An evaluation of the Heavily Indebted Poor Countries (HIPC) initiative by the Bank’s Independent Evaluation Group (IEG) released in April begs the question what next for debt relief efforts. The evaluation builds on a 2003 evaluation of HIPC, but stops short of assessing the meaning of the new Multilateral Debt Relief Initiative (or G8 debt deal – see Update 50) for HIPC.
The IEG found that HIPC had cancelled $19 billion of debt in 18 countries between its 1998 start and 2006. The debt relief “appears to have been significantly additional”, though looking forward the IEG cautions that donors will need to clearly establish what development aid would be in the absence of debt relief. The $19 billion figure was put into perspective by UK NGO Jubilee Research: in 2005 alone, there was a $123 billion shortfall in aid actually delivered relative to the 0.7 per cent UN target for development assistance.
indebtedness once again exceeds dangerous levels
Most worrying is the finding that many countries quickly got back into debt trouble after completing the HIPC programme. In 8 of 13 post-completion countries, indebtedness once again exceeds dangerous levels. The IEG explains that post-HIPC countries have “not improved much” in revenue mobilisation or export performance. Jubilee Research concludes that “without a major increase in grants and a significant change in the balance of power in international trade”, debt relief will be a “temporary solution at best”.
The evaluation found that the Bank had been overoptimistic in calculating growth rates, seriously undermining the credibility of the Bank’s debt sustainability framework. In April, the Bank and Fund published a joint evaluation of the first year of their new debt sustainability framework, finding it “broadly appropriate”. Brussels-based NGO Eurodad has criticised the framework for its “de-linkage from achievement of the Millennium Development Goals”.
Another key finding of the evaluation was that despite the imposition of an extensive set of economic conditions, countries in the midst of the HIPC programme have seen a worsening of their debt and fiscal management according to Bank policy indicators. No Bank unit currently has the mandate to offer low-income countries assistance for debt management.
The evaluation fails to offer any advice on how to speed up or broaden HIPC coverage. A conference of African finance ministers in Abuja, Nigeria, end May urged “an acceleration of qualification” for HIPC. In April, Bank and Fund staff released a final list of 11 additional countries that may qualify for HIPC debt relief if they are able to meet stringent IMF conditions. These include seven countries that had been previously identified as HIPCs (Central African Republic, Comoros, Cote d’Ivoire, Liberia, Somalia, Sudan, and Togo) and four other countries (Eritrea, Haiti, the Kyrgyz Republic, and Nepal). Three countries that technically meet the income and indebtedness criteria have indicated that they do not wish to participate in the initiative (Bhutan, Lao PDR and Sri Lanka).
Norwegians push for examination of illegitimate debt
Norway has reportedly established a $20,000 fund for the Bank to undertake a study of odious and illegitimate debt. Norway’s development minister Erik Solheim has also committed to more closely examine the debts claimed by Norway relating to the export of Norwegian-built ships to countries such as Ecuador, Peru and Jamaica between 1977 and 1980. Solheim has conceded that these loans were made to prop up an ailing shipbuilding industry, and may take unilateral action to cancel the claims. Eurodad asserts that “Wolfowitz must recognise that any comprehensive approach to corruption must necessarily involve a frank and open critique of past Bank lending practices leading to the cancellation of debts found to be odious and illegitimate.”
In the wake of a devastating May earthquake in Indonesia, NGOs are calling on world leaders to cancel Indonesia’s $134 billion debt burden, much of which “was contracted under Suharto and can be classified as ‘odious’ and illegitimate”. The government spends about $2.5 million per day on interest payments alone, with debt service accounting for almost a third of the government’s budget. Currently, only around $500 million in the country’s budget is set aside for emergencies such as the recent earthquake.
An international civil society conference on the cancellation of illegitimate debts was held in Jakarta end May. Participants worked on national and international strategies for illegitimate debt cancellation, including debt repudiation and debt audits.