general reserves, together with a repeat of limited gold revaluation
  • Chantrey Vellacott show that the World Bank can afford to cancel 100 per cent of HIPC debts owed to its two lending arms, IBRD and IDA, through prudent use of IBRD reserves and future net income, without impacting on the Bank's credit rating or its status as a lender
  • Beyond their specific recommendations, Chantrey Vellacott also point out that the World Bank and IMF could afford to cancel even more given sufficient political will from their shareholders
  • A second independent opinion on the capacity of the World Bank shows that deeper cancellation can be made possible through use of future reflows to IDA, which are projected to grow rapidly to bring in $2 billion more every year in 2016-20 than they do today
  • If the G7 countries were to fund the write off of the World Bank and IMF's debts from HIPCs, it would effectively cost each of their citizens one dollar per year

Debt cancellation delivered so far is making a real difference to the lives of ordinary people - but it is not enough

  • Funds released by debt cancellation are helping the poor, for example: doubling primary school enrolment in Uganda; vaccinating half a million children against killer diseases in Mozambique; providing three extra years of schooling in Honduras; and financing half of Guyana's national development plan
  • Two-thirds of resources released by debt cancellation so far are being spent on health and education, with most of the remainder being used for HIV/AIDS, water supply, roads and governance reforms

Deeper debt cancellation is more urgent than ever in order to help fight HIV/AIDS and meet 2015 poverty reduction targets

  • The 17 countries in Africa which have started receiving debt relief are still spending $1.3 billion per year on debt repayments - virtually identical to what UNAIDS estimates the same countries need to begin scaling up the efforts to fight HIV/AIDS
  • Sub-Saharan Africa spends approximately $13.5 billion per annum repaying debts; the Global AIDS Alliance estimates that this region needs $15 billion to combat HIV/AIDS each year
  • Sub-Saharan Africa, the continent most affected by debt, is the region faring worst against the 2015 targets to cut poverty by half; between 1990 and 1998 the proportion of Africans in extreme poverty increased, not decreased

New Deal on Debt is needed urgently in order to fight the HIV/AIDS emergency, to work towards the 2015 targets and to make levels of debt genuinely sustainable; A New Deal on Debt should include the following elements:

  • 100 per cent debt cancellation for the poorest countries from wealthy creditors who have not yet committed to this, led by the World Bank, IMF and members of the Paris Club
  • a trust fund for countries in conflict or with unacceptable human rights records so that their debt payments can be returned in the future to be invested in development
  • significant debt cancellation for poor countries facing huge debt burdens which are not currently considered - in particular, Nigeria - and eligibility for cancellation based on the resources needed to fight poverty
  • increased efforts in debtor countries to fight poverty and disease using the funds from deeper debt cancellation, and an end to imposed conditions that hurt the poorest
  • concrete steps to minimize the risk of a new debt crisis, through an increased proportion of future financing for poorer countries in the form of grants instead of loans; and the exploration of a new process to control unsustainable lending and borrowing

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1. Introduction

The ongoing global campaign to cancel the unpayable debts of the world's poorest countries, rallying under the banner of Jubilee 2000, has already made history. However, as the new millennium begins, some critics wish the campaign itself would be consigned to history. Many campaigners would like nothing better. But they will not walk away from a half-done job - and that is why Drop the Debt exists.

Despite headline-grabbing promises by creditors, the truth is that unless deeper debt cancellation is agreed, the poorest countries are far from seeing an end to unsustainable debt and the hardship it brings.

This report calls for deeper debt cancellation for the poorest countries, with a lead being taken by the World Bank and the IMF. We arrive at that conclusion because after looking carefully at the debt situation at the beginning of 2001, we find there is no other single step which would have the same degree of impact in the same period of time that is so completely achievable.

The report outlines the impact so far in terms of debt cancellation, how much more needs to be cancelled and how this can most easily be achieved. Deeper action means 100 per cent cancellation by the major creditors who are holding on to the debts, just as the rich G7 countries have now promised. The numbers show that the IMF and the World Bank are owed as much as the next largest 17 creditors combined.

As chapter 3 points out, debtor countries are putting the limited amount of money saved by debt relief to good use, fighting poverty and the spread of HIV/AIDS. Debt cancellation is working - but it is not enough and the challenge gets bigger every day. Within the last 24 hours, HIV/AIDS killed 5,500 Africans, half of them children. In the face of such a reality, intransigence on the part of those who still take historic debt payments from these countries is unacceptable.

Consider the case of Zambia: the IMF and World Bank still collect more in debt payments from Zambia than the country has to spend on fighting a disease which now infects one in five adults, and has made an AIDS orphan of one child in seven.

The argument has been made that campaigners' proposals for 100 per cent cancellation would seriously damage - or even bankrupt - the multilateral institutions, in particular the World Bank. This report publishes independent evidence for the first time that shows this is not true. Cost is not an obstacle to 100 per cent cancellation by the World Bank and IMF.

But nobody should pretend this report is an attack on the World Bank or the IMF. It is not. We have met many good, innovative and highly competent people working in these institutions. It is not an easy job.

The role played by the IMF and World Bank in contributing to the build up of unpayable debt has been well documented, and rightly so. But this report starts and ends with the presumption that these institutions exist, they have a role to play and that they can absolutely be a force for good. It is not a report about the mistakes of the past. It is about the potential of the future. It is about how we harness the remaining 'millennium momentum' that has fired the Jubilee 2000 campaign. It is about how we offer a sense of resolution and completion to that campaign and allow its supporters to move on to different aspects of the debt problem - and to other issues too. It is about ensuring that the high ambition and hope of those supporters is not replaced by cynicism and disaffection, caused by the realization that the world walked away from a half-done job. It is about how we create greater confidence that the gains made in debt cancellation in recent years will not be quickly lost because we did not go far enough. It is about how we begin to respond adequately to the extraordinary challenge of reducing poverty in the 21st century - a challenge whose whole shape and scale is altered by the unprecedented emergency of HIV/AIDS.

It is not an attack. But it is a challenge.

Some will disagree with the conclusions in this report. Some may dispute its analysis. Drop the Debt believes the analysis is robust and the conclusions are inevitable. So we welcome a debate about its findings. But let us have that debate with open minds, not closed; with global interests at heart, not institutional; and with actions based on concrete evidence, not defensiveness and evasion.

This report sets out how a New Deal on Debt must be agreed. Chapter 2 shows the limits of cancellation under the existing HIPC initiative, with the first external evaluation of the initiative's early results. Chapter 3 demonstrates that the relief delivered so far is resulting in real, positive change - but it is not enough. In Chapter 4, the case for deeper cancellation is set out in detail. Chapter 5 examines the evidence of the independent accountants commissioned to consider the ability of the World Bank and IMF to do more - and in the interests of transparency, the reports themselves are published in full as annexes to the report. Finally, Chapter 6 sets out the terms of a New Deal on Debt.

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2. Taking stock. The HIPC initiative judged

The 22 countries reaching 'decision point' in the HIPC initiative by the end of 2000 are the recipients of the most substantial debt reduction package ever agreed in twenty years or more of successive responses to the debt crisis. The initiative, described by World Bank President James Wolfensohn as "very good news for the poor of the world", is the most comprehensive that the rich world has so far offered in response to the extraordinary challenges in the poorest countries and to the unprecedented global movement that rallied to the flag of Jubilee 2000. It was billed by its architects as offering the prospect of a 'lasting exit' from debt problems and a release of substantial new resources for poverty reduction. Against such expectations, how well is it doing?

This chapter takes the data presented in the documents released for each country reaching decision point in the HIPC initiative and presents an analysis of the impact of the debt cancellation delivered. While we focus here on the 22 countries, this is because a great deal more information is available about them than for the other fourteen pipeline countries yet to reach this stage. The analysis is intended to indicate the likely impact of the entire HIPC initiative, as well as to show the particular situations of the 22 countries studied.

Payments fall by 27 per cent

The most important measure of the impact of debt cancellation is in how much is released each year in new resources that can be used in the fight against poverty. Against that measure, the 22 countries' annual debt payments are falling by an average of 27 per cent, from $2.7 billion to $2.0 billion. This average hides a wide range of outcomes for different countries. Sao Tome, one of the smallest HIPCs, sees its debt payments fall by a remarkable 85 per cent, and Guinea Bissau is 70 per cent better off. However, two countries, Zambia and Niger, actually pay more after HIPC than before (by 23 per cent and 32 per cent respectively), and Nicaragua finds itself only 8 per cent better off. The full table of "winners" and "losers" among the 22 countries is shown in figure 1.

Niger: the impact of HIPC By many indicators, Niger is among the most impoverished nations on the planet. Only 13 per cent of the population have access to sanitation and 87 per cent of adults are illiterate. Yet, the HIPC initiative has left the country worse off than before. In 1998-99, Niger paid $28 million annually to foreign creditors. After a massive payment of $94 million in 2000, the country will pay $49 million in 2001-02, with its average annual debt service in 2001-05 settling at $36 million. By contrast, Niger is currently spending $27 million each year on healthcare. Of the $36 million paid annually by Niger in the next five years, a quarter will go to the IMF and the World Bank.

Source: GDF 2001, African Development Indicators, 2001

It should be noted that the World Bank, in its most recent analysis, finds that the benefit to the 22 countries amounts to just under 31 per cent. However, this is based on figures for the period 2001-3. Earlier World Bank analysis considered the period from 2001-5 as the appropriate "post HIPC" period, compared with 1998-9 as the pre-HIPC phase. In the absence of a clear explanation for the switch, Drop the Debt's analysis maintains the original World Bank timeframe.

The depth of debt service reduction varies not only between different countries but between different years for the same country. The Brussels-based debt monitoring body, Eurodad, has noted, for example, the following fluctuations:

  • Senegal's debt service jumps by 61 per cent in 2004;
  • Nicaragua's rises by 60 per cent in 2002;
  • Mauritania's rises by 46 per cent in 2007; and
  • Honduras faces an increase of 93 per cent in 2002.

