Wednesday, November 5, 2008

Highly Indebted Poor Countries Initiative (HIPC) a case of Tanzania

Introduction
Over the past few years the World Bank, together with its partners, has evolved new processes and operational instruments in an effort to increase the resources of poor indebted governments and to improve the effectiveness of all domestic and donor-supplied resources in the fight against poverty. These include: a new set of procedures to allow higher levels of debt relief; the articulation by governments of Poverty Reduction Strategy Papers (PRSPs); and financial support to implement these strategies through Poverty Reduction Support Credits (PRSCs). Since human development is central to all poverty reduction efforts, these new approaches have tended to place a heavy emphasis on increasing financial resources for the social sectors, particularly education and health, and on improving sectoral performance.
It is the intention of this paper to examine the progress, weaknesses and challenges so far, of the HIPC debt relief initiative on the levels and patterns of poverty-reducing in poor African countries. In the course of the discussion the paper will explore the historical background; criteria for benefiting debit relief; recommendation and finally the conclusion.
Background of Heavily Indebted Poor Countries (HIPC) Initiative
After almost two decades of repeated attempts to relieve many low income countries of their external debt burdens, in 1996 the World Bank and the International Monetary Fund (IMF) proposed the Heavily Indebted Poor Country (HIPC) Debt Initiative to provide comprehensive debt relief to some of the world’s poorest and most heavily indebted countries. The initiative was formally agreed by governments around the world in September1996 with the aim of ensuring that no poor country faces a debt burden it cannot manage.
In addition to that the initiative was launched in order to “provide a framework for all creditors, including multilateral creditors to provide debt relief to the world's poorest and most heavily indebted countries, and thereby reduce the constraint on economic growth and poverty reduction. The Initiative entails coordinated action by the international financial community, including multilateral organizations and governments, to reduce to sustainable levels the external debt burdens of the most heavily indebted poor countries (World Bank, 2004).
Fundamentally the initiative still aims to reduce, within a reasonable time, the external debt burden of qualifying countries to “sustainable” levels. The underlying and plausible premise is that excessive debt is an impediment to the broader development goals of sustainable economic growth and poverty reduction.
Over the following four years, public concern with excessive debt burdens, declining aid flows and a perceived over–stringency of the terms for receiving debt relief grew and, with the strong support of advocacy NGOs such as Jubilee 2000, this led to an ‘enhancement’ of the Initiative in late 1999. Following a comprehensive review in 1999, a number of modifications were approved to provide faster, deeper and broader debt relief and to strengthen the links between debt relief, poverty reduction, and social policies.
In order to help accelerate progress toward the United Nations Millennium Development Goals (MDGs), the HIPC Initiative in 2005 was supplemented by the Multilateral Debt Relief Initiative (MDRI). The MDRI allows for 100 percent relief on eligible debts by three multilateral institutions—the IMF, the International Development Association (IDA) of the World Bank, and the African Development Fund (AfDF).
In 2007, the Inter-American Development Bank (IaDB) also decided to provide debt relief to the five HIPCs in the Western Hemisphere.
Criteria for HIPC initiative assistance:
To receive debt relief under HIPC, a country must first meet HIPC's stingy requirements. Whereby at the HIPC's inception in 1996, the primary tough requirement were as follows:
The country's debt remains at unsustainable levels despite full application of traditional, bilateral debt relief. At the time, HIPC considered debt unsustainable when the ratio of debt-to-exports exceeded 200-250% or when the ratio of debt-to-government revenues exceeded 280%. In simple terms, a sustainable debt level is the level where debt does not grow faster than the economy. This means that Government will have enough revenue to pay the debt without having to accumulate arrears or ask for debt restructuring. Debt restructuring may be done through rescheduling where the terms of the loan are reviewed; cancellation where the debt is completely written off; Debt Buy Back where the borrower is allowed to buy back its debt at a discounted price and debt swap where the debt is converted into cash, equity, assets or environmental programmes. In other words, a sustainable debt level is the one which is manageable from the Government budget's perspective, meaning that the Government can, in any financial year, accommodate in its budget all the maturing obligations of domestic and external debt. Tanzania has been to the Paris Club seven times requesting restructuring of its debt from the member creditor countries. A country knows that it has a sustainable or unsustainable debt by carrying out a debt sustainability analysis referred to as Debt Sustainability Analysis (DSA). Under the Highly Indebted Poor Countries (HIPC) initiative there are ratios which are usually called indicators used to show the position of a country's debt level in terms of sustainability. Usually the IMF and World Bank conduct the DSA in collaboration with the Official of a debtor country.
· Be International Development Association (IDA)-only and Poverty Reduction and Growth Facility (PRGF) -eligible; This is the part of the World Bank that helps the earth’s poorest countries reduce poverty by providing interest-free loans and grants for programs aimed at boosting economic growth and improving living conditions. IDA funds help these countries deal with the complex challenges they face in striving to meet the Millennium Development Goals. They must, for example, respond to the competitive pressures as well as the opportunities of globalization; arrest the spread of HIV/AIDS; and prevent conflict or deal with its aftermath.
· Establish a track record of reform and sound policies through IMF- and IDA-supported programs, For the case of Tanzania these included: Good governance, Government financial management (Finance management bill and Public audit bill; Taxi reform; Improvement on business environment; improvement of utility performance; improvement of data base and monitoring capacity; adoption of Medium Term Expenditure framework (MTEF); Priority area education and health.
· Have developed a Poverty Reduction Strategy Paper (PRSP) through a broad-based participatory process. The government of Tanzania approved its full PRSP on 31ST August 2000; it was sent to IDA and IMF on October 2000, and the Boards of IDA and IMF endorsed the PRSP on November 200 and December 200 respectively
Once a country has met or made sufficient progress in meeting these criteria, the Executive Boards of the IMF and IDA formally decide on its eligibility for debt relief, and the international community commits to reducing debt to the agreed sustainability tough condition. This is called the decision point. Once a country reaches its decision point, it may immediately begin receiving interim relief on its debt service falling due.
In order to receive the full and final reduction in debt available under the HIPC Initiative, the country must:
· establish a further track record of good performance under IMF- and IDA-supported programs;
· implement satisfactorily key reforms agreed at the decision point, and
· adopt and implement the PRSP for at least one year.
Once a country has met these criteria, it can reach its completion point, at which time lenders are expected to provide the full debt relief committed at decision point.
Who received HIPC Initiative Assistance?
In 1996 forty-one countries (41) have been found to be eligible or potentially eligible for HIPC Initiative assistance. Under the original framework, only six countries reached their completion points, and a consensus emerged that the process needed to move more quickly. Consequently, the G-7 introduced the enhanced HIPC initiative at its fall 1999 meeting in Cologne, Germany.
The enhanced initiative reduced the ratios that qualified a country’s debt burden as unsustainable to 150 percent for net-exports and 250 percent for government revenue.
The second initiative also made it easier for countries to reach a decision point, allowed them to begin receiving debt relief as soon as they did so, and provided greater relief. Under the enhanced HIPC initiative, sixteen additional countries began receiving debt relief in 2000, In 2004 the HIPC program identified 42 countries, 32 of which are in Sub-Saharan Africa, as being potentially eligible to receive debt relief.
Tanzania reached the decision point under the HIPC Initiative and was approved the Executive boards of the IMF and IDA in April 2000 The debt relief agreed was US $ 2026 MILLION IN Net Present Value ( NPV) terms , calculated to reduce the NPV of Tanzania’s external debt to 150% of average 1996/97 – 1998/ 99 export as of end June 1999. The relief represented a reduction of 54% of the NPV of debt service over time.
On July 7, 2007, the South American nation of Guyana was declared to be no longer a "Heavily Indebted Poor Country". And it remains the only nation to be removed from the HIPC lis

