Debt Relief for the Poorest Countries:

[Katey]

Statement of
Thomas H. Hart
Director of Government Relations
DATA ? Debt AIDS Trade Africa

Debt Relief for the Poorest Countries:
Accomplishments and Ways Forward?

Mr. Chairman, Ranking Member Maloney, members of the subcommittee, I appreciate the opportunity to share the views of my organization DATA ? Debt, AIDS, Trade, Africa ? on the
important issue of debt relief for the poorest countries.
While DATA is a relatively new organization, we are probably best known by our co-founder, Bono, lead singer of the Irish rock band U2. Bono has been a champion of fighting AIDS and
poverty in Africa for many years. He and many of the people who now make up DATA?s staff ? myself included ? began this work as part of the Jubilee 2000 debt relief campaign several years
ago. That global campaign helped instigate the current debt relief program, the Enhanced Heavily Indebted Poor Country (HIPC) Initiative, that you are considering today. The Enhanced HIPC program got its launch in the United States from the leadership of this subcommittee and full committee at the time. I want to thank Mr. Leach, Mr. Bachus, Mr. Frank, and Ms. Waters, as well as many others, who led the legislative effort, along with the Clinton
Administration and then-candidate Bush, to push the global agreement to provide debt relief. Your legislation provided the essential authorizing framework and the political momentum to
approve the new program and get it funded. Given that history ? perhaps parentage ? this Subcommittee is taking an appropriate look at what has been accomplished, what problems exist,
and what steps might be taken in the future. Having been here 5 years ago at this program?s creation, I am honored to bring you my perspective on these important issues. Congress and the Administration should be applauded for supporting the HIPC initiative. For an investment of under $1 billion spread over several years, the U.S. has leveraged $30 billion from
other donors, writing off $50 billion worth of debt stock ? a significant ?clearing of the books? of decades-old debt, providing a fresh start to these countries. It also freed up $1 billion a year in debt service for 27 of the poorest countries that are now building schools, clean water wells and AIDS prevention programs with this money. It has not, however, provided a lasting solution to the debt crisis and could be improved. Debt Relief ? Essential but Not Sufficient Debt relief is not, nor was it ever intended to be, a panacea for its recipient countries. While its benefits are real, debt relief is only part of a comprehensive development strategy to help poor countries reach poverty reduction and development goals. Shifting from loans to grants,
additional and effective development assistance, as well as better trade terms are all critical to poor countries. Debt relief, and even 100% debt cancellation, cannot address all the problems of needy countries. Debt relief is a first, critical, but not sufficient step. Background Over the last several decades, poor countries accumulated large international debts, built up
through Cold War-motivated lending, natural disasters, as well as decisions by corrupt dictators. These debts became a serious impediment to poverty reduction and economic development in the world's poorest countries. Many poor countries spent 30-40 percent of their annua l budgets paying back decades-old debts, much more than they spent on health and education combined.
Worse yet, most borrowed more money in order to cover their payments on old debt, creating a vicious cycle of indebtedness.
In 1996, the World Bank, IMF, and their member governments agreed to provide debt relief to approximately 40 of the world?s poorest and most indebted nations. The first HIPC Initiative was
designed to cancel some bilateral and multilateral debt for eligible countries in order to reduce their external debt burdens to ?sustainable? levels. After adopting IMF and World Bank supported economic and governance reform programs for
three years, poor countries could receive relief on debt service payments. Then, if reforms continued, they would become eligible for cancellation of some debt stock. Under this 1996 plan,
only 7 countries qualified for debt service relief with few resources freed for poverty reduction and development.
Then, under the banner of ?Jubilee 2000,? the religious community and other advocates around the world raised the concern that crushing debt burdens continued to push the poorest countries deeper into poverty, diverting scarce resources from health, education, and other development needs. This movement united under a call for deeper, faster and broader debt relief for the poorest countries, through a fair and transparent process to correctly balance in the interests of
creditors and debtors. Campaigns emerged in more than 60 countries, and inspired support from numerous luminaries such as Pope John Paul II, Billy Graham, Desmond Tutu, Pat Robertson, Muhammad Ali, and of course Bono. But the real heroes and inspiration for this movement were the grassroots groups and anti-corruption campaigner in the Global South ? like the Uganda Debt Network ? who called upon the developed world to do more, and who monitor the ongoing use of funds released by HIPC. In response, the G7 and then the Boards of the World Bank and IMF adopted the ?Enha nced HIPC Initiative? in 1999. It was designed to provide deeper debt relief for more countries more
quickly, and more directly tie the provision of debt relief to country-led poverty reduction plans. The agreement obligated each creditor government to (a) write off its own bilateral loans to