Eurodad also notes that over the longer term, debt service projections rise considerably. Debt payments in 2007-09, from the 10 decision point countries where data is available, are one-third higher than payments in 2001-03.

Debt versus health

Debt service levels after HIPC are still high in comparison to current spending on healthcare, one of the key benchmarks set by debt campaigners. The total scheduled amount spent annually by the 22 countries on debt between 2001-05 is $2.02 billion, though this could fall to $1.38 billion as a result of additional pledges by bilateral creditors (see below). The same countries currently spend $1.35 billion on the health of their people . Table 2 compares debt and health spending for the decision point countries.

Many observers suggest annual debt service should be limited to a proportion of total government revenue, usually five or ten per cent. This can be defined as government revenue in the most recent years that actual figures are available, or projected figures covering the years that the debt service is due. The latter is vulnerable to over-optimistic projections of increased government revenue.

Actual government revenue for the 22 countries at decision point in the period 1998-99 was $12.02 billion, while projected government revenue in 2001-05 is $17.84 billion - a 48 per cent increase. This means the '10 per cent' and '5 per cent' thresholds are as follows:

  • 10 per cent of projected government revenue (2001-05): $1.78 billion
  • 10 per cent of actual government revenue (1998-99): $1.20 billion
  • 5 per cent of projected government revenue (2001-05): $0.89 billion
  • 5 per cent of actual government revenue (1998-99): $0.60 billion

All of these thresholds are considerably below the average level of debt service payments after the impact of HIPC, and three of the four are below the anticipated level of debt service after additional bilateral cancellation led by the G7 countries.

The 100 per cent club

After the limited impact of the HIPC initiative became apparent, G7 bilateral creditor governments led by the United States began to go beyond HIPC terms and pledge to write off all the debts they are owed by HIPC countries. Initially, these pledges were viewed with some skepticism because of the bilateral lenders' practice of excluding so-called 'post-cut-off date' debt from cancellation - which meant that a '100 per cent' promise could in practice be well short of 100 per cent in reality. Gradually, though, the various creditors came under pressure to include post-cut-off date debt in their write-offs, and now that 22 countries are in the process, it is possible to measure the true impact of these additional bilateral pledges.

From figures supplied to Drop the Debt by the various finance ministries and earlier information published by the World Bank, table 2 has been compiled. It shows that the United States, the United Kingdom, Canada and Italy are canceling all debt including post-cut-off and are ceasing to take any payments from decision point; that France and Japan currently continue to take payments until completion point but will then cancel virtually 100 per cent, as the value of the non-ODA post-cut-off date debt is minimal; and that Germany ceases taking payments from decision point but the total cancellation falls a little short of 100 per cent.

Outside the G7, some other countries have taken extra measures beyond the termsof the HIPC initiative. In particular, Australia and Norway are canceling 100 per cent of all debt they are owed by the 22 countries.

The continued performance of the G7 countries will have to be closely monitored. Nevertheless, the impact of these additional pledges beyond the HIPC terms by major bilateral countries is striking. If all G7 countries, plus the other Paris Club members who have indicated their intention to do so, deliver 100 per cent relief for the 22 countries at decision point, average annual debt service payments can be expected to fall from $2.0 billion expected in 2001-05 after enhanced HIPC to $1.38 billion after additional bilateral commitments. However, if Japan and France continue to hold back full relief until completion point, average annual debt service in this period will be $321 million higher, at $1.7 billion. It is clearly very important to these countries that Japan and France quickly confirm their intention to stop taking payments from these countries at decision point, not later.

Figure 2 shows the impact of the debt reduction delivered so far on debt payments in 2001-05, including the effect of extra bilateral measures, while figure 3 shows the relationship with levels of health spending and government revenue described above. Both charts also show the impact of two further measures that would ensure deeper debt cancellation: first, the cancellation of 100 per cent of the debts owed to the World Bank and the IMF; and second, the cancellation of 100 per cent owed to the remaining members of the Paris Club who have yet to commit to full cancellation. Figure 2 shows that these further steps would mean a total reduction in debt payments (from pre-HIPC levels) of 66 and 71 per cent respectively - and figure 3 demonstrates that this would leave annual payments lower than the amount currently spent on healthcare.

Total debt

Reductions of total debt levels (as opposed to annual debt service) under the HIPC process come at completion point, not decision point. Because of this and the slow progress made in getting countries to this final stage in the process, by early April 2001, only one country (Uganda) had actually received outright debt cancellation under HIPC. This means that so far, of the $100 billion promised by the G7, only $12 billion has actually been cancelled. The World Bank currently projects up to eight more countries will reach completion point by the end of 2001, though on past evidence this seems highly optimistic.

Table 3 shows how the total debt of the 22 decision point countries will eventually be reduced under HIPC, in net present value terms, and how it could be further reduced by deeper World Bank, IMF and Paris Club cancellation. Debt is expected to fall from $40.6 billion before relief (except for traditional terms offered by the Paris Club) to $22.6 billion after the HIPC initiative and to $16.7 billion through the impact of additional bilateral commitments from G7 countries and others - overall reductions of 44 per cent and 59 per cent respectively.

Total debt would fall to $9.5 billion (77 per cent reduction) if the World Bank and IMF were to cancel outstanding debts from these countries, and $7.6 billion (81 per cent reduction) if the remainder of the Paris Club were to do the same.

Uneven sharing of the burden

The HIPC initiative calls on all creditors to cancel debts in proportion to their loans outstanding to eligible countries. In practice, however, the extra steps taken by some bilateral creditors mean that the overall degree of cancellation committed to date varies considerably between different creditors. Table 2 shows how, after the enhanced HIPC initiative, multilateral and bilateral creditors bore a roughly equal burden, canceling 43 per cent and 46 per cent respectively.

However, after the additional commitments made by some bilateral creditors, the depth of cancellation by bilateral creditors overall rises to 79 per cent, with multilateral cancellation remaining at 43 per cent. If the World Bank and IMF were to cancel all their remaining claims on these countries, the burden-sharing principle between bilateral and multilateral creditors would be restored, with multilateral reductions rising to 76 per cent.

The top twenty creditors after HIPC

After the effects of the enhanced HIPC initiative and the additional bilateral pledges, the major creditors to the 22 decision point countries will look rather different. There are more than 100 individual creditors to these countries, but the biggest 20 are owed more than 80 per cent of the total. Tables 4 and 5 show how the top twenty list changes after currently agreed debt cancellation is delivered.

Before and after agreed cancellation, the top two positions in the creditors' list are taken by the World Bank's International Development Association (IDA) and the IMF. Prior to the HIPC initiative, the 22 decision point countries owed $9.6 billion in total to the two arms of the World Bank and $3.2 billion to the IMF, representing nearly 32 per cent of total debt. After agreed cancellation, those institutions will be owed $7.2 billion in total, representing over 43 per cent of total debt. After cancellation, the World Bank's International Bank for Reconstruction and Development (IBRD) becomes a relatively more significant creditor, rising from 15th place to 7th.

Prior to agreed cancellation, six of the G7 countries are in the top twenty list, led by France and Japan, who together account for over 15 per cent of total debt. However, after cancellation, the G7 countries will disappear from the list altogether, leaving only the newest member of the expanded G8, Russia, among the biggest lenders.

Among the smaller multilateral lenders, the Inter American Development Bank and the African Development Bank are the most significant and both rise up the list (to 3rd and 4th respectively) after agreed cancellation. The absence of the G7 countries in the second list leaves room for other bilateral creditors to join the top twenty, led by Spain (6th, with 2.6 per cent). Other members of the Paris Club in the top twenty are Russia, Austria and Belgium, while a number of non-Paris Club members are included. China is in 9th place (but would rise to 6th if Taiwan's loans were included) and Kuwait and Saudi Arabia are also included. Commercial banks, the only group of creditors who are treated as a single entry in these lists, are the 9th biggest creditor after agreed cancellation, representing 2.1 per cent of total debt.

The relative distance on the second list between the leaders and the rest should not be underestimated. The IMF and the two arms of the World Bank together represent more than the other 17 on the list put together. As well as looking at individual creditors, it is also important to consider the regional and organizational groupings of lenders and their relative significance. Table 6 shows the total debt owed by the 22 countries under the various cancellation scenarios, grouped by creditors. Here it can be seen that while the World Bank and IMF remain overwhelmingly dominant, the Latin American development banks are also a very significant lender and other groupings, such as the Arab banks, are more significant than would be noticed in a list of individual lenders alone.

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3. Making a difference. Where the money is being spent

"I heard debt relief means we would be getting more money…and now we're getting more money." Mr Zivane Principal of Boane Secondary School, Mozambique, February 2001

The controversy surrounding the funding of HIPC is shameful given that it amounts to small change relative to the size of the economies in rich countries. But this small change is having a real impact in countries like Mozambique, where a thousand dollars goes a lot further than it would in a family home in the Virginia suburbs of Washington, DC. Many ordinary people are feeling the benefits of debt cancellation, largely through gradually improving access to healthcare and education.

With scarce resources, not everything can be done at once. In Uganda, new schools have been built, and primary education is now free, which has prompted a huge rise in attendance rates, but the country desperately needs more teachers and materials to maximize the benefits. In Mozambique, there are more health clinics and nurses, but still a lack of drugs for them to work with. But while the money released so far is modest - much more is needed through deeper debt cancellation and increased aid - on a local level, the difference it is making to individual people is tangible.

As the bulk of HIPC assistance is only just beginning, at this point in time the main impact can be seen in countries that received limited assistance under the original HIPC two years ago (see Uganda and Mozambique boxes).

