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A review of the success of debt relief under the Heavily Indebted Poor Countries initiative. A case study of Uganda and Mozambique’s debt.

Debt is a significant problem faced by many African countries. Africa’s ratio of external debt to GDP in 1998 was the highest in the world at 65.5%, approximately 6% of GDP being used annually to service this debt.[1] This however is the picture for Africa as a whole; the picture is more dire when only countries with a severe debt problem are looked at. Of the 38 countries currently identified in the heavily indebted poor countries (HIPC) initiative, 32 are in Africa[2]. For these HIPC countries, their ratio of external debt to GDP in 1998 was 103%[3]. Due to mounting public attention and pressure, and the obvious unsustainability of this debt burden, creditors began an ambitious programme of debt relief, under the auspices of the World Bank and IMF and their HIPC programme, but including many other actors, especially the Paris Club of creditor nations.

The HIPC programme was first launched in 1996 and was modified in 1999 to become the Enhanced HIPC programme. The ‘sunset clause’ end date for the HIPC programme has already been extended several times and is currently set for the end of 2006. After the end of 2006, eligible countries will no longer be able to qualify for HIPC debt relief. Ten years after the start of the HIPC initiative, 20 countries have reached their completion points entitling them to full relief under this scheme. Questions are however already being asked about how effective this debt relief has been – a recent report by the Independent Evaluation Group (IEG) raised concerns that several post-HIPC countries were in danger of regressing to their original debt levels[4]. HIPC has promised substantial relief – under the Multilateral Debt Relief Initiative (MDRI) attached to HIPC, 100% relief for multilateral debt was promised – yet many post-HIPC countries still spend a fair portion of their revenue on debt servicing.

This paper aims to take a quantitative look at how successful debt relief has been. Uganda and Mozambique qualified for debt relief under the original HIPC in 1998 and 1999, and under the enhanced HIPC in 2000 and 2001 respectively. As such they are two of the oldest post-HIPC countries in Africa. By analysing the structure of these two countries’ debt pre- and post-HIPC, one can ascertain the effect HIPC has had on their debt and how their debt composition has evolved. Uganda was also one of the countries specifically identified by the IEG report as having a moderate risk of exceeding their debt-burden threshold.

Much has been written on the topic of debt relief. The only point of consensus is that the debt-burden of these countries is unserviceable and unsustainable. The one extreme argues that debt relief carries too heavy a moral hazard, that by forgiving their debt, you are only encouraging the countries to become heavily indebted again in the hopes of getting more debt relief. Others argue that debt relief alone will not help the countries, instead the policies of the governments that led to the high debt-burden need to be revised. On the other extreme, it is argued that the debt relief is not going far enough, that what is needed is 100% debt forgiveness, as well as international bankruptcy procedures to avoid the need for future debt relief.

By focussing on the quantitative aspects of the debt composition, this paper will address whether debt relief has succeeded in reducing debt to serviceable and sustainable levels, and whether countries will indeed regress to unsustainable levels again. Previous research has mostly focussed on the theoretical and ideological aspects of debt relief, mainly due to a lack of historical data. Now that at least 7 years have passed since Uganda and Mozambique’s original qualification for debt relief, enough historical data is available to perform a limited trend analysis.

The first section will give an overview of the major debt relief initiatives – Paris Club terms, HIPC, enhanced HIPC and the MDRI – including their evolution, their objectives and how they function. The second section will give a history of Uganda and Mozambique under these initiatives, and a presentation and analysis of their debt data. And finally conclusions will be drawn from this analysis.

