ISSUES ON DEBT FOR THE UK'S IMF EXECUTIVE
DIRECTOR, STEPHEN PICKFORD
COUNTRIES (HIPC) INITIATIVE
After the slow progress in implementing the
enhanced HIPC initiative agreed in Cologne in June 1999, rapid
progress was finally made in the final three months of 2000. By
the end of December, 22 countries had reached "decision point"
in the initiative, triggering initial reductions in their debt
payments. The pressure to push countries through before the end
of 2000 was led by the British Government, and the Executive Director's
role in this was important and welcome.
Annual debt service payments
The 22 countries that are now in the debt cancellation
process are receiving, on average, a 30.7 per cent cut in their
annual debt payments (see table 1). This will still leave this
group of countries spending more each year on debt service ($2.06
billion) than is spent on health ($1.35 billion). For some countries,
the fall in payments is less than 20 per cent and one country,
Zambia, is actually paying more after the HIPC initiative than
it was paying before (see below).
Total debt levels
For the 22 countries now in the HIPC process,
total debt will fall as a result of the HIPC initiative by exactly
one-third on average. This figure hides wide differences in reductions
for different countries. For example, while Guinea Bissau's debt
will fall by 85 per cent and Nicaragua's by 72 per cent, the reduction
for Honduras, Senegal and Cameroon is around 15 per cent or less.
There is a real fear that such modest cuts will leave the HIPC
countries highly vulnerable to a return to the debt crisis in
the near future.
The IMF and the World Bank provided the analysis
and data that formed the basis of the design of the HIPC initiative
which was intended, in the words of World Bank President James
Wolfensohn, to provide a "permanent exit" from the debt
crisis. The evidence emerging from the 22 countries in the HIPC
process increases the concerns that the initiative's own key goal
will not be met and makes further action to reduce debt all the
Number of countries
Beyond the 22 countries so far in the process,
up to 19 more are potentially eligible. However, many of these
face problems that will prevent them being considered in the near
future, including conflict and civil war situations. This means
an imaginative approach will be required to progress the initiative
In December 2000, the UK Chancellor announced
a new British policy to set aside "in trust" debt payments
from countries on the HIPC list that are yet to enter the process,
pledging to return those funds to the countries concerned as soon
as concerns about conflict and poverty reduction are satisfied.
This is a welcome step. However, in order to make a significant
impact, it must also be adopted by other major creditors, including
the World Bank and IMF themselves. It could also be usefully extended
to cover countries not presently eligible for the HIPC initiative,
including Nigeria, one of Britain's biggest debtors among the
Zambia is one of the 22 countries that has reached
"decision point" in the HIPC initiative. However, rather
than paying less in debt service, the country will actually pay
more in the next five years than it did before. Average debt payments
in the years 2001-05 are $174 million, while in the two years
prior to HIPC (1998-99) Zambia paid on average $142 million each
year. Figure 1 shows how much of this increased debt service is
going to the IMF$448 million in 2001-05, representing 51
per cent of the total. This payment schedule has been agreed after
"front-loading" by the IMF prevented payments in this
period being even higher still.
The debt cancellation delivered and promised
so far under the enhanced HIPC initiative is an important step
towards a comprehensive solution to the debt crisis. However,
it is far from the rhetoric of "100 per cent" cancellation
boasted by creditors. The bilateral lenders of the G7 countries
have now pledged to wipe out allor very nearly allthe
debts they are owed directly by the 41 HIPC countries. However,
around half of debts of the poorest countries are owed to multilateral
institutions, principally the World Bank and the International
Monetary Fund, who are in fact cancelling less than half the debts
they are oweddespite holding substantial reserves and loan-loss
provisions which would more than cover the funds needed for full
Deeper cancellation by the World Bank and the
IMF would need to be a central part of a New Deal on Debt. These
institutions publicly claim a lack of resources to finance such
a cancellation. However, the IMF has large stockpiles of gold,
part of which have already been used to cover the cost of the
cancellation agreed so far. It also has nearly $12 billion in
reserves, which would more than cover the cost of writing off
the remainder of the debts of the 41 HIPC countrieswhich
before the HIPC Initiative stood at $9.4 billion. A senior source
at the IMF has privately admitted to Drop the Debt that the IMF
has "run the numbers" on outright cancellation of its
remaining HIPC debt and concluded that there is no financial reason
why it could not do so if instructed by its shareholders.
Is the Executive Director confident that the
22 countries now in the HIPC process will achieve a "permanent
exit" from the debt crisis, the intended purpose of the HIPC
How many more countries does the Executive Director
believe will enter the HIPC process in 2001? What steps is he
taking to persuade his counterparts from other major creditors
to adopt the British policy of setting aside in trust payments
from countries on the HIPC list that are yet to qualify for relief?
Does he agree that this policy would be more effective if it was
adopted by the IMF and World Bank themselves?
Will the Executive Director raise on the Board
of the IMF the case of Zambia, which will pay more after HIPC
than before, despite special measures agreed by the Board?
Does the Executive Director agree with the private
views expressed by senior sources at the IMF that the Fund can
afford to cancel 100 per cent of the debts owed to it by the HIPC
countries? Is the UK Government willing to argue the case for
100 per cent cancellation on the Board of the IMF?
COUNTRIES AT DECISION POINT IN HIPC INITIATIVE,
31 DECEMBER 2000
US$ millions, unless indicated
| ||Total debt (NPV)
||Annual debt service payments
|Public spending ||
|Sao Tome & Principe**||144
|Total for 22||50,196
* "before" is Net Present Value of debt in
last year before HIPC relief commences; 1999 in most cases; "after"
is NPV of debt in first year after HIPC relief has been delivered;
2001 or 2002 in most cases (source: HIPC decision point documents).
** "before" and "after" calculated
from NPV reduction and percentage cuts given in World Bank decision
point press releases.
*** expected to reach decision point before 1 January
"before" from Global Development Finance 2000;
"change" from World Bank Enhanced HIPC Initiative,
Commited Status as of 21 December 2000.
Figures will be adjusted when Decision Point documents are
"before" is average annual debt service paid in
the period 1998-99, except for Gambia and Guinea Bissau, 1997-98;
"after" is average annual debt service due in the
period 2001-05; 2000 is excluded by the World Bank but if included
would show still more modest reductions.
* World Bank 29 November 2000 paper, except Guyana and
Zambia; Guyana from decision point document, November 2000; Zambia
from decision point document, December 2000.
** preliminary documents where available and Jubilee
*** preliminary documents where available and Jubilee
(nb figures for these countries are less certain as full
information has not yet been made available by the World Bank
Decision point is the first stage in the HIPC process, where
countries qualify to get eventual debt reduction.
At decision point, interim relief is given to reduce annual
No debt is actually cancelled until reaching completion point,
typically one to two years after reaching decision point. At this
point, debt stock will be reduced.
Only one country, Uganda, has so far reached completion point
under the enhanced HIPC agreed in Cologne 1999.