#31: More on Debt: Jubilee 2000 UK Analysis (fwd)

[Robert Corbett <bcorbett@netcom.com>]

From: Max Blanchet <MaxBlanchet@worldnet.att.net>

> 
> The following is the Jubilee 2000 U.K. interpretation of the Outcome of
the
> G8 summit.  This can be regarded as the most complete analysis available.
> 
> Details and Interpretation of the Köln Debt Initiative
> 
> This is a summary of the details of the Köln (Cologne) Debt Initiative
with
> some interpreta-tion.
> 
> The new Initiative is based entirely on the present World Bank and
> International Monetary Fund Heavily Indebted Poor Countries (HIPC)
> Initiative and makes no fundamental changes. No new countries qualify for
> consideration (although more of the 41 who qualify will actually receive
> debt "relief") and the underlying process remains unchanged. None of this
> takes effect immediately, but is passed to the World Bank and IMF to
> implement.
> 
> Note that most decisions were taken by three different groups, each of
which
> issued a statement:
> o) finance ministers of the G7 group of industrialised countries,
> o) leaders of the G7, and
> o) leaders of the G8 (G7 plus Russia).
> 
> The amount of debt can be defined in two ways:
> o)  The "nominal", "book", or "total" value of the debt (EDT) is the
actual
> amount of money owed now.
> o) The "net present value" (NPV) is the amount of money that would be
> required to pay off the debt now.
> 
> Finally, note that normally in English the conference city is known as
> Cologne, but all G7/G8 official texts use the German name and call it the
> "Köln Debt Initiative", and we have followed that usage here.
> 
> NPV is less than EDT for low interest aid loans; NPV is higher than EDT
for
> commercial loans. For the HIPC countries, it is estimated that prevent
value
> (NPV) of the debt is 54% of the normal value of the debt (EDT) because of
> the high proportion of concessional (low interest) loans given to very
poor
> countries. 
> 
> 'Sustainability' and amount of debt to be cancelled
> 
> Under HIPC enough debt is to be cancelled to reach the level defined as
> "sustainable". There is a choice of two definitions of when a debt is
> "sustainable", and both are changed. In addition, there are changes to ODA
> (aid) debt and Paris Club (bilateral commercial) debt.
> 
> Export criterion
>  
> Under the present HIPC, debt is "sustainable" if the NPV is between 200%
and
> 250% of annual earnings from exports of goods and service (XGS). With only
> one exception, this has been set at 200%. So, presently:
>      NPV/XGS < 200%.
> 
> Under the Köln Debt Initiative this is reduced to 150%.
> 
> Fiscal Criterion
> 
> Under the present HIPC, a handful of countries with high levels of exports
> and a large tax base can use an alternative "fiscal" definition of
> sustainability: If exports are more than 40% of GDP and government revenue
> (DBR) is more than 20% of GDP, then debt is  sustainable if the NPV is
less
> than 280% of annual government revenue:
>
>      If XGS/GDP > 40% and DBR/GDP > 20%
>      then NPV/DBR < 280%.
> 
> Under the Köln Debt Initiative, all three numbers are reduced: the
> qualification criteria to 30% and 15% and the sustainability level to
250%.
> 
> Paris Club
> 
> The Paris Club of bilateral creditors negotiates with debtors over
bilateral
> debt, which for these countries mainly means export credits which have
been
> nationalised by the creditor because the debtor has defaulted. But in some
> cases, bilateral aid debt is also considered. Under the present regime:
> 
> o) Paris Club bilateral debt is first reduced by Naples terms, which
involves
> the cancellation (or equivalent shifts in accounting) of two-thirds of
> qualifying bilateral debt - both defaulted export credits and aid debt.
>
> o) Then under the HIPC "burden sharing" agreement, all debt is
> proportionately reduced as needed to meet the HIPC criteria. The Paris
Club
> at this point only deals with defaulted export credits and other non-aid
> debt only; aid debt is proportionately cancelled by individual
governments.
