Debt and

SustainableHumanDevelopment

Technical Advisory Paper No. 4Management Development and Governance DivisionBureau for Development Policy

Debt and

SustainableHumanDevelopment

Technical Advisory Paper No. 4Management Development and Governance Division

Bureau for Development PolicyUnited Nations Development Programme

May,1999

3

Foreword

There is no longer any doubt that unsustainable debt burdens, particularly inheavily indebted poor countries, have serious consequences for human devel-opment. In about a third of these countries, public debt is larger in value thantheir GDP, and as a group they have some of the worldÕs worst indicators ofhuman welfare. Compared with the average for all developing countries, illiter-acy rates in the heavily indebted poor countries are a quarter higher, andaccess to safe water is around a third lower.

These countries lack the domestic resources to invest in human capabilities pre-cisely because old debts are in many cases draining their budgets. Moreover,the recent downturn in commodity prices, coupled with the decline in officialaid flows, has further squeezed the resources they have for spending on humandevelopment.

These countries urgently need debt relief. In 1996, the International MonetaryFund (IMF) and the World Bank launched the Heavily Indebted Poor Countries(HIPC) Initiative to reduce the debt burdens to sustainable levels. This was astep in the right direction and welcomed by the international community. Buteven the HIPC Initiative does not provide poor countries with much of a fiscaldividend to invest in human capabilities.

That is why a concerned international community is calling for additional debtrelief for poor countries. For Africa, where unsustainable debt threatens theeconomic security and long-term stability of some of the poorest countries, theUnited Nations Secretary-General has issued an urgent appeal. His April 1998Report on Africa to the UN Security Council is clear:

"First, I call upon all creditor countries to convert into grants the remaining offi-cial bilateral debt of the poorest African countries. Second, I call upon theinternational financial institutions to significantly ease and quicken access tofacilities for heavily indebted poor countries, and to provide countries withsufficient resources to enable them to attain a substantial and sustainedpace of economic growth and social development."

It is not clear how enhanced debt relief will be financed. Creditor countriescould theoretically assign lines in their national budgets to cancel bilateraldebts, and the World Bank may be able to draw on a part of its own funds. Butthe IMF has no resources for this. Selling some of its gold reserves is on the inter-national agenda again, and this could be part of an answer. There is a risk in allthis: scarce official development assistance might be diverted to the HIPCInitiative. That diversion would deny adequate funds for vital work to strengthenessential capacities in poor countries, capacities on which the success of otherdevelopment investments rests. It is thus critical, as a matter of firm principle, toprovide multilateral debt relief from fresh money, not by siphoning officialdevelopment assistance funds.

This paper sets out how the United Nations Development Programme (UNDP)has defined its role in assisting heavily indebted poor countries. The interven-tions identified are consistent with UNDPÕs mandate in sustainable humandevelopment, and follow three main lines of action:

4

¥ Advocating additional debt relief. UNDP advocates the view that efforts tomobilize additional debt relief should be seen as part of the total effort tostrengthen resources in support of social and human development objec-tives.

¥ Promoting National Partnership Facilities. To ensure that debt relief dividendsare allocated to human development programmes, UNDP will assist in estab-lishing a financial and catalytic mechanism at the country level, the NationalPartnership Facility. As a financial mechanism, the Facility will direct part ofthe fiscal dividend (from debt relief) to local communities, civil society organi-zations and non-governmental organizations for their execution of projects.And as a catalytic mechanism, it will provide a forum for structured dialoguebetween national and local government agencies, civil society and donorsand creditors on the allocation of debt relief dividends.

¥ Capacity-building for effective debt management. UNDP will maintain itssupport for capacity-building in debt management, particularly in heavilyindebted poor countries. It will fund the installation of computerized systemsfor managing and monitoring debt. It will also support regional debt manage-ment initiatives, such as for West Africa, where many HIPC countries are locat-ed, and will cooperate with its development partners at the global level tocoordinate international support for effective debt management practices.

Linking additional debt relief to human development objectives will refocusinternational attention on the real debt crisis. This is not the inability of poorcountries to replenish creditor funds. It is the inability of tens of millions of peopleto secure their most basic human rights. Why? Because the debt overhangreduces the resources for growth, and debt servicing reduces the investmentsin people.

James Gustave SpethAdministratorUnited Nations Development Programme

5

Preface

By now, it is clear that the debt crisis, particularly in heavily indebted poorcountries (HIPC) constrains the ability of these nations to pursue sustainable andequitable growth and to achieve their human development goals.

The magnitude of poverty coupled with the fact that the majority of the HIPCsare in the category of countries classified by UNDP as having low human devel-opment levels explains in large part the international communityÕs concern withthe debt issue. Indeed, this ground-swell of concern was observed at last yearÕsG7/8 Summit in Birmingham and will again be seen at this yearÕs G7/8 Summit inCologne. Civil society organizations, non-governmental organizations (notablyJubilee 2000, Oxfam and Eurodad), multilateral and bilateral aid agencies andother international development institutions have persisted to ensure that theHIPC debt crisis will not fade from public memory even as international atten-tion shifts to crises that are currently affecting other parts of the world. UNDPcommends the G7/8 for having developed enhanced debt relief proposalsand we hope that significant progress will be made on the HIPC Initiative. Thesalient issue we must discuss is seeking additional funds to finance enhanceddebt relief initiatives. UNDP urges the G7/8 to focus on this critical issue atCologne.

In 1998, the Management Development and Governance Division (MDGD) ofthe Bureau for Development Policy (BDP) prepared a paper analyzing the link-ages between debt and sustainable human development. A UNDP-wide TaskForce on Debt was convened to review the paper and it was approved by theExpanded Executive Committee in December 1998.

This publication is thus the outcome of the co-operation and commitment of anextensive group of people. I would like to acknowledge the contribution of allmembers of the Task Force, in particular, the contributions made by theRegional Bureau for Africa. To all my colleagues in MDGD/BDP, I would like toextend my sincere appreciation for their intensive and collective effort inpreparing this publication on debt. Here I would like to mention, in particular,the MDGD team responsible for collaborating on this publication: Mr. G. ShabbirCheema, Mr. Georges Chapelier, Mr. Thord Palmlund, Ms. Eliane DÕPierre andthe principal author of this publication, Dr. Anuradha Seth, for her contributionin organizing and preparing this publication.

Eimi WatanabeAssistant Administrator andDirector, Bureau for Development PolicyUNDP

7

Contents

Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

1. The Debt Burden and Sustainable Human Development . . . . . . . . . . . . . 13

Global Goals, Finance and Government Outputs . . . . . . . . . . . . . . . . . . . . 16

Magnitude of the HIPC Debt Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

2. Existing Mechanisms for Debt Restructuring . . . . . . . . . . . . . . . . . . . . . . . . 19

Commercial Bank Debt Relief: From the Baker Plan to the Brady Initiative . . . . . . . . . 20

Bilateral Debt Relief: The Paris Club . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

The Heavily Indebted Poor Countries (HIPC) Initiative . . . . . . . . . . . . . . . . . 22

3. Capacity-Building for Effective Debt Management . . . . . . . . . . . . . . . . . 33

Institutional Environments and Human Resource Management . . . . . . . . . 35

Software Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Financing Capacity-Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Linking Debt Management to Macroeconomic and Financial Policies . . . . . . . . . . 36

4. UNDP and Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Advocating Additional Debt Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

The National Partnership Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Capacity-Building for Effective Debt Management . . . . . . . . . . . . . . . . . . . 43

Annex 1. Human Development Approaches to Debt Sustainability . . . . . . . 47

Annex 2. The National Partnership Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

9

Executive Summary

Heavily indebted poor countries have higher rates of malnutrition, infant mortal-ity, diseases and illiteracy than other countries in the developing world. InAfrica, six of seven heavily indebted poor countries pay more in debt servicethan the amount they need to achieve major progress against malnutrition,preventable disease, illiteracy and child mortality.

Despite the negative effects of unsustainable debt for human development,todayÕs debt relief mechanisms do not rank human development objectives inany significant way.1 The focus is on determining a countryÕs sustainable debt.But because the benchmarks for debt relief are generally about equal to thedebt service already paid, even the HIPC Initiative does not provide a substan-tial fiscal dividend for poor countries to finance human development pro-grammes.

In short, many heavily indebted poor countries lack the domestic resources toinvest in human capacity because their budgets are drained by long-standingdebt obligations. The fiscal constraints also restrain the capacity to achieve theglobal goals and targets set for a wide range of social issues in internationalforums, sponsored by the United Nations and its development partners. The tar-gets in the OECDÕs Development Assistance Committee (DAC) Report "Shapingthe 21st Century: the contribution of development cooperation" aim to reduceby 50 percent the proportion of people living in extreme poverty by 2015. Thetargets also include goals for primary education, gender equality in school,reduced mortality of children and mothers, reproductive health and the envi-ronment. The 20/20 Initiative has translated targets into public sector outputs,for providing universal access to a discrete set of basic social services.

Efforts to mobilize additional debt relief should thus be seen as part of the effortto strengthen resources, in support of the objectives laid down by the globalgoals and targets for social and human development. They should not be seenas an endÑor as the last resort to closing a balance-of-payments gap.

So far, efforts to mobilize additional debt relief have focused on:¥ Revising the debt sustainability benchmarks of the HIPC Initiative.¥ Having Paris Club creditors provide voluntary debt relief.¥ Using the IDA-only Debt Reduction Facility to reduce commercial debts.¥ Increasing the contribution of multilateral creditors.¥ Changing Paris Club rules.

Clearly, additional debt relief will be needed for debtor governments to breakthe debt-poverty cycle and make inroads to achieve social and human devel-opment targets.

1Debt relief refers to any action by a creditor that officially alters the terms established for repay-

ment in a manner that provides a reduction in near-term debt service obligations. This includes buy-backs, debt and debt service reduction exchanges, forgiveness, rescheduling, rephasing and refi-nancing. Sustainable debt is the level of debt that is consistent with a countryÕs ability to pay. TheIMF and World Bank define this as the level of debt at which "a country is able to meet its currentand future external obligations in full without compromising economic growth and without resortingto rescheduling or building up arrears in the future" (World Bank 1998).

10

Creditor countries need to demonstrate political leadership and will by makinggreater debt relief available. Securing adequate funding for additional debtrelief should not, however, compromise aid resources usually allocated to poorcountries, especially given the urgent need to continue financing technicalcooperation and capacity-building programmes in these countries. Given thelinks between ineffective debt management and heavy indebtedness, there isalso a need to build capacity for effective debt management in poor coun-tries.

UNDPÕs Position on Debt

UNDP takes the position that the amounts of debt relief provided by existingmechanisms to the poorest, most heavily indebted countries fall far short ofwhat is neededÑif those countries are to pursue economic growth and invest-ment in a full range of social and environmental policies and programmes.What is required is additional debt relief, for more countries, sooner rather than later.

UNDP has adopted a comprehensive position on debt, with three elements:advocating additional debt relief, promoting a facility (the National PartnershipFacility) to direct fiscal resources from (additional) debt relief for human devel-opment programmes, and building capacity for effective debt management.

Additional Debt Relief

UNDP concurs with and endorses the position adopted by Northern andSouthern governments and non-governmental organizations: the debt sustain-ability thresholds currently in place should be modified to make additional debtrelief available. Specifically, the debt sustainability thresholds under the HIPCInitiative should be lowered, the six-year period of adjustment conditionalityshortened, and a more flexible formula for cost-sharing found. In addition,UNDP advocates supporting alternative efforts to revise the debt sustainabilitythresholds from a human development perspective.

UNDP advocates additional debt relief primarily because existing debt reliefmechanisms are not designed to address the generation of fiscal resourcesneeded by poor countries to launch a large-scale attack on poverty.Additional debt relief should thus be seen as instrumental in achieving humandevelopment objectives and making inroads to the DAC agenda. That agen-da has received the support of all OECD members, which are also the maincreditors of the Paris Club. It has also been given a central place in the BritishgovernmentÕs White Paper on Development. Moreover, the World Bank hasendorsed the 20/20 Initiative and the DAC targets, integrating the targets intoits country assistance strategies.

The National Partnership Facility

From the perspective of sustainable human development, the goal of debtrelief efforts should be to ensure that the benefits of debt relief are directedtowards the poor. To direct part of the debt relief dividend to human develop-ment programmes, countries could consider establishing a financial and cat-alytic mechanism, such as the proposed National Partnership Facility.

11

As a financial mechanism, the Facility could direct a portion of the debt reliefdividend (along with other sources of development finance, such as OfficialDevelopment Assistance (ODA), counterpart funds and private sector contribu-tions) to local communities, civil society organizations and non-governmentalorganizations for their execution of human development projects. As a catalyt-ic mechanism, the Facility could provide a forum for structured dialogueamong national and local government agencies, their partners from civil soci-ety and the private sector and donors and creditors on human developmentissues and country priorities.

Effective Debt Management

UNDP has established partnerships and programmes on debt management onglobal, regional and country levels. The Joint Programme with UNCTAD and theWorld Bank improved the provision of international support for debt manage-ment. Some of the major achievements: upgrading UNCTADÕs programme fordebt management, installing this programme in more than 50 countries, oftenunder financing by UNDP and bilateral donors, and creating a regional pro-gramme in Southern and Eastern Africa for debt and reserve management,which evolved into the Macroeconomic and Financial Management Institute ofEastern and Southern Africa.

There continues to be a great need for international support in debt manage-ment. UNDP will contribute at the national, regional and global levels.

National. UNDP will continue its close cooperation with UNCTAD and financethe installation of its software programme, with accompanying training. Supportwill also be given to countries using other systems for the analysis of the debt sit-uation, the preparation of international negotiations on debt and debt reliefand the strategy for international borrowing. In this context, it is important forcountries to acquire the capacity to analyze the links between debt paymentobligations and the financial requirements for sustainable development, partic-ularly for spending that has a direct impact on poverty reduction.

Resources permitting, UNDP will also support governments dealing with thecoordinated management of domestic and external debtÑand the coordina-tion of aid and debt management. Further, the electronic linking of debt man-agement databases and software systems to a governmentÕs existing systemfor budgeting and accounting should be supported by international donors,including UNDP.

Regional. UNDP will base its activities on the experience of ESAIDARM (Easternand Southern Africa Institute for Debt and Reserve Management) and promotesimilar programmes in other regions of the world. UNDP will support initiatives forregional debt management initiatives in West Africa, which has many countriesin the HIPC category. The possibility for UNDP support should also be explored inCentral America and in Eastern Europe and the Commonwealth ofIndependent States (CIS). Of course, high-level interest in countries is essentialfor success, as is cooperation with the partners of the Joint Programme andother international actors. But an active role for UNDP in programming, financ-ing and coordination may be crucial for overcoming some of the hurdles that

12

have delayed the development of regional programmes.

