Making debt relief work: the heavily indebted poor countries initiative

The Heavily Indebted Poor Countries (HIPC) initiative adopted by the International Monetary Fund (IMF) and the World Bank in October 1996, looked like a significant step towards ending the debt crisis that has crippled the economies of the world's poorest countries. It promised transition to a sustainable level of debt repayments, with likely benefits in terms of poverty reduction and investment in economic growth. Has this promise come true? Recent investigations by Oxfam assessed what the debt burden means to poor countries and how HIPC works in practice, with special reference to Tanzania. The reports also asks what factors lie behind its shortcomings in countering debt.

The HIPC initiative promised a significant advance on previous approaches to debt relief. Firstly, it provided a comprehensive and integrated framework within which debt relief was to be provided in unison by all creditors. Secondly, and for the first time, its terms extended to multilateral creditors. The growth of multilateral debt stock had been at the heart of many poor countries' debt problems, and agencies like the IMF had till now refused to countenance debt reduction. Thirdly, it was intended to provide a basis for reducing debt obligations to levels consistent with ability to pay, involving the establishment of sustainability thresholds.

The findings of the Oxfam study show, however, that two years on from this shift, debt servicing continues absorb resources in poor countries to the detriment of human development and welfare. For example, Tanzania spends nine times as much on debt servicing as on basic health and four times as much as on primary education. Debt relief under HIPC has brought some benefits to a small number of countries. In Uganda, savings from debt relief have helped finance new education programmes, enabling some two million more children to go to school.

For most countries, however, HIPC is bringing too little relief, too late. Tanzania will not qualify for debt reduction until 2002, if ever. The study reports also conclude that:

• The debt sustainability threshold (the level to which debt repayments should fall to prevent rising balance of payments deficits) was set at far too high a level for most poor countries.
• Measures for pegging this level do not take into account human welfare and safety-nets for the poor.
• Eligibility for benefits from HIPC is linked fully to compliance with IMF reform packages, not to a country's improving economic management record , nor to steps to curb poverty.
• Shortcomings in applying the HIPC initiative appear to have coincided with a general disintegration of international political will to push forward debt relief.

Policy recommendations arising from the study reports urged that:

• Earlier and deeper debt relief should be provided for all countries in the HIPC framework.
• Incentives should be offered for debtor governments to convert savings from debt service charges into poverty reduction measures. More and quicker debt relief should be provided to countries that show a willingness to use savings from debt servicing for poverty reduction.
• Thresholds for determining debt sustainability and criteria for eligibility should be reviewed
• The present narrow focus on trade-related measurements of debt sustainability should be expanded to bring human development and social capital factors into the picture.
• Debt servicing should be counted unsustainable when it absorbs resources needed to meet targets for improving human and social conditions and to provide foundations for growth.
• HIPC eligibility should be de-linked from participation in IMF economic reform packages.
• Premiums should be set instead on all-round economic performance and anti-poverty gains.

Source(s):
`Debt relief for Tanzania: an opportunity for a better future.` Oxfam International, T. Burdon and K. Watkins (1998)
`Making debt relief work: a test of political will.` Oxfam International, K. Watkins (1998)

Funded by: Oxfam International (1997-1998)

id21 Research Highlight: 1998-September-08

Further Information:
Tony Burdon
Policy Department
Oxfam
274 Banbury Road
Oxford OX2 7DZ
UK

Tel: +44 (0)1865 312270
Fax: +44 (0)1865 312600
Contact the contributor: tburdon@oxfam.org.uk

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