The evolution of debt relief

Foremost of the actors in international debt is the Paris Club, an informal ‘club’ of international creditors which first met in 1956. Although they are a “non institution”, voluntary gathering[5], they are the best representation of the creditor nations and no large scale debt relief initiative would be possible without the support and agreement of the Paris Club. Also, since their primary mandate is to find solutions for when debtor countries experience payment difficulties, they were the main source of “debt-relief” prior to 1996. The terms under which debt would be reduced were revised by the Paris Club throughout the 1990s, increasing the level of debt cancellation from 33% under the ‘Toronto terms’, to 50% from 1991 under the ‘London terms’[6], and up to 67% in 1994 for the poorest countries under the ‘Naples terms’[7]. One might wonder why there was still such a debt burden when the Paris Club was offering such generous terms. To understand this, one needs to understand the function and limitations of the Paris Club. Firstly, the Paris Club only deals with bilateral debt, which although in 2000 was the largest portion, still represented less than half of sub-Saharan Africa’s total debt[8]. Secondly, this debt relief is not automatic and is normally only given to debt that is due and in distress, which has then been referred to the Paris Club. And finally the debt relief is subject to any conditions the Paris Club might choose to impose. It must be remembered that the Paris Club represents creditors’ interests – the debt-relief is not given out of altruism, but as a commercial transaction. The 67% debt relief offered in 1994 can actually be thought of as a representation of how bad the debt situation had become – poor countries were unlikely to be able to repay at least 67% of their debt. By cancelling 67% of the debt, the Paris Club were hoping to return the debt to repayable levels.

Before 1996, multilateral debt relief was dealt with through the IDA Debt Reduction Facility, but multilateral debt was not seen as a problem and the involvement of the international financial institutions was limited[9]. However with continued high levels of debt and the lack of progress made, even with the reschedulings of the Paris Club, the international financial institutions began to recognise the need for a formal, structured programme to address the debt burden. In 1996, the IMF and World Bank launched the Heavily Indebted Poor Countries (HIPC) initiative. This initiative identified countries with heavy debt burdens and proposed debt relief if these countries followed a set framework. The idea behind HIPC was to reduce debt to “sustainable” levels, ending the constant need for reschedulings and removing the impediment to growth and poverty reduction[10]. Of the original 41 countries identified for possible assistance, 33 were in sub-Saharan Africa[11]. The original HIPC programme had several flaws and did not make any significant progress. Only 6 countries reached completion point under the original HIPC, 4 of them in Africa, and only about $300 million was disbursed[12]. Coming under increasing pressure from several quarters, it was enhanced and revised in 1999. The Enhanced HIPC (EHIPC) Initiative slightly expanded the list of eligible countries and attempted to speed up and deepen the debt relief process. A key new feature was the linking of debt relief to poverty reduction – EHIPC relief requires a country to produce and implement a Poverty Reduction Strategy, thereby providing evidence that the debt relief will be properly focused and there are set criteria and tasks which a country must perform before it becomes eligible[13]. By September 2006, 25 out of the 33 African countries had reached the so called ‘completion’ point and a total of over $2 billion had been disbursed[14]. The remaining countries only have until the end of 2006 to “adopt an IMF or World Bank supported program and reform”[15].

HIPC itself was aimed at the multilateral component of debt, therefore the Paris Club were a key component of the overall programme. Without associated bilateral debt relief, being the largest grouping of debt, the HIPC initiative would have failed and would have in essence taken the form of a payment from the World Bank to the bilateral creditors. The Paris Club stepped up its debt cancellation terms to dovetail with HIPC. Firstly the Lyon terms of 80% were offered for the original HIPC countries[16], and then under the Cologne terms, up to 90% debt cancellation was offered for countries eligible for the Enhanced HIPC initiative[17]. Since the Paris Club is merely a gathering of creditor nations, these terms were possible because the member countries were being pushed and were pushing for greater debt relief – the same countries driving HIPC were also key members of the Paris Club.

These key countries mostly constitute the Group of Seven (G7)/Group of Eight (G8). Made up of the major industrialised countries, they represent the majority of the creditor countries as well as the group with enough resources to address the problem. The first major G7 summit dealing specifically with debt relief was held in Cologne in 1999, and this summit was instrumental in the creation of the Enhanced HIPC initiative.

Cologne also saw visible examples of the large amounts of civil society pressure for debt relief. This civil society movement has been attributed as one of the major reasons for progress made in debt relief. Large scale public awareness of and interest in the issue was created through the involvement of prominent international figures – from Jesse Helms to U2’s Bono to the Pope[18]. The Jubilee 2000 campaign was the main focus of debt cancellation pressure, collecting 17 million signatures that were presented to the G7 at the 1999 summit. By 1999 the movement was in over 50 countries and was meeting with officials of the IMF, World Bank, Paris Club and G7[19].

