November 2004

Gail Hurley
EURODAD
Brussels
Belgium

HIPC Sunset Clause: Haven’t We Been Here Before?

Introduction

The World Bank and IMF have produced a paper entitled "Enhanced HIPC Initiative - Possible Options Regarding the Sunset Clause". It was discussed by the World Bank's Executive Directors on 20 July and by the Fund's Executive Board on 30 July. The outcome of these discussions is not known at this time, however more formal proposals in relation to the sunset clause will be tabled within the Highly Indebted Poor Countries (HIPC) Progress Report scheduled for discussion just prior to Bank/Fund Annual Meetings in October.

The paper provides a brief background to the sunset clause and discusses the implications of its expiry at the end of the year before going on to discuss four possible policy options and concluding remarks. Finally, it breaks down the potential costs of including the eleven eligible HIPCs currently excluded from the initiative. The annexes include profiles of these eleven countries, including Poverty Reduction Strategy Paper (PRSP) and HIPC status information.

Background to the HIPC Initiative Sunset Clause

The HIPC Initiative was established in 1996 by the international financial institutions (IFIs) under pressure from millions of campaigners who recognised that the burden of unpayable debt was seriously undermining any prospect of meaningful development in some of the world’s poorest countries. A so-called “sunset-clause” (end-date) of two years was stipulated within the programme to prevent it from becoming a permanent facility. This was justified as a way to minimise moral hazard but more importantly to encourage the speedy adoption of structural adjustment style reforms within beneficiary countries (on which debt relief is conditional), as well as limit the amount of debt relief committed by the multilateral institutions and rich country governments.

Progress however was painfully slow with only a trickle of countries “on-track” with their reform programmes and therefore able to reap any tangible results from the initiative. This failure prompted a two-year extension from 1998-2000. However, before this extension period had even ended, the initiative was “enhanced” in 1999 in recognition that it simply wasn’t going far enough. The so-called “Enhanced HIPC Initiative” aimed to provide “deeper, broader and faster” relief for beneficiary countries. Nevertheless, two further extensions to the sunset-clause were still required in order to bring more HIPC countries into the initiative: in 2000 and again in 2002 with the present extension due to expire end-2004.

Current State of Play

As things currently stand, eleven eligible highly indebted poor countries have not reached their “decision points”¹ and have estimated net present value (NPV) of debt stocks in excess of HIPC thresholds.² These countries are:

1. Burundi;
2. Cote d’Ivoire;
3. Central African Republic;
4. Comoros;
5. Republic of Congo;
6. Lao PDR;
7. Liberia;
8. Myanmar;
9. Somalia;
10. Sudan;
11. Togo.

Of these countries, six have had Fund or International Development Association (IDA) supported programmes in place prior to the sunset clause date which is required in order to qualify for HIPC debt relief. These countries are: Burundi, Central African Republic, Republic of Congo, Cote d’Ivoire, Lao PDR and Togo. This leaves the other five countries (Comoros, Liberia, Myanmar, Somalia and Sudan) ineligible for relief under the HIPC Initiative unless they quickly put in place a Fund or IDA supported adjustment programme before the end of the year.

In this context, the paper proposes four possible options regarding the sunset clause.

Possible Options Regarding the Sunset Clause

1. Let the sunset clause take effect at end-2004

This implies that those five countries mentioned above would not be eligible for debt relief under the HIPC Initiative and would be left with debt levels in excess of HIPC thresholds.

2. Extend the sunset clause by another two years

This option would provide more time for current non-eligible HIPCs plus any other countries that may subsequently meet the eligibility requirements, to become eligible for debt relief under the HIPC Initiative.

3. "Grandfathering", i.e. extend the HIPC Initiative solely to countries meeting predefined criteria

According to this option, all Poverty Reduction and Growth Facility (PRGF) and IDA eligible countries, i.e. the world’s poorest countries, who are deemed by the Bank and Fund to have excessive debt levels would be eligible for a period of five years from end-2004 for the HIPC Initiative. However during this time, these countries would have to demonstrate a track record of economic adjustment reforms under the tutelage of the IMF. Early indications are that potential candidates may include: Haiti, Kyrgyz Republic and Tajikistan.

4. Limit debt subject to debt relief by using a cut-off date

According to this option, debt contracted as of end-2004 only would be eligible for debt relief under the HIPC Initiative for a period of five years in order to reach decision point.

EURODAD Comment

The paper argues strongly for an extension of the sunset clause, i.e. options two, three or four, describing an extension as "desirable". We understand that the preferred option in Washington is option two, which would be "the simplest modality" in order to implement the G8 statement from the Sea Island Summit.

This holds that G8 governments are fully “committed to fully implementing the HIPC initiative and to supporting debt sustainability in the poorest countries through debt relief and grant financing” and will “work with other donors and the international financial institutions to extend the sunset date of the HIPC Initiative until December 31, 2006”. The paper also argues it would "avoid complicated modifications".

