Statement on Highly Indebted Poor Country Enhanced Debt Reduction

Office of International Justice and Peace
U.S. Conference of Catholic Bishops

June 4, 2001

The World Bank and IMF published a report on the status of implementation of the HIPC initiative on April 20, 2001. Included in this report is information on the amount of debt reduction that the 22 countries who have so far qualified for enhanced HIPC relief will receive. The data shows that a number of the 22 countries will receive substantial debt relief and that, on average, debt service as a percentage of government revenues will drop from 27 percent in the recent past to less than 13 percent in 2001-03 and 9 percent by 2005. We welcome these trends as we seek deeper debt relief.

There are, however, substantial variations in the amount of debt service relief among countries. The average annual debt service-to-revenues ratio remains above 20 percent for Zambia, Niger and Nicaragua for 2001-03, and at 18 percent for Guinea. Altogether 12 of the 22 countries will still have debt service obligations exceeding 10 percent of revenues in 2003, while at the low end of the scale, Uganda's ratio falls to 5 percent and Rwanda's to 3 percent by 2003. (See WB/IMF Report, Table 4.)

The objective of debt relief programs, as expressed by the US Catholic bishops in their 1999 statement entitled "A Jubilee Call for Debt Forgiveness," should be poverty reduction and human development. We judge the adequacy of debt relief programs by the extent to which they free up necessary resources, and include adequate arrangements for reallocating budgetary resources for investment in education and health, as well as other investments necessary to improve the living standards of the poor and vulnerable. For this reason, we have consistently advocated that debt relief initiatives be designed, not to achieve a certain ratio of debt stock to exports, but to bring about a deep reduction in the ratio of debt service to government revenues.1

Thus, we strongly supported the bill (H.R. 1095) introduced by Rep. Jim Leach and approved by the House Banking and Financial Services Committee in 1999. H.R.1095 provided that the debt of HIPC countries should be reduced to a maximum of 10 percent of government revenues. This bill, as well as the companion Senate bill (S. 1690) with similar provisions introduced by Sen. Connie Mack that same year, attracted strong bipartisan support.

We urge, therefore, that the debt reduction formula be adjusted so that the debt service obligation of every HIPC eligible country is reduced to a maximum of 10 percent of government revenues. Furthermore, we believe that the desperate need to maximize the resources available to address the scourge of HIV/AIDS, which has reached crisis proportions in a substantial number of African countries, warrants a reduction substantially lower than the 10 percent maximum for such countries. Moreover, we believe these reductions should occur, not in 2005, but in the immediate future. More debt relief is needed for more countries in less time.

There would obviously be an additional cost associated with the adjustment we advocate, but we believe that the cost should be rather modest. First, the amount of relief shown in the World Bank and IMF Status of Implementation Report does not take into account voluntary contributions beyond their HIPC commitment which have been pledged by all the major donor countries. Several of these countries, led by the U.S., have pledged 100 percent bilateral debt relief (see WB/IMF Report, Table 17). The impact of such additional relief by all donors on budgetary funds available for poverty reduction appears significant (WB/IMF Report, Table 18), provided that such relief brings new money to the recipient countries and does not merely shift money between aid accounts.

Second, as far as costs to the U.S. are concerned, the existing cost sharing arrangements would require the U.S. to contribute about 4 percent of the incremental cost of multilateral debt reduction. A rough estimate suggests that, for 2002 this would come to a figure in the tens of millions of dollars. Given the likely slippage of "decision points" for many of the remaining countries potentially eligible for HIPC relief, the additional cost could possibly be accommodated without any increase in the Administration's $240 million commitment.

In short, we continue to advocate specific and concrete steps toward greater debt relief for more countries to help them address persistent poverty and underdevelopment, grave health crises, and inadequate education. Making essential adjustments in the enhanced HIPC initiative is a matter of life, dignity and hope for a better future for millions of people.

1 Objections have been raised in some quarters that this formula would reduce incentives to increase government revenues, but it is difficult to see how a government would be discouraged from raising revenues because 10 percent of the increase might go to debt service. Moreover, the underlying economic program which is a condition of HIPC relief would normally have commitments on fiscal performance which would protect against government's responding to such minor "disincentive."