This public interest, as well a general millennial spirit, also led to the United Nations (UN) Millennium Summit. This summit committed to set poverty reduction targets, know as the Millennium Development Goals (MDGs). Because the MDG were very specific targets in a very specific timeframe (by 2015), it has resulted in poverty reduction progress becoming measurable. The inclusion of poverty reduction strategies within the EHPIC programme and the poverty reduction goals contained within the MDGs has linked the two initiatives very closely together. The pressure of meeting the MDGs has given added impetus to debt relief, especially since at present the UN Economic Commission for Africa believes Africa is unlikely to meet its MDGs, and faces a financing gap of 10%-20% of GDP to reach the goals[20].

Debt relief and poverty reduction remained on the G7/8 agenda, but the next major breakthrough was at the G8 summit in Gleneagles in 2005. At this meeting, the members agreed to a $40 billion debt cancellation of heavily indebted countries[21]. This agreement became know as the Multilateral Debt Relief Initiative (MDRI). It is essentially an add-on to the HIPC system – rather than an average write-off of 67% under HIPC, the MDRI promised a 100% debt write-off of multilateral debt incurred before 2004 for countries completing their HIPC requirements.[22]

Taken all together, one would expect countries that have completed HIPC to therefore only be left with 10% of the bilateral debt and most of their commercial/private debt. The next section will look at the effects of these initiatives on two countries in Africa – Uganda and Mozambique – and will consider whether the initiatives have lived up to their expectations and objectives.

Uganda

Uganda in the 1990’s was in many ways the poster child of debt relief. The Ugandan Multilateral Debt Fund set up for Uganda has been identified as part of the inspiration for HIPC[23]. Uganda was also the first country to reach its completion point and therefore receive debt relief under the original HIPC initiative and then once again was the first country to qualify under EHIPC[24]. However Uganda’s debt situation post relief has not shown significant improvement. In the IEG evaluation of HIPC in 2006, it noted that Uganda would “not be able to maintain the HIPC threshold ratios for the entire nine-year post-completion-point period”[25], and as having a moderate risk of not being able to sustain their debt[26].

At the beginning of HIPC in 1996, Uganda had a total of $3.2 billion in public debt outstanding, with over 70% of the debt being multilateral. By 2004, this debt had climbed to $4.5 billion with more than 90% of it multilateral. The composition of Uganda’s debt from 1990 to 2004 is shown in Chart 1.

 

Chart 1

Source: World Bank Global Development Finance dataset

However absolute measures of debt have little meaning and should rather be viewed relative to other measures. A wealthier country would be able to sustain a much higher level of debt than a poor country. The two measures that debt levels are most commonly analysed against are Gross Domestic Product (GDP) or Gross National Income (GNI) as a measure of the size of the economy, and total exports of goods and services as a measure of foreign exchange income necessary to service debt. Using these two comparisons, Uganda’s debt profile is shown in Chart 2.

Chart 2

Source: World Bank Global Development Finance dataset

This clearly shows how Uganda’s economic growth, particularly in exports, has offset to some extent their growth in debt.

The last measure of debt I will look at is debt service levels relative to exports. This is an important measure of actual debt sustainability, since it is these amounts that at the end of the day must be paid by the country. Also due to the highly concessionary nature of multilateral debt, as multilateral debt increases, debt servicing would usually become cheaper. Chart 3 displays the level of debt service relative to exports.

