The 2008-2009 financial crisis and the HIPCS: Another debt crisis?

The current debt crisis in the Heavily Indebted and Poor Countries (HIPC) is hindering economic growth due to increasing bilateral loans and concessional lending, lack of macroeconomic adjustments and structural reforms in the HIPC. This paper states that these countries have started accumulating external debt reaching extreme ratios of debt to GDP and exports. The IMF and the World Bank argue that debt relief is not necessary and affordable because it would undermine IMF conditionalities. Another argument is that the HIPC will, this time, cope with the crisis because of their sounder fiscal positions, reduced debt burdens, lower inflation and comfortable reserve cushions.

The paper says the HIPC are facing a food crisis and a decline in exports and GDP exposing them to shock and leading them to more debt. It adds that debt relief initiatives of past decades only partially succeeded in reducing debt dependence, increasing poverty reduction and social expenditures. The author asserts that HIPC lack appropriate tools to deal with multiple external shocks and will be affected in the long run by the likely reduction in social spending. This will affect the Millennium Development Goals affecting indices like infant mortality thus lowering the economic growth rates. The paper uses available data to make projections and comparisons and highlight the bleak picture.

The paper advises as follows:

• the donors should provide financing for the most vulnerable countries to preserve their gains and prevent a humanitarian crisis. They must ensure that the aid flows are increased with clear mechanisms to ensure effective implementation of aid flows.
  
• the “Vulnerability Fund” proposed by the World Bank and the IMF calling for a temporary debt moratorium for HIPC is commendable but not enough
  
• It recommends funds for education and infrastructure should be safeguarded while protecting the most vulnerable
    
• the rich world and the International Financial Institutions should reshape their policy agenda, focusing much more attention and providing more resources and assistance to low-income countries. The call for a temporary debt moratorium on all official debt of low income countries by the IFI is commendable but not adequate.
  
• it is in the interest of the international community to help HIPC to cope with the crisis to avoid political instability, transnational crime and social unrest due to an economic downturn.