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Africa Policy E-Journal
Africa: Debt Sustainability Update Africa Policy Electronic Distribution List: an information service provided by AFRICA ACTION (incorporating the Africa Policy Information Center, The Africa Fund, and the American Committee on Africa). Find more information for action for Africa at http://www.africapolicy.org +++++++++++++++++++++Document Profile+++++++++++++++++++++
Region: Continent-Wide SUMMARY CONTENTS: This posting contains a news release and briefing note from Drop the Debt, reporting on a new World Bank / International Monetary Fund study on sustainability of the debts of the countries included in the two institutions' Heavily Indebted Poor Countries (HIPC) initiative, and a brief commentary by Africa Action director Salih Booker. The April 20 report entitled "The Challenge of Maintaining Longterm External Debt Sustainability" acknowledged that even the countries receiving debt reductions under the program remain extremely vulnerable to adverse economic circumstances including reductions in export earnings or development assistance from the optimistic levels projected under HIPC sustainability analyses. According to the cautious language of the report's executive summary: "The paper notes that HIPCs are typically dependent upon a narrow export base which makes them vulnerable to externally induced shocks. Projections indicate that most HIPCs are likely to run negative resource balances for many years to come and will continue to need financing on concessional terms. Consequently, the paper examines the sensitivity of long-term debt sustainability to possible shortfalls in export revenues and less concessional financing than currently assumed in the debt sustainability analyses (DSAs). It concludes that while the lower debt service levels resulting from enhanced HIPC debt relief will provide a safety margin in the event of shortfalls in export revenues for these countries, the room for a significant deterioration without impacting long-term debt sustainability and poverty reduction is limited." The posting also includes, at the end, a table of dependence on major exports for HIPC countries, presented in the World Bank study.
For additional background see: +++++++++++++++++end profile++++++++++++++++++++++++++++++ AFRICA ACTION COMMENTARY May 4, 2001 The data reported below by Drop the Debt from World Bank / IMF sources show that creditors' debt reduction efforts for African countries fall far short. Even within the restricted terms of debate within the international financial institutions themselves, the case for further debt reduction is irrefutable. When one adds in the broader context of the debt, outside a narrow financial accounting, it is clear that the balance of debt is from North to South rather than the reverse. More debt reduction is needed, but it is far from enough. Africa Action strongly supports the call for 100% cancellation of the debts owed by African and other poor countries to the World Bank and the IMF, as a first step towards reducing the outward flow of financial resources that are desperately needed within Africa. The reasons are many, and more than sufficient to make the case: including the illegitimacy of debts incurred by the apartheid regime and other despotic governments, the liability of creditors' themselves for failures of policies that they imposed, and the fact that paying the debt competes directly with urgent investment in health, education and physical infrastructure. Meeting in Abuja from April 25-27, African leaders adopted a target of devoting 15% of national budgets to HIV/AIDS and other public health needs, an increase from approximately 5% to 7%. There are many other prerequisites for reaching such a target and spending it effectively - including local political will, civil society pressure, additional international funding, and effective administration. But stopping the drain of debt payments to the rich international financial institutions is fundamental. And the need is for immediate action. The spring meetings of the World Bank and the IMF saw no such action. The next test will be the Genoa meeting in July of the G-7 rich countries. - Salih Booker ############################################################### 23 April 2001 Egg on faces of HIPC architects as new report reveals third world debt package failings Drop the Debt news release
http://www.dropthedebt.org An embarrassing report from the World Bank and International Monetary Fund released over the weekend casts a dark shadow over their Heavily Indebted Poor Countries (HIPC) initiative, showing little confidence that the controversial debt package will provide an end to the debt crisis for the countries involved. The paper "The Challenge of Maintaining Long-Term External Debt Sustainability" has finally emerged after a number of rewrites, and confirms debt campaigners' concerns that HIPC does not reduce debt to a low enough level. It gives a renewed urgency to discussions on debt by the Group of Seven (G7) finance ministers at the World Bank and IMF spring meetings in Washington DC on April 29, especially in light of the spreading HIV/AIDS crisis in Africa. Debt campaigners have long argued that the 150% debt-to-exports level underpinning the