IMF/World Bank - Debt Freedom or Disguised Bondage

The ancient Hebrew tradition known as Jubilee encouraged its celebrants to forgive those who had incurred debts over the past fifty years. Inspired by this ancient practice, a coalition of human rights groups and other organizations joined forces and formed the Jubilee 2000 campaign, which called for a debt-free start to the new millennium. These organizations began to lobby wealthy nations along with the International Monetary Fund (IMF) and the World Bank to cancel all debt owed them by developing countries. While its proponents hoped that the goal of a worldwide debt cancellation could be brought about in 2000, only small steps actually have been taken toward achieving this objective, via the Heavily Indebted Poor Countries (HIPC) Initiative, launched by the IMF and World Bank in 1996. The countries that have been designated for debt relief have demonstrated some measurable improvement, but of the 42 HIPC countries only 11 have been able to achieve the HIPC prerequisites granting them actual debt relief, while the remaining poor nations continue their rapid downward spiral of economic and social deterioration.

The HIPC Initiative was originally unsuccessful in achieving its proclaimed debt relief goals and was revamped in 1999 in hopes of achieving a more “lasting exit” from debt burden for the HIPC countries through the Enhanced HIPC Initiative (E-HIPC). However, during a Senate Foreign Relations Committee meeting in 2003, James A. Harmon, member of the Chairman Commission on Capital Flows to Africa, reported in his testimony that the “HIPC and the Enhanced HIPC program have not enabled African countries to achieve debt sustainability;” Africa is home to 34 out of the 42 HIPC countries. Even the IMF and World Bank have said that the HIPC Initiative is failing in a report issued by the International Development Association (IDA), a subsidiary of the World Bank Group. Therefore, the question is not whether debt relief is beneficial—because in most cases it is—but rather, is debt relief under HIPC enabling countries to sustain their external debts.

While the HIPC Initiative has helped countries like Uganda increase spending on health care and education, most of the HIPC countries have not received real debt relief due in part to the IMF/World Bank’s tortuously slow bureaucratic process in granting debt forgiveness. Furthermore, since HIPC is intrinsically tied to development, the question has to be raised as to whether HIPC is producing a viable exit point for these countries to come out from under their poverty-stricken shells. By examining the outcome of the Initiative on the HIPC countries, it is clear that the IMF and World Bank are failing to deliver on their laudable goals of providing authentic sustainable debt relief and a catalyst for social and economic development. Instead of fulfilling its altruistic mission to relieve HIPC candidate countries of their financial stress, the HIPC Initiative sadly only manages to serve as the primary disguise worn by the IMF and World Bank to appease the global financial community that such nations demonstrably are able to sustain their outstanding obligations.

Difficulty in Reaching Completion Point

In January of this year, Nicaragua, one of the poorest of the Latin American countries, wrote off $4.5 billion of debt after becoming the tenth country to reach Completion Point. The write off constituted about 80 percent of the debt burden owed to the IMF/World Bank as well as to a number of other countries and multilateral agencies. IMF deputy managing director Austin Carstens noted, “While this debt relief will no doubt help reinforce investor confidence and facilitate economic growth, even more important is the government’s strong ownership of its economic program, and its commitment to preserving stable macroeconomic conditions and promoting broad-based economic growth with structural reform.” Hopeful Nicaraguans believe that the new debt relief will allow them spend their funds on building national infrastructure and fielding social programs rather than on external debt. They may desire to mirror Uganda’s success, when upon reaching Completion Point, the Ugandan government was able to add 10,000 classrooms, 93 new health centers and reduce the poverty level from 56 percent to 35 percent.

