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close this bookPutting Life Before Debt (CI - CIDSE, 1998, 38 p.)
close this folderPART II: Reducing Debt
View the documentEarly Attempts to Reduce Debt
View the documentHeavily Indebted Poor Country (HIPC) Initiative
View the documentShortcomings of the HIPC Initiative

Shortcomings of the HIPC Initiative

Too few countries eligible. There are 41 countries classified by the World Bank as HIPCs, yet only a few will get relief through the HIPC Initiative as it is currently designed. Like Paris Club debt relief, qualifying for HIPC is difficult and countries that do qualify will likely find its impact limited. For example, Nicaragua may not qualify for relief under the HIPC Initiative because of its poor track record in carrying out structural adjustment programs. To qualify, Nicaragua would have to start an economic reform program which would likely require drastic cuts in government expenditures. Such reductions in a country still recovering from civil war and considered the second poorest country in the hemisphere would be devastating for its people, far worse than the benefits that a small amount of debt relief would bring.

BOX 2:

COUNTRIES ELIGIBLE FOR HEAVILY INDEBTED POOR COUNTRY INITIATIVE

HIPC

Expected
Decision point

Expected
Completion point

Uganda

April 1997

April 1998

Bolivia

September 1997

September 1998

Burkina Faso

September 1997

September 1999

Cote d'Ivoire

1997

2000

Mozambique

1997

1999

Guyana

1997

1998

Source World Bank IMF (through Eurodad)

BOX 3:

QUALIFYING FOR HIPC INITIATIVE IS DIFFICULT AND RELIEF INADEQUATE

To qualify, countries must be:

IDA-only and heavily indebted. IDA-only means the average annual per capita income of the country must be less than US $900. Most highly indebted countries have average annual per capita incomes under US $400.

Have a strong track record of performance under an IMF-supported structural adjustment program. If the country strays, it has to wait longer for relief.

Exhaust all existing debt relief mechanisms without reaching a sustainable level of debt. Sustainable means: I) the Net Present Value of the country's debt does not exceed 200-250% of its annual export earnings; and 2) the country's annual debt service does not exceed 20-25% of its annual export earnings. Specific targets within these ranges are determined on a case by case basis.

Too little relief: Bilateral and multilateral creditors are not writing off debt, rather, they are raising money to pay for debt reduction. As a result, they want to minimize its cost. Some powerful G-7 countries, as well as some middle income countries that are unlikely to be eligible for HIPC debt relief, have not committed sufficient resources to bilateral debt relief. The IMF will provide multilateral relief only through an existing fund, the Enhanced Structural Adjustment Facility. The World Bank, on the other hand, has set aside $2 billion for debt relief - an important commitment - but will release it only after bilateral creditors show their financial commitment by contributing to a separate debt relief fund.

Narrow definition of debt sustainability: The HIPC Initiative is designed to restore the debtor country's ability to repay its loans. The amount of debt considered sustainable was decided by looking at what middle income Latin American countries actually paid to service their debt. The concept did not take into account the fact that many Latin American countries paid their debt at the expense of the welfare of their people, paying more than they should have. The percentage of exports that went to debt service then became the standard for what low income countries were considered able to pay.

Too long a wait: Eligible countries have to establish a track record of economic reform for at least three years before receiving bilateral relief and six years before receiving multilateral relief.

Connection with structural adjustment policies (SAPs): The HIPC Initiative requires countries that want debt relief to carry out SAPs. SAPs can reform economies in positive ways but can also contribute to poverty.

Arbitrary cut-off dates for Paris Club relief: The cut-off date is the date the country first requests assistance from the Paris Club. Debt that builds up after this date is not eligible for reduction under the HIPC Initiative.