DEBT RELIEF FOR THE POOREST COUNTRIES

Congress and the Administration should be applauded for supporting the international debt relief program, the Enhanced Heavily Indebted Poor Country (HIPC) Initiative. For an investment of under $1 billion spread over several years, the U.S. has leveraged $30 billion from other donors, writing off $50 billion worth of debt stock – a significant “clearing of the books” of decades-old debt, providing a fresh start to these countries. It also freed up $1 billion a year in debt service for 27 of the poorest countries that are now building schools, clean water wells and AIDS prevention programs with this money. It has not, however, provided a lasting solution to the debt crisis and could be improved.

Background

Over the last several decades, poor countries accumulated large international debts, built up through Cold War-motivated lending, natural disasters, as well as decisions by corrupt dictators. These debts became a serious impediment to poverty reduction and economic development in the world's poorest countries. Many poor countries spent 30-40 percent of their annual budgets paying back decades-old debts, much more than they spent on health and education combined. Worse yet, most borrowed more money in order to cover their payments on old debt, creating a vicious cycle of indebtedness.

In 1999, the G7 and then the Boards of the World Bank and IMF adopted the “Enhanced HIPC Initiative.” It was designed to provide deeper debt relief than had been considered previously for more countries more quickly, and more directly tie the provision of debt relief to country-led poverty reduction plans. Congress provided essential authorizing legislation and appropriations allowing the U.S. to participate in this initiative – which triggered other countries’ participation – in the fall of 2000.

Between fiscal years 2000 and 2004, Congress appropriated $860 million to fund the Enhanced HIPC initiative in both bilateral debt relief and contributions to cut multilateral debt.

Progress and Impact

Since 2000, 27 poor countries have qualified for the HIPC program – all but four of them are in sub- Saharan Africa. The benefits of this program for these 27 countries have been measurable.

Reducing “debt overhang” – Upon completion of the program, these countries will see their debt stock reduced by two-thirds, cutting $52 billion in nominal terms¹. Getting rid of this “debt overhang” reduces a strong incentive for capital flight. The average amount governments actually have to spend on debt service has gone from 25% of their budgets to 15%.

Civil Society and Transparency – An important part of the HIPC program has been the inclusion of civil society and greater government transparency in the creation of country poverty reduction plans. Recipient governments must engage in a broadly participatory consultation process with civil society, business, labor, academic, religious and others to determine the poverty reduction priorities for the country. This Poverty Reduction Strategy Paper (PRSP) process has not been perfect, but still represents a significant new approach to improving country ownership by non-government actors, as well as enhancing transparency.

Debt Service to Poverty Reduction – One of the conditions for receiving debt relief was the recipient government’s agreement to use the debt service savings for poverty reduction. More than $1 billion annually in debt service is now staying in these 27 countries to fight poverty. Evidence collected by the World Bank shows that, indeed, recipient countries are using this $1 billion in the ways intended – in fact expenditures on poverty reduction in these countries has risen by nearly twice that amount. By another measure, spending on poverty reduction as a share of total government spending rose from 41% to 54% (1998-2004). And spending on military in these countries has risen by only an inflationary 2% in this time.

According to research conducted by Jubilee USA Network, the successor organization to the U.S. chapter of Jubilee 2000, this debt relief is working on the ground to help people’s lives.

Countries making effective use of debt relief savings Tanzania has used its savings from debt relief to increase education spending and eliminate school fees. An estimated 1.6 million children have returned to school. Uganda used the bulk of debt relief savings to fund universal primary education, more than doubling the school enrollment rate to 94%, which has contributed to Uganda’s remarkable decline in HIV rates. Uganda also used this money to dig many clean water wells. Mozambique has used substantial debt savings to vaccinate children against tetanus, whooping cough and diphtheria, as well as to build and electrify schools. Cameroon used its debt savings to launch a national HIV/AIDS plan for prevention, education, testing, and mother-to-child transmission abatement.

Moving Forward

Building on the results of the current initiative, Congress passed legislation in 2003 to deepen relief for qualified poor countries. The proposal seeks to deepen relief so that no HIPC pays more than 5% of it budget on annual debt service or 10% if the country has no health crisis. This would increase the benefit to these countries by 50% at a small additional cost to the United States, and more closely tie debt relief to a country’s ability to pay. The Administration has not yet implemented the proposal.