Debt relief has become a prominent issue in recent discussions about development, poverty and the relationship between developed and developing countries. The debt problems of the poorest countries have attracted the attention of development agencies that fear that the crisis may worsen poverty and economic decline in which the indebted nations are trapped. The inability to serve external debt by the severely indebted low-income poor countries is vividly reflected not only in massive build-up of arrears but most importantly by the number and frequency of rescheduling. Thus the debate on debt relief is no longer confined to economic and financial spheres; it is transcending every human domain - health, education, agriculture and industry.

Many development agencies and skeptics have expressed widespread doubts regarding the Heavily Indebted Poor Countries Initiative (HIPC) - launched in 1996 - and its successor the Enhanced Heavily Indebted Poor Countries Initiative's (EHIPC) ability to achieve the promised objective of a “robust exit from the burden of unsustainable debts” for developing countries. Problems associated with the design and implementation of the initiative suggest that neither of the two HIPC versions has succeeded in providing an adequate response to the Third World debt overhang. An analysis of key debt indicators shows that external debt and debt-servicing problems are most severe and persistent in the heavily indebted poor countries (HIPCs), the target group of the HIPC Initiative.

Throughout the process, creditors failed to put sufficient political will, resources and serious analysis into the debt reduction operations. Debt reduction targets were set and reset arbitrarily - writing off 30 percent, then 50 percent, and so on - rather than based on serious assessments of the needs of each country. Despite claims of success by creditors for their Heavily Indebted Poor Countries (HIPC) initiative for debt reduction, the IMF estimated that Africa's debt service payments would only go as low as 17.1 percent of export earnings in 2001 (down from 20.3 percent in 1999), before rising again to 18.4 percent in 2002. The process has been much slower than expected and the initiative is suffering from problems of under funding, excessive conditionality, and restrictions over eligibility, inadequate debt relief and cumbersome procedures.

The Overall Picture of the Process

There has been disagreement over what constitutes 'sustainable debt' in the HIPC initiative. Sustainability is subject to the determination of export performance and many debt campaigners fear overly optimistic calculations will reduce the amount of debt reduction and may mean that countries fall back into the debt trap.

It seems the International Financial Institutions are only interested in the Third World debt crisis when it reaches proportions that threaten the poor countries' ability to service their debt to Northern creditors. Thus sustainable debt to the Bretton Woods institutions is when a country reaches a level where it can meet its current and future repayment obligations in full. Debt relief has not managed to ease domestic expenditure constraints and the curbing of investments.

The 22 African countries that have so far qualified to receive some relief are still required to pay almost $2 billion each year in debt repayments to wealthy creditor countries and institutions, mainly to the World Bank and IMF themselves. African countries' efforts to address urgent domestic priorities, from poverty reduction to the fight against HIV/AIDS, continue to be undermined by their persistent debt burden. Most African governments still spend up to three times more on debt repayments than on health care for their own people Not only are some countries spending more on debt payments after they receive debt relief, but they are overshooting the World Bank and IMF's own definitions of debt sustainability. Uganda, the first HIPC graduate, currently has debts of over 200% of the debt-to-exports ratio. This will be the third time Uganda has exceeded its debt sustainability after reaching completion points. Surprisingly, the World Bank and IMF have changed definitions of debt sustainability to include liquidity as the operative criterion.

The HIPC initiative is further flawed because it is tied to controversial economic adjustment measures. In his speech to the International Monetary and Financial and Development Committees in Prague on September 24 and 25, 2000, Canadian Finance Minister Paul Martin develops a critique of the current HIPC process, including Poverty Reduction Strategy Papers (PRSPs), especially the overburdening of countries with a huge quantity of conditions to fulfill before receiving debt relief. Martin cites the problem of overburdening the HIPCs with "unrealistic conditionalities", and an excessive concern among creditors with the "quantity of conditionality rather than its quality."