Global. UNDP will focus on the capacity of the international system to providesupport for debt management and on international coordination for such sup-port. The last several years have seen an encouraging expansion of UNCTADÕsactivities with the upgraded version of DMFAS. But the financing of the DMFASprogramme in UNCTAD has not yet found a long-term solution. UNDP shouldtherefore consult with UNCTAD on ways to ensure the long-term viability ofDMFAS and support international efforts to this effect, on the basis of plans thatmake the operations of DMFAS commercially sound.

Development efforts should make DMFAS more user-friendly and more useful fordomestic debt management and the coordination of debt and aid manage-ment. Software to capture the complexity of private debt accumulation willalso be needed in many developing countries.

UNDP will also consult with its international partners on the usefulness of an inter-national forum for debt and debt management. The membership, agenda andoperations of such a forum are all open for discussion. The purpose would be tobring the main actors together to exchange experiences and identify majordebt and debt management issues for the international community to address.

The Debt Burden &Sustainable Human

Development1

14

Unsustainable debt adversely affects human development because externaldebt-servicing limits the resources available for investment in human develop-ment and because debt overhang discourages economic growth.2

External debt servicing and human development. Very high external debt ser-vicing has severely limited the resources for investment in human development.Tanzania, for example, has been spending nine times more for debt servicingthan for basic health and four times more than for primary education. InEthiopia, where more than 100,000 children die annually from easily pre-ventable diseases, debt payments are four times more than public spending onhealth care. In Africa as a whole, where only one child in two goes to school,governments transfer four times more to northern creditors in debt paymentsthan they spend on the health and education (Oxfam 1998a).

Of 27 countries, only 10 spend more on basic social services than on debt ser-vicing (table 1). Those services include basic education, basic health care, safewater and sanitation provision, family planning and nutrition. Indeed, in manycountries, the combined spending on defence and debt is higher than that onbasic social services, and often higher than the combined budgets for healthand education.

Table 1. Budget Allocation to Basic Social Services and Debt Service in Selected Countries

Country Year Total basic social services Debt service

Nepal 1997 13.6% 14.9%

Philippines 1992 7.7 30.7

Sri Lanka 1996 12.7 21.5

Thailand 1997 14.6 1.3

Benin 1997 9.5 10.8

Burkina Faso 1997 19.5 10.2

Cameroon 1996Ð97 4.0 36.0

C�te dÕIvoire 1994Ð96 11.4 35.0

Kenya 1995 12.6 40.0

Namibia 1996Ð97 19.1 3.0

Niger 1995 20.4 33.0

South Africa 1996Ð97 14.0 8.0

Tanzania (mainland) 1994Ð95 15.0 46.0

Uganda 1994Ð95 21.0 9.4

Zambia 1997 6.7 40.0

2Unsustainable debt also imposes other sorts of costs that impinge on human development: for

instance, another sort of cost is the absence of infrastructure such as roads that could both fightpoverty and create the conditions for more growth; a different type of cost is associated with thetime that civil servants spend negotiating debt repayments. It has been estimated that there havebeen more than 8,000 debt negotiations for Africa since 1980 (Caritas Internationalis 1998).

Asia

Africa

15

Belize 1996 20.3% 5.7%

Bolivia 1997 16.7 9.8

Brazil 1995 8.9 20.0

Chile 1996 10.6 2.7

Colombia 1997 16.8 7.9

Costa Rica 1996 13.1 13.0

Dominican Republic 1997 8.7 10.0

El Salvador 1996 13.0 27.0

Honduras 1992 12.5 21.0

Jamaica 1996 10.2 31.2

Nicaragua 1996 9.2 14.1

Peru 1997 19.3 30.0Source: UNICEF and UNDP, 1998

The debt overhang effect. Heavy debt burdens also prevent countries frominvesting in their productive capacity, investments necessary to spur economicgrowth. Disincentives to investment arise for reasons largely related to investorsÕexpectations about the economic policies required to service debts:

¥ The fiscal burden of debt requires higher taxes or lower government spend-ing, or both, with tax increases expected to fall in part on profitsÑand withexpenditure cuts likely to affect infrastructure, reducing the viability of com-mercial ventures.

¥ Excessive foreign debt reduces access to external lending, shifting thefinancing of the budget deficit towards domestic sources, likely to increaseinflation and domestic interest rates.

¥ Increased uncertainty about exchange rates may encourage foreign finan-cial investments over domestic productive investments.

¥ Higher taxes, lower government spending and higher interest rates limit thegrowth of domestic demand, again making investments less viable(Woodward 1998c).

The debt overhang also discourages private foreign investment. Heavy indebt-edness is a signal to the world financial community that the country is an invest-ment risk and that it is unwilling or unable to pay its debt. As a result, impover-ished countries either are cut off from the international financial markets orhave to pay more for credit. UNDP estimates that in the 1980s the interest ratesfor poor countries were four times higher than for the rich countries due to inferi-or credit ratings and the expectation of national currency depreciations (HDR1997).

It is precisely because unsustainable debt has deleterious consequences for

Latin

America

&

Caribbean

16

human development that the international community has called for additionaldebt relief and oftentimes for the cancellation of debt of the poorest countries(see Jubilee 2000 campaign). With good reason. If governments invest inhuman development rather than debt repayments, an estimated three millionmore children would live beyond their fifth birthday and a million cases of mal-nutrition would be avoided (Cantas Internationalis, 1998, p.8). Additional debtrelief is clearly needed for debtor governments to break the debt-poverty cycleand make progress in achieving human and social development targets.

Global Goals, Finance and Government Outputs

Goals for human and social development have been formulated in internation-al conferences from Jomtien to Beijing. The OECDÕs Development AssistanceCommittee report "Shaping the 21st Century: the contribution of developmentcooperation" proposed a set of targets as meaningful proxies for broaderdevelopment goals. The DAC targets aim to reduce by half the proportion ofpeople living in extreme poverty by 2015. The targets also include goals for pri-mary education, gender equality in schooling, reduced mortality of childrenand mothers, better reproductive health and protecting the environment.

The 20/20 Initiative translated goals and targets into public sector outputs pro-viding universal access to a discrete set of basic social services. The Initiativehas also quantified the financial implications of each basic social service as aproxy for the inputs to be provided if the outputs and goals of the Initiative areto be achieved. Finally, it has framed an operational conceptÑthe CompactÑby which governments and donors agree as partners, to shift resources tofinance basic social services, with the output mix reflecting the priorities of indi-vidual countries. The expenditure-shifting targets are for governments to allo-cate 20 percent of current expenditures to basic social services and for donorsto allocate 20 percent of Official Development Assistance to the same. Recentestimates reveal that for developing countries, budget allocations to basicsocial services vary between 12 and 14 percent, while donor countries devote,on average, around 10 percent of ODA to supporting these services (UNDP andUNICEF 1998). The funds channeled to these services are conservatively estimat-ed at about $136 billion a year, and an increase of at least $70Ð80 billion will beneeded annually to provide coverage of basic social services to all (UNICEFand the World Bank 1998).

3International conferences that have addressed issues important for sustainable human develop-

ment include those on: education (Jomtien, 1990), children (New York, 1990), the environment (Riode Janeiro, 1992), human rights (Vienna, 1993), population (Cairo, 1994), social development(Copenhagen, 1995), women (Beijing, 1995), sustained development in Africa (Cairo Agenda) andAsia-Africa cooperation (Tokyo, Ticad 1 and 11).4

The 20/20 Initiative, initially proposed at the Copenhagen Social Summit in 1995, is supported byUNICEF, UNDP, WHO, UNESCO, UNFPA and the World Bank.5

In the composition of spending on basic social services, education absorbs the bulk of resources(nearly two thirds of the total, on average), followed by basic health. Limited data on public spend-ing on water and sanitation suggest a weak commitment to provide these services to all (UNDP andUNICEF 1998).

17

Table 2. Global Goals and Financing Requirements

Global Goals/Outcomes Inputs/Costs/Finance Outputs

DAC Agenda for the 20/20 Compact: 20/20 Compact Output Mixyear 2015 Expenditure Requirements

Per Year

Universal primary education $7Ð8 billion Basic education

Eliminate gender disparity in No estimate Early childhood care & primary & secondary developmenteducation by 2005

No estimate Adult literacy

Universal access to $26Ð31 billion Essential clinical servicesreproductive health services through primary health care $8Ð10 billion Basic reproductive health

services

$15Ð17 billion Low-cost safe water &sanitation

$14 billion Basic public health packages &micronutrients

Not covered by 20/20 Compact

Reduce absolute poverty No estimate Rapid GDP growth and targeted by half poverty alleviation programmes,

through accelerated reforms, private sector development, agricultural research & extension

Implement national No estimate Multidimensional outputs, environment strategies including regulations, natural

resource management, slum improvements etc.

* There is not a complete one-to-one correspondence between the DAC targets and the outputmix fostered by the 20/20 Initiative because the Initiative focuses on basic social services.

Unless governments of both developing and developed countries translate theirsocial development goals into financial allocations for social services, progresstowards these agreed global targets will remain uneven. Indeed, meeting theseobjectives will require developing countries to restructure their national budgets(shift spending) in favor of social and human development programmes, requir-ing increased donor support.

The severe budgetary constraints in heavily indebted poor countries have inhib-ited them from shifting expenditures to human development programmes. Thereforms of the 1980s and 1990s required reducing state expenditure while thebudgetary share of interest payments on foreign debt nearly quadrupled,diminishing the proportion of resources available for social and economicdevelopment.

18

It is thus critical for donors to increase their aid flows, the more so because ODAhas been declining as a proportion of industrialized countriesÕ output since theearly 1980s. ODA now stands at less than one third of the target of 0.7 percentof donor GNP. Recently, the amount of assistance has started to decline aswellÑby nearly 5 percent each year since 1992. The decline has not beenaccompanied by a greater emphasis on health and education or by a focuson the least developed countries. So, the need is even greater to use scarceODA resources on social services targeted to the poorest and most vulnerable.

Given the budgetary constraints of developing countries, additional debt reliefcould provide a head start to governments in initiating expenditure reforms. Theeffort to mobilize additional debt relief should be seen as an integral part of thetotal effort to strengthen resources in support of the social objectives laid out inthe global targets for human developmentÑnot as an end in itself, or as a lastresort to closing a balance-of-payments gap.

"Connecting additional debt relief to human development targets would refo-cus the debate on the real debt crisis: not the inability of low-income countriesto replenish creditor funds, but the inability of tens of millions of people tosecure their most basic human rights, because of the low growth and under-investment the debt overhang creates and debt servicing perpetuates" (Oxfam1998, p.9). Neither the debt crisis nor the growing marginalization and impover-ishment of the most highly indebted countries will be resolved unless it is recog-nized that human underdevelopment and unsustainable debt are part of thesame problem.

Magnitude of the HIPC Debt Crisis

The total external debt for the 41 heavily indebted poor countries amounted to$245 billion at end-1996. As a group, these countriesÕ debt burden remainssevere, with a debt stock to export ratio of well over 300 percent (far above the200 percent threshold used to indicate a debt overhang) and a debt stock toGDP ratio of 127 percent in 1996. For the heavily indebted poor countries, thedebt structure is overwhelmingly public and publicly guaranteed at 80 percentof total external debt at end-1996. The marginal size of purely private debt andbonds reflect at least partially the constraints that face the private sector inthese countries in securing external financing. Of long-term debt for highlyindebted poor countries in 1996, 30 percent is owed to multilaterals, 54 percentto bilaterals and 16 percent is private (UNCTAD 1998c). The highly indebtedpoor countries have thus had to depend heavily on external financing fromofficial bilateral and multilateral sources6 (Annex 1). Appendix 1 presents dataon debt indicators for various regions.

6Multilateral institutions have "preferred creditor status," this status derives from the debtorsÕ tradition-

al practice of servicing debt owed to the World Bank and IMF before servicing debt owed to otherlenders.

ExistingMechanisms for

Debt Restructuring2

20

Commercial Bank Debt Relief: From the Baker Plan to the Brady Initiative

In September 1985, the five largest industrial countries met in New York to for-mulate a coordinated plan to deal with the Mexican monetary crisis, whichwas by that time in its third year. Sponsored by the United States, the "BakerPlan" was launched at the Plaza Meeting of the Five, and was presented inmore detail at the World Bank/IMF annual meeting in Seoul a month later. Theplan included the provision of $29 billion in new financing for borrowing coun-tries over three years. The World Bank and the Inter-American DevelopmentBank would provide a third of this new financing, the commercial banking sec-tor two-thirds (Browne 1999).

The three most important features of the Baker Plan were:

1. The commitment to resolve the crisis with more private (commercial bank)lending.

2. The requirement that multilateral institutions be part of the overall solution,requiring borrowers to satisfy the conditions of those institutionsÑlike the con-dition that debtor countries enact major structural reforms, liberalizing tradeand foreign investment and reforming state enterprises.

3. The fact that the plan was voluntary (Browne 1999).

The voluntary aspect of the Baker Plan ensured the planÕs failure to resolve thedebt crisis.

A second attempt to reduce commercial debt through a concerted effortcame in 1989Ñin the Brady Plan. The World Bank and the IMF played a morecentral role in the debt rescheduling, and their focus was more clearly on themiddle-income countries of Latin and Central America. The Plan tried in gener-al to use a more appealing and aggressive strategy, employing measures toinduce commercial banks to rewrite existing contracts to exchange debt eitherfor secure liquid assets on better terms or for cash. For example, the plan madeit possible to replace a portion of outstanding debt with "Brady bonds" having alower face value and a longer repayment schedule (Browne 1999).

Since 1989 the restructuring of developing country debt to commercial bankshas occurred largely through buy-backs supported by the InternationalDevelopment AssociationÕs (IDA) Debt Reduction Facility for low-income coun-tries (IMF 1998) (see Appendix 2).

21

Bilateral Debt Relief: The Paris Club

Institutional Structure

The Paris Club is an ad hoc creditor-country organization that responds torequests for debt relief on guaranteed export credits and intergovernmentalloans.7

To administer the Paris Club on behalf of the creditor countries, the FrenchMinistry of Finance maintains a permanent secretariat, including one senior offi-cial, who serves as President of the Club. There is no permanent membership;all countries taking part in meetings have claims resulting from export creditinsurance arrangements. Between 1981 and 1993, an average of 18 countries ayear have sought debt relief from the Paris Club, which meets almost everymonth.

Countries facing imminent defaultÑlargely because of debt service due onofficially guaranteed export creditsÑwill approach the President of the ParisClub and ask to be considered for relief. The creditors will agree to hear thatcountryÕs application at their monthly meeting if an IMF-supported adjustmentprogramme is in place.

