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LDC, HIPC definitions 'Inappropriate, arbitrary and conservative' - Eurodad

By Brian Kenety

The debt sustainability indicators that are being used by creditors with regard to the LDC and HIPC countries are "inappropriate, arbitrary and conservative", argues the European Network on Debt and Development in a paper to be presented in an NGO Forum workshop today.

Francis Lemoine, a Eurodad debt analyst and co-author of the paper, said it was urgent that the HIPC initiative, "which has given a lot of people hope for a real debt reduction and poverty reduction", be implemented more broadly and fairly.

"When we look more closely at the figures, we'll see that HIPC will only reduce some of the debts" of some of the countries, he said, and not allow for governments to tackle the massive problems they now face.

One main reason why the HIPC Initiative is not likely to reach its goal, is that the debt reduction on offer probably is too small.

Zambia and Niger will actually pay more after the initiative than they did before.

Eurodad argues that a definition of debt sustainability that creditors commonly use for low-income-countries is whether a country can meet its current and future external debt servicing obligations in full, without recourse to further debt relief, rescheduling or accumulation of arrears, and without unduly compromising growth.

The main problem with the creditors' definition, says the 42-page paper, 'Debt Reduction for Poverty Eradication', is that debt sustainability "is being confined to a matter of economics".

But when the concept of debt sustainability is approached "from a human and social development perspective - and there is no other way to approach debt sustainability in a country such as Bangladesh where 78 per cent of the people lives on 2 US dollars a day - many more LDCs have an unsustainable debt level".

The Development Committee of the World Bank and the International Monetary Fund (IMF), acknowledged as much in a meeting last month: "This definition (..) is quite narrow from an overall development perspective.

It does not deal with issues of domestic debt, which are important for fiscal sustainability, nor does it measure the adequacy of public resources to address priority development programmes after debt service has been paid".

Nevertheless, the institutions maintain this definition, which they address by the following indicators: A net present value of debt-to-exports ratio of 150 per cent; a net present value of debt-to-government revenue of 250 per cent; a debt-service-to-exports ratio of 15-20 per cent.

These indicators do not truly reflect the burden of debt, because from a resources perspective, it is debt servicing that counts.

"First of all, the emphasis is on debt stock rather than debt service.

However, many LDCs have accumulated such large debt stocks that only a fraction of it is actually being repaid," argues Eurodad.

In addition, the focus is on exports.

Even though exports are an important source of foreign exchange, which is needed for debt repayments, the debt-to-export ratio can be misleading as rapid growth in exports does not always translate into more budgetary resources for the government.

In Tanzania, for example, export revenues might be expected to rise rapidly, thanks to the recent exploitation of gold resources.

"However, given the capital-intensive nature of the industry, the government has agreed to receive relatively low revenue whilst foreign investors are recouping their investment cost, in order to attract investment into the sector," notes the paper.

"The volatility of currency and commodity markets also make the debt-to-export ratio an unreliable benchmark to predict debt sustainability in the medium term," says the Brussels-based research organisation.

The fiscal criterion is a more appropriate indicator, as it takes the amount of resources available to the government as a starting point.

However, creditors only use it from a debt 'stock' perspective and not from a 'flow' perspective.

Furthermore, the threshold for the fiscal indicator is very high, as are the thresholds for the two conditions to qualify for debt relief via the fiscal indicator.

But qualifying for the fiscal indicator "demands an impossible mixture of high indebtedness and macro-economic soundness", says the paper.

Unsustainable debt levels keep countries caught in a cycle of poverty, aid dependency, and unsustainable debt levels.

As governments have to pay large sums of money to foreign creditors, less can be spent on recurrent social expenditure or essential investments, such as infrastructure, health or education.

LDCs, with extremely low levels of social and human development, often have to pay more to foreign creditors than they can afford to invest in basic health care or education.

For example, in Burkina Faso, where one out of five children dies before the age of five, in 1998 the government spent as much on debt as on health (five US dollars per capita).

In Niger, where 78 per cent of adult males and 93 per cent of adult women are illiterate, debt service amounted to 3.

1 per cent of GNP in 1998, while spending on education was only 2.

3 per cent of GNP.

Another example is Cambodia, whose debt service due in 1999 amounted to 12.

1 dollars per capita.

While one out of seven children dies before the age of five, the government spent 17 dollars per capita on health on average per year from 1990 to 98.

"This may seem a considerable amount compared to some other severely indebted countries, but it is almost nothing compared to what middle and high income countries spend on health in the same period: respectively 199 dollars and 2,585 dollars per capita annually," notes Eurodad.

Qualifying for the Heavisly Indebted Poor Countries (HIPC) initiative, in theory, should translate into quick debt relief; the process of crafting national development policy by writing Poverty Reduction Strategy Papers (PSRPs) required by the World Bank and IMF to qualify, is meant to ensure debtor countries spend the money that would no longer go into debt servicing on the social sector (health, education, etc.) A major problem with the above scheme, as Eurodad sees it, is that "the classifications of HIPCs and LDCs are rather arbitrary.

Not only because several non-HIPC LDCs have unsustainable debts ...but also because all HIPCs are very poor and underdeveloped, even though they do not meet the criteria to fit in the LDC category".

Angola is considered to have a sustainable debt burden, even though all its 1998 debt indicators are above the threshold level and the country's arrears almost quadrupled from 700 million dollars (or 8 per cent of total debt) in 1990 to 2,704 million dollars (22 per cent of total debt) in 1998.

The reverse problem also holds true: six non-HIPC LDCs have debt levels that exceed the World Bank and IMF debt sustainability thresholds: Bangladesh, Cambodia, Comoros Islands, Haiti, Nepal, and Samoa.

Equatorial Guinea's amount of arrears equally suggests that this country is unable to carry its debt burden, says the paper.

Eurodad is advocating that as an immediate measure, "the PSRP process should be de-linked, at least temporarily, from the debt reduction process, so that countries can benefit immediately from debt reductions," says Lemoine.

"At the least, it should be de-linked when countries get to the decision point" for becoming an HIPC country.