LUNCHEON ADDRESS ON HEAVILY INDEBTED POOR COUNTRIES DEBT INITIATIVE BY HIS EXCELLENCY THE PRESIDENT OF THE REPUBLIC OF BOTSWANA, MR. FESTUS G. MOGAE - CENTRE FOR INTERNATIONAL DEVELOPMENT, AT HARVARD UNIVERSITY, CAMBRIDGE Monday, May 1st, 2000 Mr. Chairman, Members of the Diplomatic Corps, Participants of the HIPC Conference, Distinguished Guests, Ladies and Gentlemen 1. When I was first invited to speak to this gathering on African Debt Relief, I hesitated. In fact I originally refused on grounds that the Centre for International Development at Harvard University are men and women whose analytical competence and oratorical brilliance I cannot hope to equal, let alone surpass. That being the case, what could I possibly add to what they will have talked to you and informed you about on this topic, I thought, as I myself rely on the distillate of their analytical writings in learned and other publications. I then changed my mind and decided to come and dare to tell you, in their presence what I think and thereby appeal from the cold logic to the humanity of the powers that are in charge of decisions on African Debt Relief. The Original HIPC Initiative 2. It will be recalled that, when the original HIPC Initiative on debt relief was launched in September 1996, the President of the World Bank claimed it to be a 'breakthrough' and 'a very good news for the poor of the world'. The novelty of the initiative and its intimate link with implementation of World Bank/IMFsupported structural adjustment and stabilisation programmes led to extensive discussion of its strengths and weaknesses by all interested parties, - the multilateral financial institutions, the bilateral donors, the HIPC governments and the civil society. Within the space of two years from its inception, a broad consensus emerged that the good news for the poor of the world announced by the President of the World Bank could and should have been better - that the relief provided by the Initiative was not anywhere near adequate to make an effective difference to the plight of the world's poor within any reasonably short span of time. It must, however, be said to the credit of the Fund and the Bank that they had themselves organised and encouraged much of the global review. 3. Following the broad consensus that significant improvement of its terms and conditions was necessary, the leaders of the world's seven industrial economies, the G7, agreed in their June 1999 meeting in Cologne that the HIPC initiative should be enhanced with a view to broader, deeper and faster debt relief for the world's poorest countries: broader -by making more countries eligible for debt relief; deeper - by increasing the extent of the relief; and faster - by making the relief available more quickly than is possible under the 1996 framework. The Enhanced HIPC Accordingly, the Boards of the IMF and the Bank approved an enhancement of the HIPC initiative in September, 1999. The twin objectives of broadening and deepening were achieved through a reduction of the threshold used to define debt sustainability, from a net present value (NPV) of 1
debt-to-export ratio of 200 to 250%, to 150%. The thresholds for the alternative definition based on NPV of debt to revenue ratio were also reduced appropriately. I do not need to recount them to you, as they are part of the grist to your mills. Following this reduction of the thresholds, more than thirty countries are now likely to be eligible for HIPC debt relief under the enhanced initiative, compared to some twenty-odd countries under the original one. The external debt servicing obligations of these countries will, as a result, be reduced by about US$50 billion, which is more than double the amount of reduction that would be likely under the original framework. 4. Relief will also be faster under the Enhanced framework, since countries declared to be qualified to receive HIPC assistance will start receiving some relief from the decision point, instead of having to wait till the completion point. The completion point itself may also come sooner than before, since it has been made a floating one, by making it dependent on the satisfactory implementation of a number of previously agreed structural reforms, in addition to maintenance of macroeconomic stability and the adoption and implementation of a poverty reduction strategy developed through a broadbased participatory process. This last condition is significant, since it puts poverty reduction as the ultimate goal of the HIPC initiative. A parallel development of similar significance was the renaming and refocusing of the IMF's Enhanced Structural Adjustment Facility (ESAF) as the Poverty Reduction and Growth Facility (PRGF) in late 1999. 