When creditors and debtors meet at the Paris Club, the negotiations usually lastfor one day. At such meetings, the creditors settle on a period of debt relief,called the consolidation period. They determine the repayment terms (graceand repayment periods) on the consolidated debt and decide which debts willbe included in the consolidation (current maturities and sometimes arrears andpreviously rescheduled debt). Amortization and interest payments are usuallyrestructured, but it is sometimes decided that only the principal will be resched-uled. The Club produces minutes of its negotiations that all parties agree to,and these minutes form the basis for the creation of bilateral implementingagreements with each creditor. The moratorium interest, that is, the interest ondebt, is not a result of the ClubÕs negotiations; the parties negotiate this sepa-rately, because each national export credit agency charges interest at a ratereflecting its own cost of borrowing.

The Paris Club provides qualifying countries with some reduction or reschedulingof debt. The criteria are strict, but if a country qualifies, it can get a 67 percentreduction of a portion of its outstanding debt (up to 80 percent under the Lyonterms). Eligible for reduction is debt that:

¥ Has not previously been rescheduled.

¥ Is not concessional.

¥ Was incurred before the cut-off dateÑthe date when the country firstrequested assistance from the Paris Club. For most countries, the cut-off dateis in the early 1980s. The debt incurred since then is ineligible for relief.

7Guaranteed export credits are commercial credits that finance exports. When a debtor country

defaults on an export credit, the export credit agency (ECA) becomes the owner of the guaran-teed portion of the export credit (typically as much as 95 percent of the export credit).

22

The Heavily Indebted Poor Countries (HIPC) Initiative

In September 1996 the Boards of the IMF and the World Bank endorsed theHeavily Indebted Poor Country (HIPC) Debt Initiative. The central aim of theInitiative is to enable 41 countries classified as HIPCs (see appendix 3) toachieve a sustainable debt level within six years and to offer them an exit fromthe debt rescheduling process.

All but eight of the HIPCs are in Sub-Saharan Africa, and the HIPCs combinedaccount for 12 percent of the debt of developing countries, but less than 5 per-cent of developing countriesÕ exports and only 3 percent of developing coun-triesÕ GNP (table 3).

Table 3. Heavily Indebted Poor Countries Relative to all Developing Countries, 1996 (per-cent)

Region Number of Share of Share of Share of Share ofcountries populationa external debt GNP exports

Africa 33 10.6 8.8 2.3 3.3

Asia 4 2.8 1.9 0.8 1.0

Latin America 4 0.4 0.8 0.2 0.3

Total 41 13.8 11.5 3.3 4.7(a) Data are for 1995.Source: IMF, 1998.

In about a third of the HIPC countries, public debt (for which governments areresponsible) is larger in value than the GDP. And in Nicaragua, S�o Tom�,Guinea-Bissau, Guyana, Mozambique and Republic of Congo, the debt istwice or even several times higher (Browne 1999).

All but seven HIPCs are in the category of countries classified by UNDP as hav-ing low levels of human development (appendix 4), and there is a close con-nection between the burden of debt and human survival in all the HIPCs. "Achild born in a HIPC is 30 percent less likely to reach its first birthday than theaverage for all developing countries É and a mother is three times more likelyto die in childbirth" (Oxfam 1998) (box 1).

Given the distressing human situation in HIPCs, the international community hasrecently focused on obtaining debt relief for them. Indeed, there is a particularurgency for debt relief for these countries, since as a group, they have some ofthe worldÕs worst human welfare indicators. Even when compared with theaverage for all developing countries, illiteracy rates are 25 percent higher in theHIPC countries, and access to safe water and health facilities is around a thirdlower (Oxfam 1998).

HIPC Measures of Sustainable Debt

To calculate whether an HIPC countryÕs level of debt is sustainable, a debt sus-tainability analysis is undertaken. Under the Initiative, two measurements ofdebt sustainability related to export capacity were designed, and in 1997 thesewere supplemented by a fiscal threshold measure. The three measures:

23

1. A present value debt stock to export ratio above 200Ð250 percent.2. A debt service to export ratio above 20Ð25 percent.8

3. A present value debt to government revenue ratioÑor fiscal thresholdÑabove 280 percent (subject to the country having exports equivalent to morethan 40 percent of GDP and fiscal revenue collections in excess of 20 percentof GDP).9

To determine whether a country had unsustainable levels of debt, the criterionused was either (a) the debt stock to export ratio or (b) the fiscal threshold. Putsimply, if a country had a debt stock to export ratio above 250 percent, itwould be considered to be in an unsustainable position and would be poten-tially eligible for HIPC debt relief. But if the debt stock to export ratio fell below200 percent, the country would be seen as having a sustainable level of debtand so would be ineligible for HIPC debt relief. A country with a debt stock toexport ratio that fell between the 200Ð250 percent range is seen as a borderlinecase.

Box 1. Mozambique's plight

The plight of HIPC countries can be illustrated with reference to those in the mostprecarious situations, such as Mozambique, which has a per capita income of $80,the lowest in the world according to World Bank calculations. In 1992 the countryemerged from a 16-year civil war, which killed one million of its people (6 percent ofthe total) and destroyed two-thirds of its primary schools and one-third of its ruralhealth units. Half the countryÕs children have stunted growth, and 200,000 under fivedie each year from preventable diseases. Life expectancy is 46 years, and only 39percent of the population have access to health services. The adult literacy rate is 40percent.

Despite frequent rescheduling, MozambiqueÕs outstanding debt still stands at $5.6 bil-lion (in present value terms), or more than 10 times the value of annual exports. In1997 alone the country owed its creditors $196 million, or $13 for every inhabitantÑtheequivalent of two months of average income. In 1997 debt servicing absorbed one-third of government spending, and the proportion is rising. The country already spendstwice as much on debt servicing as it does on health and education (Browne 1999).

Eligibility Criteria

To qualify as a HIPC:

1. Countries must be eligible to borrow from "IDA only", but not from IBRD. IDAonly means the average annual per capita income of the country must be lessthan $900. Most heavily indebted countries have average annual per capitaincomes under $400. 2. Countries must have a strong track record of performance under an IMF-sup-ported structural adjustment program. If the country strays, it has to wait longerfor relief.3. Countries have to exhaust all existing debt relief mechanisms without reach-ing a sustainable level of debt.

8Specific targets within the ranges of the first two measures are determined in the light of country-

specific vulnerability factors, such as the concentration and variability of exports.9

The reason for including a fiscal criterion was that export-denominated debt sustainability indica-tors discriminate unfairly against countries that have relatively open economies and hence higherexport incomes.

24

The Initiative in a Nutshell

Under the HIPC Initiative, countries are considered eligible after maintaining athree-year track record of macroeconomic, structural and social policy reforms,monitored by the World Bank and the IMF. A countryÕs eligibility for assistance isdetermined by the Boards of the Bank and the IMF on the basis of a tripartitedebt sustainability analysis by the countryÕs government and Bank and IMFstaff. Towards the end of the three-year performance period required for acountry to be considered for a Paris Club stock-of-debt operation (decisionpoint), an analysis is made of whether this operation, together with at leastcomparable action by other non-multilateral creditors, would be enough toachieve debt sustainability after another three years (the completion point). Atthe completion point, the multilateral creditors provide debt relief only if allother reductions are not enough to reduce the countryÕs debt to a sustainablelevel.

Countries for which existing debt relief mechanisms would not achieve sustain-ability in the three years following the decision point would receive enhancedrelief under the Initiative. The amount would be adequate to achieve debt sus-tainability by the end of that period, assuming continuing strong policy reform.For borderline cases, where there is uncertainty about the ability to reach a sus-tainable debt position, provisions for further monitoring leave open the possibili-ty of receiving enhanced assistance under the Initiative if needed to achievedebt sustainability. The requirement of a six-year performance period is imple-mented flexibly and case by case. Countries receive credit towards the firstthree years of performance for programmes already under way, and in excep-tional cases the second three-year stage may be shortened for countries withsustained records of strong performance (chart 1).

Funding and Cost

All creditors participate in the debt relief package under the Initiative. Costs areshared broadly in proportion to each creditorÕs outstanding claims, expressed innet present value terms10 at the Decision Point. Paris Club creditors participateby granting Lyon terms. Each creditor may define the mechanisms throughwhich it will participate as long as it achieves the agreed reduction in net pre-sent value claims by the completion point. Regular meetings have been estab-lished among multilateral creditors to coordinate their participation (IMF 1998).11

The latest estimate of the total costs of the HIPC Initiative, prepared in July 1997,is $7.4 billion in 1996 NPV terms.12 This relief is in addition to that provided throughsuch traditional mechanisms as Paris Club Naples terms or commercial bankbuy-backs funded through the IDA Debt Reduction Facility and other donors.The World Bank has established the HIPC Trust Fund to facilitate participation

10Net present value (NPV): the amount of money needed to be invested at a commercial interest

rate at the beginning of the period of debt repayments such that, with accumulated interest, itwould be just adequate to meet all the payments as they fall through.11 Although the HIPC Initiative is the first debt relief mechanism that provides multilateral debt relief,so far only bilateral creditors have been the principal source of debt relief for HIPCs.12 This estimate is based onÑand very sensitive toÑa number of important assumptions including eli-gibility, debt sustainability targets and macroeconomic projections.

25

Chart 1: HIPC Debt Initiative

Either... Paris Club stock-of-debt operation underNaples terms (up to 67per cent present valuereduction of eligibledebt) and comparabletreatment by other bilat-eral and commercialcreditors is adequate forthe country to reach sus-tainability by the com-pletion pointÑcountrynot eligible for HIPC DebtInitiative.

* Paris Club provides flow rescheduling as per current Naples terms, i.e. rescheduling ofdebt service on eligible debt falling due during the 3 year consolidation period (up to 67per cent reduction on eligible maturities on a net present value basis).

* Other bilateral and commercial creditors provide at least comparable treatment.

* Multilateral institutions continue to provide adjustment support in the framework of aWB/IMF supported adjustment programme.

* Country establishes first 3-year track record of good performance.

Or...Paris Club grantsdebt relief and thedebtor governmentdeposits the equivalentamount in domestic cur-rency in two accounts atthe Central Bank of thedebtor country.

* Paris Club provides deeper stock-of-debt reduction of up to 80% in present value terms on eligibledebt so as to achieve an exit from unsustainable debt.

* Other bilateral and commercial creditors provide at least comparable treatment on stock-of-debt.

* Multilateral Institutions take such additional measures, as may be needed, for the countryÕs debt tobe reduced to a sustainable level, each choosing from a menu of options, and ensuring broad andequitable participation by all creditors involved.

* Or... For borderline cases, wherethere is doubt about whether sus-tainability would be achieved bythe completion point under aNaples terms stock-of-debt opera-tion, the country would receivefurther flow reschedulings underNaples terms.

* If the outcome at the comple-tion point is better than or as pro-jected, the country would receivea stock-of-debt operation onNaples terms from Paris Club cred-itors and comparable treatmentfrom other bilateral and commer-cial creditors.

* If the outcome at the comple-tion point is worse than projected,the country could receive addi-tional support under the HIPCInitiative, so as to achieve exitfrom unsustainable stock.

* Paris Club goes beyond Naples termsto provide more concessional debtreduction of up to 80% in present valueterms.

* Other bilateral and commercial credi-tors provide at least comparable treat-ment.

* Donors and multilateral institutions pro-vide enhanced support through interimmeasures.

* Country establishes a second trackrecord of good performance underBank/IMF-supported programmes.

First Stage

Decision Point

Exit Eligible Borderline

Second Stage

Completion Point

26

by multilateral institutions (box 2). Up to the present, the Bank has transferred$750 million from IBRD net income to the HIPC Trust Fund. The HIPC Trust Fundhas also received about $170 million in pledges and contributions from 11 bilat-eral donors to help meet the costs of other multilateral development banks. TheIMF has established the ESAF-HIPC Trust for financing special ESAF operationsunder the initiative, to which up to SDR 250 million (about $340 million) can betransferred from the ESAF Trust Reserve Account (IMF 1998).

Box 2. The HIPC Trust Fund

The World BankÕs HIPC Trust Fund will provide debt relief to eligible HIPCs on debt owed to partici-pating multilaterals. The HIPC Trust Fund will either prepay or purchase a portion of the debt owedto a multilateral creditor and cancel such debt, or pay debt service as it comes due.

The HIPC Trust Fund will consist of contributions from participating multilateral creditors and bilateral donors.

Bilateral donors including Denmark, Greece, Luxembourg, Netherlands, Norway, Switzerland andthe United Kingdom have made contributions or pledges to the HIPC Trust Fund, amounting toabout $100 million.

These contributions will help to ensure that all multilateral institutions are in a position to meet theirshare of the cost for the first countries that will receive support under the Initiative.

The Role of Creditors

Initially, the HIPC Initiative was supported only reluctantly by several key credi-tors: Germany, Japan, Italy and to a less extent France and the United States,as well as the IMF. Eurodad notes that the U.S. position is not really clear.Generally, the United States argues for low threshold levels but long monitoringperiods. France appears prepared to use its influence only if the country underconsideration is a former colony, apparent in the case of C�te dÕIvoire, forwhich the fiscal indicator was introduced in the HIPC framework.

Germany, Japan and Italy opposed the Initiative from the outset and arguedfor the strictest maintenance of the HIPC framework: high thresholds and longmonitoring periods (because this reduced the relief necessary). More recentlythough, the position of Germany has shifted, and Italy and the United Statesalso appear to be adopting a more flexible approach. Note, for instance, therecent statement by Chancellor Schroeder announcing the Cologne DebtInitiative to be presented to the G8 summit in Cologne in June 1999.13

The United Kingdom, the Nordic countries, Switzerland, the Netherlands andsometimes Canada strongly supported the Initiative from the outset.14 Whencandidates for HIPC assistance are discussed by the IMF and World Bank Boards, these creditors generally support low threshold levels and early

13 See Chancellor SchroederÕs statement in the Financial Times (1/21 /99) and Vice-President GoreÕsstatement at Davos (in the International Herald Tribune 1/30/99).14 See the Mauritius Mandate proposed by Chancellor Brown in 1997. The Mauritius Mandate aims toensure that all eleigible countries will at least have embarked on the HIPC process by the year 2000and that firm decisions will have been taken by that time on the amounts and terms of debt relieffor at least three-fourths of these countries. The Chancellor also proposed a more flexible interpreta-tion of the Paris Club rules, for example, by applying relief to post cut-off dates where necessary,shortening the six-year period of satisfactory performance and giving debtor countries a strongervoice in the negotiations. The sale of IMF gold was also mentioned as a possible mechanism forenabling the IMF to play its part in the HIPC scheme.

27

completion points. The Nordic countries and the Netherlands are also by far thelargest donors to the HIPC Trust Fund.

A large group of small creditor countriesÑAustria, Belgium, Greece andLuxembourgÑbasically follow the common denominator.

