DELIVERING ON DEBT RELIEF: FINISHING THE JOB HIPC STARTED
Thursday, April 22, 2004
The Honorable Yaw Osafo-Maafo, Minister of Finance and Economic Planning
Ghana
And moderator
Zanny Minton Beddoes, Economics Correspondent, The Economist
MINISTER OSAFO-MAAFO: I think HIPC certainly has been quite useful, and
I will be using Ghana's case specifically so that the figures will be real, but “real”
does not mean “enough”.
First of all, the question we should ask ourselves is what is the
objective of that debt relief? If it is to give you a temporary relief, then certainly
it has been very useful. But if it is to create a path for long-term debt
sustainability, then we have a long way to go. And I think that the world opinion
at the moment is clear that HIPC, in its current form, in the current arenas of the
world, is certainly not enough.
Now, debt relief, under HIPC, is provided on net present value
basis and not on nominal terms. So in the case of Ghana, our nominal debt stock
at the end of the year 2000 (we opted for HIPC 2001_ was US$6.1 billion, in
nominal terms. But on net present value terms, which was used by HIPC, it was
$3.9 billion. So, depending on which figures you use, of course, you have
different relief. And I think we have to look at this very carefully.
The nominal HIPC relief we expect over 20 years is $3.7 billion.
If we had used that nominal stock, the story would have been different, and
therefore the very definition of HIPC, in this analysis, using the net present
value, reduces the level of relief that is available to developing countries.
Now, because you are also using the net debt stock, it also allows
certain countries to really rearrange their debt in such a way that you really don't
get any relief.
Now, we have in the case of Ghana some bilateral creditors also,
such as Kuwait Fund, Saudi Fund and Exim Bank of Korea, where debt relief is
needed. What we got is debt rescheduling, which is mere deferment of debt into
the future, a temporary relief. But, basically, it was just pushing that debt to the
other end of the scale.
Also, some multilateral creditors like OPEC simply revised the
terms of their existing debt and provided new concessional loans to refinance the
existing debt.
So these net present value arrangements really enable, as it were,
tricks to be played with the figures, in the present terms, and therefore you do not
get that full value.
It would be much, much better, in my view, if we use the nominal
value and also let everybody stick to it. Now, if you go to Paris Club, it is also
not comprehensive -- that everybody provides you with the relief – and,
therefore, you have to do bilateral agreements with your creditors. Out of the 14
creditors, Ghana has signed bilateral agreements with 10, and we are still in
discussions with the remaining four. We have not yet reached the completion
point. We hope that we do so this year.
It is also important to note that the HIPC debt relief does not
really take account of the overall fiscal situation of that country. In the case of
Ghana, we have to negotiate to use 20 percent of our debt relief to service
domestic debt. So, when you are talking about debt of a country, you cannot
only deal with standard debt. In some countries like Ghana, the domestic debt
indeed would do you much more harm than the external debt because it has
crowded out completely the private sector. The debt burden situation was so bad
that if the problem of the domestic debt, which is not handled by HIPC, was not
quickly addressed, the comprehensive debt problem is only partially tackled.
We, therefore, decided to use 20 percent of our HIPC relief to reduce the stock of
domestic debt, and this has been very useful to us in helping with the domestic
situation.
So I would say that if we look at HIPC or we talk about debt
sustainability, the emphasis should not only be on the external debt. We must
look at the whole fiscal framework.
The debt sustainability analysis conducted to provide additional
relief relies, also, in my view, on overoptimistic growth assumptions and
projected exports and domestic revenues. Therefore, you find out that some of
the assumptions done to enable you to reach the decision point are also too
optimistic, and that creates a problem later on.
I think we need, as a matter of fact, to also look at borrowing
during the HIPC period and thereafter. Why do countries borrow? That is a
question which we should ask ourselves. Basically, while they are in debt, they
need to borrow because they must develop. They must generate growth. They
must provide certain social services. They must improve certain infrastructure.
These are things that no country can do without, and the countries do not have
enough resources, and therefore they borrow. So borrowing goes on during
HIPC.