The 'enhanced' HIPC initiative was agreed in Cologne by the G8 in June 1999, and the first country to benefit was Uganda, seven months later in February 2000. Of the 22 countries, eleven were only given the green light by the World Bank and IMF at the close of last year, so the impact of debt service reductions have not yet been felt. As chapter 2 showed, in Niger and Zambia there will be no overall benefit because payments have on average increased post-HIPC.

Malawi: more money to fight poverty

Malawi reached decision point at the end of 2000, and received an initial debt service cut of $28 million, or 30% per cent. This is providing the basis for a rise in total 2001 social expenditure of 45 per cent. The breakdown of the $28 million for spending in the 2001 budget is:

  • $7.3 million more on critical drugs for hospitals and health centers
  • $2.7 million for extra staff and support in primary health centers
  • $1.1 million for training more nurses
  • $3.8 million for training new teachers
  • $6.1 million for repairs to schools and new teaching materials
  • $4.2 million for borehole construction and maintenance
  • $2.7 million for agriculture expansion

Source: Malawi's decision point document, 2000

In practical terms, HIPC countries that are receiving a meager cut or rise in payments after reaching decision point are left without core funding for their Poverty Reduction Strategy Paper (PRSP), the new vehicle for guiding social spending.

Of the 22 countries to reach decision point, 19 are receiving moderate debt service cuts of above 10 per cent . Priorities for allocating these additional resources are laid out in the national PRSPs. There has been much controversy around the PRSP process, which is designed to include comprehensive consultation with groups in civil society. While this process needs to work much more effectively, and there is clear need for improvement, PRSPs are increasing the pressure for better dialogue, and do offer the hope of an integrated approach to reducing poverty.

Uganda: providing education for free

Debt service payments in Uganda have dropped from $151 million a year to $88 million. The extra resources are channeled through the Poverty Action Fund, which is overseen by representatives from government, national NGOs, churches, unions and international organizations. The bulk of debt relief in Uganda has helped fund universal primary education - the number of young children attending school has increased from 2.3 million at the start of 1997 to 6.5 million by March 1999, almost doubling the enrolment rate to 94 per cent. Malvyange Agnes teaches in Kanyagoga primary school where pupils were mostly taught outside before the completion of two new brick built classrooms in the summer of 2000. "Before when it rained we had to stop our lessons" explains Malvyange who earns $60 a month, "Some wet days, the children did not come, but now we can teach in all weathers. And you can display charts on a wall but not under a tree. And you can control the children more easily in a room." In the Luweru District, north of Kampala, school numbers have risen from 140,000 to 170,000 children. Deborah Sekibaala, deputy head teacher at Luweru Boys School where enrolment has doubled to 1080 says that even basic education makes a huge difference. Many pupils walk long distances each day from remote villages to attend the school; one in ten boys are orphaned through HIV/AIDS or war. Their ambitions are to be businessmen, teachers or doctors. "If you are educated you are so much more powerful" says Deborah, "it's such a good argument to cancel our debts. You have enough anyway in the rich countries, I don't know why you don't cancel the rest of them. If you forget the rest of these debts, then we will spend the money on schools and hospitals"Spending on primary healthcare has increased by 270 per cent. Ronald Kabira is a clinical officer in Butuntumula health centre. His most recent purchase through use of debt relief funds is two bicycles. These allow Ronald to run a primary health education outreach programme, visiting remote villages to try and reduce cases of dysentery, diarrhea and malaria which are easily preventable. His salary, and those of two new midwives, who in the absence of electricity deliver babies by candlelight, are paid from the debt relief money distributed by the Poverty Action Fund. An increased number of vaccines also funded by the PAF means that 900 children have been immunized against the six killer diseases in the past twelve months. "I have less than ten cases of measles this year," says Ronald, "and last year we had hundreds of cases - nearly an epidemic."

Source: World Bank,IRIN, reporting by Martin Wroe

Mozambique: a library, but no books

Mozambique is one of the poorest countries in the world, where one in five babies die before reaching one year old, and two in every three people have no access to sanitation. Mozambique first started receiving help with debt service payments in June 1999. Following the devastation of the floods in February 2000, a one-year moratorium was declared by creditors, which is now ending. The benefits so far are clear, but scheduled payments for 2001 still amount to $54 million. This year, health spending in Mozambique has increased by $13.9 million. Half a million children are being vaccinated against tetanus, whooping cough and diphtheria, increasing coverage to 80 per cent in the last 2 years. $10 million is being spent on electrification on rural schools and hospitals, and rehabilitation of infrastructure following the floods. $3.2 million is being used to increase the number of girls attending school, and scores of new primary schools are being built to try and provide education up to eighth grade for each child. Ocelio Rafael Zivane is principle of Joaquim Chissano secondary school, the only school in the Boane district of 157,000 people. The entire country has only ninety secondary schools. In Boane, 924 pupils rotate in three shifts, morning, afternoon and evening, as there are only six classrooms. This year, thanks to debt relief, he received a fifty per cent rise in his annual budget, taking the total from $12,000 to $18,000. After funding general repairs, buying classroom materials and equipment, and paying electricity bills, Mr Zivane used the remainder of the money to start a library for his pupils. "It's a start, " he says, "It's still not enough, but it's something." The shelves, furniture and indexing are now in place, but the books will have to wait for the next year's budget. Because of a shortage of textbooks, teachers routinely make photocopies of their lessons for pupils. Last year, the copies cost eight cents a copy and there were few who could afford it - but that was before the debt relief windfall. "This year", says the principal, " the students can have the copies for free. I'd like to set up better conditions for the students. Our needs are so great." In the rural settlement of Mahubo, the first ever school has just been built, using debt relief money. "There's no sign in front of the school saying 'This is from debt relief' but the people know it is built by the government under the poverty-eradication program. And what I know is that my budget is increasing" says Eliado Jossias Mussengue, the district administrator. "We could use at least three more schools like this one." For children in the rural Village Seventh of September, the increased education budget has delivered a new teacher, Arlindo Gandar, for their primary school. He has high hopes of debt relief: "We could expand the school, buy some cattle, improve the roads. We would work on the projects ourselves so they wouldn't cost so much." His colleague Mr Simbe walks 22 km each day to the school and back, and has the more modest request of a bicycle. The Mozambique Debt Coalition is part of the monitoring process to make sure the government sets priorities in consultation with civil society and spends the money accordingly. "People need to see things getting done," says Eufrigina Manoela, coordinator, who says that further cancellation is urgently needed. "There has been progress in the past year, but in comparison to the entire land, it's like a drop in the ocean".

Source: Mozambique finance ministry, World Bank, Wall Street Journal, Roger Thurow, March 15, 2001

Increasing social spendingThe debt service cuts so far for the 22 HIPCs are releasing $700 million dollars a year, to be ploughed into policies and programs designed to meet the needs of the poor. The World Bank estimates that post-HIPC, total social spending in these 22 countries will increase from $4.3 billion a year to $6 billion. This could represent a rise of in the percentage of GDP spending on social services of roughly 1.2 per cent to 7 per cent.

While each HIPC faces different challenges, the broad priorities are similar. For the 22 countries, increases in education and health expenditure are expected to absorb about two-thirds of the new resources, while the other third is being directed to rural development and water supply, road construction, and strengthening government capacity and institution building.

The ease of tracking these resources, and assessing the impact of debt relief varies between countries. Expenditure management is often weak, and budgetary processes are underdeveloped. However, all 22 countries that have reached decision point are in the process of strengthening their public expenditure management systems so that the effectiveness of debt relief, and poverty reduction spending in general, can be more easily assessed

In Uganda, the Poverty Action Fund (PAF) makes monitoring clearer. Announcements are made through the local media when new money will be spent, in an effort to let people know what they should expect. Budgets and reports are prepared for the PAF by beneficiaries of the grants, and quarterly reviews are then produced by the PAF for the government and general public.

Guyana: improving health, education and infrastructure

Guyana first received debt service reduction under the original HIPC in 1999 and again under enhanced HIPC last year, resulting in an cut of $60 million a year, leaving annual repayments of $41 million. Guyana is using the bulk of this to help fund its national development plan for 2000 - 2005. Debt relief will provide $132 million of the total $220 million needed over three years. Examples of increased spending are:

  • $15.4 million for improving access to healthcare for the poor across the country, by decentralizing healthcare provision, upgrading all regional health centers, and focusing particularly on rural health posts
  • $2.1 million for regular MMR immunization and malaria containment programs.
  • $2.3 million to be spent on a health education program to lower HIV, other STD's, malaria and other infectious diseases, and $1.3 million to create a specialized national HIV/AIDS care centre
  • $15.9 million for infrastructure maintenance, text books and other teaching materials
  • $5.4 million for teacher training to reduce the student / teacher ratio from 40:1 now to 27:1 by 2004
  • $15 million for rebuilding 75 nurseries, 85 primary schools and 56 secondary schools
  • $12.2 million to renovate and maintain irrigation systems thus improving farmland productivity
  • $8.5 million to be spent on drilling 100 rural wells and installing 400 water pumps
  • $2 million to be spent on rehabilitating city sewerage systems
  • $9.2 million to be spent on improvements to local feeder and market roads
  • $2.9 million to improve airstrips in the remote rainforest hinterland
  • $3.6 million to be spent on securing land rights for all people, to allow them to use their property as collateral when applying for micro credit.
  • $3.7 million to be spent on developing industrial parks.
  • $4.1 million to be spent on specific vocational training
  • $1 million to be spent on the creation of a national "ecotourism" board, and advertising overseas.

    Source: Guyana interim Poverty Reduction Strategy Paper, August 2000

    Other countries do have variants on this type of mechanism: Tanzania is developing a Poverty Reduction Budget Support Fund along similar lines to Uganda, while in Malawi, the Social Action Fund (MASAF) channels resources specifically to poverty related programs. Other countries such as Guyana and Mozambique have chosen to tag budget lines to track spending related to poverty reduction.