During the 1997 G-7/8 Summit, it was announced that Russia was admitted intothe Paris Club, significant for Angola, Ethiopia, Mozambique and Tanzania,which all have substantial debt to the former Soviet Union. The agreement withthe Paris Club now means that Russia has to give an 80 percent upfront dis-count on debts to HIPCs. After this discount, Russia will provide debt relief ordebt reduction on the same basis as other Paris Club creditors: either Naplesterms (67 percent reduction on eligible debt), or for HIPCs reaching the com-pletion point, Lyon terms (80 percent reduction on eligible debt).

The role of creditors is especially important for the resolution of the HIPC debtcrisis because of the official (bilateral) rather than commercial nature of HIPCdebts. That is, the political will exhibited by major creditors is critical if the HIPCInitiative is to be successful. Indeed, securing the necessary financing for the fullimplementation of the Initiative and the expeditious resolution of individualcountries is the key issue. Any shortfall in funding would slow implementation fur-ther and entail the risk that some HIPCs could be excluded from the Initiative.

In the 1980s crisis, the return of private capital to the Latin American region wasa crucial aspect of the resolution to the crisis. HIPCs have hardly received anyprivate capital flows to date and will, in all likelihood, fail to do so untilinvestorsÕconfidence is increased with the elimination of unsustainable debt(the debt overhang). So, the case-by-case resolution of HIPC debt will largelydepend on the political considerations of the major creditors.

A Review of the HIPC Initiative through June 199815

Since September 1996 the eligibility of 10 HIPCs has been reviewed (table 4).Eight countries have qualified for HIPC debt relief packages that could amountto about $3.4 billion in net present value terms, or about $6.5 billion in nominaldebt-service relief. The countries are Uganda, Bolivia, Guyana, Burkina Faso,C�te dÕIvoire, Mozambique, Mali and Guinea-Bissau. Debt-relief packageswere agreed on for six countries (Bolivia, Burkina Faso, C�te dÕIvoire, Guyana,Mozambique and Uganda) totaling about $3 billion in net present value terms,or about $5.7 billion in debt-service relief. Debt relief is under consideration forGuinea-Bissau and Mali, possibly totaling $500 million in net present value terms,or about $850 million in estimated debt-service relief. Benin and Senegal weredeclared sustainable, which means that traditional debt relief measures areregarded as sufficient for these countries.

15In September 1998 the IMF and World Bank Boards completed the required review of the HIPC

Initiative. The review recommended extending the entry date of the Initiative from 1998 to the endof 2000. This is important for countries with unsustainable debt burdens that have recently emergedfrom civil war and have not yet been able to embark on an IMF [Enhanced Structural AdjustmentFacility] (ESAF) programme, one of the principal HIPC entry requirements. This would raise the cost ofthe Initiative to a total of $8.2 billion (in NPV terms). Also, in recognition of the special needs of post-conflict countries, staff of the IMF and World Bank propose to count economic recovery and emer-gency assistance programmes preceding an ESAF programme as part of the necessary three-yeartrack record requirement for reaching the Decision Point.

28

For Bolivia, Burkina Faso, Guyana and Uganda the normal three-year interimperiod between decision and completion point was shortened in view of theirpolicy performance. Uganda, Bolivia and Guyana are the only countries thathave so far actually received HIPC debt relief.

Table 4. [Review of 10 HIPCs]

Country Decision point Completion point Amount of relief (US $ million NPV)

Uganda April 1997 April 1998 350

Bolivia September 1997 September 1998 448

Burkina Faso September 1997 April 2000 110

Guyana December 1997 December 1998 253

C�te dÕIvoire March 1998 March 2001 345

Mozambique March 1998 June 1999 1,400

Benin June 1997 Sustainable 0

Senegal March 1998 Sustainable 0

Mali 2nd half 1998 (expected) ? ?

Guinea-Bissau 2nd half 1998 (expected) ? ?Source: World Bank 1998.

Objections to the HIPC Initiative

Although the HIPC Initiative was lauded as the most comprehensive debtor-focused debt relief mechanism to date, some note that it contains major weak-nesses, both in its framework and implementation.16

According to critics, the main weakness of HIPC is its (mis-)understanding ofwhat constitutes sustainable debt and how sustainable debt levels are mea-sured. It has been argued that the HIPC Initiative appears to treat the debtproblem as one of liquidity, rather than one of basic solvency. "The economiesof most HIPC countries are not merely illiquid, they are fundamentally insolvent.These fragile economies are still dependent on one or a few commodities fortheir export earnings. The fortunes of their primary production sectors are at themercy of weather conditions and natural disasters. Some are recovering fromwidespread civil conflict; others are still embroiled in such. Their terms of tradehave declined in the long term and export prospects remain dim. These coun-tries lack the domestic resources to make the necessary investments in humancapacity, precisely because, in many cases, their budgets are being drainedby long-standing debt obligations" (Browne 1999, p.12) (see appendix 5).

16Two important factors slow down the implementation process of the Initiative: (a) lack of ade-

quate funding for an expeditious resolution of all eligible cases; (b) the complexity of the processitself, with its complicated methodology for determining debt sustainability and for working out aburden-sharing framework among creditors (UNCTAD 1999).

29

In other words, the HIPC Initiative does not address the structural factors thataccount for the debt crisis in HIPC countries. Instead, the focus is on determin-ing how much a country can pay and, as noted earlier, that determination isbased on the debt sustainability analysis.

Of 41 countries classified as HIPC, debt-relief packages have been approvedfor only six countries. It is argued that one reason so few countries have quali-fied for HIPC debt relief is that debt sustainability measures have been set toohigh. Take the debt to fiscal revenue indicator, currently set above 280 percent.This was introduced to reward countries with strong export performance, which,given the link between exports and revenue, is related to revenue collection.But the indicator does not systematically address the budgetary instability asso-ciated with debt. For instance, more than a quarter of the budget revenue inTanzania is absorbed by external debt servicing, or more than governmentspending on health and education. Yet, the countryÕs failure to meet the rev-enue collection and export targets set under the HIPC fiscal dimensions pre-cludes the country from seeking debt relief on fiscal grounds (Oxfam 1998c).

Further, since the debt sustainability analysis is based on what is owed to credi-tors rather than on what is actually paid to creditors, it has been argued thatthe Initiative would reduce debt service only to levels above those being paidat present, with the result that debt will continue to impose a severe strain onforeign exchange and fiscal resources. This in turn will undermine long-termgrowth and development prospects. For instance, in the 1990s the scheduleddebt-service ratio for Sub-Saharan Africa has been around 30 percent, butactual payments have been in the range of 15Ð20 percent, resulting in a con-tinued build-up of arrears. For Mozambique, a 20 percent debt-service ratiowould represent a doubling of the level of actual debt repayments during the1990s. So, if the debt sustainability thresholds were lowered, the Initiative couldprovide for deeper debt reduction.

The objections to the Initiative mentioned so far relate to how it conceptualizeswhat constitutes sustainable debt and how it is measured. Two other importantobjections have also been raised: the first on the structural adjustment condi-tionality, the second on the financing of the Initiative. In both cases, criticsargue that unresolved problems with these two issues will lead to a delay indebt relief for potential HIPC beneficiaries.

Critics argue that the current structural adjustment conditionality is a majorimpediment to a swift and efficient HIPC process. Structural adjustment condi-tionality determines when a countryÕs debt sustainability analysis can be startedand when it can go before the World Bank and IMF Boards. If a country isdeclared 'off-track' by the IMF on its structural adjustment programme, as wasthe case with Nicaragua and Ethiopia in 1997, debt relief is delayed. At thesame time, the stringent conditions accruing to these adjustment programmesmake them increasingly difficult to comply with, so that slippages become avery real problem. A recently conducted internal IMF/ESAF review revealedthat 51 significant interruptions of ESAF-supported programmes have occurredsince 1986, affecting 28 of the 36 countries under review. The three-plus-threeHIPC timeframe can thus easily become longer for a number of potential HIPCbeneficiaries (Eurodad 1998).

30

The HIPC framework is based on the principle of proportional burden-sharing,with creditors financing debt reduction commensurate to their share of debtstock. In practice, however, this principle has proven difficult to enact, con-tributing to delay (box 3). Take Mozambique, where the Boards of the IMF andthe World Bank agreed that $1.5 billion reduction in debt stock was needed toachieve sustainability. But the large share of bilateral debt meant that the ParisClub rule allowing for an 80 percent reduction in eligible debt stock was inade-quate to cover its membersÕ share of the cost. "After a protracted delay, whichat one stage appeared to derail action on Mozambique, the Paris Club agreedto provide Naples terms plus a $170 million aid package. This still left a shortfallof $100 million, likely to be covered by multilateral and bilateral creditors, onlyafter the United Kingdom, Canada and the World Bank offered to break thelog-jam and offer resources. Given that the Paris Club will need to go beyond80 percent debt reduction for at least five more countries (Guinea-Bissau,Madagascar, Nicaragua, Rwanda and Sao Tome), a more flexible formula mustbe found for sharing the costs of debt relief" (Oxfam 1998a, p.7).

Box 3. Debt relief for Uganda and Mozambique?

Without extra resources, HIPC is doomed to achieve very little. This is seen clearly in Uganda andMozambique.

Uganda is the first HIPC beneficiary and started receiving debt relief worth US$350 million (NPV) atits completion point in April 1998. However, at the completion point, UgandaÕs Multilateral DebtFund provided $42 million a year towards scheduled debt service, while Uganda was to receiveonly $30 million annually under HIPC. To overcome this cash flow problem, the World Bank andthe IMF had to "front-load" debt reliefÑto make proportionally more available at the very earlystages after completion point. This will "top up" the $30 million to exactly $42 million annually.Uganda will therefore not make a loss under HIPC, but will be exactly in the same position as in1997.

Only because donors contribute to the new Poverty Action Fund, which replaced the MultilateralDebt Fund, does Uganda stands to benefit under the new arrangements. Debt relief in UgandaÕscase will cover minimum debt servicing costs but is unlikely to free up many additional resourcesfor health, education and other sectors crucial to long-term development and growth. The WorldBank has made a $75 million grant available for UgandaÕs Universal Primary Education initiative,which aims at putting four children per family out of five in primary education by the year 2000,but universal primary education cost $120 million in 1997 alone. Uganda will thus remain heavilydependent on external financing for human development.

In April 1998 the World Bank and the IMF announced that a deal for Mozambique had beenreached. But the change in actual debt repayment will be minimal. The average public debt ser-vice for 1995Ð97 was $107 million, while the average for the first four years after the Initiative dealwill be $106 millionÑa difference of only $1 million. By comparison, the estimated costs of deliver-ing a basic package of health services to Mozambique alone are $173 million.

Source: Eurodad 1998.

In sum, almost all critics have argued that the Initiative offers too few countriestoo little debt reliefÑtoo late. If the Initiative is to be more effective, it is recom-mended that:

¥ The debt sustainability analysis be simplified and that debtors should be fullyinvolved in determining sustainability criteria. Indeed, debtors should be ableto participate as equal partners in the process of implementing the Initiativeand the principle of debtorsÕ ownership of the debt sustainability analysisshould be ensured. A proposal has been made by UNCTAD to set up an inde-

31

pendent commission, appointed by agreement between creditors anddebtors, to assess the debt sustainability of developing countries.

¥ The implementation period for individual countries (the interval betweendecision and completion points) should be shortened.

¥ The World Bank and IMF should mobilize an adequate amount of financingto secure an expeditious review of all eligible highly indebted poor countriesby 2000; this might involve selling part of the IMF's gold holdings.

¥ Contributions by bilateral donors to the HIPC Trust Fund should be increasedto allow the debt of other multilateral institutions, especially the AfricanDevelopment Bank, to be dealt with adequately.

¥ For the poorest among the HIPCs, urgent consideration should be given tobolder actions, including conversion into grants of all remaining official bilat-eral debt and the clearing of the entire stock of debt if warranted (UNCTAD1998c).

The need for the Initiative to gather speed has been noted by many. For Africa,where unsustainable debt threatens the economic security and long-term sta-bility of some of the poorest countries in the world, the United NationsSecretary-General has issued an urgent appeal. His April 1998 Report on Africato the UN Security Council is clear:

"First, I call upon creditor countries to convert into grants the remaining officialbilateral debt of the poorest African countries. Second, I call upon the interna-tional financial institutions to significantly ease and quicken access to facilitiesfor heavily indebted poor countries, and to provide countries with sufficientresources to enable them to attain a substantial and sustained pace of eco-nomic growth and social development."

Capacity-Buildingfor Effective Debt

Management3

34

Debt sustainability analyses have revealed the persistence of serious weakness-es in debt management. For instance, very few countries in Sub-Saharan Africahave been able to maintain precise information on debt stocks and arrearsand on such flows as the amounts of debt service owed. Few countries haveset into place the institutional framework to consolidate information on debtundertakings and use it for effective policy formulation. Countries have beeneven less successful in setting up effective debt management policies, whichwould allow them to regulate debt undertakings and ensure that the debt bur-den does not compromise sustained development. Clearly, without sustainedand coordinated debt management capacity-building, any attempt toachieve debt sustainability will be undermined.

For capacity-building in debt management, UNDP has established partnershipsand programmes on global, regional and country levels.17 Major achievementshave been:

¥ Upgrading UNCTADÕs programme for debt management, DMFAS.¥ Installing this programme in more than 50 countries, often under financing byUNDP and bilateral donors.¥ Creating a regional programme in Southern and Eastern Africa for debt andreserve management, ESAIDARM, which has evolved into MEFMI, theMacroeconomic and Financial Management Institute of Eastern and SouthernAfrica.

The Commonwealth Secretariat has also developed a software program fordebt management. Both UNCTAD and the Secretariat have provided free soft-ware and training, combined with advisory services on debt management insti-tutions. Besides these efforts to improve capacities, a group of donors compris-ing Austria, Denmark, Sweden, Switzerland and, more recently, the UnitedKingdom has launched a capacity-building programme for debt policy analysisfor the highly indebted poor countries. This initiative is supported by the WorldBank, the IMF, UNCTAD and UNDP, which are members of the SteeringCommittee of the Initiative.

Debt Relief International has been selected to implement this capacity-buildingprogramme. It provides technical assistance and organizes regional workshopsto train debt officials in preparing debt sustainability analyses and formulatingdebt policies congruent with the macroeconomic policies of the country.

For more progress in capacity-building for effective debt management, the keyissues are:

¥ Institutional and human resource management.¥ Software design and the assistance to install the software.¥ The financial back-up by donors.¥ The link between debt management and macroeconomic and financialpolicies.

17In 1991 UNDP, UNCTAD and the World Bank established a Joint Programme to provide technical

cooperation in debt management to developing countries.

35

Institutional Environments and Human Resource Management

The track record of many heavily indebted poor countries in debt manage-ment is poor. Governments have traditionally accorded more importance tosecuring loans than to paying them back, creating disincentives for debt man-agers. Most governments have yet to develop clear debt policies that wouldcreate top-down pressure to discipline the undertaking of new debt andreward prudent managers.

