DELIVERING ON DEBT RELIEF: FINISHING THE JOB HIPC STARTED
Thursday, April 22, 2004
John B. Taylor, Under Secretary for International Affairs, United States
Department of Treasury
And moderator
Zanny Minton Beddoes, Economics Correspondent, The Economist
MR. TAYLOR:
I very much enjoyed the Minister Ossafo-Maafo’s remarks, and I
think basically I can't think of anything I disagree with in what he said. It's also
spoken from someone who knows what it's like to be in a HIPC country and the
problems that it faces. I agree very much with the point about grants for the very
poor, Heavily Indebted Poor Countries.
The notion of how you measure is essential. Nominal values have
a lot of attractive features to them. If you're doing 100 percent, of course, it
doesn't matter, and a good number of the 14 Paris Club countries you mentioned
are 100 percent. The United States is, but others are not. So, certainly, one step
is to get all 14, in your case, to 100 percent. There is no reason why we can't just
do that right now, and it wouldn't matter whether it was nominal or net present
value.
And I think the idea of the overall situation in the country is
important, not just the international borrowing, but the domestic borrowing.
What I would like to do to more generally respond to his points
and the points you raised, Zanny, is to kind of list I would say several principles
that I think should be guiding us in this discussion, and I think they relate to your
three questions about how it can be improved, and when.
The first thing I would say is I think getting to a debt-sustainable
situation is essential. Debt sustainability itself is important for just fiscal
management. It's also important for investment. Foreign investment of countries
whose fiscal accounts are sustainable is a more attractive place to invest. That's
where credit ratings--higher credit ratings--are generated. So it's very much part
of the poverty reduction goal to get to a sustainable situation. So that would be
the first principle.
The second principle relates very much to what the Minister was
saying about new lending. I think you can't do new lending if you know that in a
year or two years or three years it's going to be forgiven. That's not a way to
operate. That doesn't develop a credit culture, but that's what we're actually
doing now. We're giving new loans after the decision point, and then we get to
completion point, and they are forgiven. It's understandable why, and the United
States supports topping up, but that's not a way to proceed. That does not resolve
the credit culture, it does not develop sustainability, and we need to find a better
way to do that. So that would be my second principle.
The third principle is very much related to what the Minister said - that we should focus on grants. And I wouldn't say "never" loans--I don't think
the Minister said that either--but for a while. Until the debt sustainability
problem is behind countries, it's got to be 100 percent in the very poorest,
struggling, Heavily Indebted Poor Countries.
Of course, most bilateral donors are already in the grant forum, so
really we're talking about the multilaterals. The international financial
institutions, and both the MDBs and the IMF, should really be moving these
poorest countries to grants. And I think you can think about a staircase approach
as development begins, and if sustainability is possible, then of course you move
towards loans. But, for the time being, grants are essential.
The fourth thing I would say is I think you do have to seriously
consider additional debt relief. I don't see how this problem is going to be
resolved when you still have the levels of debt that are just barely sustainable.
And of course why topping up occurs is because they're still too high, and you've
got to knock it down. But then what's going to happen after completion point?
It's the same issue.
So I do believe that there's more debt relief needed. And of
course this falls largely on the international financial institutions. They hold the
lion's share of the debt--the international debt--to the HIPC countries. But, as the
Minister mentioned, it's also some bilaterals, and some bilaterals in the Paris
Club framework. They can move ahead more quickly, but it's primarily
international financial institutions.
And then the last principle, the fifth, would be that, as we consider
increasing grant funding and looking for ways for additional debt relief, we have
to make sure that the net resource flow from the developing countries—the donor
countries, if you will--to the developing countries should not go down. We
would like it to go up. We would like to make development attractive for
taxpayers in the developed countries, but at the least we should have, as a
principle, the net resource flows do not go down.
So I think those five principles would be a way for us to deal with
the questions you raised, Zanny, and I think, in general, they are very supportive
of what the Minister said.
Thank you.
MS. BEDDOES: Thank you. Well, those principles that you outlined are ones
that I would take to be extremely positive principles. And if the U.S. and the G7
countries really were pushing them, I think we would be in a very much better
situation than we are.
I wonder, and if I can just push you a bit on those before I move to
our next panelists, you said your first principle, getting to debt sustainability, was
essential, and I think your fourth principle was that we need additional debt
relief. What does that mean for the here and now? It's easy to say that. What do
you think? Do you think we need to push more within the HIPC process? Do we
need a different kind of process? And where are the resources going to come
from to do that?
MR. TAYLOR: Well, part of it, of course, is that there's still some bilateral debt
that needs to be forgiven. The Minister indicated there's also some multilateral
debt, not from the World Bank, IMF, that is still part of the existing HIPC
process. So those things need to be addressed.
