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"The people of the lesser developed countries have suffered so much. But there are those who try to change this sad situation. I give thanks to WDM and its work." Archbishop Desmond Tutu

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Conditions impossible

World Development Movement Report
Jessica Woodroffe and Karen Joyner
September 2000.
 

The real reason for debt relief delays

Summary

The Highly Indebted Poor Country (HIPC) Initiative was agreed four years ago, yet only 10 countries have received any debt relief.  None have completed the process and got their full quota. Something is clearly wrong.

The UK Government has argued that the problem for many countries is their lack of demonstrated commitment to poverty reduction.  Yet our research demonstrates that the delays are in fact due to countries failing to implement International Monetary Fund (IMF) programmes, particularly requirements on privatisation.

Compliance with IMF programmes appears to have become the international test of a government's commitment to poverty reduction.  Given the widespread and widely accepted criticism of the impact of these IMF programmes on poverty, this is absurd. Debt relief should not be delayed merely because a country has not privatised its cotton or copper sectors. 

At the Annual Meetings of the World Bank and IMF, the World Development Movement will call on the UK and other shareholder governments of the two institutions, to agree that:

Economic conditions, as laid out in IMF loan documents, are not a good indicator of a country's commitment to poverty reduction. Debt relief should not be delayed due to slippage in the implementation of IMF conditions.

The real reason for delay

At their Annual Meetings in Prague, the World Bank and IMF will commit themselves to trying to get 10 more (20 in total) countries on track for debt relief by the end of 2000.  Given the feeble state the HIPC debt relief initiative has descended, this is a welcome push.  But we should not forget, this is only 20 out of the 41 'HIPC countries', and that they will only be at the first stage (so called 'decision point') on their journey to full debt relief (known as completion point). [i]  (The full list of countries is detailed in the appendix).

At a meeting with non-governmental organisations on September 8th, 2000 the Chancellor made it clear that, in the view of the UK Government, the speed of progress is out of the hands of the creditors.   It is now up to the debtor countries themselves to move things along.

The UK Government argues that nine countries (10 if you count Ethiopia which has recently signed a peace accord) are not getting debt relief because they are involved in conflict or civil wars.  Then, they add, there is a second group of 10 countries which cannot yet qualify for debt relief because:

"the international community have deep concerns about their commitment to poverty reduction" [ii]

Before getting debt relief, developing country governments should demonstrate that they will use this money wisely, on poverty reduction.  However the international test judging a countries' commitment to poverty reduction is deeply flawed. Debt relief is being delayed because countries are not meeting IMF conditions which are, at best, irrelevant to poverty reduction.

Of the first 10 countries which are now at decision point, seven out of 10 were delayed because of non-compliance with IMF conditions, mostly because of failure to privatise.  In Honduras the problem was electricity, while in Mali it was the cotton industry.

Of the next 10, which the World Bank and IMF hope to get to decision point by Christmas, six are being delayed because they are not meeting the IMF's detailed conditions.  The next five countries, waiting in the wings, have all slipped on the implementation of IMF conditions.  Again, in many cases, privatisation has been the problem, as has the general complexity of the array of conditions.  Zambia experienced problems over the privatisation of copper mines.  In Nicaragua, privatisation of telecommunications and public sector reform has caused delays.

Not only will these conditions delay debt relief, many also damage the interests of local poor people.  Oil prices rises in Tanzania have put up the cost of local transport. People in Central America fear electricity and phone prices will rise. Cotton producers in Mali are worried about their livelihoods.  The people, often living in deep poverty, cannot afford such 'adjustments' to their lives.

If a serious commitment is going to be made in Prague to speed up the HIPC process, then there needs to be substantially more flexibility in the linking of debt relief to IMF conditions.

How the HIPC initiative works

To receive debt relief under the HIPC initiative, countries have had to comply with the conditions laid down by the Enhanced Structural Adjustment Facility (ESAF) of the IMF.  These included a wide range of detailed prescriptions including privatisation, trade liberalisation, banking regulations and public sector pay.  The conditions, called a Structural Adjustment Programme (SAP), are agreed between the IMF and the borrowing country in a Letter of Intent (LOI).

