DELIVERING ON DEBT RELIEF: FINISHING THE JOB HIPC STARTED
Thursday, April 22, 2004
Nancy Birdsall, President, Center for Global Development
And moderator
Zanny Minton Beddoes, Economics Correspondent, The Economist
MS. BIRDSALL: HIPC debt relief is a watershed in the aid business. By establishing a
relatively uniform standard, it a) minimizes the “hassle” of the negotiating costs, b)
creates an ongoing benchmark—crude but transparent—for everyone inside and outside
the global community---to assess each poor country’s degree of debt sustainability, or unsustainability, and c) makes legitimate the idea that countries performing well, even if
dreadfully poor, could benefit from budget support.
We all know, however, that it has not guaranteed debt sustainability, even crudely
measured by the 150% ratio debt service to exports. Relief alone was never meant to
provide enough new resources to guarantee growth and development, but it is clear
(again, as was the fate of HIPC I) that Enhanced HIPC or HIPC II is at risk of failing
even to establish a minimal level of confidence, that is the part of domestic and foreign
investors that a HIPC country, after completion point, will be able to maintain a stable,
predictable environment. Some minimum stability and confidence is necessary if
Ministers of Finance and Planning and Health and Education are to do this work of fiscal
responsibility and institution--building and delivery of basic social services. Debt
sustainability is fundamentally about that. It is about more than freeing up resources for
good spending. It is about putting countries back on the playing field, in uniform, with
the necessary equipment, to play the game---about restoring the opportunity to grow.
How can it be improved? How do we create the confidence that has to be there to
ensure the opportunity to grow?
Topping up was a modest step…and see the tension it is creating. Even a
seemingly straightforward formula has triggered the need for judicial interpretation and a
court ruling. It is still in lower appellate court, and it is awkward that once again the
judges are the creditors.
So let me put on the table a proposal: for insurance for countries after completion
point. First, let me dispose of three assertions from the skeptics.
First, it is a moral hazard to have too much insurance. But there is no moral
hazard in an argument in which insurance is paid only in the case of costly shocks that
the country doesn’t control. In the case of an external shock, a country would apply to the
IMF for a technical judgment that the shock was indeed external and mattered for
unforeseen debt accumulation which would safeguard them for ten years against a return
to unsustainable debt levels caused by circumstances beyond their control—such as when
brought on by a sudden collapse of the price of critical commodity exports of theirs. The
application and the IMF decision would be public. Poor policy would not be rewarded.
Good policy would be clearly and predictably supported.
Second, it will be too expensive. Actually, probably not. Current costs of topping
up reflect the global slowdown 2000-2003. Commodity prices are recovering.
Third, there are no resources; we would be robbing Peter to pay Paul. Again, no.
There is a natural “contingency” facility in the form of mobilizing IMF gold when and if
necessary. IMF gold is now valued at $45, with a market price about $300. It was
mobilized already to finance HIPC I, when 14% of the gold holdings were revalued.
To return to the fundamental point: debt reduction is not a panacea. Countries will
need grants—more IDA grants. Even a full cancellation of debts by the IMF and World
Bank would not alone bring sufficient resources to meet the Millennium Development
Goals, for example, and they would surely end up reducing available resources for
equally poor countries (such as Bangladesh) that avoided debt.
MS. BIRDSALL: I want to make two points. One is that we have to remember
that the advantage of debt relief, which no one has actually mentioned explicitly, is
that it is like budget support and it helps countries avoid the problem of the hassle,
the transactions cost of many donors making new grants.
The second is that--and this is in answer to Francois' point about the
repayments--you know, the World Bank is not really a bank in the sense that it
doesn't really take risks of non-performing loans. Its loans are guaranteed
implicitly or explicitly, implicitly in the case of IDA loans. The question is, we
know from the past that those loans over 20 years were not repayable. That's one
important reason to start thinking about grants. It is not true that because they
were loans it saved anybody in terms of getting the repayments. The repayments
didn't come for this round. They are coming in the form of this explicit HIPC
program. The countries were not able to repay the loans that were made in the '80s
and '90s for many reasons.
So the international community got into a kind of defensive lending posture
in many cases. So how do we create donor accountability in the future? I think
that with grants it is much more possible to ensure performance, to look at results.
I think this is where the U.S. is making a big contribution in the saying, "Let's do
grants and then let's make them performance oriented. Let's see benchmarks."
And this is what the Minister said also, Minister Osafo-Maafo. It is legitimate to
create certain performance benchmarks in association with grants.
So we have to keep in mind the lack of accountability in the past and the
lack of performance by IDA, by the World Bank, in doing loans that could be
repaid. It became a vicious cycle. That's an argument for why moving more to
grants is so important.
MS. BEDDOES: Is it possible to come up with more for the debt relief process
from whether it's IMF gold or whether it's from reserve accounts within the Bank?
MS. BIRDSALL: Yes. I think there's a problem that immediate recourse to full
cancellation of World Bank debt would reduce instantly the amount of resources
available for countries like Bangladesh that never got indebted, so it's imposing the
costs on other poor countries.
Grants, use of more IDA resources now for grants, creates the need in the
future for larger replenishments, and that need should be obvious and clear if it has
been shown that the grants are working, and we see already that the debt relief,
which is a form of grant, after all, in a very efficient way--it's not hundreds of
missions and lots of World Bank and other donor bureaucrats visiting, you know,
Tanzania's 2,600 missions a year. It's budget support. And we know it works in
countries that are performing well. So it's just more efficient. And then we create
the demand in the future for Francois' larger replenishments.