But then, in addition, there is a lot of multilateral debt, and if there
are ways to reduce that further, in conjunction with a much heavier emphasis on
grants, so that net resource flows don't diminish, I think there's an opportunity.
The specifics, I think that's something that we need to be talking a lot about and
figuring out how it will work, developing coalitions, but the United States, as you
know, under President Bush's leadership, has pushed the grants initiative very
hard. We think it should be increased, and we are arguing the reasons for that,
not across-the-board, that there really should be countries that have the debt
sustainability problems.
By the way, I just came back from a trip to Africa to look at how
the grants initiative is going, and I must say it's extraordinarily gratifying. Every
country we visited, where the new IDA grants are being disbursed, there's a huge
amount of enthusiasm. They have the support not just of the Finance Ministers,
of course, who would be attracted to grants, but the Health Ministers, if it's an
HIV/AIDS program, or the Education Minister, if it's a grant for education. And
it's not just the government, it's the people who are getting the assistance who are
very grateful--for example, an education project in Kenya--very grateful that it's
the IDA: "IDA grants. Wow. We never knew there were IDA grants. This is
terrific." Very appreciative.
And in Rwanda we saw an HIV/AIDS project. And, again, the
people on the ground, the directors of the program, are very appreciative.
Niger, which is a country which is very, very poor and heavily,
heavily in debt, just talking so much about how the grants were useful. The
phrase we came away from that visit was "long live the doctrine of grants."
[Laughter.]
MR. TAYLOR: It was just a very positive response. So I think we have to keep
going, and that's one of the principles, but that's not everywhere.
MS. BEDDOES: Undersecretary Taylor, I want to ask you for your priorities,
but I'd also like you to comment on the two priorities we've really heard a lot
about. One is the need to make the whole debt relief process more flexible to
deal with shocks, whether it's commodity price shocks, but unforeseen shocks.
And secondly, the proposal that the Minister just put forward that it should be
made mandatory to all creditors, and that there is an issue involved in the way it
is currently structured in that regard. Beyond that, what would be your
priorities? What do we need to focus on to make it better?
MR. TAYLOR: Well, first of all, on the mandatory, we have been pleading and
cajoling and working with the other Paris Club members to do the 100 percent
debt relief like the United States does. And as you mentioned, there are some
other multilaterals--I'm not including the World Bank here--that have not stepped
up to the plate.
Mandatory, I'm not quite sure how you do a mandatory with, say,
the government of France. How does the United States do a mandatory with
France?
MINISTER OSAFO-MAAFO: Cajoling, cajoling.
MR. TAYLOR: Cajoling is what we do. We'll do a lot more cajoling, and
appreciate your assistance on that.
MS. BIRDSALL: Arm twisting.
MR. TAYLOR: Arm twisting. Well, no--
MS. BEDDOES: Cajoling, cajoling.
MS. BIRDSALL: Showing leadership.
MR. TAYLOR: Okay. I think it's very important to do that, and to the extent
that we can communicate more about the importance of 100 percent for the other
Paris Club, we'll do it. It's very important.
The shocks issue, and Nancy's particular proposal, I think it's hard
to deal formally or formulaically, perhaps is the way to say it, with shocks in the
real-world environment we live in. I actually have spent a large part of my
former life thinking about how to make contingency plans for public policy and
monetary policy. And it's very hard, and it seems to me in this particular case it's
even more difficult because it's how do you define the shock? What should the
size be?
It seems to me that another approach to dealing with it is to make
sure that you're in such a sustainable situation that you can withstand reasonably
sized shocks. For the really serious ones, then you have all of the facilities that
are at the international financial institutions now.
So how do you get to a more resilient situation? Well, debt has to
be lower. So you basically get that low enough so that it can withstand some of
these negative shocks. Just like the Minister said, you don't want to just do these
optimistic or even neutral projections, you want to do what the investment
bankers call stress analysis. When you get some big negatives, what's going to
happen with that portfolio? And that's what that sustainability analysis means.
You try out those negative shocks, and you make sure you withstand that, and
that deals with a lot of the contingencies issues and the shocks that you're
referring to, but there still will be big ones you can't anticipate, and that's why
you have the international financial institutions and their able staffs there for, to
make the decisions when the time comes.
So I very much am sympathetic with the idea of trying to have
contingencies and plan this way, but the reality is it's difficult, and this
alternative of really getting to a debt sustainable situation, my first principle that
I described, really should be sustainable in the way it's defined against some real
bad shocks.
Then I'd say, with respect to my first priority, if you're looking for
priorities, it would be grants and moving much more aggressively than we have.