Since the original agreement (HIPC I) two changes have been made.  Firstly, HIPC II (or Enhanced HIPC) increased the amount of debt relief that was on offer and made more countries eligible.

Secondly, in a revamp at the Annual Meetings in 1999, ESAF was renamed the Poverty Reduction and Growth Facility (PRGF) and SAPs were renamed Poverty Reduction Strategy Papers (to be designed by governments in consultation with civil society, and then approved by the IMF).

To get debt relief, a country must first reach 'decision point', where it will start to receive some help with debt service payments as they fall due, but will not have the full debt relief until it reaches 'completion point', having agreed and implemented a PRSP.

In the long term, the impact of these name changes is difficult to asses, but UK officials monitoring the changes have confirmed, to date, most ESAF programmes have simply become PRGF programmes, without change of content. Debtor countries still labour under traditional IMF conditions.

IMF conditions hinder rather than help poverty reduction

IMF conditions have been widely criticised, both for their anti-poor content and their undemocratic nature.  But they have also been criticised for their complexity, rendering full compliance almost impossible.  Governments, in often fragile democracies, with weak infrastructures, are basically expected to transform their economies in three years. An internal IMF review found that three-quarters of all ESAF programmes either broke down completely or experienced lengthy interruptions.

Many claim that some of the conditions may even increase poverty. [iii] Joseph Stiglitz, ex-Chief economist at the World Bank made his opinions very clear:

 "They'll say the IMF is arrogant. They'll say the IMF doesn't really listen to the developing countries it is supposed to help. They'll say the IMF is secretive and insulated from democratic accountability. They'll say the IMF's economic "remedies" often make things worse - turning slowdowns into recessions and recessions into depressions.And they'll have a point." [iv]

The US Congressional Advisory Committee concluded "many of the conditions required sacrifices of the local population, loss of jobs, and deep reductions in living standards". [v]

At last year's Annual Meetings in Washington, widespread criticism of SAPs clearly hit home, leading to the recognition that poverty reduction must play a more central role in programme design.  There is little doubt that traditional conditions on liberalisation and privatisation should not be seen as the key benchmark of a government's commitment to poverty reduction.  Horst Kohler, the new Managing Director of the IMF, said that privatisation should no longer be seen as an ideology. [vi]

Yet, debt relief for the very poorest countries is still being delayed because of these irrelevant or even harmful conditions.

A rush to 2000 will not be enough

The spur to push an additional 10 countries to 'decision point' by the end of 2000 is of course a welcome one, and perhaps testimony to the influence of the Jubilee 2000 campaign.  But the debt crisis will not end there.

In the Memorandum to the International Monetary and Financial Committee and Development Committee, the World Bank and IMF have committed themselves 'to do everything possible to bring 20 countries to their decision points by the end of 2000.' [vii]  They have recognised that to do this they must be more flexible, but we question whether they will go far enough.

Non-government organisations also fear that the good-will used up to speed countries to 'decision point' today will be paid for by delays to completion point tomorrow.  Flexibility in meeting IMF conditions may be used to get countries through to decision point, but officials have made clear this will not apply at completion point.

This fear has been borne out by recent IMF comments on Mali as it moves towards completion point:

"There have been slippages in the implementation of fiscal and structural reform measures introduced in 1999.  It would be important that the authorities adhere closely to the new timetables for reforms, especially in the cotton sector in view of its impact on the Malian economy and its role in poverty reduction strategies."[viii]

As a result of popular pressure, Mozambique's process was expedited.  Despite its patchy record on implementing its ESAF programme, the IMF gave it the go-ahead to move forward.  A wise move, which should now be repeated for others.

The case studies

The first ten to qualify

Of the ten countries which have reached decision point under the Enhanced HIPC Initiative, seven were delayed as a result of slipping on their ESAF conditions: Benin, Bolivia, Honduras, Mali, Mauritania, Senegal, Tanzania

The other three are: Burkina Faso, Mozambique, Uganda

Mali's experience with ESAF slippage is typical.  Privatisation programmes are extremely complicated and highly political.  Mali's most recent agreement with the IMF, signed in August 2000, lists almost 100 macroeconomic and structural adjustment measures to be implemented in the period 1999-2002.  Many of these measures are related to privatisation and the reorganisation of activities traditionally conducted by the government.  The government has had particular problems with reorganisation of the cotton sector, the partial privatisation of the main energy company and the opening up of the telecommunications sector.  Of the 11 structural benchmarks the government agreed to for 1999/2000, only three were successfully met.[ix]

Some of these slippages were not in the government's control. For example, one bidding company went bankrupt.  Whatever the reason, these slippages caused Mali's debt relief agreement to be delayed by six months.

