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Note: This document is from the archive of the Africa Policy E-Journal, published by the Africa Policy Information Center (APIC) from 1995 to 2001 and by Africa Action from 2001 to 2003. APIC was merged into Africa Action in 2001. Please note that many outdated links in this archived document may not work.

Africa: Oxfam Debt Statement, 2

Africa: Oxfam Debt Statement, 2
Date distributed (ymd): 970423
Document reposted by APIC

This posting, and the previous one, contain the executive summary of a new Oxfam International policy paper published this month. The full text of the paper, which includes additional background on Uganda, Mozambique and other African countries, can be found on the Oxfam Web site at
page no longer available 10/99

The Oxfam International Advocacy Office can be contacted at 1511 "K" Street, Suite 1044, Washington DC 20005, USA; Tel: 1 202 393 5332; Fax: 1 202 783 8739; Email:

Poor Country Debt Relief: False Dawn or New Hope for Poverty Reduction?

(continued from part 1)

The limitations of HIPC implementation

Applied with flexibility and common sense, the HIPC framework could make a critical contribution to poverty reduction. Instead, the initiative is being implemented more with a view to minimising the costs to creditors than to maximising the benefits for debtors, and poverty reduction considerations remain of marginal concern. The cases of Uganda and Bolivia raise particularly serious concerns. Both countries have exemplary records in maintaining economic reform programmes for over a decade; both have unsustainable debt burdens, and both have governments committed to converting savings from debt into initiatives to reduce poverty. The case for early and decisive action to reward this record is overwhelming. In the event, debt relief has been delayed for a year and, in Bolivia's case, the threshold for debt sustainability has been set absurdly high, thereby reducing debt relief.

The costs for both countries will be considerable. In financial terms, the delay in debt relief will reduce the foreign exchange available for essential imports and create a climate of uncertainty for private investment. In social terms, the costs are beyond estimation. According to the Ugandan Government, the finance lost as a consequence of delaying debt relief will amount to around $193m over the next year. To put this figure in context, it is equivalent to six times the national health budget or more than the total cost of providing free universal primary education for four children in each family.

In the case of Bolivia, the combination of a delayed completion date for debt reduction and the IMF-World Bank's decision to set debt-sustainability thresholds at unrealistically high levels will cost the country around $241m. For creditors, this is a tiny sum. Measured against the social sector budget in Bolivia it is equivalent to double the national health budget or seventeen times projected spending on rural clean water and sanitation under the Government's poverty reduction programme.

Delaying debt relief sends the wrong political signals to countries in which governments have undertaken politically painful economic reforms. It also sends the wrong signals to countries in which the reform process is still being established. If other countries suffer the same treatment as Uganda and Bolivia there is no prospect of the HIPC debt crisis being resolved until well into the next decade. On a best-case scenario, the requirement that countries adhere to two consecutive IMF programmes before qualifying for multilateral debt reduction will mean:

  • Ethiopia will not qualify for debt reduction until the end of 2000, even though the country still faces huge post-war rehabilitation and reconstruction problems. It is also besieged by recurrent drought and relentless environmental degradation.
  • Nicaragua, one the world's most indebted country with each citizen owing the equivalent of three times their annual income, will not qualify until 2001.
  • Mozambique, Tanzania, and Niger will not qualify until 2002-2003. *

Zambia will not qualify for multilateral debt relief until at least 2002 on a best case scenario. This is despite the fact that the World Bank's poverty assessment for Zambia concluded that the country's "large debt stock will have to be addressed more directly (i.e. than existing debt relief measures) if Zambia is ever to achieve sustainable and self-sufficient growth." Over half of that debt stock is accounted for by multilateral creditors.

  • Rwanda may not qualify at all, and if it does it will be after 2003, despite the country's desperate post-genocide reconstruction needs.
  • Heavily indebted and impoverished countries such as Guyana, Honduras, Benin, Mali, and Chad are likely to be excluded from HIPC debt relief on the basis of narrow financial criteria.