Chart 3

Source: World Bank Global Development Finance dataset

Looking at the total picture presented by these graphs, a few observations can be made. Firstly, the Uganda situation was far worse at the beginning of the 1990s, and the need for debt relief was therefore far greater than by the time of HIPC in 1996. Secondly, there is no noticeable impact on multilateral debt under the HIPC in 1998 nor under EHIPC in 2000. The only noticeable debt reduction is the halving of bilateral debt from 1998 to 1999, however this was not the result of the official debt relief programmes. The impact of HIPC and EHIPC can only be seen as a slightly lower rate of growth in debt stocks between 1997 and 1998, and 1999 and 2000. Thirdly, the debt situation (post 1995), particularly with regards to debt servicing, showed the greatest improvement between 1998 and 2001, and has since marginally deteriorated. These observations beg the question, how much debt relief did Uganda actually receive if the only real reduction was in debt servicing?

It can be difficult to exactly quantify the amount of debt relief given. Firstly, the relief takes a variety of forms – from straightforward cancellation of debt, to forgiveness of arrear amounts owing, to contributions to debt service payments. The amount of debt relief is therefore often given as its Net Present Value (NPV), which is the current value of future amounts. Under HIPC, Uganda received the following debt relief in 1998:

• A grant of $75 million, which although tied to HIPC was not debt relief as such
• Cancellation of $181 million World Bank debt
• The payment of the debt service on approximately US$39 million of World Bank debt over five years ($52 million NPV)
• A grant to cover debt service payments due to the IMF over nine years ($69 million NPV)
• Relief from other creditors of approximately $121 million in NPV terms, the majority of which was Paris Club debt cancellation under the Lyon terms.

The total NPV of this relief was estimated to be $350 million and the nominal value to be $650 million[27]. This amount of debt relief represents about 20% of Uganda’s total debt outstanding in 1998, which some would argue is significant, whilst others would argue does not go far enough.

The relief provided by EHIPC in 2000 was double that of HIPC – $1.3 billion nominally or $660 million in NPV terms. The major components of this amount are as follows:

• The payment of approximately 54% of debt service due to the World Bank over the next 20 years ($629 million nominal)
• The payment of approximately 50% of debt service due to the IMF over the next 10 years ($210 million nominal)[28]
• Debt cancellation by the Paris Club under Cologne Terms of $145 million

From the debt relief given, it can be seen that the majority of debt relief takes the form of contributions towards debt service payments. This had the effect of dramatically reducing debt service payments from $161 million in 1996 to $50 million in 2001, even though debt stocks were increasing. There are three different ways of looking at the debt relief given and why it was given in this particular way. The first way is that it is very different to fund a large upfront debt cancellation, and that it is far cheaper to make a series of contributions over a long period of time. The second way is that it was a deliberate strategy on the part of the World Bank and IMF to provide debt relief, yet to maintain control over the debt and to not allow other creditors to enter the market. This theory is supported by the increasing dominance of multilateral debt, in particular to the World Bank. By leaving the original debt stock intact and also providing additional debt, yet reducing debt servicing, the World Bank was able to achieve the effects of debt relief, without providing room to Uganda to borrow from other creditors. The mitigates the moral hazard associated with debt relief, as well as The third way of looking at the relief, is to view it purely as making the debt more concessional. This matches the true substance of the transaction, in that the actual debt remains intact, but the repayment terms are more favourable. In many ways this falls very short of expectations, and is a far cry from the 100% debt cancellation called for by the African Union[29].

The MDRI programme in substance appears to address these last two negative perceptions of debt relief. It aims to cancel the multilateral portion of debt, which would cut the dominance of the World Bank in debt, and would also provide real debt cancellation, rather than just more favourable terms. Unfortunately, since the MDRI only came into effect on the 1 June 2006, there is currently insufficient data to properly assess its impact. The IMF provided approximately $130 in relief under the MDRI to Uganda on 1 June 2006[30], and the World Bank estimated relief to be approximately $2.8 billion[31]. Considering that World Bank debt for Uganda was $3.3 billion in 2004 and total multilateral debt was $4.1 billion, this still leaves a shortfall of between $500 million and $1 billion, before taking account of debt incurred after 2004. Debt of $500 million would still maintain the World Bank in the position of primary creditor. One of the key provisions of the MDRI is that it only covers debt incurred prior to the end of 2004 and which is still outstanding on the date of relief (1 June 2006)[32]. This provision essentially allows the World Bank to maintain control by lending in the period from 2005 to mid 2006.