    As the next chapter shows, almost all HIPC countries are now singling out HIV/AIDS as a special-case priority which crosses over different sectors, services, institutions and economic strategies. Debt relief money is increasingly being used as core funding for HIV/AIDS national strategies, co-funded by bilateral aid and international organizations. In Uganda, the government is using $1.3 million of debt relief money to support their national HIV/AIDS plan, which will be matched by $1.3 million of government revenue, and supported by $2.4 million of overseas development assistance (ODA) to reach the $5 million funding needed.

    Cameroon: using debt relief to fight HIV/AIDS

    Cameroon reached HIPC decision point in October 2000, and received a $114 million cut in debt service. A national HIV/AIDS control program was already in place, but was small-scale and fragmented, and Cameroon's HIV rate was approaching 8 per cent by the end of 1999 - over half a million people infected. The discussions around debt relief and how to spend it identified HIV/AIDS as a key area for new resources, and in September 2000, a comprehensive national HIV/AIDS strategic plan for 2001 - 03 was launched.

    The plan contains a set of highly focused emergency actions costing $9 million over three years, to be funded by the government using savings from debt service reductions:

    • Promoting behavior change among young people aged 15 - 24 through information, education and communication at local and national levels
    • Making voluntary testing and counseling widely available throughout the country and preventing HIV transmission from pregnant women to their babies
    • Supporting a 100% condom use campaign including free provision of condoms among key vulnerable groups: truckers, plantation workers, university students, military, police, workers in the customs service, prisoners, prison wardens and commercial sex workers

    The comprehensive approach in Cameroon includes a large-scale multi-sectoral program to fight HIV/AIDS, launched in February 2001. Funding for this core part of the initiative is national funding from savings on debt service cuts in conjunction with a $50 million loan from the World Bank. Cameroon is still paying (post-HIPC) $287 million in debt service, and of this $30 million goes to the World Bank. While the loan is concessional, i.e. has a grant element, it makes far more sense to reduce Cameroon's debt further so that the government can afford to fund the HIV/AIDS program without adding to its debt burden.

    Source: World Bank, IRIN, reporting by Martin Wroe

    Back to top

    4. The case for more...

    Chapter 2 has outlined the limited impact of HIPC, while chapter 3 has shown that where resources are being released, the benefits on the ground are real. This chapter explains why the case for further debt cancellation is now stronger than ever.

    ... To fight HIV/AIDS "The vision which fuelled our struggle for freedom; the development of energies and resources; the unity and commitment of common goals - all these are needed if we are to bring AIDS under control. Future generations will judge us on the adequacy of our response." Nelson Mandela

    HIV/AIDS: the bottom line

    Every day 5,500 African families lose one of their members because of HIV/AIDS; half of those who die are childrenIn 1998, 210,000 people died because of conflict in Africa - 2.1 million Africans died from AIDS in the same yearA total of 17 million Africans have died from AIDS since the epidemic began25 million people now live with HIV/AIDS in Africa, over twice the number in the rest of the worldThere were 3.8 million new infections in Africa in 2000So far, AIDS has left 13 million orphans in its wake. This will grow to 40 million orphans by 2010 without a massive effort to contain the disease.

    Source: UNAIDS, Global AIDS Alliance

    The current efforts of creditors, especially the IMF and the World Bank, will not stand the judgement of future generations which Mandela predicts. There can be no doubt that the spread of HIV/AIDS in Africa is a crisis and human tragedy of historic proportions. What is also clear is that HIV/AIDS in Africa results from long-term under-investment in healthcare and education, largely caused by debt payments and structural adjustment programmes. But where the debt burden has been integral to the development of this crisis, deeper debt cancellation can be part of the cure. Nothing sums up the inadequacy of the current enhanced HIPC Initiative better than an examination of Africa's far greater needs if the continent is to contain this killer disease. The limited notions of debt sustainability that underscore HIPC must urgently be altered in light of the massive increase in resources necessary to fight the spread of HIV/AIDS.

    The scale of the HIV/AIDS crisis in Africa

    The figures in the box below measure the direct human cost of HIV/AIDS. But as the rate of HIV rises, the crisis becomes structural, affecting society as a whole. A vicious circle is fast tightening around the continent and especially its poorest communities, who have least access to preventive interventions, affordable care and education about HIV/AIDS, and are most likely to contract HIV.

    The scale of the epidemic exacerbates both the poverty and lack of social services which initially allowed the disease to spread.

    Once infected, the loss of income earning ability through sickness, greater dependency ratios and increased spending on healthcare for the sick, further impoverishes. Ultimately not only the poorest families and communities suffer, but GDP also declines, leaving fewer resources on a national level to contain the disease. One estimate suggests that between 1990 and 1997, Africa's per capita income growth was reduced from 1.1 to 0.4 per cent, a reduction of 0.7 per cent as a result of HIV/AIDS. USAID has estimated that Kenya's GDP will be 14.4 per cent lower in 2005 than it would have been if the spread of HIV/AIDS had been curtailed .

    Malawi Annual debt service post-HIPC:

    $51 millionHealth budget: $51 millionAdult HIV prevalence: 16%UNAIDS scale up costs: $152 millionOne study suggests HIV/AIDS has left GDP in Malawi 5 per cent lower in 2000 than it would have been in the absence of the pandemic . A study on tea workers reports that a six fold increase in the mortality rate among the workers between 1991 and 1995 cost the employing company 6% of its operating profit.

    Furthermore, the foot-soldiers in this war - teachers, doctors, nurses and income earners, are typically of the most vulnerable age. In Zambia in 1998, 1200 teachers died from AIDS - a figure equivalent to two-thirds of the number of newly trained teachers each year .

    It follows that not only is the human cost minimized by early and effective intervention, but that cost effectiveness is also improved through early intervention. UNAIDS figures show that when prevalence rates are below 5%, the per capita costs of intervention are $4 -$5 per annum. Once the HIV/AIDS rate exceeds 10% of the population, per capita costs rise rapidly, in the range of $10 - $14, but in some cases can reach as high as $30 . This underlines the case for urgent decisive action.

    Malawi Annual debt service post-HIPC: $51 millionHealth budget: $51 millionAdult HIV prevalence: 16%UNAIDS scale up costs: $152 millionOne study suggests HIV/AIDS has left GDP in Malawi 5 per cent lower in 2000 than it would have been in the absence of the pandemic . A study on tea workers reports that a six fold increase in the mortality rate among the workers between 1991 and 1995 cost the employing company 6% of its operating profit. When teachers die almost as quickly as they can be trained, when a generation of orphans develop without parental guidance and support, and when economic growth stagnates and falls into reverse, society could quickly disintegrate. In this context it is no surprise that the National Intelligence Council of the CIA declared in January 2001 that HIV/AIDS and other infectious diseases posed a threat to the USA's national security.

    Generating the funds through debt cancellation

    HIV/AIDS in Africa is a preventable tragedy. The great irony is not only that many of the necessary drugs exist to contain the spread of the disease, but that the resources to fund investment in education, health and community support exist also. But they need reallocating. These resources exist in richer countries, and more pertinently they exist in the majority of the countries facing HIV/AIDS pandemics, in the form of debt payments. Currently these funds are being extracted at the expense of scaling up the effort against HIV/AIDS.

    The recently formed Global AIDS Alliance has estimated that Sub-Saharan Africa needs up to $15 billion a year from 2002 to2007 to fight the spread of the disease. These estimates are based on a comprehensive and wide-ranging response, and work out as roughly equivalent to the $13.5 billion that Sub-Saharan Africa will spend this year in debt repayments. UNAIDS presents a more modest costing of $2.6 to $4.2 billion per year which would cover "just the most basic prevention and care". Professor Jeffrey Sachs of Harvard's Center for International Development has estimated that "needs might be as high as $10 billion annually in the next few years." Furthermore, Sachs estimates that a budget which included costs for fighting the spread of malaria and tuberculosis would cost $10 billion to $20 billion per year.

    Grants, not loans, are needed to fight HIV/AIDS

    In the context of an underlying debt crisis, the World Bank's loan program to fight HIV/AIDS presents indebted and poor countries with a serious dilemma. The soul searching amongst countries threatened by HIV/AIDS over whether to take advantage of the World Bank's Multi-country AIDS Program , which offers loans specifically to tackle HIV/AIDS, is indicative of the inappropriateness of this form of funding in this context. Although IDA loans are on concessional rates, and there is no doubt that the resources are urgently needed, it is clearly grants that should be made available, not new debts.

    Currently, UNAIDS statistics are the only statistics available on a country-by-country basis, and so allow an instructive comparison with debt payments scheduled by country. These UNAIDS figures are relatively low as they represent the recurrent costs of intervention only, and do not include related costs of building infrastructure capacity and impact mitigation necessary to win the war against HIV/AIDS. Table 7 compares the latest figures for debt payments due for the 17 Sub-Saharan African countries which have reached decision point under HIPC with the costs of scaling up the effort to fight HIV/AIDS provided by UNAIDS.

    For the 17 African countries which have reached decision point, scheduled debt service is now just under the required costs of scaling up the HIV/AIDS effort. This means that cancelling 100% of the debts these countries still owe would almost cover the scaling up funding.

    Of these seventeen countries, ten spend more repaying debts than the cost to them of scaling up requirements.

    Table 8 compares the same figures for Sub-Saharan African countries which are included in HIPC but which have not yet reached decision point. For these ten countries, debt payments due are more than double scaling up costs: $3.1 billion compared to $1.2 billion.

    Table 9 shows Sub-Saharan African countries not eligible for the HIPC initiative - i.e. with no prospect of any debt reduction - for which relevant HIV/AIDS scaling up costs are available. These eight countries are due to pay annual debt service of $3.6 billion, more than twice the resources needed to provide basic prevention, care and treatment for HIV/AIDS. Nigeria, which has the largest population of any African country, is scheduled to spend three times more repaying debts than required to scale up the HIV/AIDS effort, and six times more repaying debts than on healthcare.

