Debt sustainability: Oasis or mirage?

4 October 2004

UNCTAD has launched a fourth report on economic development in Africa. Former UNCTAD staffer Jan Kriegel introduced the report. He opened by noting that US ‘lend-lease’ funds for the UK post-WWII was premised on UK support for the US push for free trade, and not on economic policy conditionality. As early as 1976, UNCTAD was warning of the impending debt crisis, and recommending cancellation/relief and not just restructuring.

Kriegel said that HIPC was not reaching the most needy countries, nor reaching the poorest in wealthier countries. He described the indicators chosen to decide relief levels as “random”. He asked whether we should fix HIPC or fix the way that aid is channelled to countries. If cancellation, what kind of conditions?.

The report finds that between 1970 and 2002, there was a reverse transfer of resources from Africa to the industrialised countries. While acknowledging the role played by corruption and bad economic management, the authors highlight the role of cold war politics, exogenous shocks, commodity dependence, poorly designed reform programmes and the actions of creditors. Much of the debt was contracted under the guidance and close scrutiny of the Bank and the Fund.

The report calls for a moratorium on debt servicing pending the institution of an independent panel of experts to assess the sustainability of debt based on a set of criteria including those of meeting the MDGs. The panel should consider all public debt, since the HIPC initiative fails to consider domestic debt. In many cases, the domestic debt was created to ‘sterilise’ the impacts on inflation of anticipated donor inflows. When donors fail to pay, this leaves governments to pay both the principal and the high interest on the domestic bonds.

Some assumptions of the NGO community about the importance of HIPC relief are challenged by the report. On the question of whether or not HIPCs actually save on debt service, the report finds that the benefits of HIPC have been overstated. Much of the reduction merely eliminates the non-payable portion of the debt which countries had not been paying and which creditors had already written off. Until 2002, the impact of the HIPC initiative on actual total debt service payments is “quite marginal”. Bank and Fund estimates that HIPC has cut overall debt service by a third are overoptimistic since they are based on an unrepresentative base year.

A second question raised by the reports authors is whether HIPC debt relief is additional. The evidence is not clear on this question. What is needed, say the authors, are new mechanisms to ensure a “significant level of additionality” and to “prevent a reallocation of aid due to HIPC relief”.