Mozambique

Mozambique in the beginning of the 1990s presented a very different picture to that of Uganda. Mozambique had endured a protracted civil war that only came to an end in 1992, leaving its economy in ruins. Uganda’s total debt to GNI ratio only once exceeded 100% in 1992, but Mozambique’s peaked at 369% in 1994 and only dropped below 100% in 2003. Similarly, Uganda’s debt to export ratio only exceeded 1000% for the beginning of the 1990’s, but Mozambique’s remained above this percent for the entire decade. The case for debt relief for Mozambique was in many ways far stronger than it was for Uganda.

Chart 4

Source: World Bank Global Development Finance dataset

Chart 5

Source: World Bank Global Development Finance dataset

Chart 6
Source: World Bank Global Development Finance dataset

Charts 4 to 6 above present the same data for Mozambique as was shown earlier for Uganda. Major differences are immediately apparent between the two countries. Firstly Mozambique’s debt structure was completely different, with the majority of debt being bilateral rather than multilateral. Because of this Mozambique was more dependent on the Paris Club programme than HIPC. Secondly Mozambique has shown a consistent improvement in its debt position post 1996, helped to a large extent by rapid economic growth. And lastly, the impact of debt relief is far more apparent, with multilateral debt almost halved in 1999 and bilateral debt cut by two-thirds in 2001.

Mozambique seems to support the theory that debt relief initiatives are positioning the World Bank as primary lender to poor countries. In 1995 Mozambique’s percentage of multilateral debt was 28%, however by 2004 multilateral debt accounted for 68% of the total public debt, and 68% of this multilateral debt was with the World Bank. The World Bank had therefore increased its percentage of debt from 17% in 1995 to 47% in 2004.

The debt relief packages received by Mozambique were far more extensive than those of Uganda. Under the original HIPC, it received $1.7 billion of relief in NPV terms ($3.7 billion nominal) in 1999, with the following received from the major creditors:

• World Bank debt service relief of $381 million NPV ($975 million nominal)
• IMF debt service relief of $125 million NPV[33]
• Paris Club debt reduction under Lyon Terms of $170 million NPV[34]

Mozambique’s total package was by far the largest provided under the original HIPC, roughly 5 times that given to Uganda.

Given the relatively small percentage of multilateral debt and the fairly substantial relief provided under HIPC, multilateral debt relief under EHIPC in 2001 was much less significant. The World Bank provided debt service relief of $63 million in NPV terms ($80 million nominal) and the IMF provided $18.5 million in NPV terms ($21 million nominal)[35]. But given the large share of bilateral debt, the relief from the Paris Club was considerable – debt cancellation of $2.3 billion was provided under the Cologne Terms[36].

Unlike Uganda, Mozambique received both considerable debt service relief as well as debt stock cancellation under the HIPC initiatives. The most obvious reason is due to Mozambique’s far worse debt situation at the outset of HIPC. By 2004, after the debt relief initiatives, Uganda and Mozambique’s debt profiles were a lot more alike – but with Mozambique seeming to benefit from greater export volumes than Uganda.

Under the MDRI, Mozambique has received approximately $150 million from the IMF[37] and is estimated to receive $1.3 billion from the World Bank[38]. Once again it is difficult to assess to true impact of this relief at this stage, but extrapolating the steady increase in multilateral debt from 2001 to 2004, the World Bank should still have sizeable stocks of debt with Mozambique after MDRI relief.

The overall picture

The total nominal amount of debt relief under all the above mentioned initiatives is approximately $4.9 billion for Uganda and $7.6 billion for Mozambique. However one should consider the fact that Uganda’s total public debt was $3.2 billion in 1996 and $4.5 billion in 2004, and Mozambique’s was $5.4 billion in 1996 and $3.4 billion in 2004. The total cost of debt relief has therefore exceeded the actual debt, begging the question: why was all the debt not just cancelled at the outset? The slowness and reluctance of the international community to act on the debt crisis decisively has resulted in it costing them more and still leaves countries indebted. 100% cancellation in 1996, with a moratorium on new lending for a set period, could have potentially been cheaper as well as more beneficial to the indebted countries. Every improvement or add-on to HIPC has essentially been an acknowledgement that the debt relief has not gone far enough. EHIPC was an acknowledge that HIPC was too slow a process and did not provide deep enough relief, and the MDRI was another acknowledgement that EHIPC did not go far enough and still left large stocks of multilateral debt.

