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At
the Cologne Summit in June, the G-7 instructed the Bretton Woods
institutions and other parts of the international community to
consider new ways of incorporating social priorities into their
programs. The first step should be to assess the real budgetary
costs of meeting urgent social needs – particularly in health
and education – and assessing the extent to which debt servicing
jeopardizes the budgetary capacity to meet those needs. Without
such an analysis, the HIPC Initiative will remain moribund, and
impoverished governments will continue to make debt service payments
at the expense of the very lives of their citizens.
When the HIPC initiative was launched
in 1996, there was some hope that social criteria would be incorporated
into the heart of the initiative. Such was not the case. Finance
ministries and the IMF/World Bank decided instead that debt-servicing
capacity would be judged mainly by comparing the net present value
(NPV) of debt with the level of exports. These criteria neglected
the obvious fact that the debts were owed by governments, not
exporters, and that ratio of debt to exports could not conceivably
measure the tradeoffs of debt servicing and meeting basic human
needs. The result has been a statistical standard bereft of economic
and social logic.
The Cologne Initiative (CI) re-opens
the international official discussion about HIPC debt crisis.
The HIPCs are a group of countries designated by the IMF and World
Bank to be poor and highly indebted. There were 41 countries on
the original HIPC list; my list includes 42 countries (the original
list plus Malawi); 34 of the 42 countries, including 548 million
of the 712 million HIPC population (or 77%) are in Sub-Saharan
Africa.
Unfortunately, the CI leaves in place
many of the serious flaws of the original HIPC initiative. Neither
the HIPC initiative, nor the CI, have come to grips with three
basic problems:
- The debt is owed
by impoverished governments, and therefore should be based on
the HIPC governments’ capacity to pay, not on arbitrary
numerical guidelines related to exports, which have little if
anything to do with the countries’ fiscal position or ability
to pay;
- Most HIPC governments
have no capacity to repay debts in view of the urgent social
crises that they must confront. These governments are in fact
in need of large net resource transfers from the rest of the
world;
- Under current arrangements,
debt service burdens are imperfectly offset via new loans, grants,
rescheduling and outright arrears. The instability, unpredictability,
and time-consuming nature of these rollover mechanisms contribute
to the incapacity of HIPC governments and the international
community to formulate long-term solutions to the pressing social
crises in the HIPCs.
 While
the new CI aims at more “ambitious” debt reduction targets,
the basic problem remains that the new standards are as arbitrary
as the old ones. Both initiatives focused mainly on the relationship
of debt to exports, even though debt-to-export ratios have little,
if anything, to do with the real ability of governments to meet
urgent social needs while servicing debts. An effective process
of HIPC debt relief should be grounded on the following principles:
- For most HIPCs,
the unmet social needs are so vast and urgent that these countries
will require significant net resource inflows for many years,
larger than the net inflows that they are now receiving.
- To achieve these
increased inflows, it will be necessary to cancel most or all
old debts – with much greater relief than is envisioned
in the CI – and to sustain or increase the inflows of new
grants and loans.
- To the extent possible,
new inflows should be highly concessional, to avoid a repeat
of the current situation in which non-creditworthy countries
were financed through commercial loans rather than foreign assistance.
- Debt relief should
be guided by a process that helps to ensure that the increased
resource transfers will be channeled into areas of urgent human
need, especially in public health and primary education. Such
a process requires the leadership of key international organizations
with responsibility in these areas of urgent social need –
especially the World Health Organization (WHO), UNICEF, the
United Nations Development Program (UNDP), and the World Bank
– and with a diminished role of the International Monetary
Fund (IMF).
The Capacity to Pay
Many of the HIPCs currently service
their debts at the cost of widespread malnutrition, premature
death, excessive morbidity, and reduced prospects for economic
growth. If the resources were freed up and successfully redirected
towards basic human needs, there could be significant improvements
in human welfare.
Looking first at the basic nutrition
levels, we see evidence of outright declines in caloric consumption
in ten HIPCs in recent years. In nine Sub-Saharan African HIPCs,
average caloric intake does not even reach 2,000 calories per
day (compared to 3,300 calories per day of the average resident
in the G7 countries). Average life expectancy at birth for G-7
countries is 78 years; and 51 years for HIPCs, with 13 Sub-Saharan
HIPCs showing declines in life expectancy during the 1990s, partly
due to the AIDS epidemic, which is ravaging the continent.
 The
enormity of the AIDS epidemic in Africa could approach the scale
of the Bubonic Plague of 14th century Europe. In parts of Southern
and East Africa, HIV infection rates are now over 20% of the total
population, including over a third of the sexually active adult
population. AIDS claimed an estimated 2 million deaths in Sub-Saharan
Africa in 1998, a rate of 5,500 people per day, and has left millions
of children orphaned. Enterprises in many of the worst affected
countries have had to institute policies prohibiting employees
from attending more than one funeral per week. Firms are training
three people for each job in anticipation of AIDS deaths, and
are often forced to cut health care benefits entirely as costs
have spiraled due to the epidemic.