    Zambia: Annual debt service post-HIPC: $174 millionAnnual debt service to IMF/World Bank: $89 millionHealth budget: $76 millionAnnual UNAIDS estimated costs: $164.2 millionAnnual funding for national HIV/AIDS Strategic Framework: $186 millionAdult HIV prevalence: 20%Percentage of children orphaned by AIDS: 14%Zambia desperately needs both strong financial backing and strong domestic leadership to fight HIV/AIDS. While her existing debt payments to the IMF are a scandal, the Zambian government has been criticized by the Zambian debt campaign for not involving civil society adequately in developing anti-poverty strategies.

    For HIPC countries, the New Deal on Debt would free up over $700 million more a year from the multilateral creditors, and further sums from Paris Club countries. This would almost double the impact of the debt cancellation initiative to date, releasing considerably more resources to fight HIV/AIDS and poverty.

    It is not proposed that all the funds released through deeper debt cancellation be solely and exclusively used to fight HIV/AIDS directly. Funds used to strengthen basic healthcare and education infrastructure will lay the foundations upon which greater aid flows in the future can build, and will help establish the delivery systems through which the cheaper and more effective drugs necessary to win this war must be administered. The resources from reductions in debt service payments so far are already acting as an injection into basic social services which are critical to tackling the HIV/AIDS crisis.Generating the political will

    In order to successfully combat HIV/AIDS, not only will the resources have to be made available by the donor community, but the governments of nations where the disease is threatening to undo years of development will have to ensure that action on HIV/AIDS is given greater emphasis. The condition on which new resources are released through further debt cancellation to fight HIV/AIDS should be that leaders of indebted nations make clear commitments to fighting the disease, through transparently managed accounts and national HIV/AIDS plans which acknowledge the multi-faceted nature of the challenge. This condition is primarily the wish of campaigners in indebted nations, and those at the frontline of the struggle against HIV/AIDS and poverty.

    The debt cancellation process is helping focus policy makers upon the challenge represented by HIV/AIDS. The PRSPs of Cameroon, Malawi, Uganda, Tanzania, and Zambia all outline strategies for developing a response to HIV/AIDS, and almost all the PRSPs currently being put together emphasize the importance of tackling HIV/AIDS. The processes by which PRSPs have been developed to date leave much room for improvement, but they are beginning to bring together civil society, relevant ministries, the foreign donor community and other actors. Commitment from these actors must be in place to make national HIV/AIDS strategies work.

    The forthcoming Organization of African Unity (OAU) HIV/AIDS conference on 25th April 2001 in Abuja, Nigeria, will discuss the most effective ways to curtail the spread of the HIV virus, and address the impact of the epidemic. Many African Heads of State will attend the conference to confirm their commitment to winning this war.

    The subsequent spring meetings of the IMF and World Bank at the end of April, and the General Assembly Session at the United Nations on HIV/AIDS in June are further opportunities to establish a deal through which deeper debt cancellation can be used to fight HIV/AIDS. This deal must be finalized in Genoa and be the contract which represents both creditors' and debtors' desire to end the vicious circle of poverty, economic underachievement and disease which imperils the continent.

    ... To work towards the 2015 poverty targets

    "Over 10 million children will die before the age of 5. 120 million children are not in primary school. Each of us partners must be prepared to make radical changes in the way we act so that the goals of 2015 can be achieved." UK Chancellor Gordon Brown, speaking to representatives from the World Bank, IMF, G8, 26 February 2001.

    The year 2015 may seem a long way off, but it is all too soon for world leaders who committed six years ago to meeting international development goals by that date. The OECD's Development Assistance Committee devised a set of measurable targets which were ratified at a number of United Nations conferences in the 1990s. The primary goal is to reduce the proportion of people living in extreme poverty in developing countries by at least half by 2015 (from 1990 levels), as measured by the number of people living on less than a dollar a day.

    Out of reach for the poorest

    While some regions of the world have seen improvements, for example East Asia, the outlook in the poorest countries makes very depressing reading. These are lagging way behind the progress needed to meet the 2015 targets, and on many indicators positive trends have started reversing. In South Asia, the proportion of people living in extreme poverty stood at 44 per cent in 1990, and had dropped to just 40 per cent eight years later. As can be seen in figure 4, Sub-Saharan Africa is faring even worse, with levels rising marginally, not falling, to 48 per cent of the population.

    The policy makers are under no illusions. The World Bank, which has pledged to use the targets as a common framework to guide its work, warns that "Africa will be far from reaching the goal even under [a] favorable growth scenario," while "with low-case growth rates, the world as a whole would not reach the target". Breaking down the target, the Bank projects that on current trends "none of the international development goals on health and education are likely to be achieved at the global level."

    The brutal impact of the HIV/AIDS crisis in sub-Saharan Africa gives the challenge of meeting the 2015 targets a whole new dimension, as the full devastation is yet to be experienced in most affected countries (see above). As a result of HIV/AIDS, life expectancy has fallen from 50 to 47 years from 1992 - 1999, and in some countries is falling below 40. If the HIV/AIDS emergency is not tackled rapidly and effectively, the international development targets will be history long before we reach the year 2015.

    Targets related to the overall 2015 goal of reducing the proportion of people living in extreme poverty by half:

    • universal primary education for all;
    • reduction of infant and child mortality by two-thirds;
    • reduction of maternal mortality by three fourths;
    • access to reproductive services for all;
    • and a reversal of current trends in the loss of environmental resources and the accumulation of hazardous substances.

    In the world's poorest region, Sub-Saharan Africa, 300 million people live on less than a dollar a day, equivalent to the entire population of North America. Although infant mortality did fall marginally from 101 per thousand births in 1990 to 92 in 1999, according to the World Bank this fall should be 30% at this point for the international development goal to be even remotely achievable.

    Even more worryingly, some indicators have not improved at all, or have worsened in the period 1990 - 99. Under 5 mortality in Sub-Saharan Africa has increased from 155 per thousand children to 161, largely because of HIV-related diseases. And it is not only health indicators that are suffering. Fifteen countries in the region experienced a decline in primary school net enrolment between 1990 - 97.

    Don't forget about the debt

    The debt burden in the poorest countries is one of the root causes of poverty, and remains a steely constraint on progress towards meeting 2015 targets. A specific policy proposed to help meet the targets was that a minimum 20% of government budgetary expenditure in developing countries be allocated to basic social services, alongside 20% of aid flows - this target has been severely curtailed by the high levels of debt.

    In Sub-Saharan Africa, basic social services spending in 1999 was just 14%, easily overshadowed by spending on debt service. In Malawi, Tanzania and Zambia, over 30% of government expenditure was used to repay debt before recent HIPC assistance, and over 20% in most other African HIPCs. The size of debt payments heavily influences the amount that can ultimately be spent on social services, which are a vital component of meeting the 2015 targets.

    Debt reduction so far under the HIPC initiative has helped to start building up investment in health and education in the countries concerned, but even in these 22 countries, as seen in figure 5, if the remaining debt service was cancelled, the World Bank estimate that social spending as a percentage of GDP could increase from 5.8 per cent (pre-HIPC) to 8.4 per cent. As it stands, the government in Zambia, where primary school rates are falling and one in five adults is HIV positive, has to find $176 million a year for debt repayments, compared to the $76 million currently spent on health and $70 million on education.

    In the context of the 2015 targets, the amount of debt to be cancelled under HIPC is untenable. In a forthcoming report, Oxfam estimate that the cost of reaching the 2015 targets in health and education in the 22 countries that have reached decision point is $2 billion a year. This is the exact sum that these countries are still scheduled to pay under HIPC terms.

    Furthermore, the investment needed to bring growth up to the 6% level in these countries - the estimated rate required to reduce poverty overall by half - is an additional $5.2 billion, according to Oxfam. It is clear that further debt cancellation is just the start of what is needed, but an essential step that will provide substantial resources and clear the way for additional funding to be more effectively used.

    Creditors have no excuse

    With the development of PRSPs, clearer costings should be available to estimate the financing gap for countries striving to implement policies in order to meet the 2015 targets. Where a financing gap exists alongside a governmental commitment to fight poverty, there can be no argument for rich creditors, committed to the 2015 goals, to collect billion of dollars a year in debt service.

    Deeper debt cancellation for the poorest countries would not only accelerate progress towards the

    2015 targets. Such action would give a backbone of credibility to richer countries and international

    institutions that speak passionately about the 2015 poverty targets while at the same time resolutely collecting debts which are repaid at the expense of the poor.

    Carol Bellamy, Director of UNICEF, underlines the direct link between meeting the poverty targets and canceling debt: "The optimal conditions for meeting the 2015 targets are accelerated and more equitable economic growth, and improved access to better-quality basic services. Unsustainable debt has undermined progress on each of these fronts, with devastating consequences for human well-being."

    ... To respond to African leadership

    "You can't say 'I'm going to export all these billions of dollars and put them in some Swiss bank and please, rest of the world, can you come in and rescue my country.' It doesn't make sense." President Thabo Mbeki, South Africa, FT, November 2000

    One of the main arguments put forward against debt cancellation is the extent of poor governance and corruption in the poorest countries, and concern that resources freed up will be wasted. Critics cite examples of rich dictators in Africa and Latin America living in palaces while they watch their people starve. While this picture resonates, it is important to acknowledge that these same dictators were financially supported by western creditors who turned a blind eye to corruption and human rights abuses. Half of US overseas aid to Sub-Saharan Africa went to the brutal dictator Mobutu during the1970s; when the IMF was warned by its country staff in 1974 that there was no prospect of getting any money back from the corrupt leader, the IMF responded by tripling its lending to Zaire.

    Increasingly this is a picture of the past. Times are changing in Africa. The majority of countries are now functioning democracies, with a new generation of more responsible leaders who are increasingly showing their commitment to weeding out corruption, ending conflicts, fighting poverty and strengthening democracy.