Mozambique and Uganda also provide evidence that under the debt relief initiatives there has been a either a shift to World Bank lending or a consolidation of World Bank lending, making or maintaining the World Bank as the primary creditor. But is this true for all HIPC countries? Unfortunately a country by country study is outside the scope of this essay, but the overall debt data for sub-Saharan Africa and low income countries can be analysed. For sub-Saharan Africa (which includes non-HIPC countries), the World Bank’s share of public debt grew from 16% in 1995 to 30% in 2005[39], and for low income countries (also including non-HIPC countries) it grew from 18% to 30% in 2005[40]. What are the possible reasons for this increase in World Bank debt?

Firstly the uncertainty surrounding debt relief and the debt relief process itself may have scared off other creditors. The World Bank, G8 and Paris Club put great pressure on other creditors to contribute to the debt relief process in order to enforce collective action and avoid free-riders. Rather than be caught up in this process, most other creditors may have considered it wiser to stay out of the way. Another possibility is that other creditors have long since given up on the heavily indebted countries, considering them high risk and rather leaving them to the international financial institutions. This is in part supported by the decline of private creditors in both Uganda and Mozambique in the very early 1990’s, before HIPC had been proposed (see chart 1 and 4).

In terms of bilateral debt, the Paris Club considers the relief given under HIPC (Lyon and Cologne) as “exit terms”[41] or “exit rescheduling”[42]. This essential means that the rescheduling by the Paris Club is expected to be the last and no further treatment is necessary. Taken together with the complete lack of growth in bilateral debt stocks in Uganda and Mozambique post-HIPC completion points, this seems to indicate that the bilateral creditors would prefer not to lend to the HIPC countries in the near future.

From the World Bank perspective a few possibilities arise. By providing highly concessional loans with repayment terms far below market values, the World Bank has undercut any other creditors. It is simply not profitable for private creditors to lend to HIPC countries at these rates, and the countries have no reason to lend from anyone other than the World Bank. It may merely be a consequence of the World Bank attempting to provide the best deal to the countries in order to assist their growth, or it may also be a deliberate strategy by the World Bank. The international community may have decided to centralise debt services to poor countries in one entity – namely the World Bank – thereby standardising it and making it more measurable and manageable, or it could be a strategy by the World Bank to raise its profile and increase its influence in the international system. It could also be a strategy to attempt to avoid most of the perceived dangers of debt relief. If the World Bank is able to control and manage the debt of the countries, it lessens the moral hazard, and since the World Bank is the primary lender, they will have first hand information on why countries are borrowing and how they are controlling it.

Lastly from the debtor countries’ perspective, it may be a further complication to the already complicated donor/recipient relationship. Debtor countries may be using the poverty reduction focus to leverage more debt from the World Bank. Since the poverty reduction strategies were such an integral part of EHIPC and with the international focus on achieving the MDGs, countries could be using poverty reduction spending as a justification for more debt. The World Bank could find it difficult to say no to providing finance for something that it holds so dear. Since the loans are for the greater good of poverty reduction and the previous debt crisis must be avoided at all costs, the terms will naturally need to be highly concessionary. But questions arise over whether this is responsible behaviour on the part of the World Bank – this could be seen as the equivalent of providing a subsidised bar at an Alcoholics Anonymous meeting.