Debt relief: an investment in human development

Slow implementation and the limited application of the HIPC framework will undermine its effectiveness in reducing poverty in some of the world's poorest countries. As a group, the 41 HIPCs display the worst social indicators in the developing world. All but six fall into the lowest category of human development in the UNDP's Human development Index. Translated into human terms, this means that a child born in a HIPC is 30 per cent less likely to reach their first birthday than the average for all developing countries; and that a mother is three times more likely to die in childbirth. The IMF in particular has been at pains to stress that debt relief is not a panacea for poverty. Of course it is not. But it could make an important contribution by increasing the financial resources available for investment in people. It is surely unacceptable that most HIPC governments spend over 20 per cent of their revenues on debt servicing when confronted by such pressing human need. And it is outrageous that, in many countries, debt repayments exceed social expenditures - often by a huge margin:

  • In Mozambique, debt servicing for 1996 absorbed double the amount allocated to the combined current expenditure budgets for health and education. This is in a countrywhere one-quarter of all children die before the age of five as a result of infectious disease; and where two-thirds of the population are illiterate.
    • In Zambia, infant mortality rates are rising in the face of collapsing provision of health, clean water, and sanitation. Yet for every $1 spent on health, the country spends an additional $4 on debt servicing.
    • In Ethiopia, over 100,000 children die annually from easily preventable and treatable diarrhoea. Less than 40 per cent of the rural population have access to the most basic health facilities. However, debt repayments are equivalent to four times public spending on health.
    • In Niger, the country at the bottom of the Human Development Index, life expectancy averages 47 years and only 14 per cent of the population is literate, but debt servicing absorbs more than the combined budgets for health and education.
    • In Nicaragua, where three out of every four people live below the poverty line, where one-quarter of the under-five population suffers nutritional deficiency, and where 35 per cent of the population is illiterate, debt repayments exceed the total social sector budget.
    • In Bolivia, where over 90 per cent of the highland population is in poverty, where only 16 per cent of that population has access to safe water, and where over one-third of women are illiterate, debt repayments for 1997 account for three times the spending allocated for rural poverty reduction.

Such facts illustrate the lethal interaction between the debt crisis and the fiscal crisis - the growing inability of governments to finance spending on basic services out of domestic revenues. They also illustrate the high social costs of debt, in terms of lost opportunities for health, education, and poverty reduction, and the potential human welfare gains which could be achieved through debt relief.

Saving lives

The scale of these potential gains is underlined by our review of the seven national plans for achieving the targets for human development set by the World Summit for Children in 1990. Those targets included major progress against malnutrition, preventable disease, and illiteracy, in addition to a reduction by half in child mortality. This Briefing compares the external financing requirements need to achieve these targets over the period 1993-2000 for seven African HIPCs* against the debt service payments of the same countries. The striking result is that, for all but one country, debt servicing represents more than the external finance requirement for the national plans.

What does this mean in human terms? We consider this question by assuming that the World Summit targets for reducing child mortality and malnutrition can be met with adequate finance and appropriate policies. If they were met in the seven countries under review, the lives of over three million children under the age of five would be saved over a seven year period; and over four million cases of malnutrition would be avoided. For individual countries, the human development gains would be enormous, with debt relief contributing to measures which would save the lives of * 1.3 million children in Ethiopia * almost 600,000 children in Mozambique * 475,000 children in Niger * a combined total of around 440,000 children in Burkina Faso and Mali.

Even before the wider benefits of reduced vulnerability to maternal mortality and infectious disease, increased literacy, and improved productivity are taken into account, these are very high returns on a very small investment.

In this Briefing we propose that governments willing to convert savings from debt repayments into social investment should be rewarded with an accelerated time-frame for debt relief. Eligibility would be through a modified economic reform conditionality, along with a government commitment to transfer between 80-100 per cent of any savings from debt relief into a ring-fenced budget account for social investments. Concrete targets for improving human welfare would be established through dialogue with creditors, donors, and non-government organisations (NGOs). Debt relief funds would be earmarked for specific investments, additional to those provided for in existing budget plans, summarised in a debt-for-poverty-reduction contract. The aim of such a contract would not be the erection of another hurdle to eligibility for debt relief, but the creation of positive incentives for poverty reduction. Performance would be closely monitored under the World Bank's Public Expenditure Reviews. As in any contract, non- compliance would be penalised. Debtor governments failing to undertake the expenditures to which they have committed themselves would face a dollar-for-dollar reduction in their aid budgets.