List of Countries That Have Qualified for, are Eligible or Potentially Eligible and May Wish to Receive HIPC Initiative Assistance(as of March 2008)
Post-Completion-Point Countries (23)
Benin
Honduras
Rwanda
Bolivia
Madagascar
São Tomé & Príncipe
Burkina Faso
Malawi
Senegal
Cameroon
Mali
Sierra Leone
Ethiopia
Mauritania
Tanzania
The Gambia
Mozambique
Uganda
Ghana
Nicaragua
Zambia
Guyana
Niger

Interim Countries (Between Decision and Completion Point) (10)
Afghanistan
Republic of Congo
Haiti
Burundi
Democratic Republic of Congo
Liberia
Central African Republic
Guinea

Chad
Guinea Bissau

Pre-Decision-Point Countries (8)
Comoros
Kyrgyz Republic
Sudan
Côte d'Ivoire
Nepal
Togo
Eritrea
Somalia


How the HIPC Initiative is financed
The total cost of providing assistance to the 41 countries that have been found eligible or potentially eligible for debt relief under the enhanced HIPC Initiative is estimated to be about US$68 billion in end-2006 net present value terms. About half of this was to be provided by bilateral creditors this includes top five bilateral creditors ie Japan, United Kingdom, Italy, Belgium and France. The rest was to come from multilateral lenders. The IMF's share of the cost is financed primarily by the investment income on the net proceeds from off-market gold sales in 1999 that were deposited to the IMF's PRGF-HIPC Trust.
Additional contributions to this trust have been provided by member countries.
NB/=Debit relief committed so far under HIPC $ 2.7 billion and Debit relief delivered so far under MDRI is $ 3.4 billion



The progress and success from the HIPC Initiative
HIPC addressed its shortcomings by expanding its definition of unsustainable debts, making greater relief available to more countries, and by making relief available sooner. . Today, HIPC defines three minimum requirements for participation in the program as follows:
Firstly, as before, a country must show its debt is unsustainable; however, the targets for determining sustainability decreased to a debt-to-export ratio of 150% versus 200 to 250 % and a debt-to-government-revenues ratio of 250%. Versus 280%
Secondly, the country must be sufficiently poor to qualify for loans from the World Bank's International Development Association or the IMF's Poverty Reduction and Growth Facility (PRGF, the successor to ESAF), which provide long-term, interest-free loans to the world's poorest nations.
Lastly, the country must establish a track record of reforms to help prevent future debt crises.
In addition to the modified stingy requirements, the 1999 revisions introduced several other changes as follows:
Firstly, the six-year structure was abandoned and replaced by a "floating completion point" that allows countries to progress towards completion in less than six years.
Secondly, the revised HIPC allows for interim debt relief so that countries begin to see partial relief before reaching the completion point.
Thirdly, the PRGF heavily modified ESAF by curtailing the number and detail of IMF conditions and by encouraging greater input from the local community into the program's design.
Following these revision of requirements the HIPCs that have already obtained debt service relief are spending much more on social services than on debt service—on average four times as much—and have shown a marked increase in the share of health and education in the budgets under their Poverty Reduction and Growth Facility (PRGF) programs.
For the 33 countries for which packages have already been approved, debt service paid, on average, has declined by about 2 percent of GDP between 1999 and 2006. Yet for debt reduction to have a tangible impact on poverty, the additional resources need to be targeted at the poor.
Before the HIPC Initiative, eligible countries were, on average, spending slightly more on debt service than on health and education combined. Now, they have increased markedly their expenditures on health, education and other social services and, on average, such spending is about five times the amount of debt-service payments. During the course of the HIPC initiative (completion point already in November 2001) Tanzania’s total external debt dropped significantly from US$ 7.6 billion in 1998 to US$ 1.6 billion in 2003. Originally, Tanzania’s debt to export ratio was 484 % which is three times higher than the sustainability level defined by IMF and World Bank.
Tanzania reduced its annual debt payment by $170 million. The government used the savings to increase spending on education and to eliminate elementary school fees, leading to a 1.6 million-student surge in enrollment. For example the Tanzania Government PRSP estimates that HIPC debt relief has contributed approximately $62 Million to Government budget in 2001/02
Health MTEF budget estimates that HIPC debt relief would contribute $5.6 million to a total recurrent budget of approximately $36million in 2001/2002. The allocation of the $5.6 million was as follows:
HIV/AIDS advocacy and IEC $3.5 M
Expansive Program for Immunization $1.5 M
Malaria control $0.6 M
Mozambique on the same approach channeled its savings from HIPC debt-relief into a number of social programs: $13.9 million for child vaccination programs; $10 million to bring electricity to rural schools and hospitals and to rebuild infrastructure damaged by natural disasters; and $3.2 million to build new elementary schools and promote the education of young girls.