6. Another welcome feature of the new framework is that the amount of the relief to be obtained by the country concerned will be calculated and committed at the decision point, based on actual data for the preceding year and not on projected data at the completion point. This has removed the uncertainty that remained as to whether and how much relief a country would actually get, even after it had reached the decision point. The change has also increased the amount of the relief that countries are likely to get, since the relevant debt ratios are typically expected to go down from the decision point to the completion point as economic reform measures take hold. 7. Recent reports from both the World Bank and the IMF indicate some progress on implementation of the HIPC initiative. The expectation is that by end-2000, more than 20 countries will reach their respective decision points under the enhanced HIPC, compared to only 9 having reached their decision points under the original framework over the entire period since September 1996. The main reason for the expected faster progress in reaching the decision points, of course, is that many of the potential candidates for relief have already established a track record of successful implementation of reform and stabilisation programmes over the last three or more years. HIPC in Africa 8. We from the African continent have a strong interest in the HIPC Initiative, since 32 of the 40 original HIPC countries belong to our continent. An overwhelming majority of the countries which are expected to reach decision points within this year are also from Africa. Uganda was the first country to reach the completion point under the HIPC initiative in April 1998. Another African 2
country, Mozambique, reached its completion point in June 1999. Both of these countries have already benefitted from debt relief. Some Observations on the HIPC Initiative 9. The HIPC Initiative must be welcomed as a more imaginative programme mounted by the world donor community to relieve the debt burden of some of the world's poorest economies, while strengthening policies and reform measures for development. The agreed principles of sharing the burden of financing the initiative among all the creditor countries and institutions are also encouraging. I am further encouraged by the recognition on the part of the donor community of the necessity for additional resources for debt relief. It should not come at the expense of aid under other programmes nor at the expense of other countries. Care is also taken to ensure that the additional costs of the enhanced initiative do not compromise the financial soundness of the multilateral institutions participating in the financing. I am happy to note the progress made in respect of the off-market gold sales by the Fund and the pledges of bilateral contributions to the IMF's PRGF-HIPC Trust, which have already totalled the required figure of SDR 1.5 billion. On the side of delivery of relief, the progress made in discussions with potential beneficiaries under the programme is also welcome. The Initiative will, of course, need to be monitored and reviewed in the light of experience in the implementation process, including, in particular, those of the beneficiary governments. 10. Having said all that, I must also say that in my view, despite the recent enhancement of the HIPC initiative, debt relief to the target countries needs to be broader, deeper and faster than is possible under the HIPC framework. The HIPC initiative aims at ultimately bringing down the debt burden of qualifying countries to a sustainable level. Conceptually, a sustainable level of debt is one which the debtor country can service, without recourse to any rescheduling or forgiveness, without defaulting on debt-service payments, and without compromising economic growth targets. For practical purposes, sustainability has been defined in the enhanced HIPC as a maximum debt level of 150% of exports of goods and services in net present value terms. I wonder if, even at this level, the debt servicing obligations will not continue to be too high in relation to export earnings and Government revenue in some of the HIPC countries, bearing in mind their low level of development, and their vulnerability to frequent droughts, outbreaks of diseases, and terms of trade losses. The possible total debt relief in net present value terms under the enhanced HIPC, taken together with all traditional debt relief, has been estimated to be in the region of 50%. What I am saying is that some countries should have considerably deeper reduction of debt, depending on the level of their development and the extent and depth of their poverty. 11. The other concern I have is that the debt relief may not come fast enough even under the enhanced HIPC initiative, considering the urgent need for growth and poverty alleviation in many of the prospective recipients. While more than 20 African countries are expected to reach their decision points before the end of this year, only two have actually reached their decision points so far under the new framework. A major problem for many of the others would be to develop the Poverty Reduction Strategy Paper (PRSP) which is supposed to be in place by the time a country reaches its decision point. 3
