| Watch ’em grow
The heavily indebted poor countries initiative, launched in 1996 by the International Monetary Fund and the World Bank and endorsed by 180 governments, has two main objectives. The first is to relieve certain low-incomecountries of their unsustainable debt to donors. The second is to promote reform and sound policies for growth, human development and poverty reduction.
The enhanced HIPC framework, approved in 1999, introduces broader eligibility criteria and increases debt relief...Countries must be eligible for highly concessional assistance such as from the World Bank’s International Development Association and the IMF’s Poverty Reduction and Growth Facility. In addition, countries must face unsustainable debt even after the full application of traditional debt relief mechanisms. They must also have a proven track record in implementing strategies focussed on reducing poverty and building the foundations for sustainable growth.
Debt relief occurs in two steps: At the decision point the country gets debt service relief after having demonstrated adherence to an IMF programme and progress in developing a national poverty strategy. At the completion point the country gets debt stock relief upon approval by the World Bank and the IMF of its poverty reduction strategy paper. Of the 42 countries participating in the initiative, 34 are in sub-Saharan Africa. None had a per capita income above $ 1,500 in 2001, and all rank low on the human development index.
Between 1990 and 2001 HIPCs grew by an average of just 0.5 per cent a year. HIPCs have been over indebted for at least 20 years. At the same time, HIPCs have received considerable official development assistance...To date 16 HIPCs have reached the decision point and 8 have reached the completion point (Benin, Bolivia, Burkina Faso, Mali, Mauritania, Mozambique, Tanzania, Uganda).
Uganda has achieved almost universal primary enrolment. Mali, Mozambique and Senegal plan to use their freed debt to increase spending on HIV/AIDS prevention. Another review of 10 African countries that have reached their decision points shows clear increases in social spending. Yet the pace of relief is neither fast nor deep enough — and not enough countries have benefited.
According to the original schedule of the HIPC initiative, 19 countries should have reached their completion points by now. Achieving the goals will require additional resources — at least $ 50 billion a year in addition to domestically mobilized resources. More debt relief can help fill this gap. There is also concern that the HIPC initiative will not be adequate for countries to escape their debt traps. Of the eight countries that have reached their completion points, two have returned to a ratio of net present value of debt to exports above 150 per cent — the threshold considered sustainable under the initiative. Initial IMF and World Bank projections of debt sustainability were calculated during a global economic boom. This analysis relied on three assumptions that have since proven overly optimistic:
Exports would increase. In the coming decade exports would have to grow at almost twice the rate of the 1990s if HIPC countries are to be able to service their debts.
Borrowing would decline. New annual borrowing is projected to decline from 9.5 per cent to 5.5 per cent of GNP, and grants are projected to double. But already a few HIPC countries are borrowing at higher than expected interest rates.
Shocks would not matter much. But most HIPCs are vulnerable to droughts, floods, civil conflicts and plunging commodity prices.