Letter to HIPC Review Committee on Debt Relief, March 16, 1999

March 16, 1999

HIPC Review Committee
The World Bank
The International Monetary Fund

Dear Members of the Review Committee:

As Chairman of the International Policy Committee and Chairman of Catholic Relief Services, we thank you for the opportunity to contribute to the first stage of the HIPC Review.

We believe that the HIPC program is a very important initiative. It represents the first major, comprehensive effort to address the problem of poor country debt. As you know, Pope John Paul II has spoken on various occasions in the past few years, most recently in his report on the Synod of the Americas released in January. While we applaud the efforts of the World Bank and the IMF, we believe this presents an opportune moment to reexamine the current framework to see if it can be strengthened to deliver substantial and timely debt relief to all heavily-indebted poor countries. We believe that policy conditionality must be designed with the concerns of the poor citizens of these countries at its center. In addition, relief should be structured to assure that the benefits accrue to the poor. We realize that an expanded HIPC program will require an increase in funding, and we are supporting efforts to have the United States exercise leadership in providing the necessary financing.

Attached are more specific responses to the questions you have posed. They were prepared primarily by staff from the U.S. Catholic Conference and Catholic Relief Services. We would be pleased to discuss these responses with you in more depth. We have been very pleased with your efforts to work with church groups and other non-governmental organizations on the problem of international debt, and we hope these comments contribute positively to your review of HIPC.

Sincerely yours,

Most Reverend Theodore E. McCarrick
Archbishop of Newark
Chairman, International Policy Committee
U.S. Catholic Conference

Most Reverend John Ricard
Bishop of Pensacola
Chairman
Catholic Relief Services

1. Debt Sustainability: Does the current HIPC Initiative framework achieve debt sustainability? Do you agree with the eligibility criteria and debt sustainability targets (both relating to present value and debt service)? If not, how should they be changed to meet the needs of poor, heavily indebted countries?
   
   We question whether the HIPC debt relief achieves "debt sustainability" even as that term is defined in the current framework. We call your attention to a report prepared by the U.S. General Accounting Office, "Developing Countries: Status of the Heavily Indebted Poor Countries Debt Relief Initiative," in September 1998. This report indicates that countries with debt-to-export ratios near the bottom of the 200-250 percent HIPC target range may still have debt burdens that are not likely to provide a cushion against adverse economic events. It notes that the economic forecasts used to assess future debt sustainability may be overly optimistic, generally assuming a steady, if not significantly higher level of growth in future export revenues for HIPC countries than is realistic. The volatility of commodity markets, the possibility of adverse weather conditions or other natural disasters, and uneven patterns of export growth in the past all suggest that countries receiving HIPC debt relief will remain vulnerable to future debt problems. The report also questions the HIPC assumption that if export earnings fall short of expectations, external aid will increase. We believe that at a minimum the HIPC Initiative should enable countries to achieve debt-to-export ratios lower than provided in the current framework.
   
   Our basic problem with the concept of "debt sustainability" as used in the HIPC Initiative, however, is more fundamental. Our concern is with the human aspects of the debt problem -- its impact on the poor and vulnerable in a society. Because the ratios used to describe debt sustainability are based primarily on export earnings, and not on human development, they do not sufficiently take into account the budgetary impact of debt service on health, education, sanitation, and other investment needed for sustainable development and poverty reduction.
   
   We advocate criteria for evaluating debt sustainability that are based on human development. Several Catholic organizations have made proposals to do just that. Some suggest linking debt relief programs to the commitment made by the Development Assistance Committee to halve poverty by the year 2015. The human development criteria should be flexible enough to fully reflect country conditions and human development needs.
    
2. Fiscal Targets: Do you agree with the fiscal criteria and the thresholds for qualifying for the Net Present Value (NPV) of debt-to-fiscal target? If not, how should they be modified? How should domestic debt be treated under the HIPC Initiative?
   
   As indicated above, we believe that fiscal criteria, insofar as they take into account human development (health, education, sanitation, etc.) and other expenditures necessary for sustainable development and poverty reduction, should be the primary determinant of HIPC eligibility. Thus, we do not believe that the application of fiscal criteria should be limited to countries with certain ratios of exports to GDP, nor do we feel that countries should be required to improve their fiscal performance (revenues to GDP) to qualify for HIPC debt relief. Moreover, the specification of a 280 percent threshold is arbitrary, as the GAO report suggests, and seems based more on concerns about limiting cost rather than the actual impact of debt on the country's fiscal situation. Criteria based on annual debt service to Government revenues would be more adequate.
   
   We recognize that domestic debt also poses a significant obstacle to investment in human development and thus it should be factored into debt sustainability analyses. Countries with high domestic debt burdens should be given favorable external debt relief, in part to make up for vulnerabilities caused by domestic debt. More complete country case analysis is needed to make specific recommendations.
   
   We encourage consultation with local organizations working on domestic debt issues. The Catholic bishops' conferences and associated organizations in Zimbabwe, South Africa, Brazil, and India, among others, have expressed interest in this issue. The debt vulnerability of these countries is primarily on the domestic side. Another organization, the Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI), which was created to strengthen debt management and analysis by public officials in Africa, analyzes domestic debt and its relation to external debt.
    
3. Policy Link and Timing: Are there countries which should receive debt relief sooner than is scheduled? If so, why? What conditionality,length of track record and timing would you recommend for HIPC debt relief? How can we best ensure that the mix of resources provided—including balance of payments and budgetary support plus debt relief—promotes broad-based growth and development, is used effectively, and moral hazard is minimized?
   