While there may be benefits to centralising this debt and managing it through the World Bank, there is the considerable danger of creating long-term dependencies. If the lending in these countries is dominated by one entity that will perform the majority of debt management functions and will always provide cheap finance, the countries will never learn or be able to manage their own debt. To put it more simply, the dependency on the World Bank will make any level of debt unsustainable, as these countries will lack the mechanisms to sustain their debt on their own. This trend has already been identified by the IEG report, in that “all low-income countries, including post-completion-point countries, have seen a worsening of their debt service and debt management capacity.”[43] Most middle to high income countries have capital and bond markets through which they issue and manage their public debt. South Africa’s debt, for example, is almost entirely issued to private creditors, via government bonds. The bond market leads to more and better debt information, as there is a market need for such information, and the government therefore has better information about how new debt issues will be received. A crucial aspect of a functioning bond market is that it allows the government to issue debt in local currency, thereby creating certainty and better debt forecasting ability. The IEG report identified foreign exchange depreciation as one of the reasons that countries would be unable to maintain their HIPC debt thresholds[44].

Conclusion

Debt relief has been slow and the results often disappointing. Comparing Uganda and Mozambique’s total debt to GNI ratios in 2004 of 72% and 81% respectively, after both HIPC and EHIPC relief, to South Africa’s worst level of 24% in 2002 puts this into perspective. Much concern has been raised in the past over South Africa’s high level of debt and yet it was still only a third of that achieved after two rounds of debt relief in Uganda and Mozambique. The lack of decisiveness on the part of the international community has cost them and the heavily indebted countries valuable time and money. Concerns over the possible impact of debt relief and the moral hazard attached, as well as wrangling over how to measure debt sustainability, has diverted attention from the true seriousness of the situation and crippled the debt relief efforts. It took a decade after the introduction of HIPC before the international financial institutions made a serious commitment to debt relief through the Multilateral Debt Relief Initiative. Yet the debt burden remains in many countries, and rather than freeing them from debt, the debt relief has instead laid the foundations for a new dependency relation. Either deliberately or because of circumstances, the World Bank is becoming the sole provider of new debt to heavily indebted countries. The World Bank’s good intentions may be preventing the countries from learning how to manage and sustain their debt on their own. By denying them this learning and experience, the World Bank may be dooming any progress made through debt relief to failure. Only by creating the proper debt management infrastructure in countries, can the objective of long-term debt sustainability be achieved.

The paper raises several questions. Are the experiences of Uganda and Mozambique similar to other HIPC countries, and are the conclusions made above supported by the experience of the other countries? What are the World Bank’s true intentions and what are its long term plans regarding debt management? Can the World Bank play an active role in creating and supporting local capital markets in post-HIPC countries?

There is very little doubt that debt relief has been necessary to return heavily indebted countries to more sustainable levels of debt and the HIPC initiatives have made significant progress in this regard. However most of the major actors agree that more action is needed to make the debt truly sustainable. The United Nations Economic Commission for Africa considers “the beneficiaries of the HIPC Initiative … unlikely to achieve debt sustainability in the long term after reaching the completion point.”[45] The IEG report notes that there is “no systematic program by which the Bank assists low-income countries to build the needed capacity for debt management [and debt] reduction alone is not a sufficient instrument to affect the multiple drivers of debt sustainability.”[46] Unless these concerns over debt sustainability are addressed soon, any benefits gained through debt relief will be for naught.

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[1] World Economic Outlook: Globalization and Inflation, International Monetary Fund, Washington DC, April 2006, pg 238 – 245

[2] Ibid, pg 173 – 174

[3] Ibid, pg 244

[4] Debt Relief for the Poorest Debt: An Evaluation Update of the HIPC Initiative, The World Bank, Washington DC, 2006

[5] Description of the Paris Club, http://www.clubdeparis.org/en/presentation/presentation.php?BATCH=B01WP01, June 2006

[6] London terms, http://www.clubdeparis.org/en/presentation/presentation.php?BATCH=B03WP02, June 2006

[7] Naples terms, http://www.clubdeparis.org/en/presentation/presentation.php?BATCH=B02WP06, June 2006

[8] Global Development Finance 2006: volume II, The World Bank, Washington DC, 2006, pg 21

[9] Callaghy TM, Innovation in the Sovereign Debt Regime: From the Paris Club to Enhanced HIPC and Beyond, The World Bank, Washington DC, 2004, pg 27

[10] Ibid, pg 36

[11] Ibid, pg 8

[12] IMF Financial Activities – Update September 7, 2006, http://www.imf.org/external/np/tre/activity/2006/090706.htm, September 2006

[13] Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative, http://www.imf.org/external/np/exr/facts/hipc.htm, April 2006

[14] IMF Financial Activities – Update September 7, 2006, op. cit.