> 
> Under the present HIPC, the Paris Club will not cancel more than 80% of
> outstanding eligible debt (although it did go higher for Mozambique).
Under
> the Köln Debt Initiative, the Paris Club will "forgive up to 90% and more
in
> individual cases if needed." Naples Terms will be extended to HIPC
countries
> where debt is deemed to be "sustainable".
> 
> Aid (ODA) debt
> 
> Loans which are sufficiently concessional (long term and low interest) are
> counted as Official Development Assistance (ODA). In 1978 UNCTAD agreed a
> resolution calling for ODA loans to be ended and replaced by grants. Only
4
> countries continue to make significant ODA loans - Japan (19% of ODA in
> 1997), Spain (18%), France (5%) and Germany (4%). At their meeting in
Köln,
> 21 years after the UNCTAD agreement, the G8 actually back-tracked; it only
> agreed at to "increase the share of grant-based financing in ODA".
> 
> Most donor countries have now cancelled ODA debt. The G7 said that in
> addition to improve-ments in HIPC, "we call for full cancellation on a
> bilateral basis, through various options," of ODA debt. Japan is by far
the
> largest ODA creditor, and this wording is intended to allow Japan to
> continue using its system whereby debtor countries make payments on ODA
> debt, but these payments are returned to the country as tied aid to be
used
> for the purchase of Japanese goods.
> 
> Summary of Köln changes
> 
> Export criterion:
>      NPV/XGS < 150%
> Fiscal criterion:
>      if XGS/GDP > 30% and DBR/GDP > 15%
>      then NPV/DBR < 250%.
>
> Paris Club:
> cancellation up to 90% and higher in individual cases
>
> ODA:
> cancellation on top of HIPC improvements
> 
> How much money is involved
> 
> Cancellation already on offer:
>o) $25 billion (bn, 1000 million) under present HIPC
> o) $30 bn under Naples terms for countries as they qualify
> 
> New cancellation under Köln Debt Initiative:
> o) $25 bn in additional HIPC cancellation
> o)  $20 bn of ODA debt
> 
> These are nominal (total) values, based on World Bank and G7 finance
> ministry estimates. Thus the total debt cancellation now on offer is $100
> billion, and this is an increase under Köln of $45 bn.
> 
> A series of very confusing numbers have been put by the G7 in its 18 June
> statement and by various finance ministries, suggesting that this cancels
> half or even two-thirds of total debt. The G7 statement talks of "the debt
> stock of countries possibly qualifying under the HIPC initiative [of] some
> US$ 130 billion in nominal terms". This figure is arrived at by excluding
> short term debt and by excluding publicly guaranteed private debt (which
is
> included in HIPC calculation) and by excluding the debt of several HIPC
> countries which will still not qualify for debt relief even under the new
> Köln criterion. Jubilee 2000 does not consider this acceptable. The total
> debt of the 41 countries defined by the World Bank as HIPCs is $207
billion,
> while the total debt of the 52 countries highlighted by the UK Jubilee
2000
> Coalition is $370 bn.
> 
> Of the $207 billion HIPC country debt, approximately $100 billion is not
> being serviced - mainly with the agreement of the IMF and World Bank as
most
> of these countries have Bank and Fund programmes. This means the Bank and
> Fund have already admitted that this money will never be paid. So the $100
> billion now on offer is only equivalent to the money that it is already
> accepted will never be paid - in effect this much debt can be written off
> without real cost since it would never have been paid.
> 
> NPV vs. nominal: The G7 estimate that NPV debt is 54% of nominal debt. The
> $50 bn nominal HIPC cancellation corresponds to $27 bn NPV, while the G7
say
> their figure of $130 bn corresponds to $71 bn NPV.
> 
> Even the G7 finance ministers admit that "the final costs of the
initiative
> are subject to many uncertainties."  In practice, the figures given here
are
> only estimates by the IFIs and finance ministries, and it is impossible to
> find detailed estimates for individual countries. Indeed, the IMF and
World
> Bank have distributed estimates, but refuse to disclose how they are
arrived
> at - even to governments. Frustrated finance ministries privately admit
even
> they cannot check what the IMF and World Bank are saying.