Challenges and weakness of HIPC Initiative
Challenges and weaknesses that faced the HIPC's scope and its structure included the following:
Firstly, the HIPC's definition of debt sustainability, that argued that the debt-to-export and debt-to-government-revenues criteria were arbitrary and too restrictive. As it was evidenced, and it was reported and highlighted that, by 1999, only four countries had received any debt relief under HIPC.
Secondly, the six-year program was too long and too inflexible to meet the individual needs of debtor nations.
Thirdly, the IMF and the World Bank did not cancel any debt until the completion point, leaving countries under the burden of their debt payments while they struggled to institute structural reforms.
Fourthly, the ESAF conditions often undermined poverty-reduction efforts. For example, privatization of social services ie health and education tended to raise the cost of services beyond the citizens' ability to pay in the name of cost sharing.
Fifthly, HIPC as a program was designed by creditors to protect creditor interests, leaving countries with unsustainable debt burdens even upon reaching the decision point. There is a widespread criticism that it was a fundamental mistake to let the creditors, led by the IMF and World Bank, work out the original framework of the HIPC initiative. Though it is acknowledged that the IMF and World Bank had undertaken an extensive consultation process across the world for the 1999 review of the initiative, the enhanced HIPC framework clearly followed the suggestions of the G7 summit of June 1999 in Cologne. As is reflected in most criticism of the HIPC framework voiced in many NGO forums and some United Nations organizations, developing countries, and especially debtor countries, had little or no say in the final adoption of the enhanced framework of the HIPC initiative. Given that some developing countries are major creditors to some HIPCs, their exclusion from the key decision making process constitutes a problem.
Sixthly, while country-by-country data demonstrate that these countries are seeing clear gains, it has taken time and effort to ensure that money is redirected to help the poor in ways that most reduce poverty. Even if all of the external debts of these countries were forgiven, most would still depend on significant levels of concessional external assistance, since their receipts of such assistance have been much larger than their debt-service payments for many years and difficult problems remain. For example while multilateral debt relief will lead to a substantial reduction of the existing debt stock, Tanzania’s external financing gap remains, so external borrowing will continue. The impact of HIPC on debt servicing the relief provided under the HIPC initiative reduces debt servicing by almost 55 percent. For instance, the US$169 million in debt service relief provided in 2001/02, correspond to about 11 percent of total government revenue in 2000 and is more than the entire budget for the Ministry of Education. In addition to that countries affected by war or natural disasters, pressing reconstruction needs may mean large new loans at the same time that old debt is being reduced.
Moreover, other countries face challenges to meet the criteria for reaching the decision point due to uneven policy records or poor governance resulting from civil conflict. Countries such as Somalia and Sudan have very large debts and are running arrears to various creditors that will require additional funding for the Initiative. Inadequate debt relief for such countries means that they will need to spend more on servicing debts, rather than on actively investing in programs that can reduce poverty. In another way this is like a poverty trap.
Eighthly, it is argued that the HIPC initiative has been designed around the concept of what debt reduction is needed according to inappropriate debt sustainability indicators, instead of what debt reduction is needed for sustainable development. This was especially the case under the original framework, which did not have any explicit link to poverty reduction. While the enhanced framework makes a formal link to poverty reduction by requiring HIPCs to develop and implement poverty reduction strategies, enhanced HIPC debt relief is still not calculated on the basis of a country’s need for sustainable development.
Recommendations
The paper makes four recommendations addressing the strategic issues facing the initiative.
The first is to clarify and communicate the purpose and objectives of the initiative and ensure that its design is consistent with these objectives.
The second recommendation is to make explicit the methodology and economic models underlying the debt projections used in the debt sustainability analyses and make the economic forecasts more realistic to assess better the prospects and risks facing individual countries.
Third, the initiative should maintain the standards for HIPCs’ policy performance to ensure that the risks to achieving and maintaining the initiative’s objectives are minimized. And when flexibility is desirable, there should be a clear and transparent rationale for relaxing the criteria.
Finally, the paper recommends a greater focus on pro-poor growth to provide a better balance among development priorities relative to the current emphasis on social expenditure.