On the institutional front, few governments have been able to centralizeauthority over debt policies and their management, inhibiting the collection ofdebt data and the dissemination of debt analysis to users. Debt managementunits are often pushed to the margin in policy formulation and implementation.The absence of a disciplined framework also generates imprudent borrowingby public sector units, which makes control over contingent liabilities more diffi-cult.

Further undermining effective debt management is the frequent rotation oftechnical and managerial staff in most governments. The skills that a debt tech-nician and manager will develop as a result of experience and training are ingreat demand in and outside governments (particularly in private banks). It isnot surprising that training programmes never end, perpetuated by the highstaff rotation.

Software Design

The Commonwealth Secretariat (COMSEC) and UNCTAD are the two mainproviders of software to developing countries. Their tools provide a full range ofoutputs, including the management of data and the production of manage-ment reports. A new interface between each system and a spreadsheet appli-cation developed by the World Bank allow countries to carry out debt sustain-ability analyses.

COMSECÕs clients are primarily members of the Commonwealth. Its productdesign strategy has been to develop a closed-end proprietary computer toolso that the software cannot be connected to public finance managementsoftware without the assistance of COMSEC staff. To expand its markets, COM-SEC has translated its software into French and Portuguese. It is now upgradingits software to make it more user-friendly and to allow connectivity with all com-mercial relational database platforms.

UNCTAD has a different approach. Its software is open-ended and uses a popu-lar relational database management engine (Oracle 7). As a result it can, withsome additional engineering, be connected to financial management data-bases. UNCTAD has also upgraded its software to run in the Windows environ-ment. Its client base is outside the Commonwealth, though it has made head-way in providing its software to Uganda and Zimbabwe.

With the high turnover of personnel in debt management agencies, makingcomputer technology more user-friendly is essential for sustainability. Complexcomputer software is difficult to learn and requires more training and resources,

36

and distracts cash-strapped development agencies from focusing on othermore critical, institutional development issues. For instance, the two main data-base systems installed in Sub-Saharan Africa appear overdesigned and requireextensive training. Efforts should aim at user-friendly software that can be usedby relatively inexperienced users.

Financing Capacity-Building

The effectiveness of assistance for capacity-building in debt management iscritically affected by the type of financing that supports it. Since the end of theJoint Initiative, financial support has been project-based rather than pro-gramme-based. This has forced UNCTAD to rely on country projects to financeits overhead costs and develop its tools. Without programme-based finance, itcan recruit staff on only very short-term contracts, making it difficult to retain itstrained professionals.

Rather than mobilize new business, COMSEC now just provides assistance toexisting clients, an assured financial base. Until recently, the InternationalDevelopment Research Center (IDRC) of Canada was helping to develop thesoftware, translate it into French and Portuguese, and build a new client base,mainly in Francophone West and Central Africa (Benin, Cameroon, Mali). Nowphasing out its programme, IDRC has concluded an arrangement with theAgence de Cooperacion Culturelle et Technique to ensure future programmesupport.

Linking Debt Management to Macroeconomic and Financial Policies

Effective debt management requires that debt data be used to steer debt poli-cy formulation and implementation. With the exception of theESAIDARM/MEFMI programme, linkages are weak in integrated capacity-build-ing programmes. The support for Debt Relief International is diluted by the weakdata it must use for its work programmes.

ESAIDARM/MEFMI

One institution that has received continuous support is MEFMI, the only success-ful experience in sustained debt management capacity-building in the Africancontext. MEFMI's key features:

¥ It has been set up as a sustainable, regional training institution with restrictedmembership and strong ownership by the country members. Sustainability isassured by having members contribute to the unitÕs recurrent costs on a slidingand progressive scale (which, in 1997 accounted for 50 percent of the budget).The secretariat is managed by an ex-Governor of the Central Bank of Lesotho,and the governing council consists of central bank governors and first secre-taries of the ministries of finance of member countries, who drive the trainingagenda.

¥ Donors fund this agenda. The donor group is limited to a few agencies, com-mitted to seeing MEFMI achieve its objectives and no longer depend on exter-

37

nal financing. Donors also provide technical support in the form of residentadvisers (phased out in 1999), high-level policy workshops and seminars (WorldBank, IMF and the Bank of England) and a limited number of fellowships.

¥ From the outset, MEFMI has emphasized the recruitment of high-calibreregional staff through competitive entry and limited-duration contracts. This hasensured the high calibre of MEFMI training and advisory services and the credi-bility of the Institute among its members.

¥ As a regional programme, MEFMI has provided a focus for its member coun-tries to build a qualified regional human resource base in debt management,facilitating the exchange of cross-country experience and putting in place acritical mass of expertise in the region. There is also a programme to accreditMEFMI consultants, who may be staff of government administrations. Thisensures a steady supply of qualified trainers to MEFMI and to member govern-ments, whether they remain in the public sector.

¥ Its programme in support of debt management has been built on highly inter-active workshops aimed at the in-depth identification of user needs. This hasfacilitated the acquisition of new knowledge and competencies, and fed intothe debt management practices of its membership.

¥ Debt management training has been followed up by continual onsite trainingand advisory assistance, reinforcing the training at the center and allowing forcontinuous support to new debt managers. In turn, this has compensated forthe high staff turnover in national debt management units.

¥ In addition to debt management, MEFMI has emphasized the policy linkagesamong debt, macroeconomic and reserves management. During the pilotphase, MEFMI emphasized debt management. Since then, it has developedworkshops and training sessions on macroeconomic and reserves managementlinkages, a process expected to deepen as the MEFMI programme is imple-mented.

UNDP&

Debt4

40

UNDP takes the position that the amounts of debt relief provided by existingmechanisms to the poorest, most heavily indebted countries fall far short ofwhat is neededÑif economic growth and investment are to be pursued in a fullrange of social and environmental programmes. What is required: additionaldebt relief, for more countries, sooner rather than later. More significant, there isa need for a profound change in the goal of debt relief itself: it is not enoughto end unsustainable debt; the goal should be to contribute to ending poverty.

UNDP has adopted a comprehensive policy on debt with three elements:

¥ Advocating for additional debt relief.¥ Promoting a facility, the National Partnership Facility, to direct fiscal resourcesmade available, in part, from additional debt relief for human developmentprogrammes.¥ Supporting capacity-building for effective debt management.

Advocating Additional Debt Relief

UNDP concurs with and endorses the position adopted by both Northern andSouthern governments and non-governmental organizations: the debt sustain-ability thresholds now in place should be modified so that additional debt reliefcan be made available. Specifically, the debt sustainability thresholds underthe HIPC Initiative should be lowered; the six-year period of adjustment condi-tionality should be shortened; and a more flexible formula for cost-sharingshould be found. In addition, UNDP advocates supporting alternative effortsthat attempt to revise the debt sustainability thresholds from a human develop-ment perspective (annex 1).

UNDP advocates the need for additional debt relief primarily because existingdebt relief mechanisms are not designed to generate the fiscal resources nec-essary to launch a large-scale attack on poverty. Additional debt relief shouldthus be seen as instrumental in achieving the global targets for social andhuman development and in making inroads to achieving the DAC agenda.The DAC agenda has received the support of all OECD members, who are alsothe main creditors of the Paris Club. It has also been given a central place inthe British governmentÕs White Paper on Development. Moreover, the WorldBank has endorsed the 20/20 Initiative and the DAC targets, which it is integrat-ing into its country assistance strategies.

Securing Additional Debt Relief

Additional debt relief could come from five sets of measures:

Changing Paris Club rules. Paris Club rules determine the amount of availablestock of debt to be reduced, limited in two ways. First, Paris Club-eligible debtincludes only commercial debt assumed by governments (through guaranteesoffered by public export insurance agencies) and non-concessional govern-ment loans. It thus excludes ODA-concessional loans by governments. Includingall debt held by Paris Club members would increase the pool of debt eligiblefor rescheduling even though the pool may now be relatively small, because anumber of donors have forgiven ODA debts. Second, rules for cut-off dates alsolimit the debt stock eligible for reduction, because they have been set at dates

41

of the first Paris Club rescheduling for each country. Revising rules for cut-offdates would expand the pool of debt eligible for relief.

Voluntary debt relief by Paris Club creditors. Bilateral creditors could voluntarilycancel ODA loans, as the Swedish and Norwegian governments have done.This would reduce some of the debt obligations of heavily indebted poor coun-tries.

Revising the debt sustainability benchmarks of the HIPC Initiative. Because thecurrent debt sustainability benchmarks are too high, they limit the amount ofdebt relief a country receives. If lowered, countries could receive deeper debtrelief.18

Using the IDA-only Debt Reduction Facility to reduce commercial debts.Through the IDA Debt Reduction Facility, the World Bank has expanded themenu of debt reduction options to include provision for debt-for-developmentswaps. Under this provision, commercial banks can choose to donate or tenderdebt to be repurchased by non-governmental organizations(at the same priceas the debt buy-back option). Non-governmental organizations can then con-vert the debt into local currency to finance development projects. Two coun-triesÑBolivia (1993) and Zambia (1994)Ñhave implemented such options (IMF1998).

Countries could explore the possibility of using the IDA-only Debt ReductionFacility to further reduce commercial debts through debt-for-developmentswaps. Here, it would be important to identify creditors most likely to sell ordonate debt at a discount from face value. Generally, official bilateral debt isthe most promising source for debt-for-human development swaps becausemultilateral debt is not currently eligible for debt conversions.

Paris Club creditors such as Belgium, France, Germany, the Netherlands andSwitzerland currently permit conversion of both ODA and Export Credit Agencydebt. Non-Paris Club creditors, such as Argentina and the Czech Republic maybe interested in debt sales for conversion purposes. The difference betweenconcessional and non-concessional debt is important in considering differenttypes of debt conversions. Most bilateral creditor-sponsored conversion pro-grammes have involved cancellations of ODA debt. In contrast, export creditagencies in Europe have sold publicly guaranteed export credits (non-conces-sional debt) for debt conversions (UNSO 1997).

Increasing the contribution of multilateral creditors. The principal internationalfinancial institutions could look for ways to increase their contribution to financedebt relief, in addition to their contribution to the HIPC Initiative. The sale of partof the IMFÕs gold holdings is one such possible source.

18Target ranges for debt levels are currently set in terms of net present value, a concept that is per-

haps not the accurate measure of the debt overhang and the debt-servicing capacity of debtorcountryÕs. As a general consideration, criteria and target ranges should be flexible enough to takeinto account different debt situations: there could be merit in adopting common thresholds for thedebt overhang, as well as for foreign exchange and fiscal constraints, instead of ranges of thresholdvalues (see UNCTAD 1977).

42

The National Partnership Facility

From the perspective of sustainable human development, the goal of debtrelief efforts should be to ensure that the benefits of debt relief be directed tothe poor. In order to direct a portion of the debt relief dividend for humandevelopment programmes, countries could consider establishing a financialand catalytic mechanism, such as the National Partnership Facility.

As a financial mechanism, the Facility could direct a portion of the debt reliefdividend (along with other sources of development finance, such as ODA,counterpart funds and private sector contributions) to local communities, civilsociety organizations and non-governmental organizations for their executionof human development projects. As a catalytic mechanism, the Facility couldprovide a forum where structured dialogue can take place between nationaland local government agencies, their partners from civil society and the pri-vate sector, and donors and creditors regarding human development issuesand country priorities in this regard (see annex 2).

The main functions of the Facility could be:

Advisory. The Facility could play an advisory role to a national government, asthe government designs its sectoral programmes for human development. Thegovernment might have to prepare sectoral programmes to show the ParisClub and other creditors how, where and how much of debt relief would beallocated among the various sectors and associated programmes. In this con-text, the Facility could prepare reviews and strategic orientations for the gov-ernment, donors and various donor consultation mechanisms, such as round-table meetings and consultative groups. It could also ensure that the voices oflocal communities, non-governmental organizations, civil society organizationsand representatives of the donor and creditor communities are heard andtaken into account as the government designs its sectoral programmes.

Channeling resources. The Facility could channel resources to local communi-ties and non-governmental organizations executing projects congruent with thenational programmes for human development. It could thus empower localcommunities and also their local government partners by involving them indecision-making processes and supporting activities not funded through tradi-tional government budget allocationsÑand by matching fiscal resources withthe social capital existing at the grass-roots level and in civil society.

Consultative. The Facility could convene forums for public discussions on issuesrelated to human development to develop a national agenda (including tar-gets and programmes) for human and social development. In addition, it couldprovide a forum for consultation and reviews on the design, implementationand execution of human development projects.

What would be the benefits?

¥ Enhanced coordination of support for human and social developmentthrough forging partnerships and building coalitions among the different stake-holders.¥ Increased resources for human development by matching financial resources

43

with the existing social capital and catalyzing the widespread adoption ofsuccessful models for human development at the local and national levels.¥ Assurance to creditors and donors that funds, including those from debt reliefand development assistance, would be used to build social infrastructure forhuman development.

Other positive spin-offs: The strengthening of pro-poor programmes could helpreduce social tensions. And deeper and faster debt relief could enable countriesto restore eligibility for access to commercial credits more quickly and ultimate-ly create favorable conditions for foreign and domestic private investment.

UNDP proposes to assist two countries to pilot-test the process of establishinga National Partnership Facility. The experiences would be documented andevaluated, and the lessons globally disseminated. The following aspectswould be tested:

The institutional setup for the facility. This would involve identifying the relevantpartners (the board of directors) and holding a national consultation to identifya human development agenda.

The methods for formulating detailed programmes and associated targets forkey human development sectors. These targets would likely be necessary if thegovernment is to receive additional debt relief. UNDP could also assist the gov-ernment in the diagnosis of sectoral reforms needed to ensure that humandevelopment programmes would be targeted to encompass the poorestcommunities. And it could help in the diagnosis of the reforms needed toincrease the efficiency and productivity of delivering social services.

The methods for assessing the fiscal resources required if the country is to implementthe social development targets proposed by the national government.What is the extent of fiscal resources that would be freed by debt relief so thata country could pursue these social and human development objectives? If theHIPC Initiative does not provide for a fiscal dividend, what would be the extentof additional resources needed?

Capacity-Building for Effective Debt Management

UNDP has gained experience in the Joint Programme and its present involve-ment through financing of debt management projects in a great number ofcountries. This gives it reason to consider its future role in debt management asa component within the overall context of its debt policy. The contributions willbe at three levels: national, regional and global.

National. UNDP should continue financing the installation of DMFAS withaccompanying training. Support should also go to countries using systems otherthan DMFAS. While the installation of computerized systems are basic for datacollection and the management of information and payments, UNDP will havereason to give added emphasis to developing capacity for the analysis of thecountryÕs debt situation, preparing international negotiations on debt and debtrelief and formulating the strategy for international borrowing. In this context, itis important for countries to acquire capacity for analysis that links debt payment

44

obligations to its financial requirements for sustainable development, particular-ly expenditures with direct impact on poverty reduction.