Money matters. Vaccination, drug therapies,
doctors’ salaries, teachers’ salaries, basic sanitation
systems, and other underpinnings of basic human welfare cost real
dollars. While the average Frenchman or German has approximately
US$2,500 devoted by the government to public health, the astounding
figures in Sub-Saharan Africa include: Kenya, US$8; Uganda, US$9;
Cote D’Ivoire, US$25; Burkina Faso, US$54; and Ethiopia,
US$3. The same vast gap is evident in education spending.
The Current Debt Quagmire
The current debt servicing “system”
works as follows. Part of the debt service that is due is postponed,
formally or de facto as arrears. Of the substantial debt service
that is actually paid, some is covered through new loans and the
rest through grants from bilateral donors. In the end, the HIPCs
generally receive more than they pay but the amounts of net resource
transfers are small (less than US$10 per person in 1997), grossly
insufficient in the face of the social crises hitting these countries.
The net resource transfers are also unstable and unpredictable.
As a general rule, the HIPCs make net resource transfers (i.e.,
they pay more in interest and amortization on old loans than they
receive in new loans) to their bilateral creditors, the IBRD (International
Bank for Reconstruction and Development), the IMF, and private
creditors.
Even though the net resource transfers
tend to be positive, the debt servicing “system” is
fundamentally flawed. First, and most urgently, the net resource
transfers are not large enough to enable the HIPC governments
to meet basic health and education needs of the population. The
negative net transfers on existing debt have gotten substantially
larger in recent years, while the grants extended to the HIPCs
have remained roughly unchanged.
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"The
result of constantly trying to cover up fiscal bankruptcy
through new loans and grants, therefore, results in the
system promoting long-term institutional degradation of
the HIPC governments."
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Second, and crucially, the bilateral grants to do not neatly
offset the heavy burden of debt servicing, even if they appear
to do so in formal accounting. The debt burden falls heavily on
the budget, and therefore on line ministries while grants frequently
finance extra-budgetary activities established by the donors.
In fact, since the governments are bankrupt, donors often attempt
to establish these extra-budgetary programs precisely so that
they will not be drawn into the fiscal insolvency of the government.
The result is profound de-institutionalization of public activities,
with a government that remains insolvent and illiquid, and a bilateral
donor process that supports non-governmental activities in lieu
of an effective state.
Third, the process of offsetting heavy
debt payments with grants and new loans is highly unstable and
erratic. Indeed, sometimes there is a self-fulfilling collapse
of fiscal resources. A “financing gap” opens up, causing
the IMF to delay payments to a HIPC country. The IMF decision
in turn blocks the disbursement of funds by other major creditors,
including the World Bank and bilateral donors. The absence of
such funds then dramatically worsens the budget situation, “proving”
that the IMF was right to suspend the program. A long period of
default, followed by difficult negotiations to restart lending,
transpires.
The result of constantly trying to cover
up fiscal bankruptcy through new loans and grants, therefore,
results in the system promoting long-term institutional degradation
of the HIPC governments.
Financing the Debt Relief Program
One of the peculiar arguments concerning
the HIPC initiative is that rich countries and multilateral institutions
cannot “afford” to forgive the HIPC debt. For most of
the bilateral creditors, a high proportion of the debt is already
deemed to be uncollectable. In the United States, for example,
the roughly US$6 billion owed by the HIPCs is already held on
official accounts at around 10% of face value, or US$600 million.
Under current procedures, the US Congress would have to appropriate
only US$600 million to enable a complete write-off and forgiveness
of all of the HIPC debt owed it.
In the case of the World Bank, we must consider mainly the IBRD
claims which totaled around US$4 billion in 1998, but are falling
fast as a result of net repayments. Outstanding IBRD claims may
amount to no more than US$2 billion as of 1999. These loans could
be forgiven by the Bank with losses easily absorbed by loan loss
reserves at the Bank. The IBRD has already provisioned for some
US$3.24 billion of loan losses. In addition the World Bank has
capital of at least US$27 billion.
 In
the case of the IMF, several methods could be used to reduce IMF
claims, which amount to roughly US$3.5 billion in NPV of ESAF
(enhanced structural adjustment fund) loans, and another US$2.8
billion of standby loans. First, the IMF is sitting on massive
unrealized capital gains on its gold reserves, which could also
be used to back debt write-offs on the IMF balance sheet. Even
without gold sales, these gold holdings could be revalued to market
prices, and the capital gain could be allocated partly to finance
debt cancellation and partly to augment the IMF various reserve
accounts. In addition, the IMF maintains various special accounts
to absorb losses. Thus, some combination of gold revaluation (and/or
gold sales at market value) together with the use of various reserve
funds available for adverse contingencies, could easily fund a
complete write-off of IMF claims on HIPCs.