[15] Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative, op cit

[16] Lyon terms, http://www.clubdeparis.org/en/presentation/presentation.php?BATCH=B03WP03, June 2006

[17] Cologne terms, http://www.clubdeparis.org/en/presentation/presentation.php?BATCH=B02WP07, June 2006

[18] Arslanalp S, Henry PB, Debt Relief: What Do The Markets Think?, http://www.nber.org/papers/w9369, December 2002

[19] Collins C, Break the chains of debt, http://www.un.org/ecosocdev/geninfo/afrec/subjindx/132debt2.htm, September 1999

[20] The Millennium Development Goals in Africa: Progress and Challenges, Economic Commission for Africa, Addis Ababa, August 2005, pg 15

[21] What debt relief means for Africa, http://www.csmonitor.com/2005/0613/p01s02-woaf.html, 13 June 2005

[22] The Multilateral Debt Relief Initiative (MDRI), http://www.imf.org/external/np/exr/facts/mdri.htm, May 2006

[23] Callaghy TM, op. cit., pg 22 - 25

[24] Callaghy TM, op. cit., pg 46

[25] Debt Relief for the Poorest Debt, op. cit., pg 20

[26] Debt Relief for the Poorest Debt, op. cit., pg 48

[27] Uganda to Receive US$650 Million in Debt Relief, http://www.imf.org/external/np/sec/pr/1998/PR9813.HTM, 8 April 1998

[28] IMF and World Bank Support Debt Relief for Uganda, http://www.imf.org/external/np/sec/pr/2000/PR0034.HTM, 2 May 2000

[29] The Position of South Africa regarding Debt Relief, http://www.dfa.gov.za/foreign/Multilateral/profiles/debt.htm, February 2004

[30] IMF Financial Activities – Update September 7, 2006, op. cit.

[31] IDA’s Implementation of the Multilateral Debt Relief Initiative, http://siteresources.worldbank.org/IDA/Resources/MDRIfinalimplementation.pdf, 14 March 2006, pg 18

[32] The Multilateral Debt Relief Initiative (MDRI), op. cit.

[33] Mozambique to Receive US$3.7 Billion in Debt Relief Through the HIPC Initiative, http://www.imf.org/external/np/sec/nb/1999/nb9935.htm, 30 June 1999

[34] Mozambique Completion Point Document, http://www.imf.org/external/np/hipc/pdf/mozhipc.pdf, 16 June 1999

[35] IMF and World Bank Support US$600 Million in Additional Debt Service Relief for Mozambique Under Enhanced HIPC Initiative, http://www.imf.org/external/np/sec/pr/2001/pr0141.htm, 25 September 2001

[36] Mozambique Debt Treatment - November 17, 2001, http://www.clubdeparis.org/en/countries/countries.php?IDENTIFIANT=372&POSITION=0&PAY_ISO_ID=MZ&CONTINENT_ID=&TYPE_TRT=&ANNEE=&INDICE_DET=, 17 November 2001

[37] IMF Financial Activities – Update September 7, 2006, op. cit.

[38] IDA’s Implementation of the Multilateral Debt Relief Initiative, op. cit., pg 18

[39] Global Development Finance 2006: volume II, op. cit., pg 21

[40] Ibid, pg 24

[41] Mozambique Debt Treatment - November 17, 2001, op. cit.

[42] Definitions, http://www.clubdeparis.org/en/presentation/presentation.php?BATCH=B04WP02, 27 October 2006

[43] Debt Relief for the Poorest, op. cit., pg 27

[44] Debt Relief for the Poorest, op. cit., pg 20

[45] Economic Report on Africa 2005, Economic Commission for Africa, Addis Ababa, 2005, pg 48

[46] Debt Relief for the Poorest, op. cit., pg 33