    While there are clearly big differences between countries, leaders are developing a pan-African initiative which is boldly led from within the continent itself. The challenge is enormous, but the vision of progressive leaders is clear - if Africa's poverty-ridden, aid-dependency days are to be numbered, governments across the continent must become more accountable to their people and with help from the international community, stem the tide of Africa's marginalization from the developed world.

    The Millennium Partnership for the African Recovery Programme (MAP) is an attempt to articulate this vision. Presidents Thabo Mbeki from South Africa, Olusegun Obasanjo from Nigeria, and Abdelaziz Bouteflika from Algeria are proposing a new partnership between Africa and the international community which fully acknowledges the role that African leaders have to play in cleaning up corruption and developing better governance. The plan will be announced in full later this year, but broadly aims to get African governments to sign up to commitments and measurable actions which result in openness, transparency and improved and accountable governance.

    While governmental commitment from Africa is crucial, alone it is not sufficient. Although the political climate has changed, the debts plus compound interest remain, resulting from economic mismanagement, failed projects, and bad lending decisions. The success of MAP depends not only on African governments, but equally on the support of the international community in key areas. Leaders are agreed that financing development will require the mobilization of vast resources from both inside and outside the continent. This includes first and foremost further debt cancellation.

    Other actions required from richer countries and international organizations include increased financing through ODA, reform of unfair trade rules, and technical support and assistance.

    So far, MAP has received a cautious welcome from richer countries, who remain skeptical about good governance, and wary of making promises they don't want to keep. But while poverty continues to feed political instability in parts of Africa, rich countries who can be part of the solution must not sit by and watch the human tragedy unfold. With the rise of new and bold leadership comes a new opportunity, holding the promise of a better future for the 300 million Africans who currently survive on less than a dollar a day.

    Nigeria - a special case"The people of Nigeria have suffered under the military oppression; they have been oppressed and they have been deprived. Democracy is not only for the intrinsic value of democracy, but for the democracy dividend: an improvement in the quality of their lives." President Olusegun ObasanjoNigeria is home to almost one-fifth of people in sub-Saharan Africa. Despite many natural resources and a relatively large economy, decades of misrule under corrupt military dictatorships have left an enormous, unpayable foreign debt, and all but a tiny minority living in poverty - Nigeria rates amongst the twenty poorest countries in the world. Seventy per cent of the population live on less than a dollar a day, and per capita GDP is just $310. Economically, the country has the potential to become an engine of growth for the whole of West Africa. Politically, Nigeria has huge strategic importance, and plays a vital role in peacekeeping and conflict prevention. But if Nigeria is to realize this potential, and bring peace and prosperity to it's 129 million population and the region of West Africa, swift and bold international support, including debt cancellation, is needed.The current government, led by President Olusegun Obasanjo (chair of the advisory council to Transparency International) was democratically elected in 1999. Since coming to power, he has declared war on corruption, "the single greatest single bane of our society" and established the Corrupt Practices and Other Related Offences Commission which has wide-ranging powers to investigate, prosecute and pre-empt corruption.Nigeria's debt stands at just over $28 billion. Under previous rulers, repayments were made to private creditors, but the country fell far behind on due debt service to public creditors. Of the total owed, only $8.5 billion represents loans still to be repaid. The rest is arrears. The majority of debt stock is owed to governments in the Paris Club of creditors, and of this, over $15 billion is in arrears. The democratic government has made repayments of $1.5 billion in 1998 and 1999 - almost three times the budget for spending on health ($150 million) and education ($400 million) combined.Nigeria was initially on the HIPC list and eligible for substantial cancellation. However, in 1998, just as President Obasanjo came to power, the country was removed from HIPC with little explanation, meaning that debt cancellation would be left to the whims of the Paris Club. After prolonged negotiations, Nigeria was given rescheduling from the Paris Club in December 2000, with market-based loans subject to a three-year moratorium while official assistance will be rescheduled over twenty years with a 10 year grace period. Scheduled payments over the next five years average $2.1 billion annually.President Obasanjo has support from the international community, but is clear that reduction in debt stock, not just rescheduling is needed to get Nigeria's burgeoning debt to manageable levels. Creditors point to earnings from oil-export revenues and increases in the oil-price as obvious sources of foreign exchange with which to pay off debt. But in a country where half the population still have no access to clean water, and 40% of adults cannot read, there is a clear case that this money instead be directed to building up health and education systems to provide a better future for Nigeria's people. In the context of HIV/AIDS, the case for debt reduction is even clearer. In 1999, the HIV/AIDS rate was 5 per cent of the population. Recent estimates suggest that this has now risen to 7 per cent, meaning that over eight million Nigerians are HIV-positive. The largest country in West Africa stands on the brink of an exponential rise, which if not contained, threatens to become one of the worst cases of HIV/AIDS in Africa.During Sani Abacha's dictatorship in Nigeria, billions of dollars of public money were siphoned off to foreign banks, with at least $1.3 billion alone in UK banks. In the past, creditors have lent to dictators who brutally oppressed the Nigerian people, and have turned a blind eye to laundered money. Now, with democracy and a government committed to fighting poverty, creditors have a duty to help Nigeria emerge from its painful past.

    Sources: World Bank, GDF 2001, Financial Times, 30 March 2001

    ... To make debt sustainableEver since the HIPC initiative was conceived, arguments have continued over how to define a 'sustainable' level of debt. From the beginning, creditors including the IMF and World Bank were at loggerheads with debtors and much of the international community over both the method of defining sustainability and the levels at which it should be set. The HIPC initiative relies primarily on comparing debt stock to annual levels of exports from a debtor country. Many observers have argued that much more weight should be given to comparisons of annual debt payments with available government revenue as well as exports, or that a specific assessment of the cost of meeting the 2015 development targets should be made and the definition of affordable debt payments (and therefore sustainable debt) based on that.

    Alongside the arguments about which type of measure should be used, equally intense disagreements have continued over the appropriate level within one measure. The range defined as 'sustainable' under the original terms of the HIPC initiative, namely a debt-to-exports ratio of 200-250 per cent, was supposedly based on a long-forgotten piece of research commissioned by the World Bank and IMF that suggested this level offered an exit from debt problems. The credibility of this claim was undermined by the World Bank and IMF themselves when they reviewed the initiative after 18 months and decided, after pressure from outside, that a 150 per cent ratio was in fact the appropriate threshold. This judgment was in turn undermined when the major bilateral creditors, led by the United States, then wrote off 100 per cent of their claims on HIPCs, an implicit acknowledgement that the 150 per cent level was also unsustainable. The clear lesson of this process is that HIPC was never based around a true assessment of sustainability, but instead guided by what creditors felt willing to cancel. As public pressure for deeper cancellation grew, particularly in G7 countries, politicians felt willing (or obliged) to agree to go deeper - but as a result of politics, not a technical or academic assessment.

    In the broader debate, many campaigners for debt cancellation reject the narrow argument about debt sustainability altogether. They point out that in many cases, because of compound interest and rescheduling, the debts have been paid many times over; that the debt is far outweighed by the unequal terms of trade between rich and poor countries; and that the origin of much of the debt, lent to support favored regimes without any regard for the people of the countries concerned, makes that debt illegitimate and any discussion of sustainability therefore academic.

    Even in the narrowest discussion of debt sustainability in the context of the HIPC initiative, current levels of debt for countries exiting the initiative are widely being recognized as unsustainable. At the time this report was being finalized, a confidential paper prepared by the World Bank and circulating within the institution was said to make clear just how dangerously unsustainable debt levels after HIPC are proving to be.

    Even from the published data, the evidence is clear. The 22 countries at decision point in the HIPC initiative will see debt service payments fall by a quarter initially, only to see them rise again steadily over the period from 2001 to 2009, when payments will only be 14 per cent below current levels, according to Eurodad.

    Many within the World Bank, IMF and creditor finance ministries, as well as the debtor governments themselves, have privately expressed concern that HIPCs will emerge form the initiative without the 'lasting exit' from debt problems that was promised. Increasingly, attention is turning to the control of future debt levels, with a focus on what constitutes 'productive' lending and the consequent impact on debt. This important work is no substitute for addressing yet again the failure of the HIPC initiative to live up to its original stated purpose of delivering debt sustainability. As well as looking to future debt management, the obvious and necessary course now is to do what the HIPC initiative was supposed to do years ago and deliver much deeper debt cancellation.

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    5. The independent view. How the World Bank and IMF can afford to do more

    This report has set out clearly:

    • The present HIPC initiative is severely limited in the depth of debt cancellation it delivers;
    • There is an urgent need for deeper debt cancellation in order to address the developing emergency in HIV/AIDS and to begin the task of meeting the 2015 poverty reduction targets, as well as to ensure that countries do not return to unsustainable debt burdens in the near future;
    • The particular need is clear for deeper cancellation by the World Bank and IMF, as the biggest single lenders to the poorest countries.

    Given this reality, the logical next step is for the World Bank and IMF to follow the lead of the G7 countries and cancel 100 per cent of the remaining debts they are owed by the poorest countries, as the centerpiece of a broader New Deal on Debt. However, the most familiar objection to this step is that the institutions cannot afford to do so - or that if they did, the impact on the institutions would be so great as to jeopardize their ability to function effectively. James Wolfensohn, President of the World Bank, has implied that asking his institution to match the G7's commitment to 100 per cent cancellation would effectively shut down the Bank.

    Drop the Debt has never believed this would be the case. The cost of 100 per cent cancellation by these institutions appears transparently modest and affordable to institutions that are extremely well endowed and supported by some of the most secure financial backers in the world. However, many observers have commented that the only way to settle the issue would be to invite an independent firm of accountants to address the question of how much debt cancellation could be afforded by the institutions without impacting on their ability to function. That is why Drop the Debt commissioned the London accountancy firm, Chantrey Vellacott DFK, to provide an independent, expert view on the issue.

