Debt Relief For the Most Heavily Indebted Countries By Basile & Eric

Development Strategy: HIPC Initiative Heavily Indebted Poor Countries (HIPC) Initiative The HIPC Initiative was launched in 1996 by the IMF and World Bank, with the aim of ensuring that no poor country faces a debt burden it cannot manage. The World Bank, the International Monetary Fund (IMF) and other multilateral, bilateral and commercial creditors began the Heavily Indebted Poor Country (HIPC) Initiative in 1996. The structured program was designed to ensure that the poorest countries in the world are not overwhelmed by unmanageable or unsustainable debt burdens. It reduces the debt of countries meeting strict criteria. As of the most recent annual report, the HIPC and related Multilateral Debt Relief Initiative (MDRI) programs have relieved 36 participating countries of $99 billion in debt. In 1999, a comprehensive review of the Initiative allowed the Fund to provide faster, deeper, and broader debt relief and strengthened the links between debt relief, poverty reduction, and social policies. In 2005, to help accelerate progress toward the United Nations Millennium Development Goals (MDGs), the HIPC Initiative was supplemented by the Multilateral Debt Relief Initiative (MDRI). The MDRI allows for 100 percent relief on eligible debts by three multilateral institutions—the IMF, the World Bank, and the African Development Fund (AfDF)—for countries completing the HIPC Initiative process. In 2007, the Inter-American Development Bank (IaDB) also decided to provide additional (“beyond HIPC”) debt relief to the five HIPCs in the Western Hemisphere.

How to benefit from HIPC Initiative? 1. Decision Point 2. Interim Period 3. Completion Point

Decision Point (Conditionality) Be eligible to borrow from the World Bank’s International Development Agency and from the IMF’s Poverty Reduction and Growth Trust Face an unsustainable debt burden that cannot be addressed through traditional debt relief mechanisms; Have established a track record of reform and sound policies through IMF- and World Bank–supported programs; Have developed a Poverty Reduction Strategy Paper (PRSP) through a broad-based participatory process in the country. Be eligible to borrow from the World Bank’s International Development Agency, which provides interest-free loans and grants to the world’s poorest countries, and from the IMF’s Poverty Reduction and Growth Trust, which provides loans to low-income countries at subsidized rates; Face an unsustainable debt burden that cannot be addressed through traditional debt relief mechanisms; Have established a track record of reform and sound policies through IMF- and World Bank–supported programs; Have developed a Poverty Reduction Strategy Paper (PRSP) through a broad-based participatory process in the country.

Completion Point Establish a further track record of good performance under programs supported by loans from the IMF and the World Bank; Implement satisfactorily key reforms agreed at the decision point; Adopt and implement its PRSP for at least one year.

List of Countries Post-Completion-Point Countries (36) Afghanistan Ethiopia Mauritania Benin The Gambia Mozambique Bolivia Ghana Nicaragua Burkina Faso Guinea Niger Burundi Guinea-Bissau Rwanda Cameroon Guyana São Tomé & Príncipe Central African Republic Haiti Senegal Chad Honduras Sierra Leone Comoros Liberia Tanzania Republic of Congo Madagascar Togo Democratic Republic of Congo Malawi Uganda Côte d’Ivoire Mali Zambia Pre-Decision-Point Countries (3) Eritrea Somalia Sudan To date, debt reduction packages under the HIPC Initiative have been approved for 36 countries, 30 of them in Africa, providing $76 billion in debt-service relief over time. Three additional countries are eligible for HIPC Initiative assistance.

Success To date, debt reduction packages under the HIPC Initiative have  been approved for 36 countries, 30 of them in Africa, providing $76  billion in debt-service relief over time. Three additional countries are  eligible for HIPC Initiative assistance.  Boosting social spending. Reducing debt service. Improving public debt management.

Success Example 1. Guyana Reducing interest payments by 60 million annually and increased social spending by 25% 2. Uganda Transport budget has doubled in the last decade Poverty rate has decreased from 56% to 31%

Failure The pre-decision point countries face common challenges, including preserving peace and stability, and improving governance and the delivery of basic services. Another challenge is to ensure that eligible countries get full debt relief from all their creditors. Some commercial creditors have initiated litigations against HIPCs, raising significant legal challenges to burden sharing among all creditors, including the multilateral institutions. The pre-decision point countries face common challenges, including preserving peace and stability, and improving governance and the delivery of basic services. Addressing these challenges will require continued efforts from these countries to strengthen policies and institutions, and support from the international community. Another challenge is to ensure that eligible countries get full debt relief from all their creditors. Although the largest creditors (the World Bank, the African Development Bank, the IMF, the Inter-American Development Bank, and all Paris Club creditors) have provided their full share of debt relief under the HIPC Initiative, and even beyond, others are lagging behind. Smaller multilateral institutions, non-Paris Club official bilateral creditors, and commercial creditors, which together account for about 27 percent of total HIPC Initiative costs, have only delivered a small share of their expected relief so far. Some commercial creditors have initiated litigations against HIPCs, raising significant legal challenges to burden sharing among all creditors, including the multilateral institutions. The number of litigation cases against HIPCs has been declining in recent years but flattened over the past few years.