Conclusion
Compared with other debt initiatives implemented over the past two decades, the HIPC initiative represents a huge step forward. It was a breakthrough in terms of its aim to provide a lasting exit from unsustainable debt and achieve debt sustainability and its approach to including multilateral creditors in sharing the costs related to debt relief. The HIPC initiative is to be commended for providing more debt relief to HIPCs than the sum of all previous debt rescheduling.
The enhanced initiative has also started to link debt reduction to poverty reduction. However, the enhanced HIPC initiative is unlikely to achieve a lasting exit from unsustainable debt for many HIPCs, as they suffers from some fundamental flaws in its design, such that continues to face considerable financing constraints, applies an inappropriate burden-sharing concept, and may lead to a reduction in traditional development assistance.
Finally, the costs of debt relief and poverty reduction programmes should not be seen as an economic burden but as investments in the future. Experience from the past for example, the 1953 debt relief provided to Germany after World War II shows that debt relief can pay for itself in terms of political stability and contributions to world growth. It should not be surprising that political instability, ethnic conflicts and war are re-occurring in poor countries facing unsustainable debt. A marginal cut in world military expenditures and to be allocated to a global poverty reduction strategy would boost global peace and reduce the costs of future peacekeeping efforts around the globe. Maintaining a sustainable debt position while seeking the additional financing needed to make progress toward the MDGs remains a serious challenge, even after debt relief under the HIPC Initiative.
























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