This memo from Joe Hanlon of Jubilee 2000 UK is a little bit difficult to
get through, but if you want to understand what the G* debt forgiveness
program envisions, this is the document to read.
Robert Weissman
Essential Information | Internet: rob@essential.org
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:
* finance ministers of the G7 group of industrialised countries,
* leaders of the G7, and
* leaders of the G8 (G7 plus Russia).
The amount of debt can be defined in two ways:
* The "nominal", "book", or "total" value of the debt (EDT) is the actual
amount of money owed now.
* 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:
* 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.
* 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:
* $25 billion (bn, 1000 million) under present HIPC
* $30 bn under Naples terms for countries as they qualify
New cancellation under Köln Debt Initiative:
* $25 bn in additional HIPC cancellation
* $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