    Chantrey Vellacott was one of a number of accountancy firms and consultants with whom the project was discussed. However, in addition to the quality and suitability of Chantrey Vellacott to this role, it was also apparent that few of the biggest firms would be able to carry out the work because of their close ties with the World Bank and IMF themselves. One of the big five accounting firms, where partners were especially keen to carry out the work, eventually concluded that it could not proceed because of a 'conflict of client interest'.

    Chantrey Vellacott is one of the top twenty UK accountancy practices, with 55 partners and 250 staff. It is the lead member of DFK International, an international organization of independent accounting practices operating in around 70 countries, with a worldwide fee income of around $350 million per annum. The firm undertook the project for a commercial fee. Chantrey Vellacott were given the following terms of reference:

    a) What financial capacity do the World Bank and IMF have to finance deeper cancellation of debts they are owed by heavily indebted and poor countries without impacting adversely on other developing countries?b) How much of the remaining debts owed by HIPCs to the World Bank and IMF could be cancelled through these means?

    In order to gain a second opinion, with a particular focus on the World Bank, Drop the Debt also commissioned an independent consultant, Subhrendu Chatterji. The two worked independently of each other. Neither Chantrey Vellacott nor Subhrendu Chatterji had access to any World Bank or IMF information other than that in the public domain. Subhrendu Chatterji submitted a series of questions to the World Bank which remained unanswered three weeks later. Despite this, both were able to complete reports as requested, Subhrendu Chatterji on 27 March and Chantrey Vellacott on 5 April 2001. They are published in full as annexes to this report.

    The verdict of the accountancy firm

    Chantrey Vellacott conclude that if their proposals were adopted, the World Bank and IMF would be able to cancel 100 per cent of the debts owed to them by the Heavily Indebted Poor Countries, "without (in our view) jeopardizing the ability of the World Bank and IMF to carry out their overall functions". They add that their proposals "are unlikely to have a detrimental effect on the ability of these organizations to carry out their objectives" and that in fact, "a case could probably be made for going further, depending on the political commitment to helping the HIPC countries."

    The cost of canceling 100 per cent

    Both independent reports seek to define the cost of canceling 100 per cent of the outstanding debts from the HIPCs to the institutions they analyze. Chantrey Vellacott approach this on the basis of the overall funds needed to cancel the stock of debt, while Chatterji looks instead at the cost of covering the foregone debt service of cancelled debt - the approach taken by multilateral creditors under the HIPC initiative.

    Under the latter approach, Chatterji finds that the annual cost of canceling the World Bank's debts could be as shown in table 10.

    The 14 'pipeline' countries yet to reach decision point in the HIPC initiative include Ghana, whose new government last month decided to accept HIPC debt cancellation.

    Chatterji says it is unclear how much of the current HIPC initiative cost has been effectively funded, but notes that "the political commitment has been made by the international community under the agreements reached in 1999 at the Cologne G-8 summit, and at subsequent meetings of the World Bank and the IMF, to deliver all the relief due under the current enhanced HIPC framework." The cost, therefore, of the Drop the Debt proposal to increase the World Bank's cancellation to 100 per cent on the same basis as the G7, is $353 million per year, based on the period from 2001-09 that Chatterji examines.

    While Chatterji does not focus on the IMF, similar research and calculations done previously by Drop the Debt indicate that the cost of 100 per cent cancellation by the IMF - in addition to the current HIPC terms - for the 22 decision point countries would be around $287 million per year, with the 14 'pipeline' countries costing approximately a further $81 million. Thus, the anticipated total extra cost to the IMF of going beyond HIPC and delivering 100 per cent is around $368 million per year. On this basis, the total additional cost to the World Bank and IMF of Drop the Debt's proposal is $721 million per year - $502 million for the 22 countries currently at decision point and $219 million for the 14 countries expected to enter the initiative.

    Chantrey Vellacott focus on the cost of dealing with the overall stock of HIPC debt to the World Bank and IMF, and do not distinguish between that which is already committed under the existing HIPC terms and that which would be additional. They find that the total value of HIPC debts is $38.7 billion.

    In the context of the cost of deeper cancellation, it should be noted that neither expert - nor Drop the Debt in this report - has addressed the question of whether the IMF and World Bank are right to value their outstanding HIPC debts the way they do. There is a strong argument that the World Bank and IMF should recognize that the true value of the debt they are owed by the poorest countries is much lower than its face value. Private and official bilateral lenders - including the United States government - generally make proper provision for debts that are not effectively being serviced, and so the cost of canceling them is very much lower than its face value. The United States recently valued HIPC debt it was owed at around 10 per cent of its face value. The IMF and World Bank only avoid this prudent provision by acting as preferred creditors - and even then, they can only ensure debts are repaid by advancing new loans to cover old repayments.

    This argument is valid, but it has not been taken up in this report because we have deliberately sought, and we have asked the independent experts, to tackle the objections to cancellation of deeper debt cancellation in their own terms. Nevertheless, in the broader context, many observers would argue that much less is actually needed in order to cancel the debts to the World Bank and IMF. However, our independent experts find that even if such funds are required, they are available within the structures of the institutions themselves.

    Available resources within the World Bank and IMF

    Chantrey Vellacott put forward four 'Cases for Serious Consideration' in the light of their examination of the World Bank and IMF, addressing the World Bank's non-concessional lending arm, the International Bank for Reconstruction and Development (IBRD); the concessional window, the International Development Association (IDA); and the IMF itself:

    1. "The IBRD to make an immediate contribution of a further $2.8 billion to HIPC debt cancellation, representing the increase in the IBRD's reserves over the last four years."

    IMMEDIATE BENEFIT: $2.8 billion

    Chantrey Vellacott find that the release of this amount from the IBRD's reserves would not jeopardise the Bank's 'triple A' credit rating 'nor adversely affect its ongoing operations in any material way'. This judgement is formed on the basis that such a step would leave the key ratios affected only as follows:

    • The 'equity capital to loans ratio', which has stood at a little over 20 per cent in recent years, would fall to around 19 per cent, which remains a prudent level;
    • The 'reserves to loan ratio', which the Bank targets to keep with the range of 13 to 15 per cent, would fall to 12.9 per cent based on June 2000 data, which would not seriously jeopardise the operational target on an ongoing basis;
    • The 'loans to issued and committed capital, reserves and surplus ratio', which the IBRD is obliged to keep below 100 per cent, would remain well below 60 per cent;
    • The 'interest coverage ratio', which has averaged 1.22 over the last five years, would be around 1.25, which Chantrey Vellacott describe as 'prudent'.

    2. "The IBRD to publicly commit itself to an annual contribution of 1/3 of its annual net income to HIPC Debt cancellation; on current figures this would produce around two thirds of a billion dollars per year".

    ONGOING BENEFIT: $667 million per annum

    This proposal draws on the precedent set for the funding of the current terms of the HIPC initiative, whereby IBRD net income is used to cover the foregone debt service to IDA.

    The allocation of net income is determined once each year by the Board of Governors of the IBRD, based on recommendations from their Executive Directors. Decisions on net income are made by a simple majority of the eligible votes on the Board of Governors. The G7 countries cast 45 per cent of the votes on the Board of the IBRD and 50 per cent on the Board of IDA. The United States governor on the Board is Paul O'Neill, US Treasury Secretary.

    In August 2000, the IBRD allocated $1,280 million of the $1,991 million net income to reserves and $635 million to special projects, including $250 million for the current HIPC initiative.

    3. "The IDA to seek no further reimbursement from the HIPC Debt Initiative Trust Fund in respect of the proposed write-off of $8 billion HIPC Debt by the IDA, which $8 billion has already been provided for in the IDA's accounts. In order to maintain IDA lending in the future, IDA member contributions would have to increase by some $300 million per annum or approximately 8 per cent of current contributions."

    IMMEDIATE BENEFIT: $8 billion (in reduced cost of cancellation)

    Chantrey Vellacott note that the IDA's reserves have already been debited for the $8 billion anticipated cost of the existing HIPC initiative, with no formal assurance of where that money will come from. As it stands, IDA has 'taken the hit' for the cost of the HIPC initiative, just as many other creditors have had to do, and it still has reserves of $1 billion on which to draw.

    In practice, IDA expects to be reimbursed for the full $8 billion as it becomes due for release to cover HIPC debt payments. This reimbursement is intended to come from the IBRD's net income until 2005, and thereafter from the contributions made by donors to IDA's three-yearly replenishment.

    If IDA's members wish to ensure that IDA continues to disburse funds at the same rate, Chantrey Vellacott says, they can contribute slightly more to the replenishment process than they otherwise would have done. About $300 million each year would be needed in order to cover the $8 billion over time. This would represent no more than about 8 per cent of a typical replenishment.

    Chantrey Vellacott say that if this proposal were adopted, the IDA could simply continue functioning from the entirely viable situation it is in now, while the total $38 billion owed to the World Bank and IMF by HIPCs would be effectively reduced by the same $8 billion.

    4. "The IMF to contribute a further $350 million per annum to HIPC debt cancellation, representing a notional figure of $200 million per annum being the income earning capacity of its general reserves, together with a further $150 million p.a. to be derived from a repeat of the exercise carried out by the IMF in the year to 30 April 2000 in connection with the sale and repurchase at market value of some 1/8 of its gold reserves."

    ONGOING BENEFIT: $350 million per annum

    Chantrey Vellacott note that one of the most obvious ways to deal with the IMF's outstanding debt is to repeat the revaluation of part of the gold stocks that are kept on the IMF's books at a historic low value. This has a clear precedent, and it would have no direct negative impact on any country or group of countries. In fact, there is good reason to believe more of these gold stocks can be utilised in the future. However, there may be political difficulties in agreeing further action on the IMF's gold, although there is no evidence to connect the last revaluation with any discernible impact on gold prices.