With this kind of development success Western nations must be proud and may even wonder why there is not more debt relief happening. The answer is that the HIPC Initiative is bogged down by an IMF/World Bank system that requires an unsuccessful and complex interim period of economic evaluation before any part of the external debt is written off. Furthermore, the HIPC benefits are only available to countries determined incapable of sustaining their outstanding debts, and most importantly, agree to strictly follow IMF/World Bank economic guidelines. The HIPC country must formulate, under IMF supervision, a Poverty Reduction Strategy Paper (PRSP) that is eventually put before the IMF and World Bank for approval. This document has to profess fidelity to professional-grade macroeconomic management, more open markets and support a stable environment for the private sector. The IMF and World Bank subsequently will decide if the country has reached Decision Point—currently there are only 27 out of the eligible 42 HIPC countries that have done so.

Upon reaching Decision Point the creditors then must commit to providing partial debt relief, although the majority of a HIPC country’s debt is not cancelled until it reaches Completion Point. HIPC countries reach Completion Point once they have proven that they can and will maintain the economic reforms laid out by the PRSP for a minimum of one year. This includes keeping the existing debt “stock” at one and half times a country’s expected yearly export earnings. However, most of the HIPC enrollees have found these requirements difficult to meet due to the high propensity of natural disasters and political strife that plague their nations. Consequently, only 11 HIPC countries have reached Completion Point under IMF/World Bank standards. Therefore, most of the HIPC countries have not received extensive debt relief due to their lack of the required economic reforms caused by non-economic shocks. The IMF/World Bank deem these countries as being “off track,” immediately withholding further debt relief and foreign aid until these countries are back “on track”—which serves to only compound the problem.

Is the Debt Sustainable?

One of the biggest problems for HIPC countries upon reaching Completion Point is being able to keep their economies growing, while still paying off their external debt. The Enhanced HIPC Initiative never erases the entire debt; it only cancels enough of it to ensure that the impoverished nations are able to reliably service the remainder of their debt. However, nations such as Nicaragua, whose debt after Completion Point still equals almost three times its GDP, find it all but impossible to sustain their debt with service payments worth more than half the value of the nation’s exports. By lowering debt levels to the maximum that a HIPC country can pay without defaulting, the HIPC Initiative is only perpetuating the dependent relationship traditional to the poorest countries. Moreover, the 150 percent debt-to-export ratio was based on an optimistic 9.4 percent IMF/World Bank projection of HIPC countries’ export growth rate, which in reality has only grown at an average of 5.1 percent. Due to the lackluster economic growth rate of the HIPC countries, many of their governments cannot repay external debt and focus their national budgets on social development and infrastructure. Thus, while the IMF/World Bank are intent on ensuring repayment of creditors, the HIPC Initiative is not, in many cases, moving countries toward sustainable debt levels while simultaneously stimulating development.

Another example of why the HIPC Initiative is not helping poor countries sustain their debt is demonstrated in a Stanford Business School study that examined the impact of debt relief through the process of stock market evaluation. This investigation determined that within a year of debt relief, 16 developing countries’ local stock markets began to appreciate by 60 percent, foreign capital began to flow in and robust economic growth began. However, the study further determined that debt relief did not produce debt sustainability for the HIPC countries, due to the international creditors’ nervousness over the credibility of the HIPC government’s repayment prospects. This was caused by the HIPC countries’ lack of “basic social infrastructure that forms the basis for profitable economic activity—things like well-defined property rights, roads, schools, hospitals, and clean water.” Apprehensive foreign creditors began to immediately ask for debt payments all at once. However, the HIPC countries have difficulty in repaying their external debts when they do not have an adequate social and economic infrastructure allowing them to service the debt and improve the economy. This study concludes that even with the IMF/World Bank debt relief policy in place, HIPC countries are unable to sustain their debt as well as improve economic and social development.