HIPC initiative is based on precarious projections of export growth. For the 22 countries to get HIPC relief so far, the World Bank and IMF use predictions for export growth of above 6 per cent. This report admits for the first time that original export growth predictions were overly optimistic. The report shows how if exports grow more realistically at an average of 4.2%, in line with 1990 - 1999 levels, debt levels will have risen above the declared "sustainability threshold" to 160 per cent by 2005, reaching around 180 per cent by 2015. Three of these countries, Bolivia, Malawi and Niger, will not reach the 150 per cent threshold in the first place because of export growth rate volatility. Three further countries (Burkina Faso, Rwanda and Tanzania) are not predicted to reach the 150 per cent level until the medium term, because of anticipated new borrowing. Even for countries that do reach the 150% level, the World Bank and IMF acknowledge that the HIV/AIDS emergency in many African HIPCs will mean that debt levels will soon rise: "Longer-term growth prospects can be undermined by natural disasters, war, or health threats such as the AIDS epidemic in such cases, in the absence of adequate grant financing, external indebtedness may need to rise to accommodate the financing of reconstruction and rehabilitation." Despite the overwhelming evidence presented in the World Bank/IMF paper that HIPC is not delivering sustainable debt levels, the IMF and World Bank do not consider the case for further debt cancellation. Instead they focus only on solutions through economic growth and policy reform, while also examining the importance of future financing patterns. While these are crucial to long term debt sustainability, Drop the Debt emphasizes that the starting point must be to make debt repayments affordable now. "The bad news is that the HIPC initiative is yet again failing to meet its stated objectives. The good news is that the IMF, World Bank and their shareholders have the resources to cancel 100% of the debts these institutions are owed by the poorest countries. HIV/AIDS is compounding the failures of HIPC and making delay more costly and inexcusable. This week we will see whether the IMF and the World Bank are more interested in saving cash or saving lives." In light of this report Drop the Debt calls for the following urgent steps to be taken at the Spring Meetings:
The report was launched at a Drop the Debt/Oxfam conference and discussed by a panel including Adam Lerrick, Carnegie-Mellon University, Adrian Lovett, Drop the Debt, JoMarie Griesgraber Oxfam, Edith Ssampala, Ugandan Ambassador to the US, representatives from the IMF and World Bank ,and Maurice Fitzpatrick, Chantrey Vellacott.
For more information: Notes for editors:
23 April 2001 HIPC INITIATIVE OFFERS "NO GUARANTEE AGAINST FUTURE DEBT PROBLEMS", WORLD BANK & IMF ADMIT A Drop the Debt briefing note On April 10, 2001, Drop the Debt launched a new report, Reality Check, focusing on the impact of the Heavily Indebted Poor Countries (HIPC) initiative to date and calling for a New Deal on Debt, including the cancellation by the World Bank and IMF of 100 per cent of the debts owed to them by the poorest countries. Part of the case for deeper cancellation set out in the report was that the debt reduction delivered by the HIPC initiative does not reduce debts to a genuinely sustainable level, raising fears that the old problems of unsustainable debt will quickly recur. Now, days before the World Bank & IMF Spring meetings in Washington, DC (April 26-30), the two institutions have released an internal paper, "The Challenge of Maintaining Long-Term External Debt Sustainability," which raises deep concerns about debt sustainability after the HIPC initiative and demolishes the notion that the HIPC initiative adequately deals with the problem. This briefing note sets out the key relevant points in the paper. HIPC does not deliver a lasting exit from debt problems, contrary to its stated intention The paper describes the HIPC initiative process of bringing the value of outstanding debt down to a particular level and admits that "reducing debt to that level at a single point in time is no guarantee against future debt problems. To assess long-term debt sustainability, the focus of attention must shift away from this single debt indicator to a more complex and comprehensive view of the development process in which policies, institutions, exogenous factors and debt management play an integral role over time." (9) It reiterates later: "HIPC debt relief alone does not ensure long-term debt sustainability" (24), offering only that "the HIPC initiative provides a good basis for these countries to exit from rescheduling." (2) This stands in marked contrast to earlier claims by creditors that the HIPC initiative would itself provide a "lasting exit" from debt problems. The debts of three countries (Bolivia, Malawi and Niger) fail even to reach the 150 per cent debt-to-exports ratio required under the HIPC initiative. (51) The future sustainability of debt is highly vulnerable to over-optimistic projections, external 'shocks' and changing circumstances, including the HIV/AIDS emergency The paper acknowledges that the HIV/AIDS emergency is likely to increase debt levels in the most