Failure Example Zambia Debt caused decrease in efforts to combat HIV/AIDS as infected raise to over a million Strained resources Mortgaged health and education Strained resources, mortgaged health and education because of its debt service obligations

Effectiveness (+) Reducing poverty Improving infrastructure Improving growth and jobs Benefits to the global trading system Reducing poverty Unsustainable debt can be a considerable burden for a country, and can lock it into poverty, and prevent it from progressing towards greater development. Servicing debt creates a considerable opportunity cost for countries – the more that debt is repaid the less funds are available for reducing poverty and increasing development. Reducing or totally forgiving debt could therefore help reduce poverty and free-up resources for other uses, such as education and infrastructure. Improving infrastructure Improving infrastructure is, of course, essential for the generation of long term efficiency gains and labour mobility and productivity, as well as enabling the economy to benefit from globalisation and become an active player in the global trading system. Improving growth and jobs Improvements in efficiency and productivity will, in turn, stimulate growth and development, and enable governments to implement more progressive tax policies which can both stabilise the macro-economy as well as provide a flow of funds into its central bank. Infrastructure is especially significant for land-locked countries. By reducing debt repayments, more national income is available for generating growth, and this will generate jobs. As a by-product of structural adjustment requirements (SAPs) most indebted economies are forced into a period of austerity – as in the case of Greece. Rescheduling or reducing debt repayments will limit the length or severity of the austerity programme. Benefits to the global trading system Of course, creditor countries do not necessarily lose in the long run by forgiving debt – they can gain in both a multi-lateral way - through the development of the global trading system which enables them to gain from general increases in export earnings – and in a bi-lateral way as the relief of debt may mean gains for specific exporting firms and those who may win contracts to improve infrastructure.

Effectiveness (+)

Effectiveness (+)

Effectiveness (-) Moral hazard Higher interest rates Resources are diverted Moral hazard Critics of debt relief – usually the creditor countries - argue that it may send out the wrong signals to potential and existing borrowers. For example, by providing an insurance policy against poor financial management by national governments, debt relief creates the problem of moral hazard, so debtors do not take proper steps to prevent debt problems arising in the future. Furthermore, it may be argued that borrowers do not have a chance to learn from their mistakes, and continue to make the same mistakes that led to debt problems in the first place. This is certainly the view of Greek creditors, including Germany, who may take the view that debt relief will simply encourage debt defaulting in the future. Higher interest rates Cancelling debt, or the possibility of debt default, means that creditors will look to increase their expected return on new lending, meaning that interest rates on new loans are likely to increase - this in turn will have a negative effect on other borrowers. Furthermore, lenders in developed economies may be less likely to lend in the future. Resources are diverted Lost revenues from debt relief could have been used to help other developing economies who are also in debt, but have not reached unsustainable levels. To this extent, every unpaid dollar is one dollar less for, perhaps, more worthy lending.

Effectiveness (-)

Short term Smoothing repayment profile Decrease interest rate risk Waiving step-up interest rate margin 1.Smoothing repayment profile means that the number of repayment humps can be spread out over more years 2.Decrease interest rate risk: Bond exchange: Instead of exchanging cash there will be bonds being loaned out With the bonds, it’ll be ensured that interest rates stay fixed Swap arrangements: A swapping arrangement is a financial contract that enables two counterparties to exchange, for instance, fixed-rate payments for floating-rate payments Matched funding: This means charging a fixed rate on part of future disbursements of money 3. The step-up interest rate is when the interest rate is increased over time but by waiving the step-up interest rate, it’ll ensure that the interest rate is fixed

Long term Economic restructuring Interest on loan Increase GDP Economic restructuring will be implemented to ensure long term sustainability but could lead to a overuse of resources as well as a mortgage on health and education which would cause a stunt on economic development

Quiz Time 1. When was the HIPC Debt Relief Initiative launched? 2. What are the three steps to benefit from Debt Relief? 3. How many countries have benefited from this initiative and how many are currently eligible? 4. List an example of success 5. List an example of failure 6. List an advantage of the HIPC Debt Relief program 7. List a disadvantage of the HIPC Debt Relief program

Bibliography http://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/16/11/Debt-Relief-Under-the- Heavily-Indebted-Poor-Countries-Initiative http://www.worldbank.org/en/topic/debt/brief/debt-relief https://en.wikipedia.org/wiki/Debt_relief http://www.investopedia.com/terms/d/debt-relief.asp http://www.globalissues.org/article/31/the-heavily-in-debt-poor-countries-initiative-is-not- working https://www.esm.europa.eu/press-releases/explainer-esm-short-term-debt-relief-measures- greece

Bibliography http://ricardotejero.net/wp-content/uploads/2016/11/debt.png http://dgff.unctad.org/sitecomponents/charts/4.3.1Chart1.jpg http://www.ft.com/fastft/files/2017/01/Greece1.png