However, this would embarrassingly for the WB and IMF, represent the fourth extension to the initiative. We argue that this demonstrates the severe technical shortcomings (and therefore credibility) of the initiative. The paper also recognises (and we agree) that a two-year extension is unlikely to provide enough time for many of these countries to meet the requirements for reaching their respective decision points since many are countries recently emerging from civil conflict. We ask therefore, will we be looking at a fifth extension to the HIPC Initiative end-2006? Questions should also be asked over any new restrictions or conditions countries may face as they enter the initiative under the fourth extension.

Regarding option three (“grandfathering” a set of countries for a period of five years in order to reach decision point), countries would still be required to demonstrate a track record of adjustment reforms under the direct control of the Bank and Fund and there is still no guarantee that these countries will indeed reach their respective decision points within five years.

In relation to option four (limiting debt subject to debt relief by using an end-2004 cut-off debt) - while this aims to eliminate the incentive to borrow post-2004 in anticipation of further debt relief, it clearly limits the debt stock subject to debt relief. This would have serious implications for the future debt sustainability of countries passing through the initiative because the calculation of debt relief to be awarded would be based on end-2004 debt data, ignoring new borrowings between end-2004 and decision point. It also treats countries that reach decision point after end-2004 differently than those that reached decision point beforehand.

Moreover, all of the above options firmly leave the Bank and Fund in charge of calculations of debt sustainability within a country based on debt to export ratios, fiscal revenues, openness criteria, discount and exchange rate indicators. The paper points out that, “any of the options chosen will need to be complemented by actions being considered under the low-income country debt sustainability framework”³ and that these indicators constitute “all relevant parameters” for calculating debt sustainability. Instead, we maintain that a human development approach to debt sustainability is fundamental: i.e. that calculations of debt sustainability and debt service should be based on the cash a country needs to meet the Millennium Development Goals (MDGs) and other essential civil infrastructure, and only once these expenses are met should calculations about the level of debt to be repaid made. In any case, whether or not “openness criteria” constitutes an indicator of economic growth and therefore debt sustainability is hotly contested by empirical evidence.

More fundamentally however, we feel that none of the options presented within this paper attempt to address the initiative’s most basic shortcomings which are political, i.e. the HIPC Initiative has always been an initiative created by creditors, for creditors. None of options two, three or four attempt to remedy this imbalance while option one would, in the paper’s own words, “leave the international community without a mechanism for dealing with these debts”. This seriously puts into question the commitment of rich country governments and the international financial institutions which they control to truly provide an exit from unsustainable debt for the world’s poorest countries despite the rhetoric.

Instead, we believe that the options presented within this paper attempt to delay the debate on more desirable options for the future for these countries, for example discussions on a new initiative based on a set of fair and transparent rules (which would define such things as debt sustainability, the legitimacy of debt, etc.) but in equal partnership between debtors, creditors, the private sector, civil society, experts and academia. In this context, we would support a more fundamental multi-stakeholder evaluation of the HIPC Initiative in the framework of the financing for development follow-up process. However if this paper is anything to go by, it seems that the future for the HIPC Initiative is to

Of this US$18,933mn, the cost of inclusion of Sudan alone is US$9,728mn.

The total IMF contribution would amount to less than US$2.345mn out of pool of currency and reserve assets amounting to an estimated US$290bn at the exchange rate in 2000. Nevertheless, the IMF pleads poverty within the paper and argues that “no provision has been made in the IMF Poverty Reduction and Growth Facility (PRGF)-HIPC Trust Fund for the financing of new potential HIPCs’ debt relief beyond [the cases of Burundi, Central African Republic, Republic of Congo, Cote d’Ivoire Lao PDR and Togo]. Additional grant resources would, therefore, need to be mobilised before IMF HIPC debt relief can be committed to new countries.”

Whichever of the above options is finally selected, it is clear that the HIPC Initiative will remain essentially a simple exercise in “book-keeping” i.e. above all, the programme serves to clear uncollectable debt from the creditors books and has precious little to do with debt sustainability in impoverished and indebted nations. Whether or not the eleven pre-decision point HIPCs are eventually included within the HIPC framework or not matters little: these countries currently pay very little (if anything) in debt service and are unlikely to simply pay up once the HIPC Initiative has been closed down. This of course, puts the international community in a very awkward situation. In this context, EURODAD urges debt campaigners to intervene to urge officials to think more broadly about the future treatment of highly indebted poor countries and press for the closure of this highly unsatisfactory initiative and the establishment of a new one based on a set of fair and transparent rules defined in equal partnership between debtors, creditors, the private sector, civil society, experts and academia. Key targets include of course your Bank/Fund Executive Directors and Finance Ministers.