Privatization Pains

One of the major problems of HIPC countries’ inability to service their debt stems from IMF/World Bank requirements demanding that these countries focus their economies on exports and privatize national industries. Many studies have concluded that the Structural Adjustment Programs (SAPs) maintained by PRSP requirements have contributed to increasing inequality and marginalization of the poor. Carlos Pacheco, director of the Center for International Studies, a Managua think tank, believes that the cancellation of debt is being used as a wedge to force a nation to accept privatization and higher costs of living through these SAPs. This is the result of SAPs' focus on quick financial fixes instead of long-term social and economic development. While privatizing in larger, competitive markets may drive price rates down, often transnational companies in smaller countries have an enormous potential to evolve into monopolies. Many HIPC governments have to make long-term contractual arrangements for companies to be the sole supplier of their services in order to persuade the company to invest. Without having to respond to market signals, companies turn into private monopolies that easily increase prices for basic utilities, in the absence of any effective competition. For example, once the Dominican Republic privatized its electrical company, prices increased by 51 percent. Consequently, the government attempted to absorb 42 percent of the price increase so as to only pass on 9 percent of the price to the consumer, driving the government even further into debt.

Moreover, HIPC governments, eager to appease the IMF and World Bank by following privatization criteria so as to receive debt relief benefits, may entice foreign companies with “sweeteners” (reducing the buying price, paying off debts, providing tax breaks, etc.) in hopes of enhancing the prospects for attracting investment in their country. In the energy sector, this has taken the form of Power Purchase Agreements (PPAs), under which the state, or the state power company, guarantees to pay a fixed price for a fixed period (usually thirty years or more) for whatever energy the company can generate, regardless of the demand. As a result, free market competition is superceded by foreign private monopolies, fixed prices and guaranteed demand. Furthermore, by increasing the utility rates of basic services for financially poor citizens of HIPC countries, the IMF/World Bank are only exacerbating the poverty quagmire.

Monocrop Exports v. Heavy Subsidies

On December 19, 2003, Guyana became the ninth country to reach Completion Point under the Enhanced HIPC Initiative. Today Guyana still owes $500 million, which represents more than 70 percent of its annual GDP; however, with a slow economic growth rate, chronic natural disasters, and political unrest tearing the country apart, it is unlikely that Guyana will be able to sustain this debt. Furthermore, the country constantly experiences difficulty with selling its sugar crop, the main export, due to the 39.2 percent drop in price attributed to a flooded global sugar market. Despite Guyana’s pleas for help, the rich countries hypocritically obliged Guyana, as well as other HIPC countries, to remove subsidies and privatize its sugar industry and other state-owned facilities, yet they steadfastly refused to halt subsidizing their own sugar farmers. This would not be so detrimental if Guyana was not solely dependent on this one crop. Thus, the tendency of HICP countries to predictably flood the market with the same crop year after year hinders their quest to make good on their debts because these HIPC countries are forced to violate the quintessential economic law of supply and demand, having to engage in unabated output.

While the developed nations (except the U.S., in order to maintain its high domestic prices) work at ensuring that the price of sugar and other agricultural products of exporting countries remain low on the international market, they eliminate the only feasible way for poor countries with otherwise limited prospects to economically flourish. Thus, at the very time creditor countries are being assured of at least minimum payments on the debt owed to them, they are arranging for the increased importation of cheap products. With the IMF donors palpably benefiting from HIPC “debt relief,” it is no wonder why they have chosen to advance their own profit picture by implementing free market initiatives under the guise of extracting these nations out of unsustainable debt. While many textbook economists will argue that unilateral liberalization greatly enhances national development, they fail to recall that industrialized countries used “trade distorting” policy interventions during their own development history. James A. Harmon, Chairman on Capital Flows to Africa, testified in a Senate Foreign Relations Committee that, “Africa’s ability to attract capital and increase trade is adversely affected by the domestic agricultural subsidies provided by the United States and the European Union. U.S. agricultural subsidies are a major impediment to African agricultural exports, which would otherwise be a significant source of economic growth on the continent. These subsidies also run counter to U.S. claims that it favors a more open and fair global trading system.” This “kicking away the ladder” policy, as one author put it, is economically ruinous for the financially strapped HIPC countries and runs counter to free trade macroeconomic strategy.

How do You Spell Relief?

