CIDSE/Caritas Statement on Debt (January 2002)

Rethinking Bretton Woods | Tue, Jan 22, 2002

By CIDSE and Caritas Internationalis
This paper summarizes current positions on debt held by members of the CIDSE and Caritas Internationalis networks.

CIDSE and CARITAS Statement on Debt

This paper is a brief summary of CIDSE and Caritas papers on debt (January 2002)

To date, 23 countries have graduated through the enhanced Heavily Indebted Poor Country (HIPC) Initiative. Member organisations of the international network of Catholic aid agencies campaigning for economic justice - CIDSE and Caritas Internationalis - believe that this initiative is failing to meet both its objectives - to provide sufficient additional finance to meet poverty reduction objectives in debtor countries and to achieve debt sustainability. The initiative is not working because it is fundamentally flawed. At the heart of the weakness of the HIPC policy framework is the use of an inappropriate criterion used to assess the sustainability of a country's debt obligations. We argue that a more durable and coherent standard by which to judge the sustainability, or payability, of a country's debt stock is to balance a country's debt servicing obligations against the opportunity costs of financing basic poverty reduction expenditures. Moreover, we argue that a critical failing of current approaches to debt cancellation is the lack of an equitable political framework that would bring a greater balance between the needs of debtor countries and the interests of creditors. To redress the current monopoly enjoyed by creditors over the pace, volume and the criteria for eligibility of debt relief, we propose the international community adopts a Fair and Transparent Arbitration Process.

Background to the enhanced HIPC Initiative

The G7 Summit in Cologne in June 1999 provided a significant breakthrough on debt relief. The Summit communiqué promised to increase the levels of debt relief on offer, to speed up delivery of write offs and to link debt cancellation to poverty reduction. The decisions taken at Cologne included:

--The lowering of measurements of debt sustainability from 200% of debts-to-exports to 150%

--Shortening the timeframe for the delivery of debt reduction so that all eligible countries would receive some debt relief by the end of the year 2000

--The requirement for HIPCs to produce Poverty Reduction Strategy Papers to ensure that the proceeds from debt reduction would be targeted towards poverty reduction goals.

HIPC2 failing to meet its own poverty reduction objectives

23 countries have now graduated through the post-Cologne HIPC Initiative and we are now in a position to judge its performance. It is clear that the policy framework is failing to meet both of its principal objectives - achieving debt sustainability and providing enough finance to meet internationally agreed poverty reduction goals.

Reasons for the failure to achieve debt sustainability

--Some bilateral creditors continue to impose arbitrary cut-off dates. These reduce the stock of debt eligible for reduction and make the objective of debt sustainability conditional on creditors' considerations of what constitutes eligible debt. As a result, debt relief granted leaves some countries still above the threshold of 150% debts-to-exports that has been determined by the World Bank and IMF as a sustainable level.

--Overoptimistic assumptions on future export earnings and economic growth prospects are used to assess future debt sustainability thresholds (for example, as a result of vulnerabilities to exogenous and endogenous ""shocks"" Uganda has twice moved above debt sustainability thresholds after reaching its HIPC1 and 2 completion points)

--After all traditional and HIPC Initiative debt reductions, no HIPC will achieve sufficient reserves of foreign exchange coverage without resort to future concessional lending.

Failure to achieve poverty reduction objectives:

Actual debt servicing reductions for the 23 graduate HIPCs are estimated to be on average between 27-33%. This level of reduction will not provide the additional levels of finance commensurate with meeting the challenges of poverty reduction (some countries such as Niger and Zambia barely receive any new finance from the enhanced HIPC Initiative).

--After Completion Point, HIPCs are still, on average, left with paying more on debt servicing than on health care or education.

--The enhanced HIPC Initiative is failing to provide the finance necessary to meet the International Development Targets to halve HIPCs' poverty by the year 2015. All projections show that the only two other sources of additional finance, aid or economic growth and investment are likely to remain, at best, stagnant or continue to decline.

It is because debt cancellation is one of the most efficient and effective forms of resource transfer and because there is an urgent requirement to address the dire lack of resources in low-income countries, that CIDSE and Caritas Internationalis are calling for an overhaul of both the current financial criteria used to judge the sustainability, or payability, of debt and the mechanisms that determine how much debt relief is on offer. It is wholly unacceptable that the HIPC Initiative requires debtor governments to come up with poverty reduction plans in exchange for debt relief while creditors do not cancel enough debts to finance those poverty reduction goals.

