Letter to Secretary of the Treasury O'Neill on Enhanced HIPC Debt Reduction, June 5, 2001

June 5, 2001

The Honorable Paul O'Neill
Secretary of the Treasury
1500 Pennsylvania Ave., NW
Washington, D.C. 20220

Dear Secretary O'Neill,

As the Genoa summit approaches, I am writing to ask your active support for resolving an issue that has arisen with respect to the recently-enacted debt relief program for poor countries. I welcome the Administration's commitment to providing $240 million for the enhanced HIPC initiative in FY2002, funding that is essential if there is to be substantial debt relief for the poorest countries. Even with this funding, however, the enhanced HIPC initiative will not fully achieve its goals unless relatively modest corrections are made. While we support broader debt relief than that provided under HIPC, we urge you to act now to make these corrections so that the promise of this initiative can be fulfilled.

Our concern arises from information recently published by the World Bank and the IMF which shows a wide disparity in the amount of debt service reduction which the first 22 countries will receive under the enhanced HIPC initiative. According to this information, some HIPC countries will receive substantial debt service reduction over the next several years. Others, however, will receive much less, with a number of countries continuing to pay debt service averaging close to one-quarter of government revenues. (The attached note explains this result in more detail.) For these latter countries, even if all the appropriate mechanisms and processes are implemented to assure that debt relief reaches the poor and promises of additional bilateral relief are fully realized, we fear that the immediate benefits will be too small to have a substantial impact on poverty.

We support debt relief, not to adjust old accounts but to combat poverty. In order to ensure that debt relief in fact gives a fresh start to the poor, we urge an adjustment in the current program to reduce the external debt service obligation to a maximum of 10% of government revenues for all enhanced HIPC recipients. This formula was included as
a provision of the debt relief legislation that was introduced in the 106th Congress by Representative Jim Leach and Senator Connie Mack with strong bipartisan support. In the case of countries in Sub-Saharan Africa ravaged by health crises, including HIV/AIDS, debt service should be limited to a figure well below 10% in order to maximize resources available to address this crisis whose devastating effects are akin to a natural disaster.

This modest proposal is very much in line with the original purpose of the enhanced HIPC initiative, which sought debt relief not to reduce the debt stock to a certain percentage of exports, but to free up budgetary resources for poverty reduction. The G-8 communique was clear:

"The central objective of this initiative is to provide a greater focus on poverty reduction by releasing resources for investment in health, education and social needs." It is difficult to see how the debt relief granted under the current formula to Zambia, Niger and Guinea, among others, will fulfill this objective.

The adjustment we are proposing will bring the amount of relief for all enhanced HIPC countries much closer to that which countries such as Uganda and Rwanda received. The cost associated with this adjustment would be small and should not be an impediment to making this essential correction.

We urge the Administration to support this adjustment to the debt relief program which is one key element of what we hope will be a more comprehensive development agenda. Among other things, this agenda should include promoting just trade and investment policies, reversing the scandalously small amount our country gives in development aid, and ensuring that both bilateral and multilateral aid is focused more directly on improving the lives of the poor. While economic growth is very important, it must be accompanied by measures designed to assure that it achieves a broad distribution of its benefits, so that the poorest members of society have the opportunity to realize their God-given potential.

It is in this context, Mr. Secretary, that I ask you to look favorably on our request for further debt relief. At a minimum, please urge your colleagues at the Genoa summit to make an essential adjustment to the enhanced HIPC initiative that will assure that this program truly will free up substantial financial resources for urgently needed investments in human development of the world's poorest people.

With best wishes and asking God to bless you, I am

Sincerely yours,

Bernard Cardinal Law
Chairman, International Policy Committee
United States Conference of Catholic Bishops

Enclosure