Debt management now faces issues that go beyond the traditional limits ofexternal debt management. Resources permitting, UNDP should support gov-ernments dealing with such issues as the coordinated management of domes-tic and external debt and the coordination of aid and debt management. Theelectronic linking of debt management databases and software systems to thegovernmentÕs existing system for budgeting and accounting presents newopportunities and challenges, which should be supported by internationaldonors including UNDP.

While considering the possibility of providing funds for the joint programme,UNDP should note that UNCTAD and the COMSEC have made progress overthe past 15 years in building debtor government capacity in debt manage-ment. But much more work needs to be done. For example, software programsused to calculate essential baseline debt statistics need to be more user-friend-ly and updated to capture the complexity of private debt accumulation.Enhanced capacity-building in this area is critically needed.

Regional. UNDP should base its activities on the experience of ESAIDARM/MEFMIand actively promote the establishment of similar regional programmes in otherparts of the world. The approach seems to be cost-effective in providing train-ing and advisory services for country-level activities and in facilitating theexchange of experiences on debt management and debt strategies of debtmanagers. All the better if the regional activities, as in the case of ESAIDARMevolving into MEFMI, could also offer a framework for regional experience-shar-ing and training on wider financial management topics.

UNDP should support initiatives for regional debt management initiatives in WestAfrica, where many highly indebted poor countries are situated. Other regionswhere UNDP support should be further strengthened are Central America andthe countries of Eastern Europe and the Commonwealth of IndependentStates. High-level interest in countries is essential for success; so is cooperationwith the partners of the Joint Programme and other international actors. But anactive role for UNDP in programming, financing and coordination may be cru-cial for overcoming some of the hurdles that have delayed the development ofregional programmes in recent years.

Global. UNDP should focus on the capacity of the international system to pro-vide support for debt management and on the international coordination forsuch support. It is a matter of international concern that the financing of theDMFAS programme in UNCTAD, for example, has not yet found any long-termsolution. UNDP should therefore continue to consult with UNCTAD and othertechnical assistance providers to find ways to ensure the long-term viability,including the commercial viability, of DMFAS and other relevant software. It isessential to find the resources necessary for the development of DMFAS so thatit can continue to address the new demands it faces in servicing its customers.

In addition, UNDP should consult with its international partners on the usefulnessof some sort of international forum for debt or debt management. While themembership, agenda and operations of such a forum are all open for discus-

45

sion, attention should go to the establishment of an international professionalassociation of debt managers, an idea that originated at an inter-regional debtmanagement conference arranged by UNCTAD and co-sponsored by UNDP inDecember 1997.

The debt management forum's main objective would be to offer debt man-agement professionals a global forum to discuss technical matters of commoninterest and to exchange experiences, know-how and information about debtmanagement, complemented by regional events. UNCTAD has drafted thepossible statutes for such an organization, provisionally referred to as the WorldAssociation of Debt Management Offices.

47

Annex 1.Human Development Approaches toDebt Sustainability

Since a major criticism of the HIPC Initiative is that it sidelines poverty eliminationand human development concerns, several organizations have developedalternative methods that now focus on human development while estimatingsustainable debt levels. More specifically, four such approaches are on thetable, developed by The European Network on Debt and Development(Eurodad), Oxfam International, Cafod and Christian Aid.

Those international non-governmental organizations have substantial experi-ence in the issue of debt. Eurodad, its member non-governmental organizationsin 16 European countries and its partners in the South and the United Stateshave been working since the 1980s towards the international acceptance of acomprehensive solution to the external debt problem of the worldÕs poorestcountries. Christian Aid, the official aid and development agency of 40 Britishand Irish Churches, works through partner organizations in 60 countries to pro-mote human development. Oxfam International is a network of 10 aid agen-cies committed to fighting poverty.

In addition to the human development approaches to debt sustainability, thereis the position of Afrodad, which emphasizes the links between ineffective debtmanagement and unsustainable debt.

Four Approaches to Debt Relief

Eurodad

Eurodad (1997) presented an approach linking UNDPÕs Human DevelopmentIndex (an indicator of a countryÕs poverty level) to the major HIPC debt sustain-ability indicator, NPV debt-to-exports.

The HDI value is measured on a scale ranging from 0 to 1. The closer the HDIvalue is to 0, the lower is the level of human development in the country. In thisapproach, the target for the NPV debt-to-exports indicator is altered accordingto whether the HDI value is lower or higher than a middle range. When assum-ing a middle range of 0.45Ð0.55 HDI value, at which level the NPV targetremains unchanged at 200 percent, increments of 0.05 above or below themiddle range will alter the NPV debt-to-exports ratio with 10 percentage pointsmore or less. For instance, when this approach is applied to Burkina Faso, whichhas an HDI of 0.221, its NPV debt-to-exports target is reduced to 150 percent(from 205 percent). In other words, if a country has a low level of human devel-opment (as indicated by its HDI value), its debt sustainability threshold shouldbe lowered accordingly.

Oxfam International

According to this approach (1998), governments willing to allocate 85Ð100 per-

48

cent of the savings from debt to poverty reduction initiatives will be given earli-er and deeper debt relief. This would be done through a Debt-for-Human-Development Window in which the debt sustainability thresholds are loweredto:¥ 10Ð15 percent for debt servicing;¥ 100Ð150 percent for NPV debt stock/exports;¥ 150Ð170 percent for NPV debt stock/revenue.

To qualify for the Debt-for-Human-Development Window, debtor governmentswould be required to develop a poverty action framework. This would be sub-mitted at, or in advance of, the Decision Point in the HIPC framework, for con-verting savings on debt into poverty reduction initiatives.

If governments fail to deliver on the financing pledges, and if policy failure onthe part of the government is the cause of non-performance, penalties in thefollowing form will be posed: shortfalls in public spending will be matched byreductions, on a dollar-for-dollar basis, in aid disbursements during the nextfinancial year. These reductions could be applied up to a ceiling equivalent tothe amount of additional debt relief provided under the Debt-for-Human-Development Window.

Christian Aid

This approach takes as its starting point the development targets set by theDevelopment Assistance Committee (DAC) of the OECD, which comprises allmajor creditors. These targets incorporate health, education, poverty, genderequality and human rights. According to Christian Aid, achieving the DACpoverty levels will require higher growth in the HIPCs than has been seen overthe past 20 years. Since the debt burden acts as a major impediment to growthby deterring investment (the debt overhang effect) in HIPCs, it is unlikely thatthese targets will be met through growth alone. Increased public expenditure,especially in health and education, will be needed. Thus, debt relief has a cen-tral role to play in meeting DAC targets, by spurring higher growth and freeingup resources.

Christian Aid assumes that to meet the DAC poverty targets (a reduction byone-half of the people living in extreme poverty by 2015), a countryÕs economyneeds to grow at least at 5 percent a year and that to reach that target, thedebt should be low enough to reduce the debt service-to-exports ratio to 8.8percent. On the basis of this assumption, the debt relief required is calculated.

Cafod

Called the feasible net revenue approach, Cafod's approach (1998) assumesthat all revenue raised by the government in an underdeveloped country can-not reasonably be used to service debt. Nor can an arbitrary proportion of thatrevenue be used without first addressing humanitarian imperatives.Measurements of what a country can afford in terms of debt servicing is consid-ered after minimum levels of government spending have been set aside tomeet targets for the most basic levels of human development (education,health service, etc.). And it is argued that the external debt burden above thatlevel should be eliminated.

49

More specifically, the calculation of debt sustainability under the feasible netrevenue approach is based on four assumptions:

1. That it is not reasonable to levy tax on incomes below the international absolute poverty line.

2. That an incidence of taxation greater than 25 percent on incomes above this level will give rise to distortions in the economy and therefore hinder economic development.

3. That debtor governments must be allowed to put aside the finances needed to meet the basic human development needs of their populations before having revenues subject to debt-servicing demands.

4. That only a limited amount of any remaining revenue should be allocated towards debt service, to leave resources for other essential government expendtures.

Afrodad

Afrodad (1998) argues that a sustainable solution to the debt crisis requires thatdebt relief resources be directed to addressing one of the causes of the crisisÑthe inability of governments to generate adequate financial resources for loanrepayments.19 The argument is as follows: borrowed resources are usuallydirected at specific activities. The extent to which these projects or pro-grammes have not been able to make a contribution to the countryÕs develop-ment, particularly to loan repayments, is a central factor to deal with in thedebt relief process. The reasons for failure should be identified and appropriateinstitutional measures taken.

Because debt relief is negotiated on a country-by-country basis, the debt sus-tainability analysis (on which the level of debt relief is based) should be deter-mined through a disaggregated analysis. The weaknesses in loans and debtmanagementÑbe they lack of management capacity, ineffective monitoring,poor project implementation, inappropriate allocation of resources, inability towithstand economic shocksÑshould be directly tackled by establishing mecha-nisms that function to eliminate these constraints. According to Afrodad, mea-sures to correct weaknesses in loans and debt management are the only formof conditionality of debt relief acceptable to bring about a sustainable solution.

In other words, Afrodad links the need for effective debt management andgreater transparency to the issue of debt sustainability. The issue of transparen-cy is important because transparency assists debtors in debt negotiations andin their own debt management practices by providing a more accurate pic-ture of outstanding debt. During the HIPC negotiations, much time was takenup as debtors and creditors had to start from scratch in calculating outstandingdebt, because accurate and updated statistics were not readily available. Amore complete baseline picture also assists debtors and creditors in makingmore informed decisions with regard to new lending. Transparency also facili-tates information-sharing among countries, which contributes to learningthrough their varied and alternative approaches to debt relief (such as debtswaps). And transparency allows civil society and parliamentarians to bringpressure to bear on their governments, to make them more accountable.

19Afrodad, an African non-governmental organization network, facilitates the engagement of

African civil society organizations with African debtor governments and creditor governments andinstitutions on issues of debt and development.

50

Debt Conversion (Swaps) Programmes

Efforts to relieve the burden of debt payments have employed a number ofmechanisms to reduce debt and convert (swap) resources for social and envi-ronmental benefit. A debt swap is defined as the cancellation of external debtin exchange for a commitment to mobilize domestic resources for social ser-vices (health, education) or for the environment or for poverty alleviation pro-grammes. Although most debt swaps typically involve very small amounts ofresources, these mechanisms of debt relief are nonetheless of great interest tothose involved in social and human development.

"In the 1980s, the majority of debt swaps took place in Latin America andinvolved commercial debt. Since the introduction of the Paris Club ÔswapclauseÕ in 1990, swaps involving bilateral debt have increased and the focus ofdebt swaps has shifted from Latin America to other parts of the world, includingAfrica and Eastern Europe" (UNSO 1997, p. 6). Some of the most impressiveexperiences in debt conversion have taken place in Latin America and manyof these have been focused on environmental sustainability: between the late1980s and the mid-1990s, debt swaps helped to generate $850 million for envi-ronmental protection projects in 23 countries, with Costa Rica making thelargest number of swaps (Action Aid 1998). Generally, debt swaps are conduct-ed in one of two ways.

Bilateral

The bilateral swap has been used to convert official development assistancedebt and publicly guaranteed export credits. In a bilateral swap, a creditorgovernment cancels debt owed by a debtor government in exchange for thedebtor setting aside an agreed amount of counterpart funds in local currencyfor social services or for the environment. The Swiss Debt Reduction Facility andthe U.S. Enterprise for the Americas Initiative are both examples of this model(see box 4). Although NGOs or other local organizations may benefit from theswapÑand even play a role in the design and implementation of the projectsto be funded by the swapÑthe primary agreement is made between the cred-itor and debtor governments.

Box 4: Debt Swap Initiatives

¥ The Americas Initiative, launched in 1990 by President Bush, was designed to reduce commer-cial debt owed to U.S. companies by Latin American countries. The agreement required thatcountries introduce conditions outlined in the Brady Plan, in return for cancellation of a percent-age of the debt principal, and allowing interest to be paid in local currency to be spent on envi-ronmental protection and sustainable development. In 1992, Chile and the United States agreedto reduce $15.7 million of ChileÕs total debt of $39.3 million. Chile has dedicated $23 million ininterest payments to finance environmental protection projects. Bolivia reduced its debt to theUnited States to $300 million, committing itself to investing $2 million in an environmental programand sustainable development.

¥ The Swiss government canceled more than $700 million in bilateral commercial debt inexchange for the debtor governmentsÕ promising to allocate resources in local currency fordevelopment funds. In Latin America agreements were reached in Bolivia, Ecuador, Honduras,Nicaragua and Peru.

Source: Action Aid (1998).

51

Three Party

In a three-party swap, a non-governmental organization or United Nationsagency solicits donations of debt or purchases of debt at a discount from facevalue from a creditor and negotiates separately with the debtor governmentfor cancellation of the debt in exchange for project funding for social develop-ment. In contrast to the bilateral model, the non-governmental organization orUnited Nations agency may acquire commercial debt or official bilateral debt,usually from an export credit agency (UNSO 1997).

"Three organizationsÑFinance for Development, New York Bay and UNICEFÑhave been the main participants in debt-for-development swaps that providelocal currency funds for projects. Finance for Development and New York Bayhave swapped $566.7 million since 1992, of which $107.8 million was swappedin 1997. The funds have been invested in various sectors, including health, pop-ulation, agriculture, eco-tourism and low-income housing" (IMF 1998, p. 89-90).

By 1995 UNICEF, a pioneer in debt-for-development swaps, had completed 21transactions, generating $52.9 million in local currency while helping participat-ing countries reduce their external debt stock by $199.3 million (see appendix6). A wide range of entities has been involved in these transactions, includingan IDA Debt Reduction Facility operation for Zambia. The funds used comefrom national committees for UNICEF in industrial countries. These funds helpfinance programmes for primary education, women in development, primaryhealth, children in especially difficult circumstances and water supply and sani-tation (IMF 1998).

Debt conversions are not limited to agreements with Northern creditors. InMexico, for instance, the Fund for Assistance, Promotion and DevelopmentÑanagency created at the initiative of the Archdiocese of Mexico after the greatearthquakeÑnegotiated a debt swap worth $23 million between 1988 and1989. In return, the Mexican government agreed to dedicate the resources toimplement housing, education and other projects (Action Aid 1998).

