Implementing Debt Relief for the HIPCs

Abstract

The Cologne Initiative (hereafter CI) re-opens the international official discussion about the HIPC (highly indebted poor country) debt crisis. Unfortunately, the CI leaves in place many of the serious flaws of the original HIPC initiative of 1996. To a first approximation, 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 gets 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 that US$10 per person in 1997. 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. Second, the bilateral grants 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 (such as the ministry of health) while grants frequently finance extra-budgetary activities established by the donors. Third, the process of offsetting heavy debt payments with grants and new loans is highly unstable and erratic. There is no guarantee that new grants will fill the fiscal void left behind by the heavy debt servicing; indeed sometimes there is a self-fulfilling collapse of fiscal resources. 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 HIPC countries. While the new CI aims at more "ambitious" debt reduction targets than the 1996 HIPC Initiative, the basic problem remains that the new standards are as arbitrary as the old ones. Both initiatives focus 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: the unmet social needs of most HIPC countries require significant net resource inflows; to achieve these increased inflows, it will be necessary to cancel most or all old debts; to the extent possible, new inflows should be highly concessional; debt relief should be guided by a process that helps to insure that the increased resource transfers will be channeled into areas of urgent human need, especially in public health and primary education.

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