The World Bank could play a central role in working with governments to draw up concrete plans and targets for converting debt into poverty reduction initiatives. This would be entirely consistent with the vision set out in the Bank's Strategic Compact. It would also enable the World Bank to develop more participatory approaches to poverty reduction, engaging with civil society and non- government organisations in identifying co-operative approaches to financing and delivering social sector provision.

An agenda for reform

The central argument of this Briefing is that debt reduction could make a decisive contribution to a broader social development strategy. That is why Oxfam International is arguing for more effective implementation of the HIPC framework, allied to some significant reforms. The time-frame for debt relief must be accelerated, the level of relief increased, and country coverage widened. An urgent review of the economic conditionalities attached to debt relief is also needed.

At present, adherence to two IMF programmes is required for qualification to the HIPC initiative. Yet these programmes have failed to establish the conditions for economic recovery. They have also been pursued at enormous social cost, with deflationary monetary targets taking precedence over social spending. Moreover, two-thirds of IMF programmes break down before completion, raising the prospect of protracted delays in HIPC implementation. It follows that more flexible approaches to conditionality are required, with economic reforms geared towards the real needs of poor countries, rather the reckless pursuit of an outmoded monetarist idelogy. More generally, poverty reduction must be integrated into the HIPC framework as a central objective, rather than being appended - as is the case at present - as a peripheral concern.

This Briefing proposes the adoption of a new debt-for-poverty-reduction contract in the HIPC initiative, under which governments will be given an incentive, in the form of increased debt relief and an accelerated time-frame for implementation, to convert savings from debt into priority social investment.

Five broad reform measures are required.

(i) The time-frame must be accelerated. The end of the decade should be established as a target date for ending the HIPC debt crisis. The period of eligibility for multilateral debt reduction should be reduced from six years to three years.

(ii) The debt sustainability thresholds should be lowered and broadened to take into account human development levels. Threshold ratios for debt service should be lowered to 15-20 per cent and for debt-to-exports to 150-200 per cent. For countries with exceptionally poor human development indicators, lower thresholds should be considered on a case-by-case basis.

(iii) More weight should be attached to fiscal criteria. Upper ceilings of between 15-20 should be set for the proportion of government revenue absorbed by debt repayments, since expenditure in excess of this level is likely to represent an unacceptable diversion of resources from investment in priority social services.

(iv) Reliance on IMF economic conditionality should be abandoned. More flexible approaches to policy conditionality are required, with less emphasis placed on deflationary monetary targets and a higher priority attached to employment creation and social investment. The alternative is to make debt relief conditional on the adoption of policies which undermine, rather than enhance, the position of the poor.

(v) Poverty reduction incentives should be integrated into the HIPC framework. Countries willing to engage in a dialogue aimed at converting debt relief into poverty reduction initiatives should be rewarded with an accelerated time-frame for debt relief.

It is claimed by some that such reform would increase the costs of debt relief to unrealistically high levels. Oxfam International accepts that the costs of HIPC would rise - but what is an unrealistic price for an initiative which could save over 3 million young lives - equivalent to the combined populations of Adelaide, Edmonton, and New Orleans? The total cost of the HIPC framework for forty one countries over an eight year period is estimated at around $5bn, is equivalent to: * slightly over 1 per cent of public spending in Britain * roughly one-twentieth of the sum spent by Germany in financing reunification * less than US citizens spend annually on training shoes.

Double spending on HIPC, and it would cost less than the resources mobilised by the IMF to finance Mexico's financial rescue package. Triple it, and it would still cost less than the New York City budget. If such investment is regarded by the international community as unacceptably high, it is a sad testament to the myopic vision of political leaders.

This material is being reposted for wider distribution by the Africa Policy Information Center (APIC), the educational affiliate of the Washington Office on Africa. APIC's primary objective is to widen the policy debate in the United States around African issues and the U.S. role in Africa, by concentrating on providing accessible policy-relevant information and analysis usable by a wide range of groups and individuals.

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