Debt relief for the poorest countries in the world may be blessed in theory, but based on current IMF/World Bank procedures, most of the HIPC countries usually find it to be a Herculean task to reach Completion Point and write off the majority of their unsustainable debt. The IMF/World Bank and other creditors should work toward easing the requirements to reach Completion Point, thereby enabling the HIPC countries to receive the debt relief that now painfully eludes so many of them. The HIPC prerequisites must be cognizant of the fact that many of these countries endure external and internal shocks that directly exacerbate economic deterioration and increase the difficulty for them to reach IMF/World Bank standards. Thus, if the IMF/World Bank move away from their current “cookie-cutter” approach to debt relief, and instead more thoroughly assess a country’s individual political and/or environmental problems in order to determine Completion Point, then the rest of the HIPC countries could receive more accelerated debt relief.

Some HIPC countries that have reached Completion Point have demonstrated an ability to focus their national budgets away from external debt payments and toward social programs, as is the case in Uganda. However, for many HIPC countries, even after Completion Point is attributed, a large debt remains and the capacity of augmented social spending is minimal. For example, Tanzania paid $168 million in debt servicing in 2002, while only spending $87 million on health. In addition, in April 2002, the World Bank admitted that of the six countries that had successfully reached their Completion Points, at least two still did not have a sustainable level of debt. Furthermore, in half of the 20 countries that were between Decision Point and Completion Point, the external debt had significantly worsened. One plausible solution to improving debt sustainability is setting a ceiling on debt repayments in terms of government revenue, thereby ensuring that sufficient funds remain in the budgets of the HIPC governments to finance social development programs and economic restructuring. For example, if Guyana, which still devotes 12 percent of its annual revenues to servicing its external debt after Completion Point, were to decrease this to 5 percent of its revenue, the country would then be able allocate its precious funds to economic reforms and social development programs.

Due to the fact that Guyana has been tormented by external and internal shocks, most notably by the slowdown of the price of sugar, it is almost impossible for the HIPC country to repay its external debt. Much of the basis behind the IMF/World Bank debt forgiveness program focuses on optimistic projections of an HIPC country’s exports and GDP growth, neither of which have produced at forecasted levels. Thus, many HIPC countries, regardless of IMF/World Bank debt relief initiatives, continue on a mired economic and social development path. Some of the problem stems from the strict IMF/World Bank stipulations that require HIPC countries, above all, to privatize. The free trade world market is an incredibly complex, fast-paced arena; many of the HIPC countries are so eager to minimize their debt that they will adhere to any requirement in order to receive debt assistance.

However, it is important to understand that not all privatization and trade liberalization is wrong; it has produced beneficial results in some HIPC countries under the right circumstances. The key is to implement these policies at the appropriate stage in a country’s development, accompanied by effective government regulation and levels of public support. Nevertheless, many HIPC countries are discovering that once they privatize they are inextricably bound to fixed rates and long-term agreements, which could, very well, produce monopolies and promote psuedo-free enterprises. If privatization is carried out with increased regulation by the HIPC governments and backed up by the IMF/World Bank, the process could be beneficial not only to the transnational company, but to the country’s citizens as well.

Lastly, the richest nations of the world, which also happen to be the major shareholders of the IMF and World Bank, must stop subsidizing their own agricultural industries. If these rich countries are serious about relieving debt and producing social infrastructure for the HIPC countries through the magic of free market policies, then they also must diligently implement them in their own countries. Many HIPC countries have tried to implement reforms through privatizing and by focusing their economies toward exports, only to find that they are economically worse off. Thus, HIPC Initiatives are not always adequately allowing poor countries to integrate in the world market. If more lenient prerequisites are not applied to the IMF/World Bank stipulations and fair trade principles are not carried out by developed nations, then HIPC countries will assuredly witness prolonged economic deterioration and minimal development activity. For such nations, it becomes a matter of choices, leadership, responsibility and democracy. Ultimately, it is up to the world, as a community, to recognize the poverty of their fellow global citizens and legitimately work to minimize their debts, so that they might economically and socially flourish and become responsible members of the society of nations.

This analysis was prepared by Jedediah Briggs, Research Associate.

Issued 16 April, 2004

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