qualified poor countries, (b) authorize the IMF to use internal gold resources to write down its loans, (c) contribute to a pool of funds to write off multilateral debts, and (d) approve a new
process for debt relief and new lending at the World Bank and IMF that had poverty reduction as its focus, not economic austerity programs. Congress, led by this Committee, provided essential authorizing legislation and appropriations
allowing the U.S. to participate in this initiative ? which triggered other countries? participation ? in the fall of 2000.
Between fiscal years 2000 and 2004, Congress appropriated $860 million to fund the Enhanced HIPC initiative in both bilateral debt relief and contributions to cut multilateral debt. 4
Progress and Impact
Since 2000, 27 poor countries have qualified for the HIPC program ? all but four of them are in sub-Saharan Africa (country list attached). The benefits of this program for these 27 countries
have been measurable. Reducing ?debt overhang? ? Upon completion of the program, these countries will see their debt
stock reduced by two-thirds, cutting $52 billion in nominal terms1. Getting rid of this ?debt overhang? reduces a strong incentive for capital flight. The average amount governments
actually have to spend on debt service has gone from 25% of their budgets to 15%. Civil Society and Transparency ? An important part of the HIPC program has been the inclusion
of civil society and greater government transparency in the creation of country poverty reduction plans. Recipient governments must engage in a broadly participatory consultation process with civil society, business, labor, academic, religious and others to determine the poverty reduction
priorities for the country. This Poverty Reduction Strategy Paper (PRSP) process has not been perfect, to be sure, but still represents a significant new approach to improving country
ownership by non-government actors, as well as enhancing transparency. Debt Service to Poverty Reduction ? One of the conditions for receiving debt relief was the
recipient government?s agreement to use the debt service savings for poverty reduction. More than $1 billion annually in debt service is now staying in these 27 countries to fight poverty.
Evidence collected by the World Bank shows that, indeed, recipient countries are using this $1 billion in the ways intended ? in fact expenditures on poverty reduction in these countries has
risen by nearly twice that amount. By another measure, spending on poverty reduction as a share of total government spending rose from 41% to 54% (1998-2004). And spending on military in
these countries has risen by only an inflationary 2% in this time.
According to research conducted by Jubilee USA Network, the successor organization to the U.S. chapter of Jubilee 2000, this debt relief is working on the ground to help people?s lives
(paper attached). ? Tanzania has used its savings from debt relief, averaging around $80 million a year, to increase education spending and eliminate school fees. An estimated 1.6 million children have returned to school. ? Uganda used the bulk of debt relief savings to fund universal primary education, more
than doubling the school enrollment rate to 94%, which has contributed to Uganda?s remarkable decline in HIV rates. It also dug many clean water wells. ? Mozambique has used substantial debt savings of around $70 million annually to
vaccinate children against tetanus, whooping cough and diphtheria, as well as to build and electrify schools.
Cameroon?s $140 million per year savings were used to launch a national HIV/AIDS plan for prevention, education, testing, and mother-to-child transmission abatement.
1 Unless otherwise noted, numeric data comes from World Bank/IMF ?Heavily Indebted Poor Country Initiative -
Status of Implementation,? September 12, 2003.
Room for Improvement
While the Enhanced HIPC initiative is a significant step forward in reducing unpayable debt stock and freeing up some resources for poverty reduction, more needs to be done.
1. Uneven results ? The impact on recipient countries in terms of debt service has been very uneven. Currently Burkina Faso is the only one of the 27 countries that spends less than 5%
of revenues servicing debt. 19 of these countries spend more than 10%. The Gambia spent around 35% of revenues servicing debt in 2003.
2. Remaining debt ? Much of the progress to date has been to eliminate large chunks of old debt
stock ? the ?debt overhang? ? which was not being paid back. To a smaller extent the HIPC program, as noted above, freed up money for poverty reduction. Unfortunately, the 27
currently qualified HIPCs continue to pay $2.3 billion annually on debt service, with the World Bank and IMF as the two largest remaining creditors. These are badly needed resources that could address major crises facing their nations, including fighting poverty, preventing HIV/AIDS, rebuilding infrastructure and putting children into school.
3. Debt sustainability ? The Enhanced HIPC Initiative does not provide a credible guarantee that these countries will reach or maintain ?debt sustainability,? the purported objective of
the program. Currently, debt sustainability is defined as reaching 150% of debt stock to exports. HIPCs graduating from the program are struggling to reach the 150% debt/export
ratio, and there is little expectation they will maintain that level. The World Bank?s own analysis concludes that in order for HIPCs to be sustainable under the current program,
countries would have to grow at almost 8% a year, twice the rate as they did over the last 20 years. Also, because the current program is tied to exports, shocks to commodity prices have