Impact - Cotton is one of the government's main sources of foreign exchange and an important source of income for many farmers, so there is obvious concern about reorganising the sector.  Cotton producers are keen to be involved in the debate, and are particularly concerned that liberalisation will not eliminate their access to credit.  Cotton producers have now gone on strike with this issue as on of their concerns.

Benin reached decision point in July 2000.   Decision point was delayed by several months due to the government's failure to liberalise the cotton sector to the IMF's satisfaction, as well as failing to introduce a performance-based compensation system for the civil service.[x]

Bolivia had its decision point under HIPC I delayed by at least three months because the IMF was not convinced that the government of Hugo Banzer, which had recently come into office, would implement Bolivia's ESAF programme to the letter.  Bolivia's HIPC debt relief was therefore delayed because of the presumption of slippage on its ESAF programme, not even a real slippage.[xi]

Honduras reached HIPC II decision point in June 2000.  In the government's negotiations with the IMF leading up to decision point, there were disagreements regarding the restructuring of the electricity company.  These delayed the process by at least a month. An increase in tariffs on electricity rates and approval of the Framework Electricity Law were preconditions to moving forward in its PRGF programme.[xii]  Civil service reform is also a requirement of the IMF.

Impact - The plans to privatise the state-owned electricity, telecommunications and social security sectors to comply with IMF requirements led to a 24 hour general strike on 24 August 2000.  Organised by the Popular Bloc, compromising farmers, workers and students, the protest closed down universities affecting 60,000 students and blocked services at hospitals and major highways. [xiii]

Tanzania's decision point was delayed by three months due to delayed implementation of some of the structural reforms in its ESAF programme.  Privatisation of the National Bank of Commerce was one of the most difficult reforms to implement.  Liberalisation of the petroleum sector was also a requirement to make decision point.  Tying up these loose ends took the extra months that delayed Tanzania's debt relief agreement.[xiv]

Impact - Removing subsidies on petroleum has, predictably, led to a rise in prices.  Bus fares increased by 50 per cent earlier this year.  Past experience suggests these price hikes will eventually be translated into price rises for most goods, including food. People in Tanzania are also concerned that their main bank will now by owned by a foreign company.

Mauritania's HIPC debt relief has been delayed by almost two years due to ESAF slippage.  Mauritania was originally projected to reach decision point in mid-1998.  HIPC II decision point was not reached until February 2000.  In 1997/98 the government performed well on macroeconomic targets but experienced delays in restructuring the national airline company and the fisheries sector.  Owing partly to weak performance in the fisheries, macroeconomic performance slipped a bit in the first half of 1998 but strong performance in other sectors compensated.[xv] Over the last half of 1999, the IMF considered that Mauritania performed well on all the structural reforms for the period, but continued to have problems with the privatisation of Air Mauritania.[xvi] In its most recent agreement with the IMF, the government committed itself to meeting 36 structural benchmarks in 2000, including selling 65% of the shares in Air Mauritania, preparing the national water and electric company for privatisation and completing the sale of the telecommunications company.

While Senegal's HIPC II debt relief has not been delayed due to ESAF slippage, its treatment under HIPC I was.

Burkina Faso, Mozambique and Uganda are the only three of these first ten countries that have not had their debt relief (to decision point) delayed due to ESAF slippage. But even they have had some trouble implementing their ESAF programmes or trouble with the donor community in obtaining their HIPC debt relief. For instance, Uganda was delayed in the Paris Club meetings, where OECD bilateral creditors make their formal HIPC commitments, firstly because of the purchase of a Presidential jet and then because of Uganda's involvement in the Congo.