It is to be remembered in this context that the PRSPs have to be produced transparently by national authorities, with broad participation of all stakeholders, including the civil society, and in close collaboration with the World Bank, the IMF and other multilateral institutions, key bilateral donors and regional banks. 12. The PRSP has to identify the obstacles to rapid growth as well as the diffusion of the benefits of growth to the poor; and propose measures to deal with these obstacles. And it should ensure consistency between a country's macroeconomic, structural and social policies, including their sequencing, and the goals of poverty reduction and social development, including establishing priorities in these areas. All these elements, if present, would make the Poverty Reduction Strategy Paper an extremely valuable tool for planning and policy formulation. Indeed, the intention is to make the PRSPs the main basis for all IMF and IDA supported programmes in poor countries in the future. I am concerned, however, about the time and effort that the drawing up of such a paper is likely to demand, bearing in mind the poor levels of analytical and organisational capacity in many of the national governments and the inevitable divergences of views among the donor countries and institutions. While the requirement that the Paper be in place at the decision point may be relaxed in certain circumstances, it is understood that implementation of the PRSP Strategy must be well advanced before a country reaches the completion point. I am afraid, therefore, that the 50% debt relief expected from the combination of the enhanced HIPC Initiative and all debt relief from other traditional sources, which I mentioned before, will actually take a long time coming, while the situation on the ground goes from bad to worse with every passing day. 13. And then there are those countries which will not get any relief at all under this Initiative, not because they are not heavily indebted, nor because they are not poor, but because they have not been able to establish a track record of successful implementation of Fund and/or Bank-supported stabilisation or structural adjustment programmes and therefore, have either not been considered for relief or failed to reach the decision point: It needs to be borne in mind in this context that the conditionalities and performance criteria attached to these programmes, such as removal of subsidies and price controls, public sector reforms, including privatisation and introduction of social safety nets, have often proved too demanding for the implementing authorities. Countries which are desperately poor, and whose debt service obligations are much too high in relation to export earnings and Government revenue, crippling their ability to import essential goods and services and to finance high priority social and economic development projects, have often found their reform programmes under IMF/World Bank support thrown off course by political turmoil and social unrest. Such countries also need help, and badly too. The HIPC Initiative would treat them as undeserving. But they may be considered deserving, perhaps even more so than the others, on some alternative scales of judgement. Conclusion 14. It is in view of these reasons that I had suggested, at a Seminar on the African Debt Problem held in Nairobi in August 1999, that the international donor community should get together to agree 4
on immediate writing-off of a proportion of the external debt of all poor African countries, fixing the proportion for individual countries on the basis of some objective and measurable criteria of their capacity to pay such as GDP per capita, the average ratio of debt service to export earnings over a period of years, etc. The proportions could vary from a minimum of 20% to a maximum of 80%. I appreciate that this process may lead to debt relief going to some countries which are 'undeserving', according to the perceptions of some donors. However, the donors would still be able to give differential treatment to the deserving and the undeserving, by directing their future support only to the countries which are deserving, as shown, for instance, by their willingness and ability to implement social and economic reform programmes spelt out in a Poverty Reduction Strategy Paper. The Jubilee 2000, advocates that all indebted poor countries be given full debt forgiveness, so that they could start the new millennium free of external debt. What I was advocating was considerably less and yet would give considerably more relief, more quickly, than the enhanced HIPC initiative. In a well-knit village community, no family is allowed to go without food and shelter, if none other is deprived of these basic necessities of life. The same principle should apply to the global village of today. Indeed, the globalisation which we never tire of talking about and welcoming, should make it morally unacceptable that a fifth of humanity remain submerged in absolute poverty and deprivation, while many of the rest of mankind are enjoying spectacular advances in their living standards. 15. I fully accept that we African leaders should be held responsible for the management of the performance of our economies, and that it would be irresponsible for the world community to give us assistance without adequate or satisfactory assurances in terms of performance that optimum policies would be implemented rigorously. My concern however, is whether the plight of the poor masses is a matter of indifference to us so long as in our perception the African leadership either is or was to blame. This is a challenge to the international community. I thank you for your attention. 5