    Chantrey Vellacott's second proposal on the IMF, to take the income earning capacity of its reserves, would bring in around $200 million every year. This might work in a similar way to the transfer of IBRD net income - it is largely a political choice for the IMF's members if they view deeper debt cancellation as justified.Chantrey Vellacott's four proposals all stand independently of one another. Together, they are worth some $3 billion immediately (or $11 billion accounting for the reduced cost of IDA cancellation) and around $1 billion each year on an ongoing basis. Chantrey Vellacott find that this would allow the World Bank and IMF to write off all outstanding claims on HIPCs over time.

    A second opinion

    While working separately from Chantrey Vellacott and not commenting directly on their findings, Subhrendu Chatterji reaches a similar conclusion on the use of a prudent portion of reserves and an ongoing part of net income in order to realise resources for debt cancellation. On the use of reserves, he observes that "there is certainly no feeling in the market that the IBRD is currently undercapitalised. Much depends on its future lending plans and there does not appear to be an excess of demand for IBRD loans at present." However, he notes that there is clearly a limit to the amount that can be derived from use of reserves in this way, so "releasing existing equity capital can only play a minor part in an overall package of debt relief for the Bank."

    On use of the IBRD's net income, Chatterji confirms that this is a usable ongoing source and that "at least theoretically, the IBRD should be able to meet all the 100 per cent. HIPC debt relief needs from net income after transfers to IDA, etc." However, he acknowledges, relying entirely on net income for this purpose "will negatively impact on its ability to grow its loan portfolio." Nevertheless, he says, net income "could form a key on-going component of an overall package of sources of financing. Further assessment of IBRD's earning prospects, projected demand for loans, etc., is required to arrive at an accurate estimate of the potential for drawing on this source."

    IDA reflows

    As well as a small benefit that could be derived from the IBRD's loan loss provisions, Chatterji offers one further way to contribute substantially to the resources needed for deeper cancellation. Because of the way IDA lends money over long repayment periods (35-40 years) with an initial ten-year grace period, IDA expects a substantial growth in its 'reflows' - its income from loans made earlier - in the next 20-25 years. Figure 6 shows the scale of that growth, rising to a peak in 2016-20 that is 236 per cent higher than it is in 2001 - releasing an additional $2 billion every year. Total reflows to IDA between 2001 and 2025 will be around $70 billion. Chatterji proposes: "Assuming the donors continue their current level of contributions in future funding rounds, this growth in reflows, which will be further enhanced by reflows from credits provided over the next few years, could be used to fund HIPC debt relief, whilst maintaining growth in lending to other poorer countries."

    This proposal adds further credibility to Chantrey Vellacott's view that the $8 billion provided for in IDA's accounts to deal with the current HIPC initiative costs does not need to be reimbursed from within the World Bank Group. The test of donor countries' support for IDA will be in their willingness to continue to fund it through the replenishments planned in the coming months and years.

    The money is there

    The evidence submitted to Drop the Debt by the two independent experts commissioned to look at the question of how resources can be used to fund deeper debt cancellation by the World Bank and IMF is conclusive. With the prudent use of a small proportion of the IBRD's reserves and an ongoing commitment from its net income, the realization of more funds through the IMF, a 'top-up' to the IDA replenishment by donors to ensure it does not suffer adversely as a result of the cost of the initial HIPC initiative and the future use of IDA's greatly increased reflows, more than enough funds can be realized to cancel 100 per cent of the outstanding debts owed by these poorest countries to the IMF and the World Bank. In practice, not all of these options are likely to be needed; the institutions could choose from a menu of the possibilities put forward and still have enough to fund complete cancellation for these countries.

    A further benefit of this cancellation would be that future lending from these institutions could be used much more effectively for its supposed purpose - to reduce poverty and stimulate development. Under the current HIPC initiative, it is clear that countries are being left with debt burdens that remain on the dangerous edge of sustainability and that new loans are already being taken on in order to meet future debt payments. The 100 per cent cancellation of these countries' debts to the World Bank and IMF would end that cycle of waste, and allow future investment to be directed into the areas they always should have been - stimulating the infrastructure and the growth to help countries reach the international poverty reduction targets and tackle the even more immediate emergency of HIV/AIDS and other key priorities.

    And if that doesn't work...

    Drop the Debt believes the proposals set out above by independent accountants and experts offer a clear way for the World Bank and IMF to join the G7 in canceling 100 per cent of the debt of the world's very poorest countries, using their own resources, without impacting adversely on other developing countries or on their own capacity to function effectively. We have commissioned this independent research in order to remove the obstacle of 'cost' from the path to deeper debt cancellation.

    However, our priority is not who pays for debt cancellation among the rich world. Our first concern is that deeper debt cancellation is delivered - and we recognize that the effective majority shareholders in the World Bank and IMF are the G7 governments. With this in mind, there is another, very obvious way for Drop the Debt's proposal to be funded.

    The G7 countries themselves could meet the full cost of the 100 per cent cancellation by the IMF and World Bank for around one dollar per year for each person in the G7 countries.

    This pitifully small sum - which would make such an enormous difference in the poorest countries - is all that is required to ensure:

    • that the poorest countries spend substantially less on debt service than they currently spend on health;
    • that their debt burdens are reduced to a genuinely sustainable level, giving much greater confidence that the same crisis will not return;
    • that future lending and grants to these countries will be used to fight poverty and build growth, and not be diverted to repaying old debts as too often it is now;
    • and that, most of all, immediate funds are released to build an infrastructure that can help fight the emergency of HIV/AIDS, which disproportionately affects indebted poor countries, and begin to approach the 2015 international poverty reduction targets on the basis of realistic hope, rather than the hopeless reality of the present.

    Drop the Debt believes the World Bank and IMF can afford this. But most of all, we believe it must be done.

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    6. The New Deal on Debt

    "The current diversion of precious resources to the payment of debt-service away from human development goals is an affront to our common humanity. We call on the leaders of the world's largest economies in meeting at the G8 Summit in Genoa in July 2001 to reduce further the debts of poor countries. Deeper cancellation is required. This should result in a 100% cancellation of unpayable debts including those owed to the international financial institutions." The Vatican, December 2000

    "I am proud of what the debt campaign has achieved, but frustrated that the poorest countries still spend more on debt payments than on healthcare for their children. We need to call on the US President to agree a New Deal on Debt at the next G8 summit"Muhammad Ali

    The figures speak for themselves. The devastating implications of the HIV/AIDS emergency make the existing arguments even more compelling. A New Deal on Debt must be agreed by the Genoa G8 Summit with the following components:

    Debt cancellation must go deeper: As an immediate step, the IMF, World Bank and Paris Club members who have not yet committed to cancel 100% must do so now.

    Trust fund for countries in conflict or bad governance: Debt payments from countries which are not eligible for cancellation because of conflict or poor human rights should be placed in trust. Creditors should not benefit from these payments. Once citizens of these countries enjoy democratic governance and the satisfaction that released funds would actually be spent on poverty alleviation and fighting killer diseases, then the funds from the trust should be released back to those governments.

    Inclusion of more countries: Nigeria is a case for immediate inclusion in the debt cancellation process (see chapter 4). IDA-only countries could be included for cancellation, as proposed by the Italian government. Most of these countries are poor but not very indebted. However, Haiti and Bangladesh are both indebted and poor and should be urgently considered for deeper cancellation. A comprehensive review of debt sustainability should now take into account the emergency that is HIV/AIDS in the poorest regions, particularly Sub-Saharan Africa, and the future impact that this epidemic will have on a government's ability to repay debt. HIV/AIDS is not just a compelling case for deeper cancellation for HIPC countries, but a reason to consider cancellation for countries affected by HIV/AIDS which are outside the current initiative.

    Debtor governments must prioritize the fight against poverty: Governments in the poorest countries must demonstrate their commitment to increase efforts and resources to fight poverty and disease. This includes transparency to allow effective monitoring of resources from debt cancellation, and openness and debate about how the resources are best used. Furthermore, pressure should not be put on debtor governments to comply with externally imposed economic conditions which hurt the poor, such as user fees for healthcare and education.

    Steps to prevent a future debt crisis: The present crisis is the result of poor lending and borrowing practices in the past. Governments and public lending institutions must take urgent steps to ensure that future lending is solely for productive purposes, and that country ownership of the program or project associated with the loan prevails. In the poorest countries, lending must be replaced by more grants. In particular grants not loans should be used to combat HIV/AIDS. The best long term insurance against a repeat of the crisis would be a fairer and more transparent process by which borrowing and lending is managed.

    1. The World Bank / IMF HIPC decision point documents are source of all data and calculations in this chapter unless otherwise indicated.
    2. Rob Mills, Eurodad submission to GNG conference workshop, 2 April 2001
    3. World Bank, Global Development Finance 2000, and World Development Indicators 2000
    4. Analysis based on the 15 countries for which a breakdown on future payments to Paris Club countries is available.
    5. World Bank, Financial Impact of the HIPC Initiative: first 22 country cases, March 2001
    6. Rene Bonnel, ACTAfrica, World Bank, Nov 6 2000
    7. ibid
    8. Global AIDS Alliance
    9. UNAIDS, Cost of Scaling HIV/AIDS Program Activities, 2001
    10. Cuddington and Hancock, 1995
    11. Sachs and Attaran Defining and refining international donor support for combating the AIDS pandemic 357 Lancet 57, Jan 6, 2001
    12. South Africa, Kenya and Uganda are amongst the African countries which have decided not to take up
    13. UN, A Better World For All, 2000
    14. The International Development Goals: Strengthening Commitments and Measuring Progress, World Bank, February 2001.
    15. Children in Jeopardy, UNICEF, 2000
    16. Choices for the Poor, UN, 2001
    17. Children in Jeopardy, UNICEF, 2000
    18. Financial Impact of the HIPC Initiative: first 22 country cases, World Bank, March 2001

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    See also :

    • Reality Check - summary here6
    • Financial Times report7
    • UNAIDS8

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