Maravi

(TALKZIMBABWE) Domestic debt relief strategy vital

Domestic debt relief strategy vital
Itayi Garande - Opinion
Mon, 28 Sep 2009 13:17:00 +0000

MINISTER of Finance Tendai Biti this week said that Zimbabwe should aim to have its debt to international financial institutions cancelled by seeking access to the Heavily Indebted Poor Countries (HIPC) initiative.

Minister of State in the Prime Minister's office, Gorden Moyo, said it would be immoral for Zimbabwe to pay off its debts to the International Monetary Fund, World Bank and African Development Bank when it could not pay teachers.

"We should be having conversations with the international financial institutions to get them to either reschedule our debt or to cancel our debt," he said, speaking at a meeting in London.

Moyo said that the IMF and World Bank had launched the HIPC initiative in 1996 to help countries unable to pay their debts. He added that the move would also give Zimbabwe access to the IMF's Poverty Reduction and Growth Facility, which provides loans to low-income countries at subsidised rates.

"We will get the resources and we will get the credit lines and we can stabilise our economy," he said.

The most glaring problem with the HIPC initiative for debt relief is that it will not provide lasting relief from debt for the highly indebted countries of the south, as Moyo and Biti suggest.

It is a six-year process aimed not at canceling debts, but at ensuring that they can be repaid. It has little to do with enhancing human development, reducing poverty, or even increasing economic growth in the debtor countries.

Rather, it is designed to massage debt figures down to a level where they would be deemed “sustainable” again according to the criteria of the IMF.

HIPC's definition of debt sustainability; the debt-to-export and debt-to-government-revenues criteria are arbitrary and too restrictive. By 1999, only four countries had received any debt relief under HIPC.

The six-year programme is too long and too inflexible to meet the individual needs of a country like Zimbabwe; reeling from the effects of sanctions and extended periods of drought and seeking to re-establish trade links with the rest of the world.

The IMF and the World Bank will not cancel any debt until the completion point, leaving Zimbabwe under the burden of its debt payments while it struggles to institute structural reforms.

The crucial question is: How will the structural reforms in Zimbabwe (conditions set under the HIPC initiative) be financed before debt cancellation?

IMF and WB conditions have historically undermined poverty-reduction efforts. For example, privatization of utilities tends to raise the cost of services beyond the people's ability to pay.

The programme is designed by creditors to protect creditor interests, leaving countries with unsustainable debt burdens even upon reaching the decision point.

The dependency increased by HIPC means that after debt relief the country will have got to a point where it needs more debt. Such a debt will need to be serviced again from meagre resources impacting heavily on investments in programmes that can reduce poverty.

This was the case in Zambia. The country fulfilled its side of the HIPC deal, implementing harsh structural reforms which brought down inflation, but it saw an increase in the poverty gap.

In Zambia, creditors had to extend relief substantially ("topping-up"), order to reach the sustainability thresholds established by the HIPC initiative. This increased the debt burden of the country and impacted heavily on poverty reduction programmes.

The IMF/WB did not seem prepared to deliver the necessary resources.

The Zambian government found itself under considerable pressure from other International Financial Institutions (IFIs), to finance its contractual debt service through expenditure cuts or via additional privatisations.

Notwithstanding the fundamental ambiguity of financing (current) expenditure via asset sales, Zambia's historical experiences with that approach have not been encouraging: wide gaps in rich and poor, increased indebtedness with other IFIs and creditors, expensive public provision and access, etc.

Zambia is the most vivid illustration of HIPC's flaws, but other countries have not done much better, even though their payments have fallen rather than the other way round.

Tanzania saw barely any reduction in repayments after qualifying, Mali received just a 13% cut, and Senegal nineteen percent.

On average, countries have been getting their annual payments reduced by just one third; whereas they could have achieved more poverty reduction with home-grown strategies.

Given these experiences, it would be foolhardy for the Zimbabwean government to join the HIPC process as an instrument to have its enormous debt brought down to a sustainable level.

Instead the country should develop its own debt relief strategy, which would need to include the following elements:

* Increasing the call for sanctions to be removed inorder for normal trading to resume;
* Declaration of an immediate moratorium on all its long-term debt;
* Declaration of the country's readiness to negotiate with all its creditors a realistic and sustainable debt service. To that end the Zimbabwean government by its own initiative invites all its creditors to a debt conference in Zimbabwe;
* The Zimbabwean government will undertake a broad based consultative process regarding the country's ability to service any debt in the future.
* The Zimbabwean government will seek political support for this initiative from individual creditor governments, which like for instance France, have supported the call for an international insolvency framework or for the full cancellation of debt; eventually this will be done in co-operation with civil society in these particular countries.

The biggest problem with HIPC status is that threshold levels to measure debt sustainability are arbitrary and still too high and sustainability is defined in economic terms and not in terms of human and social development.

In the case of Zambia, the failure to meet the HIPC Initiative conditions derailed the fight against poverty. The debt reduction on offer was too small abnd unjustifiable.

The “piling up” of different sets of conditionalities by the Bretton Woods twins slows down the process. Conditionalities such as the much-criticized Poverty Reduction Strategy Papers (PRSPs) do not succeed in aligning macro-economic issues and poverty issues more closely.

Macro-economic frameworks do not change significantly as a result of PRSPs.

In any case HIPC status is only granted after a country has shown that its debt is unsustainable. Zimbabwe has not reached this stage yet. The country has been under effective sanctions for almost a decade.

If the IMF and WB are concerned about "poor countries", the right decision would be an unconditional cancellation of all debts owed by these so-called HIPCs not this backdoor debt collection.

The World Bank has been criticized by Oxfam in a report, for having “used wildly optimistic growth projections for the 22 HIPC countries.”

The ramification of this as they continue is that because “projections are linked to growth, revenues have been overestimated, and debt is likely to absorb much larger shares of government revenue than World Bank projections state” meaning that in many cases nations will continue to spend more on debt than on basic education or health, even after receiving HIPC debt relief.

Issues of poverty reduction are important for any government and cannot be left entirely to the IMF/WB or to the international community.

Rather than seeking HIPC status, the Government’s expenditure patterns should be adequately altered in favour of poverty reduction programmes away from non-priority areas (e.g. purchases of automobiles).

The two ministers either have other (political) motives for seeking HIPC status or have no viable solution to the economic problems in the country; under the current sanctions regime.

Labels: DOMESTIC DEBT, GORDEN MOYO, TENDAI BITI

posted by MrK @ 4:28 PM