> 
> 
> Timing
> 
> Under the present HIPC, after successfully completing 3 years of a World
> Bank and IMF adjustment (ESAF - enhanced structural adjustment facility)
> programme, a country goes to "decision point" when the Bank and Fund agree
> that a country can receive debt relief, and set additional conditions. The
> "completion point" when debt relief is granted normally occurs after a
> further 3 years of successfully following the ESAF programme and meeting
the
> additional decision point conditions. This second 3 years can be reduced
if
> there have been more than 3 years of ESAF before the decision point. The
> Köln Debt Initiative makes several changes to this.
> 
> Floating completion point
> 
> The G7 finance ministers declared: "While implementation of debt relief
must
> continue to be predicated on sound economic policies over two stages,
debtor
> countries should be allowed to advance the 'completion point' through
> improved performance. The second stage could thus be shortened
significantly
> if a country meets ambitious policy targets early on ('floating completion
> point')." Officials in several countries said that decision and completion
> points would be made the same, but this clearly was rejected.
> 
> Dates
> 
> Under the present HIPC, the sustainable level is determined by the IMF
based
> on projections of export earnings or tax revenue. Under the Köln Debt
> Initiative, "the amount of debt reduction should be determined at the
> 'decision point' on the basis of the situation prevailing at the time" -
in
> other words, actual rather than projected export or tax earnings.
> 
> Under the present HIPC, debt is only cancelled at completion point. The G7
> finance ministers said "the debt service burden of qualifying countries
> should be alleviated more quickly through provision of 'interim relief' by
> the IFIs [international financial institutions] even before debt reduction
> is implemented at the 'completion point'. This is already current practice
> in the Paris Club for bilateral debts, and the IFIs should provide
> comparable treatment."
> 
> 3 years instead of 6 years?
> 
> Combining the fact that debt cancellation is determined at decision point
> and that there will be "interim relief" between decision and completion
> points, this is being billed as effectively granting debt relief after 3
> years instead of 6. However, the lack of incontrovertible backing for this
> interpretation in the texts of the various statements at Köln must give
some
> cause for concern.
> 
> By the year 2000
> 
> In addition, the G7 heads of government "call on the IFIs and Paris Club
to
> ... work with the HIPC countries to ensure that three quarters of eligible
> countries have reached their decision point by the year 2000."
> 
> The 3 conflict countries (Liberia, Somalia and Sudan) will clearly not
meet
> the deadlines. Of the remaining 38, 33 are now estimated to be
unsustainable
> under the Köln terms (7 more than under the original HIPC terms) and the
> other 5 will only receive Naples terms by the Paris Club, according to the
> British Treasury. Of the remaining 38, three-quarters (28 or 29) should
> reach decision point by the end of 2000. This is likely to include most of
> the 5 who will not qualify. So it is expected that around 24 countries
will
> have some debt cancellation promised by the end of the year 2000.
> 
> Civil society and poverty reduction
> 
> The G7 leaders say the Köln Debt Initiative "should be built on an
enhanced
> framework of poverty reduction, developed by the IFIs in consultation with
> other institutions and with civil society."
> 
> The G7 finance ministers say: "Integrating their efforts, the World Bank
and
> IMF should help qualifying countries with the drafting and implementation
of
> poverty reduction plans for the effective targeting of savings derived
from
> debt relief, together with increased transparency of budgetary procedures
to
> protect social expenditure. Throughout program design and implementation,
> there should be consultations with broader segments of the civil society.
> Such dialogue will be the basis for deepening the sense of 'ownership'
with
> governments and citizens in debtor countries when necessary adjustment
> programs are to be adopted."
> 
> The World Bank and IMF are directed by the G7 finance ministers "to
develop
> ... specific plans for such an enhanced framework for poverty reduction"
in
> time for the annual meetings in September.