had a severely negative impact on many countries? debt sustainability. Such was the case for Niger, which recently was approved to have its debt relief ?topped up? so that it could
graduate the HIPC program within the 150% limit.
Ethiopia also is nearing its graduation above the 150% threshold due to shifting global interest rates. While not an ?exogenous shock? that the HIPC program fully anticipated, the
World Bank has found that the impact has made it harder for Ethiopia to maintain debt sustainability and recommends it receive greater relief.
4. Process and Conditions ? The HIPC program?s biggest structural weakness is the process
continues to be driven and controlled by creditors. In a domestic bankruptcy procedure, courts usually balance the interest of creditors with basic needs and financial capacity of
debtors to arrange a suitable outcome. No such disinterested party exists in the HIPC program. One of the concrete results of this imbalance is some of the conditions associated
with debt relief have been harmful to the goals of poverty reduction ? such as the imposition of user fees on education, health, water, and sanitation. 5. More countries ? More poor countries could benefit from both bilateral and multilateral debt
reduction, in the same way the current 27 HIPC-qualified countries have. The original HIPC 6 framework identified 42 heavily-indebted poor countries, and this list did not include
Nigeria, Haiti, Bangladesh, Kenya, or many others that could benefit. As we have seen recently in Iraq, any reconstruction and development package should include substantial debt
relief as a way of easing the financial pressure on a burdened country and freeing up resources to meet critical nee ds.
Debt Legislation
Over the last couple of years, DATA and a broad coalition of churches and other NGOs have supported an effort to address the first 4 of these shortfalls, by changing the way debt relief is
measured for the qualified HIPCs. With the leadership of Mr. Frank and Mr. Smith of New Jersey here in the House, and Senators Santorum and Biden in the Senate, legislation was
introduced to make a simple change to the Enhanced HIPC initiative to free up additional debt service and lead to greater debt sus tainability. This legislation was enacted into law last year as part of the global HIV/AIDS bill, Public Law 108-25.
The legislation urged the Administration to negotiate with international partners a change to the
HIPC program. Instead of defining the goal of debt sustainability as simply 150% debt stock to exports, the legislation proposed that countries should pay no more than 10% of annual
government revenue on debt service and, in the case of a country hard hit by a health crisis such as HIV/AIDS, no more than 5% of revenue. The majority of the 27 HIPCs would qualify for the
5% health crisis level. Adding this debt service-to-revenue formula would more closely link debt relief to a countries ability to pay, and limit some of the volatility that changing exports have had on current debt sustainability measures.
Also, such a change would lower overall debt levels. Comparing apples to apples, under the current system, the 27 HIPCs pay an average of 15% of their budgets on debt service. The legislation would reduce this level to 5 or 10 percent. The Department of the Treasury?s estimate of the cost of this proposal is roughly $1.3 billion over 3 years to all creditors (Treasury?s report to Congress on this proposal is attached). Data to assess the costs to the U.S taxpayer are not readily available. However, if the same financing mechanism used currently is applied to this proposal, the cost to the U.S. could be as low as $26 million per year for 3 years2. For recipient countries, this would result in an additional debt service savings of $430 million each year, increasing by nearly 50% the amount of resources freed up from debt service for poverty reduction. Therefore, with a modest increase in expense to the program, we could dramatically increase its impact on poor countries. The Administration expressed concern with draft versions of the legislation about the debt
service-to-revenue formula. In response, Congressional sponsors authorized Treasury to come up 2 Under the current HIPC program, bilateral creditors like the U.S. cover the costs of their own bilateral loans and contribute to writing down non-World Bank/IMF multilateral debt (mostly regional multilateral banks). Since the U.S. has no remaining bilateral loans to the 27 HIPCs, and the World Bank and IMF would cover their share of the
costs, the U.S. would contribute a portion (20% under the current program) to write down regional banks? debt. This
non-World Bank/IMF multilateral debt is assumed (based on an estimate of the composition of remaining debt to the
27 HIPCs) to be approximately 30% of the total, or $385 million of the $1,284 million cost. A 20% U.S. share of this is $77 million over 3 years, or $26 million/year. with a similar formula or mechanism that would accomplish the same goals of deeper relief for qualified HIPCs. For simplicity, the legislation is designed to operate within the existing structure of the HIPC program ? it does not seek to expand the number of countries (although it requests a report on the feasibility of expansion), and it does not change the basic rules or financing of the program. Despite this legislation being law for nearly a year, the Administration has not pursued negotiations with international partners to implement its provisions.

This is just a portion of his testimony you can read the entire article at http://www.data.org/archives/Tomtestimony4-20-04.pdf


Cheers

 

[BrownEyedBoy]

May I suggest that Honduras be included in the exemption?