It was a lot of cajoling and a lot of persuading that got President Bush's grants
initiative through the international community in 2002. It took a whole year of a
lot of hard work from 2001 to 2001 by lots of people, lots of places. And at least
the predecessors of DATA--I'm not sure when DATA was founded exactly--but
certainly DATA, the people involved with that, helped with that. And it's still
being implemented. In 2002 it was decided to put up to 21 percent of IDA funds
in the form of grants. It was a major accomplishment. That allows some
countries to get as much as 35 percent of IDA funds in terms of grants, and
depending on what their programs are like. HIV/AIDS has a very high priority
because it's just hard for anybody to stomach the idea of loans for HIV/AIDS.
That's certainly where grants are essential. There's other areas too.
Francois mentioned the reflow problem I think a lot of people raised, and it's a
good question. But I always just think about it this way. Take Niger, a very poor
country, very high debt. And when you talk about reflows, you're talking about payments
from Niger to the developed countries. That's your reflow. It's Niger paying us. You
shouldn't count that as part of your income. You should basically try to have a way that
you provide them with the funds so they don't have to have the reflow. It seems to me
that it's a kind of a misconception to think that to count those funds in terms of your
resources--that's why I say the principle of having net resource flows positive, and at least
not falling, is essential, and that resource flows basically are net of those payments
coming back. You don't want to count those because those are the very poor countries,
poorest people in the world paying those funds, and I just don't think you should count it.
I think other countries should step up to the plate here.
With respect to the reflows, I think there's just sometimes
misunderstanding because to me it doesn't do any good in the sense of providing
more resources to poor countries. If you're taking money from Niger and giving
it to Ethiopia, I mean I just don't get it. The money's coming from Niger, and
you say, "Whoopee, we can give money to Ethiopia." It doesn't seem to me the
way to think about it. We want to have--and also, just maybe you're thinking
about China's paying. Well, China is paying. I wish they'd pay more. They have
$8.7 billion in IDA loans. Why don't they start paying early?
[Laughter.]
MR. TAYLOR: So we're not talking about giving grants to China, believe me.
So there's a lot of issues here.
The resource flow, the net resource flow that I've emphasized, is
net of repayments from the very poor countries, from these poor countries paying
money back so that we can give it back to them or to their neighbors who are
equally poor. What I would like to do is find ways to at least make sure our net
resource flow does not diminish, and in fact increases. That's the principle I
enunciated, and that's net of the transfers.
The questions of how you do that, I think what we ought to do,
there are these principles that seem to be part of this discussion, and there's
different ways to go about it. The cajoling is certainly the first step to get others
to participate, and then to look for ways to, you know, perhaps in answer to the
questions about the international financial institutions, to see if there's more
there, and whether how much it is, I think it requires a lot of discussion.
One of the problems with the international discussions, you really
have to build up an idea broad-based at the beginning, and I would say actually,
quite candidly, I think one of the reasons the grants initiative of the United
States, why it's taken so much cajoling to move through is perhaps it was an idea
that came too much from the United States. Maybe people don't like it because
it's coming from the United States. Well, fine, we don't care about getting credit.
So what I'm thinking here is we should try to find a way to get together with
some proposals. Nancy's got some proposals. I've listed some principles. Some
of the speakers have suggested some things, and I think there's--definitely know
there's problems. We can hear it from our colleagues from Africa, and we need
to find a way to address it.
MS. BEDDOES: I think the underlying problem that those people who have
some skepticism about grants worry about is how do you make sure the positive
net resource flow that you say we need is sustained beyond this administration to
the next administration and looking forward? One of the advantages of the IDA
system was it was a system where resources were circulated around. Admittedly,
in some countries they didn't, because countries didn't perform that well or fell
into difficulties, but overall, the system was relatively effective. And if you are
shifting to this new system, how do you--are there ways that you can make sure
that in the future the net resource flows will be there?
MR. TAYLOR: Net resource flows depend on the donor countries, on the
congresses, on the administrations, and to me, I mean having to have gone to the
Congress many times to argue for more net resource flows, if you like, more IDA
funds--and we have actually in the Bush administration increased IDA funding
for the first time in many years--the main thing people want to hear about is how
effective it is.
MS. BEDDOES: Show it works.
MR. TAYLOR: And show it works, exactly. This measurable results program
we have is showing it works. And it works sometimes--I mean we saw some
grants--and there are some grants initiatives in Kenya, just remarkably successful
in terms of measuring the impact on people's lives, and in this case, kids getting
textbooks in the schools in the poorest slums you've ever seen. And you know,
you go back and you tell a member of Congress there's a kid that has some more
books in school in a terrible slum in Nairobi, he or she is going to listen and
respond. So that I think is the key.
And it's net resource close, so again, I don't see what you get, why
we should feel like we're doing something if they're recirculating flows with-Niger pays, we get Niger back. That's not a net resource transfer. A net resource
transfer is when people in France, the United States, Japan, Germany, provide
funds to Niger or Ethiopia.