53

Annex 2.The National Partnership Facility: A Mechanism to Enhance Financing ofHuman Development

The capacity of heavily indebted poor countries to implement human andsocial development programs is severely constrained given their current eco-nomic prospects and fiscal positions. The fiscal constraints of poor, indebtedcountries are largely on account of:

Heavy debt burdens. In many heavily indebted poor countries, debt servicingabsorbs a large share of public revenues and public expenditure and limits theresources available for investments in human development. Recent estimatesshow that for the HIPC-eligible countries as a group, debt servicing on averageabsorbs 40 percent of revenues. For Nicaragua, with the world's highest percapita debt, the debt repayments are two and a half times the spending onhealth and education. Tanzania has been spending nine times more for debtservicing than for basic health and four times more than for primary education.In Mozambique more than one-third of tax revenues leaves the country torepay debts. In other words, human and social investments have been crowd-ed out by diverting limited government revenues to foreign creditors.

Falling commodity prices. Between June 1997 and April 1998 non-oil commodi-ty prices declined by 10.6 percent (UNCTAD 1998). Given the recent downturnin commodity prices, prospects for financing human development throughincreased resources from traditional exports appear slim. Further, the declines incommodity prices have also reduced the tax revenue base in many poorcountries, further squeezing the fiscal resources available for expenditures onsocial development.

Declining Official Aid Flows. Concessional aid flows that have traditionally beena source for financing social expenditures have declined steadily since 1990.Just for the HIPC sub-Saharan African countries, the loss in net ODA amounts to$2.6 billion for 1990Ð96.

Clearly, implementation of a human development agenda in the heavilyindebted poor countries, particularly on a large scale, will require easing thesecountriesÕ fiscal constraints.

In addition to overcoming fiscal constraints, progress in human developmentwill also require that the social service delivery systems of these countries bestronger and more efficient. Evidence shows that proper targeting of projectscritically influences the outcome of human development programmes. In manypoor countries, health, education and social services could be more efficientand reach the poor more effectively than they do if local communities wereinvolved in the planning and management of social services. So social andhuman development will also require new ways of delivering services, perhapsusing non-governmental channels.

54

Rationale for a National Partnership Facility

Given the uncertain economic prospects and the tight fiscal conditions in mostHIPCs, one feasible source for mobilizing resources for human development isdebt reliefÑthat is, additional to that offered by the HIPC Initiative. Why?Because the HIPC Initiative as currently designed does not provide a realreduction in the resources a poor country allocates to service its external debt.That is, the Initiative does not yield a substantial fiscal dividend. Indeed, evenaccording to the World Bank, "the fiscal space created by HIPC debt relief fordirect increases in social expenditures may not be very large in the earlyyears".20 This is also the position of the G-24 and the General Accounting Officeof the United States.21

Many debtor countriesÑas well as the International Financial Institutions (IFIs)and the G8 countriesÑhave stated the need to link debt relief to human devel-opment.22 To forge this link, HIPC countries could consider establishing a mech-anism that would link debt relief to human development programs. In what fol-lows, is a prototype for this facility, called here the National Partnership Facility,envisaged as a financial and catalytic mechanism. It would manage resourcesmade available, in part, from debt relief and from other possible sources ofdevelopment finance (regular aid, counterpart funds, contributions from theprivate sector) for social development and poverty reduction.

The Facility would also provide a forum for structured dialogue between nation-al and local government agencies, their partners from civil society and the pri-vate sector, and donors and creditors on human development issues and coun-try priorities. In its catalytic role, it could also serve as a mechanism for civil soci-ety to participate in decisions on the allocation of debt relief dividends. Indeed,civil society organizations in debtor countries are eager to carve out a greaterrole for themselves in the long and complicated process of negotiating for debtrelief. The importance of their so doing cannot be overstated. The final declara-tion of the Maputo conference states that "The peopleÕs participation in policymatters such as debt negotiations is a fundamental necessity for developmentand is enshrined in the African Charter for Popular Participation".

Debt relief dividends could be shared by both the national government and bynon-governmental actors and local communities. It is the share of resources tobe allocated to NGOs and civil society organizations that the Facility couldmanage (see flow chart on p. 49).

Potential Benefits

Such a Facility would have three main benefits:

¥ Enhancing the coordination of support for human and social developmentthrough forging partnerships and building coalitions among the differentstakeholders.

20World Bank/IMF document, the "HIPC Initiative-Guidelines for Implementation", April 1997.

21 See G24 statement at the 1998 Annual Meetings of the World Bank and IMF; and the GAO report,"Status of the Heavily Indebted Poor Countries Debt Relief Initiative", September 1998.22 See statement made by Paris Club, and WB, IMF at the Annual Meetings, 1998.

55

¥ Increasing the resources for human development by matching financialresources with the existing social capital and catalyzing the widespreadadoption of successful models for human development at the local andnational levels.

¥ Assuring creditors and donors that funds, including those from debt reliefand development assistance, would be used to build the social infrastructurebase for human development. Other positive spin-offs will be stronger pro-poor programmes to reduce social tensions and deeper and faster debt reliefto enable countries to more quickly to restore eligibility for access to commer-cial credits. That could also create favorable conditions for foreign anddomestic private investment.

Institutional Design

Each country would have to tailor the National Partnership Facility to its needs.Indeed, if NPFs are to be viable, national stakeholders must select the specificdesign for such a facility, its legal status, its governance and the criteria foractivities to be funded. Important lessons for designing such a facility could bedrawn from the Ugandan governmentÕs Poverty Action Fund (box 5), or fromsuch social funds as the one in Egypt.

Box 5

Uganda established a Poverty Action Fund connected with debt relief to mobilize resources forprimary education, primary health, water, road, infrastructure and agriculture. The Fund includesboth donor and government resources. The government will make available to the social sectorsthe full amount of resources it expects to be released from debt service as a result of the HIPCInitiative. The government has invited local NGOs to attend donor meetings on the quality ofsocial services. All releases of Poverty Action Fund resources will be published and discussed atquarterly donor meetings.

Defining the orientations and objectives of national social programmes must bea function of the government. This should be done after extensive consultationswith civil society and other social actors. A National Partnership Facility couldbring added value by building catalytic relations among NGOs, CSOs andgrassroots communities, providing expertise and quick disbursing of funds forsocial development activities. Indeed, the partnership mechanism could beaimed at ensuring that all participants are involved in building capacities forsocial and human development.

Scope and Functions of NPFs

The main objective of the NPF would be to coordinate and fund activities thataim to enhance the absorptive capacity of a country to promote humandevelopment. The National Partnership Facility could have three main func-tions:

Providing advice. The NPF could play an advisory role to the national govern-ment, as the government designs its sectoral programmes for human develop-

56

ment. The government might have to prepare sectoral programmes in order toshow the Paris Club and other creditors how, where and how much of debtrelief would be allocated among the various sectors and associated pro-grammes. In this context, the NPF could prepare reviews and strategic orienta-tions for the government, donors and various donor consultation mechanisms,such as Round Table meetings and Consultative Groups. The NPF could alsoensure that the voices of local communities, non-governmental organizations,civil society organizations and representatives of the donor/creditor communi-ties are heard and taken into account as the government designs its sectoralprogrammes.

Channeling resources. The NPF could channel resources to local communitiesand non-governmental organizations that are executing projects congruentwith the national programmes for human development. NPFs could thusempower local communities and also their local government partners byinvolving them in decision-making processes and supporting activities that arenot funded through traditional government budget allocations and by match-ing fiscal resources with the social capital existing at the grass-roots level and incivil society.

Convening forum. The NPF could convene forums for public discussions onissues related to human development in order to develop a national agenda(including targets and programmes) for human and social development. Inaddition, the NPF could also provide a forum for consultation and reviewsregarding the designing, implementation and execution of human develop-ment projects, funded by the NPF and undertaken by local communities, localauthorities and NGOs.

Governance Structure

The National Partnership Facility could have a two-step governance structure:

The Chief Executive Officer of the Facility would be the Executive Director, witha lean secretariat to assist in the requisite tasks. The functions of the ExecutiveDirector would be to:

¥ Govern the day-to-day management of the Facility.¥ Assist CSOs and NGOs in project formulation. In this context, liase with mem-bers of the Consultative Forum, who could be asked to assist in these tasks.¥ Assist with the accreditation of local communities groups and unregisteredNGOs.¥ Report to the Board of Directors with quarterly progress reports, on thefinancial and human resource position of the Facility.

A Board of Directors could comprise selected members from a balance of thenational and local government (from the Finance, Planning and SocialDevelopment Ministries and local authorities), from civil society, the private sec-tor and from the donor/creditor community. The functions of the Board wouldbe to:

¥ Advise the government as it prepares for debt relief negotiations. It wouldassist in the design of sectoral programmes for social development. And it

57

would advise the government on the proportional share of debt relief to bechanneled to the NPF to support human development projects executed byCSOs and NGOs and on the share to be allocated to the government to sup-port its sectoral programmes in human development. ¥ Review proposals submitted by NGOs and CSOs to the Facility for fundingÑto ensure that they complement the governmentÕs sectoral programmes andsocial and human development policy, and ensure that funds disbursed arebeing used properly.¥ Appoint reviewers to evaluate social development projects being executedby local communities and non-governmental organizations.

The management of the Facility would have to aim for the highest degree oftransparency, openness and efficiency. A system of regular monitoring wouldassess the progress of the activities of all approved projects. This would providean opportunity to resolve difficulties, and to institute timely corrective measures.At the end of the implementation of projects supported by the Facility, thepartners concerned could undertake joint evaluations.

Financial Issues

Sources of funding. Determining how many countriesÕ actual debt-service pay-ments will be reduced by HIPC relief is complicated by the fact that some havesubstantial arrears. For example, the HIPC Initiative will reduce MozambiqueÕsscheduled debt payments by 42 percent from the obligations that remain afterParis Club relief on Naples terms. Mozambique was paying only about 30 per-cent of its debt service originally due during 1995-98. So, any reductions in actu-al debt repayments under HIPC are likely to be small; in some cases nonexistent(box 2). A further complication is that a substantial portion of the poor coun-triesÕ debt service is financed through donor and credit resources, as is clear inUganda.

So, the mobilization of financial resources to capitalize National PartnershipFacilities is one of the most significant challenges in their establishment. At theoutset, it will be important for a country to develop a clear strategy for resourcemobilization based on innovative approaches.

Additional debt relief. Several proposals for additional debt relief in support ofhuman development have been placed on the table and presented to credi-tor countries and to the Bretton Woods Institutions. If adopted, these debt reliefmechanisms could produce a fiscal dividend that could be used in support ofhuman development. Additional sources for debt relief could potentially comefrom: revising the HIPC debt sustainability thresholds; changing Paris Club rules;voluntary debt relief by bilateral creditors; use of the IDA-Debt ReductionFacility; increasing the contribution of multilateral creditors to debt relief.

Debt swaps. Debt-for-development swaps could provide considerable relief topoor HIPC countries that have borrowed heavily from commercial lenders andfor which there is a transparent secondary international market for commercialbank liabilities. This might be significant for post-conflict countries in Sub-Saharan Africa that have not yet benefited from the various debt buy-back ini-tiatives that have allowed many countries to reduce commercial liabilitiesthroughout the 1990s.

58

Domestic sources and grant aid. National and local governments in consulta-tion with donors could contribute by:

¥ Reallocating development assistance resources;¥ Providing counterpart funds.

The private sector could contribute through:

¥ Donations by individuals and corporations. Boards of NPFs could undertakevigorous campaigns to obtain the support of corporations and philanthropicinstitutions;¥ Grants from domestically based foreign corporations and government enti-ties, for country projects.

Channeling Debt Relief to National Governments and to the Facility

Before debt relief negotiations. The government would in all likelihood have toprepare sectoral programmes in human and social development that wouldidentify the additional social programmes that the government expects to fundfrom debt relief. The National Partnership Facility could assist in this task by hold-ing consultations to discuss national priorities. To support the case for additionalfunds for sectoral programmes, the government could also prepare a multi-year (three years) parallel sectoral budget that is separate from the traditionalnational budget of the government. This separate budget would increase trans-parency and allow auditors to monitor the efficient use of funds released fromdebt relief.

In other words, it would be necessary to mount practical, sectoral programmesto absorb the additional funds, allocate these expenditures to correspondingbudget lines, and establish a management framework in each participatingcountry to exercise adequate oversight over the use of resources and to makesure that beneficiary countries use the added resources to increase investmentfor agreed purposes. So, countries would prepare multi-year programmes thatare additional to expected budget contributions and to the current assistancebeing provided by donors or by existing programmes.

Debt relief negotiations. The Paris Club, along with the multilateral institutions,would negotiate with the national government the additional debt relief to beprovided, the share to be allocated to the government and the share that willgo to the Facility. Once this decision has been reached, the government coulddeposit resources in two accounts (at the Central Bank of the debtor country)in the amount equivalent to the debt-service obligations specified in the agree-ments for debt relief reached by the Paris Club. The Central Bank would notifyParis Club creditors that funds have been deposited, and the creditors wouldthen grant debt relief.

Disbursing funds from the Central Bank to the NPF. The Central Bank couldrelease funds to the NPF on a quarterly basis and on the basis of a financialplan and on certified accounts of expenditures incurred. (chart 2).

59

Chart 2: Channeling Debt Relief to the Government and to the NationalPartnership Facility for Social Development

Potential Uses of Additional Debt Relief

By national and local governments. National and local governments couldconsider supporting the following aspects of human and social development:

¥ Financing underfinanced social or educational programmes of the nation-al, regional and local governments. ¥ Financing the development of frameworks for national, regional and dis-trict-level development to carry out social development activities. ¥ Strengthening the capacity of the ministries at various levels to collect, ana-lyze, and use information about the needs and preferences of communitiesfor programme purposes.¥ Funding national-level activities in order to reinforce the efforts of govern-ment structures in delivering social services at the national, regional and locallevel.

National government nego-tiates debt relief on thebasis of social developmentprogrammes, prepared inconsultation with theNational Partnership Facility.

Paris Club negotiates theamount of debt relief to beprovided and with the gov-ernment decides on theproportional share to beallocated for use by gov-ernment and the share tobe allocated to the Facility.

Paris Club grants debt relief and the debtor governmentdeposits the equivalent amount in domestic currency intwo accounts at the Central Bank of the debtor country.

The Facility receives funds from debt reliefdividends and from other sources of devel-opment finance. These funds are channeledto CSOs, NGOs and community organizationsfor executing social development projects.

Government uses debt reliefdividends to finance socialdevelopment programmes.

NGOs CSOs CommunityOrganizations

60

For example, debt relief dividends could be used to finance recurrent costs(staffing and procurement of materials, supplies, pharmaceuticals and otheressential goods) in public education and health establishments. As the out-reach of social services is extended, the additional resources could be used tofund investment in social infrastructure.

Funds could also be used to finance the recurrent costs of critical capacity-building programmes. Accelerated capacity-building would be undertaken toassist governments to set up public expenditure management systems, startingwith those sectors associated with debt relief, and then expanding to theremainder of the government. Particular attention could be paid to strengthen-ing debt management, enabling governments to prudently manage debtundertakings and avoid, if possible, future debt crisis.