> 
> The G8 leaders "urge the International Monetary Fund (IMF) to give more
> attention to this issue [development of sound social policy] in designing
> its economic programs and to give particular priority to core budgets such
> as basic health, education and training to the extent possible, even
during
> periods of fiscal consolidation." The G8 welcome the efforts of the World
> Bank to work with the UN on social policy and "invite the World Bank and
the
> IMF to work together ... in the design of adjustment programs that ensure
> the protection of the most vulnerable."
> 
> There is a noticeable difference of views on the role of debt relief in
this
> respect. The G8 leaders say "the central objective of this [Köln debt]
> initiative is to provide a greater focus on poverty reduction by releasing
> resources for investment in health, education and social needs." By
contrast
> the G7 finance ministers continue to talk of Köln as an attempt to
> "reinforce the [HIPC] Initiative so as to enhance the prospects for a
robust
> and lasting exit for qualifying countries from recurrent debt problems."
> 
> Increased conditionality & IFI power
> 
> Increased debt cancellation has been won only at the price of increasing
the
> power of the IMF. Debt reduction is even more strictly linked to ESAF, and
> the IMF and World Bank have been given the power to impose additional
> conditions on "poverty alleviation". The words "adjustment", "reform",
> "sound policies" and "good governance" a liberally sprinkled through the
> documents.
> 
> The G7 finance ministers said, "there will have to be a strong link
between
> debt relief, continued adjustment, improved governance and poverty
> alleviation. ... The pursuit of sound social policies should be integrated
> with structural adjustment programs that debtor countries are expected to
> implement. ... The World Bank and IMF should adapt their support under the
> 'Policy Framework Papers' (PFP), in particular the IMF's programs under
the
> Enhanced Structural Adjustment Facility."
> 
> G7 leaders left it to the IMF and World Bank to develop a new "framework
for
> poverty reduction", and it seems clear that ministers and leaders intend
> social conditions to be added on to the present ESAF and HIPC decision
point
> conditions - subject to a bit of extra protection of social spending.
> "Consultation" is required, but decisions will continue to be taken by the
> Bank and Fund; in particular, they will determine if a government has what
> the G7 finance ministers call "sound economic policies" and does not make
> "unproductive expenditure".
> 
> Furthermore, it has been left to the IMF and World Bank to set out the
rules
> for the new "floating completion point," and they will surely retain the
> power to decide if a country has met the conditions.
> 
> Funding and front-loading
> 
> All three statements stress that the international financial institutions
> (IFIs) will need "additional substantial financing".
> 
> The G7 leaders agreed that the IMF should sell up to 10 million ounces of
> gold. Later briefings indicated that this would be for both debt relief
and
> IMF ESAF loans.
> 
> In addition, the G7 leaders called for governments to donate to the HIPC
> Trust Fund to pay some IFI costs, and called on "the private sector of
> reinforce the objectives of this initiative, through contributions to a
> Millennium Fund to help finance debt relief."
> 
> The G7 finance ministers' statement implicitly recognises that the Köln
Debt
> Initiative is largely about reducing the "stock" of debt and not the
> "flow" - the actual debt service payments. To reduce flow, the G7 finance
> ministers propose that "after the 'completion point', the IFIs could
> frontload debt stock reduction in a way to reduce debt service payments
more
> strongly in early years."
> 
> But two press briefings by the British Treasury spokesperson in Cologne on
> 18 and 19 June both stressed that "the degree of reduction in debt service
> payments depends crucially on front loading, and thus on how much money is
> put into the Millennium Fund."
> 
> In effect, then, the Köln Debt Initiative itself will have relatively
little
> impact on actual debt service payments for most countries. Instead,
reducing
> actual payments will depend on private and government donations to the
HIPC
> Trust and Millennium funds.
> 
> Joseph Hanlon
> Jubilee 2000 Coalition, London
> 
> 23 June 1999