   The focus of our concern is the impact on the poor of delays in debt relief. We recognize that debt relief is only one element of the array of measures necessary to tackle the deep-seated poverty of developing countries. Yet for many poor countries debt is a major obstacle to progress in poverty reduction, and we believe it is imperative to minimize the delay in lifting this burden from the backs of the millions struggling to meet their basic human needs.
   
   We thus strongly believe that debt relief should be provided much sooner than the current 6-year period during which a track record of policy performance is to be established. In the most impoverished countries, a six-year delay before the full amount of debt relief is received means that a generation of children will not have access to the resources that could be directed to education or health care assistance in the most critical years of their lives. In addition, countries emerging from conflict or natural disaster or other such circumstances should be eligible for debt relief on an accelerated schedule. We recognize that the 6-year rule has been applied with flexibility, to give countries credit for prior performance, but we urge going further and allowing all countries a much shorter time period for receiving HIPC debt reduction -- a maximum of three years.
   
   With respect to social conditionality, we support its use insofar as it strengthens a government's commitment to put human development at the forefront of its development agenda. Given wide differences in the degree to which governments are committed to the well-being of their people, we do not presume to recommend the specific social development criteria that should be introduced, or whether conditionality ex ante or ex post (i.e., rewarding for prior performance) is more useful. Yet, some type of social conditionality is needed to ensure that the benefits of debt relief are used for investments in health, education, and other sectors crucial to sustainable development and poverty reduction. One approach which has been used in some countries that could be of help to assure that the benefits of debt relief reach the poor is the establishment of a fund into which debt relief savings would be deposited and used for human development.
   
   Our concerns about economic conditionalities center on their impact on poverty. We acknowledge the view that, in the long run, structural adjustment and stabilization policies may help a country develop a more dynamic and competitive economy, one which can compete globally and thus create opportunities for economic growth, job creation, and improvement in the general welfare of the population. However, Church leaders and missionaries throughout Africa and Latin America have spoken to us again and again about the suffering of their people, particularly the poor, during the implementation of structural adjustment programs. Even the recent IMF evaluation of ESAF concluded that inadequate attention had been paid to the poverty impact in the design of ESAF policy measures, and that many of the costs to the poor in the countries examined should have, and could have, been avoided.
   
   When structural adjustment and stabilization policies have the effect of worsening the condition of people already struggling to meet their basic human needs or of reducing others to a similarly impoverished condition, whether in the short- or the long-run, and regardless of which entity (government, international financial institution) conceived them, then they are unacceptable. To avoid such situations, poverty must be central in the analysis. The design of conditionalities requires an approach that fully recognizes the social impact of macroeconomic policy and focuses as much on social issues as economic ones. It also requires more effective involvement of civil society and openness within society than currently exists.
   
   Ensuring that the mix of resources provided promotes development, is used effectively, and minimizes moral hazard is the heart of the challenge confronting creditors, and there may be no easy answer. But clearly some changes in the current processes would be helpful. Creditors should deepen their knowledge of social and cultural as well as economic issues within a country. International financial institutions could coordinate and collaborate better among themselves. They could improve their information sources within the countries by establishing communication with groups and entities not considered part of the local "establishment." Locally-based NGOs which can give voice to the interests of the poor and disadvantaged should have a direct participation in the development and implementation of debt relief programs. More broadly, both bilateral and multilateral creditors should meet with locally-based NGOs on a regular basis and should develop processes to enable such NGO's to provide input into lending programs and development plans on a continuing basis. Such participation by civil society would greatly improve the effectiveness of the resources provided.
    
4. Financing: Do you have any suggestions for the financing of any additional cost arising from changes in the HIPC framework? Given current aid budgets, should resources be diverted from less indebted poor countries to finance debt relief for HIPCs? Should aid budgets be increased to finance additional debt relief for HIPCs? What if this is not possible?
   
   Expanding the HIPC framework will require the commitment of additional resources by all major creditors. The multilateral institutions need to maximize their internal contributions to the program from available resources, but not to the extent that it would require diverting resources from other impoverished countries. Probably the bulk of the new resources for HIPC will have to come from donor governments and may be needed primarily to make up for shortfalls in available resources from regional development institutions. As with the multilaterals, donor governments should not divert resources from other poor countries, but rather should provide new resources for debt relief.
   
   The 2015 poverty goals established by the Development Assistance Committee imply a major commitment of financial resources on the part of donors, creditors as well as governments themselves. Debt relief, along with development aid and the government's own revenue from taxes, will all be needed to achieve the goals. We encourage the IFIs to use the data available to them to calculate roughly, on a country by country basis, the financial resources needed to achieve the goals, and the relative contributions of debt relief, aid, and internal revenue toward this total.
   
   There is no consensus among academics, development experts, NGOs and others on whether aid or debt relief is better, if the choice has to be made. Debt relief has the advantage of fostering more self-reliant development, as the country, not the donor, is responsible and accountable for specific expenditure choices. Debt relief also addresses the problem of debt overhang, whereas aid does not. Also, debt stock reduction relieves the heavy administrative burden associated with constant debt reschedulings. But debt reduction will not relieve the need of most poor countries for continuing flows of foreign aid for the foreseeable future.
   
   For your information, we have attached a copy of a bill which the U.S. Congress has begun considering and which we believe addresses many of our concerns with the current scope and structure of HIPC.