affected African countries: "longer-term growth prospects can be undermined by natural disasters, war, or health threats such as the AIDS epidemic affecting many of the HIPCs, particularly several decision point cases such as Malawi, Rwanda, and Zambia. In such cases, in the absence of adequate grant financing, external indebtedness (and the NPV-of-debt to exports ratio) may need to rise to accommodate the financing of reconstruction and rehabilitation." (20) The paper states: "The susceptibility of a country to external shocks, although not a separate factor, has important implications for disruptions in repayment capacity." (13) "Debt repayment capacity of HIPCs is projected to strengthen only gradually even after HIPC debt relief." (39) The narrow range of exports of most HIPCs, a feature of these countries' economies under the IMF-driven programs of the last two decades, leaves them "exceptionally vulnerable to external shocks" and the consequent impact on debt sustainability. (26) The paper states: " projected NPV debt-to-export ratios are only useful insofar as the assumptions underlying them are reasonably realistic and prudent." (Appendix I) If export performance is only slightly more modest than assumed under HIPC, the impact on debt levels will be significant. If exports continue to grow at the 4.2 per cent per annum rate experience in the 1990s, rather than the growth rates projected in the HIPC calculations (over 6 per cent), countries will on average fail ever to reach the 150 per cent debt-to-exports ratio targeted under HIPC - in fact, their debts will steadily rise to around 180 per cent by 2017. (57) Debt sustainability may need to be reviewed for individual countries as early as 'completion point' under the HIPC initiative: "The current framework allows for the consideration of additional assistance at the completion point if a broad assessment of a country's debt sustainability shows that exogenous elements have caused a fundamental change in a country's economic circumstances. It is envisaged that this provision would only need to be invoked in exceptional circumstances." (65) The scale of debt reduction under the HIPC initiative has nothing to do with an assessment how much is needed to fight poverty The paper ends the claim that the amount of HIPC debt relief is linked to funds needed to reduce poverty. It admits that the definition of debt sustainability under the initiative is "quite narrow from a development perspective", and does not "measure the adequacy of public resources to address priority development programs". (12) Drop the Debt's view Despite the overwhelming evidence presented in the paper that HIPC is not delivering sustainable debt levels, the IMF and World Bank do not consider the case for further debt cancellation. Instead they focus only on solutions through economic growth and policy while also examining the importance of future financing patterns. While these are crucial to long term debt sustainability, the starting point must be to make debt repayments affordable now. Adrian Lovett, Director of Drop the Debt, said: "We take no satisfaction from the revelation that World Bank assessment shows campaigners were right all along. The HIPC initiative does not deliver a sustainable level of debt. "Their internal report fails to draw the logical conclusion, however: that the first step to real debt sustainability lies in getting existing debt down to a truly affordable level. That means the World Bank and IMF must do what the G7 have done and cancel 100 per cent of the debts they are owed by the poorest countries. Independent research has shown that they can afford to do this without jeopardizing their ability to function. The G7 finance ministers must give deeper debt cancellation for the poorest countries their urgent attention at the IMF and World Bank meetings this week."
HIPC Country Dependence on main exports Country** GNP/Capita (US $) ** Main product ** % of exports (main product) ** % of exports three main products Benin ** 380 ** Cotton ** 84 ** 94 Bolivia ** 1010 ** Soybeans ** 12 ** 33 Burkina Faso ** 240 ** Cotton ** 39 ** 55 Cameroon ** 580 ** Oil ** 27 ** 47 Gambia, The ** 340 ** Groundnuts ** 10 ** 13 Guinea ** 510 ** Bauxite ** 37 ** 58 Guinea-Bissau ** 160 ** Cashew ** 69 ** 79 Guyana ** 760 ** Sugar ** 21 ** 49 Honduras ** 760 ** Coffee ** 22 ** 46 Madagascar ** 250 ** Coffee ** 12 ** 26 Malawi ** 190 ** Tobacco ** 61 ** 75 Mali ** 240 ** Cotton ** 47 ** 75 Mauritania ** 380 ** Fish ** 54 ** 94 Mozambique ** 230 ** Prawns ** 15 ** 24 Nicaragua ** 430 ** Coffee ** 14 ** 27 Niger ** 190 ** Uranium ** 51 ** 69 Rwanda ** 250 ** Coffee ** 43 ** 72 Sao Tome & Principe ** 270 ** Cocoa ** 78 ** 79 Senegal ** 510 ** Fish ** 27 ** 51 Tanzania ** 240 ** Coffee ** 20 ** 40 Uganda ** 320 ** Coffee ** 56 ** 63 Zambia ** 320 ** Copper ** 48 ** 67 Simple average ** 389 ** ** 39 ** 56 Weighted average ** ** 30 ** 50
Documents previously distributed in the e-journal are
available on the Africa Action website: To be added to or dropped from the e-journal subscription list, write to e-journal@africaaction.org. For more information about reposted material, please contact directly the source mentioned in the posting.
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Africa Policy E-Journal