It is interesting to observe that although Nigeria's debt stock is the largest in West Africa and the country is experiencing growing poverty, she has not been recognized as an HIPC eligible country. Debt relief has been more successful in protecting the interests of the creditors than the debtors. It is actually designed and controlled by creditors to extract the maximum possible in debt repayments.

According to the UN Secretary General's report of 2000 there are 18 least developed countries that are not included in the HIPC category, and some of them are considered severely or moderately indebted according to the World Bank classification. For instance, most of the debt-distressed African countries are classified as moderately indebted middle-income countries such as Zimbabwe while Gabon and Nigeria are both severely indebted yet excluded from the HIPC initiative.

The HIPC Initiative obfuscates the illegitimacy of most of Africa's debt. As such, it fundamentally undermines the strong imperative for debt cancellation. It sanctions the continued exploitation of indebted countries by rich creditor nations and institutions. Many of the loans that are being re-paid were made during the Cold War to repressive regimes and corrupt leaders, who used the money to strengthen their rule or to line their own pockets. Many more loans were made without attention to the viability of planned projects or to the capacity of the recipient country to make repayments.

Out of 20 HIPCs that have already reached HIPC decision point, four countries (Mali, Niger, Sierra Leone and Zambia) will have annual debt service payments due in 2003-2005 which will actually be higher than their annual debt services paid in 1998-2000. Five countries will be paying almost as much in debt service payments as before HIPC (Ethiopia, Guinea-Bissau, Honduras, Nicaragua, Uganda). In six countries, a modest $15 million in 2003-2005 will reduce annual debts serviced. Over half of the HIPCs are spending more than 15% of their government revenue on debt servicing.

Despite modest recovery in some countries, poverty has intensified, and human development indicators - life expectancy, infant mortality, and school enrolment have worsened. The export basket remains un-diversified. Since the start of the HIPC process the fragile industrial base has shrunk even further (de-industrialisation) in many countries. In short, HIPCs worsened the crisis on a number of scores. The debt under HIPCs strongly and negatively affects economic growth, threatens the sustainability of reforms, and prevents the development of a capable and functioning state due to the fiscal crisis that it engenders.

Recommendations:

1. The way in which debt relief is calculated for each country needs to be reviewed and alternatives adopted. The reliance on a debt-to-export ratio to calculate debt relief packages, based on World Bank and IMF projections, is flawed.
2. There is a need for an independent panel of experts not unduly influenced by creditor interests to reassess the debt sustainability, eligibility for debt reduction, and the amount of debt reduction needed, conditionality and financing of developing countries.
3. Future reviews of debt sustainability should also bear in mind the impact of debt relief on progress towards the achievement of the development goals contained in the Millennium Declaration.
4. Reform of the international strategy regarding official debt of poor countries should address the problems of debt distressed low-income countries that are not currently eligible for special treatment accorded to the HIPCs.
5. Third World governments should be afforded the chance to determine their own approaches to poverty reduction, in consultation with civil society groups and other partners - not to have these prescribed to them by external powers.
6. Needless to re-iterate, the idea of all countries caught in the debt trap forming a cartel to maximise the effectiveness of an international campaign of debt repudiation has been around for some time.

Conclusion

The analysis above shows that there are serious flaws in the HIPC initiative's approach to the Third World debt crisis. Levels of debt repayment after HIPC initiative are far too high, undermining the necessary investment needed to accelerate poverty reduction. In the absence of radical reform, HIPC will join a long list of failed poverty reduction initiatives. Past and present initiatives at international debt relief are increasingly acknowledged to be inadequate and flawed. The creditors should not monopolise decision-making on debt resolutions and there is a need for the debtor countries to come up with their own initiatives.

The IMF and World Bank are off-track on meeting their performance benchmarks in the HIPC initiative. Any solution to the debt crisis must move beyond debt relief and conditionality, to consider debt within the wider context of equitable and sustainable development. It should address socio-economic and developmental relations between debtor and creditor countries. Needless to state again that if global efforts to reduce poverty and fight underdevelopment are to be successful, Third World debt must be canceled outright.

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