By civil society and nongovernmental organizations. The Facility should identifycriteria for allocating resources. For instance, projects that would have thegreatest benefit for the poorÑespecially for women, children and youthÑcouldbe given high priority. An important criterion for selecting projects could be thecomplementarity of the project to the national governmentÕs national strategyfor social and human development. Other criteria could include:

¥ Funding for activities that directly build social capital.¥ Funding for community-based activities that do not normally qualify forfinancing from mainstream sources.¥ Funding activities that are co-financed with local communities.¥ Funding activities for groups not reached by other social sector pro-grammes.¥ Increasing the capacity of local communities and NGOs to improve accessand delivery of social services.¥ Assisting communities in strengthening existing line agencies whose statedpurpose is to improve the quality of life at the community level.

61

AppendixAppendix Table 1

Debt Indicators for Capital-Importing Countries, 1985-95

Debt indicator 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Ratio of external debt to GNP

All countries 44.1 47.0 49.3 43.8 40.1 39.1 39.5 38.1 37.5 37.0

Africa 57.8 66.7 72.8 72.0 73.6 70.4 72.4 69.7 71.0 76.4

Sub-Saharan Africa 75.9 77.7 87.0 86.9 91.3 98.9 103.0 108.3 114.2 135.8

Asia 26.0 28.6 30.4 26.3 26.6 27.2 27.8 27.9 28.6 28.5

Latin America 62.2 63.7 65.7 56.7 50.1 44.9 45.5 42.7 40.0 37.1

Ratio of external debt to exports

All countries 179.9 198.8 185.6 158.6 143.2 138.9 138.9 132.4 130.2 122.8

Africa 208.9 262.3 273.1 263.9 252.4 223.1 229.5 218.7 232.9 248.7

Sub-Saharan Africa 259.7 302.5 338.8 327.7 320.7 327.1 352.0 356.6 386.0 384.5

Asia 101.9 105.6 94.0 78.0 78.0 77.4 76.7 73.5 71.8 67.7

Latin America 326.1 392.7 384.7 332.5 293.2 277.3 281.8 276.0 274.5 258.4

Ratio of debt service to exports

All countries 23.5 24.5 21.8 19.9 17.3 15.7 14.6 14.5 14.6 12.9

Africa 26.1 29.1 23.8 26.0 24.3 24.0 23.2 22.3 22.4 19.0

Sub-Saharan Africa 21.3 24.8 23.1 22.3 19.3 17.7 17.6 15.3 14.4 16.7

Asia 15.7 15.5 15.4 11.7 10.7 9.9 8.8 8.6 9.2 8.1

Latin America 38.6 44.4 38.2 39.6 32.1 26.3 26.2 28.9 30.0 27.5

Source: United Nations, Department for Economic and Social Affairs (formerly Economic and SocialInformation and Policy Analysis), based on IMF, OECD and World Bank data

62

Appendix Table 2

Commercial Debt and debt-service reduction operations for low-income coun-tries, 1989-97 (billions of U.S. dollars)

a Includes past-due interest.b Includes buy-backs, discounts, down payment on past-due interest, and forgiveness.

Source: World Bank 1998.

Appendix Table 3

The Heavily Indebted Poor Countries (HIPC)*(September 1997)

* The list of HIPCs is not definitive but is modified depending on a countryÕs debt sustainabilityanalysis. Currently, 33 of the 41 HIPCs are in Sub-Saharan Africa.

Type of Operation CountryGrossamountrestructureda

ClosingFace valueof restruc-tured debt

Face valueof debtreductionb

Low-income countries Buy-backs funded bythe Debt ReductionFacility

Debt & debt-servicereduction agreements

Other

Cumulative, 1996TogoCumulative, 1997

Cumulative, 1996Cote dÕIvoireVietnamCumulative, 1997

Bosnia &Herzegovina

12 Dec 97

6 May 9716 Dec 97

30 Dec 97

4.20.14.3

5.36.50.8

12.6

1.3

4.10.14.2

3.34.10.27.6

0.9

0.10.00.1

2.02.40.65.0

0.4

AngolaBeninBoliviaBurkina FasoBurundiCameroonCentral African RepublicChadCongoCote dÕIvoireDemocratic Republic of CongoEquatorial GuineaEthiopiaGhanaGuinea-BissauGuineaGuyanaHondurasKenyaLao PDRLiberia

MadagascarMaliMauritaniaMozambiqueMyanmarNicaraguaNigerNigeriaRepublic of YemenRwandaSao Tome & PrincipeSenegalSierra LeoneSomaliaSudanTanzaniaTogoUgandaVietnamZambia

63

Appendix Table 4

Heavily Indebted Poor Countries: Debt and Development Status, 1995

Country Human development GNP $ US Per Head Public Debt as % of rank (out of 175) GDP

Angola 157 410 --Benin 146 370 57Bolivia 113 800 46Burkina Faso 172 230 39Burundi 169 160 --Cameroon 133 650 106Central African Republic 151 340 --Chad 164 180 36Congo, Dem. Republic 130 680 282Congo 142 120 184Cote dÕIvoire 145 660 144Equatorial Guinea 135 380 --Ethiopia 170 100 --Ghana 132 390 55Guinea 167 550 74Guinea-Bissau 163 250 270Guyana 104 590 347Honduras 116 600 75Kenya 134 280 48Laos, PDR 136 350 47Liberia -- -- --Madagascar 152 230 114Mali 171 250 32Mauritania 150 460 125Mozambique 166 80 205Myanmar 131 -- --Nicaragua 127 380 460Niger 173 220 52Rwanda 174 180 40Sao Tome 125 350 381Senegal 160 600 45Sierra Leone 175 180 72Somalia -- -- --Sudan 158 -- --Tanzania 149 120 138Togo 147 310 67Uganda 159 240 33Vietnam 121 240 29Yemen 148 260 --Zambia 143 400 101

Source: UNDP, World Bank.

64

Appendix Table 5

Heavily Indebted Poor Countries: Aid and Debt Flows, 1995

Country Aid as % of Debt Debt Service Debt as % Debt serviceGNP a servicing as as % of exportsc as % of

% of GNP a government exportsexpenditureb

Angola 11 -- -- 278 a 13Benin 17 3 11 221 8Bolivia 11 6 12 223 29Burkina Faso 24 2 10 294 11Burundi 32 5 -- 388 a 28Cameroon 10 6 70 410 20Central Africa Republic 19 4 -- 243 a 7Chad 24 2 10 140 6Congo(Brazzaville) 25 48 87 423 14Congo(Kinshasa) -- -- 81 702 55Cote dÕêvoire 25 47 38 340 23Equatorial Guinea -- 1 -- 308 a 14 a

Ethiopia 23 2 18 383 a 14Ghana 9 6 -- 219 23Guinea 11 3 14 340 25Guinea-Bissau 74 3 61 1,882 67Guyana -- 21 58 367 27Honduras -- 15 55 208 31Kenya 10 15 26 148 26Laos 14 1 5 184 6Liberia -- -- -- 339 a 8 a

Madagascar -- 4 73 485 9Mali 25 8 13 145 13Mauritania 28 11 11 270 22Mozambique 101 7 19 989 35Myanmar -- -- -- 442 a 32 a

Nicaragua 46 10 114 1,358 39Niger 25 5 36 346 20Nigeria -- 274 12Rwanda 96 7 17 656 --Sao Tome -- 35 -- 1,846 24Senegal 17 7 20 141 19Sierra Leone 36 21 17 499 60Somalia -- -- -- 3745 a 150 a

Sudan -- -- Na 3057 a 87 a

Tanzania 30 -- 54 525 17Togo 14 3 16 212 6Uganda 19 4 16 271 21Vietnam 6 3 18 82 5Yemen 5 4 27 189 a 3Zambia 21 11 32 318 174

a 1994b public service debtc present value.

Source: IMF, World Bank.

65

Appendix Table 6

UNICEF Debt-for-Child-Development Swaps, 1989-95(thousands of U.S. dollars)

Country Year Sector Face Cost Development Purchasevalue funds a price (%)

Mexico 1995 UNICEF programs. 6,400 3,647 4,935 57.0

Madagascar 1994 Emergency 2,000 1,000 2,000 50.0

Madagascar 1994 Water/education/ 1,200 576 950 48.0health

Peru b 1994 UNICEF programs. 10,880 0 2,720 0.0

Zambia c 1994 UNICEF programs. 66,614 7,328 10,990 11.0

Mexico 1994 Health/Education 1,870 1,015 1,902 54.3

Philippines d 1993 Education 250 0 180 0.0

Philippines 1993 Education 1,226 864 1,000 70.5

Bolivia 1993 Education/ 15,000 2,400 3,600 47.0Institutions

Madagascar 1993 Water/Education/ 2,000 940 2,000 16.0Health

Senegal 1993 Water/Education/ 24,000 6,000 11,000 25.0Health

Jamaica 1992 Health/Street 4,000 2,877 4,000 71.9Children (e)

Madagascar 1992 Health/Education/ 4,000 2,000 4,000 50.0Nutrition (f)

Philippines 1992 Children in Armed 486 245 329 50.4Conflict

Sudan 1992 Water/Sanitation/ 38,068 0 1,200 0.0Health (g)

Sudan 1991 Water/Sanitation/ 5,000 0 460 0.0Health (g)

Sudan 1991 Water/Sanitation/ 3,000 0 276 0.0Health (g)

Sudan 1990 Water/Sanitation/ 7,023 0 801 0.0Health (g)

Sudan 1989 Water/Sanitation/ 2,732 0 244 0.0Health (g)

Sudan 1989 Water/Sanitation/ 2,732 0 225 0.0Health (g)

Sudan 1989 Water/Sanitation/ 800 0 80 0.0Health (g)

Total or average 199,281 28,892 52,892 14.5

a Value in dollar equivalent to the local currency part of the swap (either face value of the bond orlocal currency equivalent). For bonds, figures do not include interest earned over life of the bond.Debt donated.b IDA Debt Reduction Facility operation.c Brady bonds donated.d Primary health care, women in development and children in especially difficult circumstances.e Health, nutrition, education, social mobilization and area-based UNICEF programmes.f UNICEF water, sanitation and health care programmes in rural areas.

Source: Global Development Finance, 1998.

66

ReferencesAction Aid (1998). Beyond Crisis Management: Southern Perspectives on the

Future of Debt. Action Aid: London.

Bokkerink, S., T. van Hees (1998). "EurodadÕs campaign on multilateral debt: the

1996 HIPC debt initiative and beyond". Development in Practice, vol. 8, no. 3.

Browne, S. (1999). Beyond Aid: From Patronage to Partnership. Ashgate Publishers:

London.

Caritas Internationalis (1998). "Putting Life before Debt". Caritas: Rome.

Christian Aid (1998). "Forever in your debt?" Christian Aid: London.

Debt Relief International (1998). "HIPC Progress Report". DRI: London.

Department for International Development (1998). "Speech" at Queen Elizabeth

House by the RT HON Clare Short MP, Secretary of State for International

Development.

Eurodad (1998a). "Re-evaluating HIPC: The Fiscal Indicator". Eurodad: Brussels.

_______ (1998b). Draft: "Taking Stock of Debt". Eurodad: Brussels.

_______ (1998c). "The HIPC Initiative Reviewed". Eurodad: Brussels.

International Monetary Fund (1998). Global Development Finance. IMF:

Washington, D.C.

Jubilee 2000 (1998). Debt Education Packet. Jubilee 2000: Washington, D.C.

Kapijimpanga, O. (1998). "Towards a Sustainable Solution to the African Debt

Crisis". Afrodad: Zimbabwe.

Northover, H., K. Joyner and D. Woodward (1998). "A Human Development

Approach to Debt Relief for the WorldÕs Poor". North-South Issues. Trocaire: Dublin.

67

Martin, M. (1997). "A Multilateral Debt Facility Ð Global and National". in

International Monetary Issues. UNCTAD: Geneva.

MEFMI (1997). "MEFMI Progress Report". Macroeconomic and Financial

Management Institute of Eastern and Southern Africa: Harare.

OECD: Development Assistance Committee (1996). ÒShaping the 21st Century: the

Contribution of Development CooperationÓ. OECD: Paris.

Oxfam International (1997). "Growth with Equity: An Agenda for Poverty

Reduction". Oxfam: Washington, D.C.

_________ (1998a). "Making Debt Relief Work". Oxfam: Washington, D.C.

_________ (1998b). "Debt Relief for Nicaragua". Oxfam: Washington, D.C.

_________ (1998c). "Debt Relief for Tanzania". Oxfam: Washington, D.C.

UNCTAD (1997a). International Monetary and Financial Issues for the 1990s. United

Nations: Geneva.

_____ (1997b). The Least Developed Countries Report. United Nations: Geneva

_____ (1998a). The Least Developed Countries Report. United Nations: Geneva

_____ (1998b). Trade and Development Report. United Nations: Geneva.

_____ (1998c). "The debt situation of developing countries at mid-1998". United

Nations: Geneva.

_____ (1999). ÒFinding Solutions to the Debt Problems of Developing Countries Ò.

United Nations: Geneva.

United Nations Development Programme (1997). Human Development Report.

UNDP: New York.

UNDP, UNICEF, UNFPA, UNESCO, WHO and World Bank, "Implementing the 20/20

Initiative". Hanoi Meeting on 20/20, October 1998.

UNDP and UNICEF. "Country Experiences in Assessing Public Spending on 20/20".

Paper prepared for the Hanoi Meeting on 20/20, October 1998.

UNICEF and the World Bank. "Universal Access to Basic Social Services". Hanoi

Meeting, October 1998.

United States General Accounting Office (1998). "Status of the Heavily Indebted

Poor Countries Debt Relief Initiative. Washington, D.C.

68

Woodward, D. (1997a). "The Next Crisis? Direct and Portfolio Investment in

Developing Countries". London.

_______ (1997b). "The HIPC Initiative: What Needs to be Done?" London.

_______ (1997c). "Unilateralism, Burden-sharing and Additionality under the HIPC

Initiative". London.

________ (1997d). "The HIPC Initiative: Effects of Changes to the Rules Governing

the Fiscal Criterion". London.

_______ (1998a). "Debt Reduction for the Highly-Indebted Poor Countries: An

Alternative Approach". London.

_______ (1998b). "The Debt Overhang Revisited: Debt and Private Investment in

Poorer Developing Countries". London.

_______ (1998c). "Debt Sustainability and the Debt Overhang in Highly-Indebted

Poor Countries: Some Comments on the IMF view".

World Bank (1989). Dealing with the Debt Crisis. The World Bank: Washington, D.C.

_______ (1997). The World Bank Annual Report. The World Bank: Washington, D.C.

_______ (1998a). "The HIPC Initiative: Objectives and Key Features". The World Bank:

Washington, D.C.

_______ (1998b). "The Debt Reduction Facility for IDA-only Countries". The World

Bank: Washington, D.C.