The next ten - six out of ten slipping

Of the ten countries which World Bank and IMF staff hope to get to decision point by the end of 2000, six are currently slipping on their ESAF programmes:

Cameroon, Chad, Guinea, Guyana, Nicaragua, Zambia

The other four are: The Gambia, Guinea Bissau, Malawi, Rwanda

Cameroon is an example of a HIPC country with a chequered history with structural adjustment programmes.  Cameroon was originally scheduled to reach decision point in 1998.  While it is currently considered on track with its PRGF, the government went off track on many of its IMF programmes, (in 1989, 1992, 1995 and 1996).  These slippages were attributed to the government's generally haphazard implementation and poor economic and financial management.  Since late 1996, the government's progress with reforms has been generally satisfactory.  But there has been enough slippage to delay its debt relief for over two years. [xvii] Cameroon should reach decision point by the end of 2000 - at least two years later than originally anticipated due, to ESAF slippage since 1996.  However, Cameroon is not considered an especially good performer and its progress on financial management and transparency will be monitored closely as it approaches completion point.

Nicaragua has had its HIPC debt relief delayed by at least two years due to ESAF slippage.  Originally projected to reach decision point in 1998, it is scheduled to reach HIPC 2 decision point by the end of 2000. The government has experienced problems while implementing a particularly ambitious programme of public sector downsizing and privatisation.  Problems have been encountered in privatising the national telephone company due to the withdrawal of potential investors.[xviii]

Impact - Thousands of jobs in the state sector have been lost since 1990 with the implementation of SAPs. Currently, a further 6,000 redundancies in the state sector are planned. Loss of employment has brought severe hardship to many families who are in turn unable to satisfy their minimum basic daily needs. 53.2% of the population are unemployed, 53% live on an income of less than 1 US dollar a day, and 43.8% live below the poverty line. [xix]

Spanish electricity group Union Fenosa now has 95 per cent of the shares in the two companies created out of the national electricity distribution company Enel, creating a new private monopoly to replace the nationalised industry.[xx]

Guinea was not originally considered eligible for HIPC I debt relief, but was one of the countries which became eligible under HIPC II. Guinea is experiencing delays in its relief agreements due to failure to comply with PRGF conditions, including taxation and custom arrangements.[xxi]

Zambia's HIPC debt relief has been delayed at least a year due to ESAF slippage.  Originally projected for decision point by the end of 1999, Zambia will be lucky to get through by the end of 2000.  The government has had trouble meeting most of its structural benchmarks, but its central problem with its ESAF has been, as usual, slippage on its privatisation programme, principally that of the national copper mine.[xxii] To comply with the condition, the Zambian government had to offer the mining company, Anglo-American, a very generous deal. Along with a cut down price, the government had to agree to adopt all the mines' outstanding debts.

Impact - Zambia has been pursuing rapid privatisation, which is opposed by many local non-government organisation's. Reportedly, half of the privatised companies are now bankrupt.  More than 60,000 jobs lost and 420,000 people put into destitution.[xxiii] The copper mines certainly needed attention and were running at a loss.  However Zambian NGOs questioned the wisdom of privatising at a time when copper prices were so low.  The mines had earlier been valued at $350 million but were eventually sold off for $90 million.  Moreover, the deal only went through because the government agreed to take on the mines' debts.  Ironically to get debt relief the government had to get further into debt.[xxiv]  Local people are watching to see whether this massive subsidy to the mining multinational will really provide them with more jobs.  They have had past experience of South African companies coming in, stripping assets, and then leaving, or of firms failing to make the necessary investment and then moving on.  ZARD, a Zambian research NGO, is also concerned about the 20 year environmental indemnity given to Anglo-American.[xxv]

The next five - all slipping

When HIPC was first agreed, a list of countries to be taken through the process was drawn up.  Those with bad, or no, record on ESAF programmes were relegated to the end of the list: Cote d'Ivoire, Ethiopia, Madagascar, Niger, and Sao Tome Principe.

The five HIPC countries expected to receive debt relief later than the others are the ones who have performed poorly, or not at all, on adjustment programmes, or have had serious political problems.  The World Bank and IMF intend to get five of the remaining 22 HIPCs through to decision point by the early part of 2001.

