HIPC Initiatives world Bank

Remarks by
K. Y. Amoako, Executive Secretary, ECA
January 1997  Washington, D.C.

I am particularly pleased to be here today and pleased to be a part this important forum. As we all know, the concerns over Africa's debt problems have been the impetus for this HIPC Initiative. The causes, the evolution, and the consequences of Africa's debt are also well known and have been the subject of much debate. There is no need for me to go into the details of the African debt problem. 

However, I will provide an appraisal of the initiative particularly from the African perspective. The initiative should be welcome for a number of reasons: 

First, it represents a commitment by the international financial community to help those heavily indebted poor countries that follow sound policies, but for which traditional debt relief mechanisms are inadequate to secure a sustainable external debt burden. 

Second, it takes a comprehensive, integrated, and coordinated approach debt reduction covering all groups of creditorsbilateral, multilateral, and commercial. 

Third, it will involve officials of the debtor countries through the debt sustainability analysis to determine whether a country is facing an unsustainable debt situation after the full application of the current debt relief mechanisms. 

Fourth, the introduction of properly managed social conditionality into debt relief operations will help to provide finance for the reconstruction of basic health, education, and water and sanitation services. 

One must also commend the Bank and the Fund for making modifications in the original proposals. There is evidence in the initiative that reflects a response to some of the comments and criticisms that were made regarding the original proposals. 

The resulting proposal is an improvement over the initial attempts. In particular, I am pleased to note two important modifications: 

First, greater recognition has been placed on the vulnerability factors in the debt sustainability analysis and the conclusions to be arrived at the decision point. Among the factors that will help determine the actual level of debt relief to be provided are: the degree of export diversity; the sensitivity to export shortfalls; and the extent of the fiscal burden. 

In other words, the initiative will deliver debt relief based on the actual and not projected debt-to-exports ratio and debt service-to-export ratios. 

Second, it addresses the flexibility issue the time frame for implementation of the initiative. We are pleased to know that required performance periods will be implemented flexibly on a case-by-case basis with countries receiving credit towards the decision-point stage for programmes already underway; and that the second stage of three years might be shortened for the countries that have already sustained records of strong performance. 

In summary, the initiative is a very significant step towards achieving debt sustainability and therefore represents a window of opportunity for the Highly Indebted Poor Countries, most of which are in Africa. 

However the proof is in the pudding.... in the actual implementation. The goal should be to ensure that as many countries as possible are eligible for the initiative so that reform efforts are not put at risk by continued high debt and debt service burdens. 

In this context, I would like to identify two sets of factors that in the actual implementation of the initiative will be critical for successful outcomes. 

1) Where countries meet the performance criteria of the adjustment and reform programmes, they must be given the maximum debt relief to prevent slippage into unsustainable positions. 

In applying the debt service and the dept-to-export ratios, we should sensitive to the requirements of long-term debt sustainability. For example, we note that at the completion debt relief would be reduced from what was committed at the decision point, if the actual ratios were lower than the target ranges. We should avoid a bookkeeper's approach to the problem, and if we have to err, let us err on the side of generosity. 

Here, the issue of transparency in the decision-making process will be paramount in ensuring that recommendations for debt relief reflect the actual needs of the debtor countries. The active involvement of governments in the analysis and decisions will be critical. 

2) The second set of factors for successful outcomes for the initiative concern the nature and degree of conditionality and capacity of governments. In many cases, governments have failed to meet the conditionalities of adjustment and reform programmes. 

One reason for the high rate of non-compliance has been the lack of realism in the conditionality or targets attached to these programmes. Another has been the limited capacity of governments, of African governments in particular, in analyzing, designing, and implementing programmes. This has often led to slippages or discontinuation of programmes. 

Regardless of what you blame it on unrealistic targets or a lack capacity and/or commitment on the part of governments....or a combination of both the fact remains that few countries have been consistently able to meet IMF targets, such as inflation and public sector spending. 

Unless we address these factors adequately, we will have this beautiful initiative, but very few countries will be able to benefit from it. 

This further underscores the importance of applying the initiative in a flexible way, with regards to both the performance criteria for the ESAF and Bank adjustment programmes, and the time frame for implementation. 

We should also not allow capacity limitations to an overriding factor in preventing countries from meeting the policy requirements of the initiative. 

How to ensure the capacity limitations do not continue to derail reform programs will continue to be a challenge. The World Bank's recently announced capacity building initiative for African countries can be an important vehicle for assisting African governments in this area. We, at the Economic Commission for Africa, have undertaken a number of initiatives to bolster the capacity of African governments in economic management. 

In this regard, at the beginning of April this year, the ECA's Sixth African's Finance Ministers Conference will be held in Addis Ababa. A key topic for discussion will be the implementation of the HIPC and the effectiveness in debt management of African countries and the need for capacity-building. The Fund and the Bank have been invited to participate in these deliberations. 

Finally, a few comments on the financing provisions. As we understand it: 

The language in the initiative says "the multilaterals may choose to provide assistance to help ease the burden of debt during the second stage for countries with continued strong performance and that such assistance will count towards the completion point action." What factors will determine the actions by the multilateral lending institutions during this stage? 

In terms of IMF support at the completion point, there will be a mix of grants and enhanced ESAF loans (with extended maturities). What factors will determine the exact mix? 

"The HIPC Trust Fund will be administered by IDA, and will consist of contributions from participating multilateral creditors and bilateral donors." The strength of the commitment by the bilaterals, particularly the G7 countries, to this trust fund idea will be crucial to its success and the amount of debt relief that can be provided to individual countries. Is there sufficient assurance that this will be forthcoming? 

"Consistent with current practice, countries receiving assistance under the initiative would be required to seek treatment on debt owed to other bilateral and commercial creditors on terms at least comparable to those agreed with the Paris Club." From past experience, negotiations on debt owed to non-Paris Club bilateral and commercial creditors have been bedeviled by problems of validation and valuation of debts. Will this continue to be a major impediment to the implementation of the initiative? 

We also know from the Paris Club reschedulings in the past decade, translating Paris Club Agreed Minutes into actual bilateral debt restructuring agreements has often involved costly and protracted negotiations in different capitals of the world. How does the initiative deal with this? 

I will stop at this point and then maybe in the discussions, I will come back again but overall, I think, this initiative takes us some significant steps forward to addressing these problems. The issue is what happens during the actual implementation. 

Thank you.