So we cannot address the debt problem if we do not look at the
whole arrangement of borrowing. If 27 countries in Africa today have been
declared HIPC, from the pure commercial point of view, these are countries
which, in practice, have gone bankrupt. They are not in a position to service
their debt. It's as simple as that. And therefore how do we consider the whole
arrangement of borrowing? I think this is a very, very fundamental question. In
essence, 27 countries of the world will not be able to honor their debt obligations
to their creditors, and therefore you are giving them relief.
What happens thereafter? Should all countries continue to borrow
and pay the associated interest rates? The whole IDA agreements will have to be
looked at. So I think we oversimplify certain problems when we look only at the
debt. We oversimplify the problem because we assume that most countries are
developing, and you put them into one group, and that is not right.
Some countries have many more very endemic problems, and they
can never, never borrow and pay interest on it. Some countries should forever be
receiving grants for their development. Financing terms is an area that we should
look at. We should look at the resource base, we should look at the ability of
certain countries to service their debt, and then look at certain other factors, and
we realize that we have to re-categorize countries. We should not put all of the
countries together in one group because they all are from Africa. We must go to
some fundamentals, and I think here some analysis would be required.
And then when that analysis has been done, we should come out
broadly to say that there are certain countries which can never borrow with
interest payment if the Millennium Development Goals are to be achieved and,
therefore, they must forever live on grants
We think that the quality of life for the whole world must be
raised to certain levels, that education and health must come up. If that is our
underlying objective, then let us also categorize our countries such that we
achieve these Millennium Development Goals. Presently, I think the agreements
are murky and some of the assumptions are not right, and we keep moving
forward and backward, and we need to look at this problem in a more
comprehensive and more realistic manner.
Thank you.
MS. BEDDOES: What do you think the priorities are for improving HIPC?
MINISTER OSAFO-MAAFO: I think it's important to realize a very simple
formula. You repay your loans with your inflows, and therefore, what you earn
and what you sell is important. If you're not earning anything, there's no way
you can pay your loans. Now, if your expenditure externally also varies at levels
which is beyond your control, then you also have that problem.
So I'm suggesting that the analysis which we do for HIPC should
cut across shocks in two ways. Now, the first shock is the shock which you get
because you are not getting the assumed price for the commodities you sell, say
in Ghana, cocoa, gold, whatever we sell, whichever items are our main sources of
our inflow. So that if we assume that cocoa price should average $1,500 per ton
and it drops to 900, then it should be very clear that the country has gone through
a shock.
And analysis, you don't have to go back to the IMF. If we assume
a certain main value of certain prices, then we can always work the cost of the
shock and address it. As to who addresses it becomes the next problem.
The other problem is that Ghana, for instance, had assumed a
petroleum price of $25 per barrel, the 2001 analysis. Now we are buying it at
$32, $34, $35. Now, at one stage we had to go up adjusting petroleum prices by
94 percent. We were lucky that people did not take to the streets, because, to me,
to go up on petroleum prices across board in a country 94 percent overnight, was
a recipe for disaster. We had no choice because we could not also subsidize the
petroleum prices. We could not afford it. And it continues to haunt us because-I mean it was this year because of the levels of petroleum prices that I do not
know, and I cannot really forecast.
I think we have to also consider this as well in our analysis. So to
support my friend from Malawi, there are certain unknowns in the whole
management of the economy of developing countries in particular. And because
our economies have not been developed to absorb shocks, we are knocked down
by many shocks. So you are knocked down because of the prices you are getting
for your main source of inflow. You are knocked down because of fluid oil
prices, et cetera, et cetera. And if you ignore all this in your analysis for HIPC,
where are you going?
Then naturally, at the end of your completion point, you are likely
going to be in difficulty. So I think we need to do a thorough analysis of this.
I would also say that, yes, the HIPC appears on paper to be
comprehensive, but it should be made mandatory to all creditors, for the richest
are important. How much do you owe to the Paris Club members? How much
do you owe outside Paris Club members? How much do you owe commercially?
Can we really make it mandatory to all creditors? If we can, then it will also help
a lot.
My next point is that at the end of the day, developing countries
must necessarily grow to create wealth, to reduce poverty, to provide certain
level of services. The role of the private sector is critical. So what do we do to
attract the private sector to play a more meaningful role, a single role in
generating growth? We appear to address this problem of debt sustainability
without giving much cause to attracting the private sector.