The more difficult case involves
the African Development Bank. It is probably true that a deep
write-off of debts owed to the AfDB would impair the bank, and
require some recapitalization. Informal estimates by US Government
officials suggest that the overall recapitalization could amount
to a few billion dollars, to be shared among a large number of
donor governments.
The Need for Social Audits
The current international assistance
strategy is based on a series of negotiations between the indebted
country and its major creditors: the bilateral donors, the IMF,
the World Bank, and the regional development banks. The IMF operates
as primus inter pares among the international institutions
and donors. It alone judges whether a country’s budget is
in macroeconomic balance. When the IMF declares that a HIPC budget
is out of balance, its verdict generally stops much or all of
the resource transfers to the country coming from bilateral and
other multilateral sources.
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"The
UNDP should work with the World Bank and the IMF to ensure
that the social audits form the basis for actual debt relief.
"
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Under
current aid arrangements, aid decisions – and decisions about
how much debt should be serviced – are taken with little
attention to social needs. The IMF has no expertise to deal with
issues of public health, nutrition, immediate food security, the
HIV-AIDS epidemic, and other critical social issues in need of
budgetary expenditure. When the IMF renders a decision on whether
a government can or cannot service a debt, it gives little attention
to whether the health care system has collapsed, whether children
are being vaccinated, or whether the HIV-AIDS epidemic is being
attended to. This would be fine if the IMF were limited to its
own immediate brief – monetary stability – but, in fact,
the IMF has a major, if not decisive, influence on the implementation
of the entire HIPC process although its net transfers to the HIPCs
are relatively small.
 In
the future, decisions over the extent of debt relief should be
made in view of a detailed assessment of real social needs. UN
agencies that specialize in critical social areas should play
a decisive role in the process of assisting the HIPCs, working
under the leadership of the HIPC governments to prepare “social
audits” that can be the basis for a revised and revived strategy
on meeting urgent social needs. NGOs involved in social services
should also be encouraged to provide inputs to the deliberative
process. The key UN agencies would include the WHO, UNICEF, the
Joint United Nations Program on HIV-AIDS, the World Food Program,
and the Food and Agricultural Organization.
The UNDP — which is both the
UN’s producer of key social indicators in the Human Development
Report (and national human development reports), as well as
the agency charged with coordination of UN development
activities at the country level — should play a leading role
in coordinating the UN efforts in preparing the social audits.
The UNDP should work with the World Bank and the IMF to ensure
that the social audits form the basis for actual debt relief implementation
and monitoring.
The debt reduction process itself
could be based on a formal debt-reduction-cum-human needs program
presented by each HIPC government to a creditor committee, which
would formally approve a timetable for debt cancellation in conjunction
with enhanced efforts on the social programs. The creditors, sitting
as a committee, could formally vote on the proposed program, so
that no single institution or creditors would be the arbiter of
the relief process. One of the key aspects of such a program should
be a multi-year commitment to meet quantitative targets on
basic human needs, such as immunization coverage, population
access to mother-and-child care, HIV incidence and prevalence,
and primary school enrolment rates. These quantified targets would
not only be a guide to long-term budgeting and funding of social
programs, but would also provide a kind of conditionality for
the international community as well as the HIPCs.
It is often asked whether debt relief
will simply release countries from necessary conditionality on
future loans. In the case of the HIPCs, conditionality will be
easily maintained even after comprehensive debt relief. These
countries need not only a cancellation of old debts, but also
a continued inflow of new resource flows. For that reason, bilateral
and multilateral donors will be in a position to insist upon real
government performance in using international funds, and will
be in a continuing position to monitor the use of those funds
– even to the point of cutting them off if governments abusively
misuse the international resources put at their disposal.
Social policy is but one aspect
of overall development policy. Considerable research and country
case studies show that the single best long-term solution to crises
of basic human needs is long-term economic growth. Thus, we should
not put aside the goals of long-term growth as we turn our attention
to enhanced social programs. A greatly enhanced social strategy
and an improved long-term growth strategy are complementary components
of an overall revision of development policies for the HIPCs.
Jeffrey Sachs is Director of the Center for International
Development at Harvard University. Sachs serves as an economic
advisor to governments in Latin America, Eastern Europe, the Former
Soviet Union, Asia and Africa. He has been a consultant to the
IMF, World Bank, OECD and UNDP. This article has been abridged,
with permission, from “Implementing Debt Relief for the HIPCs”,
by Jeffrey Sachs et al, August 1999. The full text is available
on the CID website at: www.cid.harvard.edu
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