Ethiopia, Madagascar, and Niger were, a year ago, predicted to reach decision point by the end of 2000.[xxvi]

Ethiopia's HIPC debt relief has been delayed for the last two years because of the border conflict with Eritrea. But before this, its debt relief was being delayed because of ESAF slippage.  Ethiopia was originally projected to reach decision point in 1997. So, Ethiopia's debt relief has already been delayed by three years.

Three years ago it was very difficult to get a straight answer from IMF staff on why countries were slipping on their ESAF programmes.  Ethiopian NGOs had heard that their government and the IMF were at odds over the privatisation of Ethiopian Airlines. There were also rumours that the government had upset the IMF by borrowing foreign exchange from domestic commercial banks to pay off G7 export credit debt coming due.  Whatever the real story, Ethiopia's debt relief was delayed for at least a year before the conflict with Eritrea erupted.

While Madagascar has had some trouble with its ESAF programme, it is unclear why it is not included in the list of HIPC countries to reach decision point before the end of 2000.  The IMF has recently noted that Madagascar has performed well on its economic programme in spite of several natural disasters.  There has been some concern over failure to control public sector wages but there has been progress on privatisation, although slower than hoped.[xxvii]

Glossary:

G7 - Group of seven leading industrialised countries
ESAF - Enhanced Structural Adjustment Facility
HIPC - Highly Indebted Poor Countries
IMF - International Monetary Fund
PRGF - Poverty Reduction and Growth Facility
PRSP - Poverty Reduction Strategy Paper
SAP - Structural Adjustment Programme

Footnotes

[i] WDM has also commented elsewhere that the debt relief currently on offer will be insufficient to ensure that countries are finally able to escape the debt crisis and move towards meeting the UN 2015 targets for poverty reduction.
[ii] Letter from Gordon Brown and Clare Short 21/8/00
[iii] See 'Still sapping the poor' A critique of IMF poverty reduction strategies, Charles Abugre, World Development Movement, June 2000,
[iv] Joseph Stiglitz, the New Republic, 4/06/00
[v] Meltzer Commission Report Chapter 2, 2000
[vi] Meeting with UK NGOs on 11/9/00
[vii] ***********************************************
[viii] IMF News Brief 00/83 8 September 2000
[ix] IMF Completes First Review of Mali under PRGF-Supported Program and Approves US$9 Million Disbursement IMF Newsbrief 00/83  8/9/00; Letter of Intent of the Government of Mali and Memorandum on Economic and Financial Policies for 2000, 11 August 2000
[x] Background Note on the Timetable for the Implementation of the Initiative for the Heavily Indebted Poor Countries, World Bank and IMF, 14 April 2000
[xi] Eurodad reports on Bolivia, September 1997
[xii] Letter Of Intent, 13 April 2000
[xiii] National Strike protests IMF privatisation demands', AFP, 29 August 2000
[xiv] Tanzania decision point document, under the Enhanced HIPC initiative 20/3/00  World Bank and IMF.
[xv] Mauritania:  ESAF Medium-Term Economic and Financial Policy Framework Paper, 1999-2002, prepared by the Mauritanian Authorities in collaboration with staffs of the Fund and World Bank, 12 July 1999.
[xvi] Letter of Intent of the Government of Mauritania and Memorandum of Economic and Financial Policies for the Government of Mauritania for 2000, 25 May 2000.
[xvii] World Bank and IMF, Cameroon: Preliminary Document on the Enhanced Initiative for the Heavily Indebted Poor Countries, 23 May 2000
[xviii] Letter of Intent and memorandum of Economic and Financial Policies, 19 August 1999
[xix] The National Workers' Front 1999, Nicaraguan Solidarity Campaign website.
[xx]  Financial Times UNION FENOSA WINS DISTRIBUTION CONTRACT IN NICARAGUA, Sep 14, 2000
[xxi] Letter of Intent, 7/12/99
[xxii] Letter of Intent of the Government of Zambia, 30 June 2000
[xxiii] 'Letter from Zambia, the Nation, 14 February 2000'
[xxiv] Alliance for Development, Zambia, personal communication 11/8/00
[xxv] Rueban Lifuka, ZARD, Zambia personal communication 11/8/00
[xxvi] Modifications to the HIPC Initiative, IMF and World Bank 23 July 1999
[xxvii] IMF Concludes Article IV Consultation with Madagascar, 30 August 2000.