The moment you pronounce yourself as “HIPC”, psychologically
you have created a credit regime problem for yourself, and therefore, direct fund
inflow becomes a problem during your HIPC processes. People are suspicious of
you. You borrowed. You are lent some very cheap sources of money. You
come out and raise your hand and say, "I cannot pay." Who is going to send
funds to your place for projects? And therefore, we are caught in this--in fact, in
Ghana, the biggest single problem we had with the public was that we were
“HIPC”. I had to hide for a few days after the announcement.
[Laughter.]
MINISTER OSAFO-MAAFO: Because people thought: how could I tell the
whole world that Ghana, with gold, cocoa, diamonds, is broke? That Ghana is
literally bankrupt, and that I was in some arrangements with the IMF to discredit
the country? This is how my population took it. It took a lot of education. I
said, look, let's distinguish between your promise and your ability to service your
debt. Ghana is in a temporary situation because to date we are not in a position
to service our debt.
And therefore, we insisted that all projects arising out of HIPC
relief must be labeled. And I am saying that the results have been very
rewarding. So now you go to every village you see a HIPC school, a HIPC toilet,
a HIPC health clinic-[Laughter.]
MINISTER OSAFO-MAAFO: Any projects that we have funded through HIPC
we have labeled, so destitution has reversed. Now people are saying that, "Oh,
after all, Minister of Finance didn't make a mistake."
[Laughter.]
MINISTER OSAFO-MAAFO: We have seen the results. So I would say that if
you don't take care of these shocks, if you don't make this thing mandatory, we're
going to get ourselves into trouble. And I think are bringing indirectly through
HIPC some of the objectives of the U.S. Millennium Challenge Account. When
you look at the way the account insists on a certain environment for
transparency, ruling justly, things that you yourself should do as a matter of
course; improve the quality of life for your people. You must invest in your
people. So, obviously, education, health, governance.
Now, I think that HIPC should also have within it certain
imperatives put on HIPC countries to do certain things right as a way of also
attracting private sector. You are given a lead, but now this should affect certain
things, and it should be visible. In case of Ghana, growth at 2000 was 3.7 GDP,
going to 4.2 percent 2001, 4.5 percent 2002, 5.2 percent 2003. So naturally, the
HIPC relief, the relief of resources to enable the country to use it on other things
has paid off. You can see it on our GDP growth. It's become very obvious. Our
foreign exchange reserve, 2000 would cover three weeks of import. As I speak,
it will cover four months of import. So naturally, HIPC has been quite useful.
But I do not know what will happen when we reach the
completion point in respect of other debt relief if, for instance, oil prices continue
to go up. It will completely knock down most of the things we have done
because we don't produce any oil. That's why I'm talking about categorizing
countries. That is why I'm thinking that the whole arrangement of debt relief
lacks analysis, analysis which is realistic. It is done on some basic very primary
assumptions. It must go a little bit deeper into these things. So we should look
seriously at shocks leading to our inflows and to our expenditure. And all effort
should be made to accelerate for investment.
We, for instance, insisted that we should be rated, and we invited
Standard & Poors, with the support of USAID, and we were rated B plus. This
has really assisted Ghana, the fact that Standard & Poors has rated us B plus.
And it also assisted us politically at home, for the fact that we have declared
ourselves, as it were, bankrupt, and we have been rated B plus by Standard &
Poors. People say, "Oh, then it's not that bad. The relief has brought
something."
[Laughter.]
MINISTER OSAFO-MAAFO: I am also very much concerned about direct
foreign investment. I'm very much concerned about the role the private sector
can play in generating growth and wealth. There's no way that government can
be the main source of generating growth, so that we can concentrate on what
government does, regulating the system and making sure that all resources are for
basic infrastructure and social services.
I think good of the HIPC process. It is also necessary to ask those
who are benefiting from the relief, to also do certain things like social
investment. We should insist that your investment in health should move from X
of GDP to Y of GDP. Your investment in education should move from X of
GDP to Y of GDP. The whole idea is to also make sure that you are investing in
the people and you are improving the quality of life as others provide you with
relief.
So there are a few analysis that I think we should do and continue to do to
improve the whole thing. Thank you.