An alternative approach to debt sustainability analyses

The key weakness of the HIPC Initiative is in the use of an inappropriate criterion. CIDSE and Caritas is calling for the World Bank and IMF to change the method of judging when countries should become eligible for debt cancellation and how much to write off. We believe that it is absurd that creditors and the international financial institutions should depend on campaigners and civil society to alert the international financial community to problems caused by indebtedness. CIDSE and Caritas member organisations want to see the creation of a more durable and more accurate criterion by which poor countries' indebtedness is assessed.

CIDSE and Caritas believe that the current standard for measuring debt sustainability should be overhauled. Judgments on a country's capacity to repay its debts must include assessments of the finance required by HIPC governments to meet their country's human development needs. Debt sustainability must be judged in terms of the capacity of governments to raise the finance needed to fund sustainable poverty reduction programmes and to achieve basic human development objectives. Only when these programmes have been fully funded, should any residual resources be assessed for debt servicing. One such alternative ""human development approach"" has been proposed by CIDSE member organisations as a possible way of integrating pro-poor objectives in the HIPC framework.

CIDSE and Caritas believe that, since the international community has agreed clear targets for poverty reduction, it has an obligation to ensure that the requisite resources are available to meet those objectives. Debt cancellation is the quickest way to transfer these resources. However, CIDSE and CI agencies maintain that a more legitimate and effective decision-making process should allocate the proceeds from debt relief after including a strong representation of civil society organisations or at least an influential voice of the poor. A policy design process that has a broader group of stakeholders may come up with an alternative vision of poverty reduction goals and strategies that may differ widely from those set out by the international community. We believe that the voice of the poor should be the preferential option in the policy-making process and that debt servicing should become a residual obligation.

Not only do we believe that there is a moral imperative for cancelling all the unpayable debts of poor countries, but also there is a growing body of evidence to suggest a robust economic case for going further. All available studies show that by easing the constraints on domestic credit sources, debt cancellation is the form of North-to-South resource transfer that has the quickest and most beneficial impact on economic growth. Not only is it economically desirable, it is easily achievable and affordable. The only obstacle is the lack of political will of the leaders of the world's richest creditors.

Is more debt relief affordable?

For CIDSE and Caritas member organisations, the starting point for analysing the amount of debt cancellation required should be based on principles akin to the Church's doctrine of the preferential option for the poor. According to the church's social teaching, at the forefront of economic policy- making should be the imperative of addressing the needs and rights of the least advantaged in society. Thus far, creditors have approached the issue of debt relief according to the level of financing they are willing to afford rather than on the basis of what debtor countries need.

According to independent auditors , the additional costs of all creditors going to 100% (pre and post-cut off debts) for the 22 of the HIPC graduate countries is marginal. The cost of the biggest creditors, the World Bank and IMF, going up to 100% cancellation for 22 HIPCs is approximately $287 million for the IMF (per year for 5 years) and $215 million for the World Bank (per year for 5 years). In international financial terms, this is marginal.

However, CIDSE and CI member organisations believe that there is a wider group of countries needing debt relief other than those restricted by the narrow criteria set out by the World Bank and IMF [ie those countries where debts are unsustainable as counted by NPV-to-exports ratio or IDA-only countries]. According to our human development approach, using a Feasible Net Revenue calculation, a wider group of countries, including some middle countries, also need substantial debt reduction. If the creditor and donor communities are serious about achieving the 2015 IDTs, then all, low income countries will require a 100% debt write off.

Fair And Transparent Arbitration Procedure

The persistence of the debt crisis, the half-hearted approach by creditors to its resolution and the derisory amounts of debt relief that have been offered through the enhanced HIPC Initiative (nearly twenty years after the crisis emerged in low-income countries) has led international campaigning groups to call for a rethink over international debt relief mechanisms. CIDSE/CI see an urgent need for creditor governments and institutions to review the unjust imbalance in decision making processes that underpins the current international management of debt crises - where creditors have an undue control over the pace, volume and eligibility of debt write offs. Mechanisms that have been defined by creditors are grossly inadequate. Their fundamental shortcomings are intrinsically linked to the imbalance in decision making in international debt management where creditors retain a monopoly in the processes, rule-making and decisions over particular cases based on information that they themselves have generated or commissioned.

To overcome this structurally and ethically unacceptable asymmetry in the decision-making over debt relief, we propose that urgent consideration be given to the establishment of a fair and transparent arbitration process for indebted southern countries. Our proposal is for a process that would be comprised of four key elements: a neutral decision making body (to be established on an ad hoc basis), the right of all stakeholders and particularly civil society representatives of the affected countries to be heard, the protection of the debtors basic needs and the institution of an automatic stay of debt servicing once the case is opened.

We believe that a fair and transparent procedure would not only help to deal in a more comprehensive and sustainable way with existing debt crises but that it would also help to reduce future irresponsible lending and borrowing."