Other testimony is on http://www.house.gov/banking/61599wit.htm. It is nothing short of criminal that while we have Jeff Sachs saying that the debt should be cancelled immediately and the IMF should abolish ESAF and get out of Africa we have NGOs which claims to speak on behalf of poor people in the South demanding more money for the existing HIPC initiative, linked to ESAF and structural adjustment (the Leach Bill). According to observers at today's hearing, there was the bizarre spectacle of Members of Congress being told by Jeff Sachs that they need to do more than the HIPC-framework Leach Bill only to be told by the "liberal" NGOs that it's ok if they do less. Please file this under "spare me your lecture about the danger of working with 'conservatives'." --------------------------------- HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES Hearing on Debt Reduction Tuesday, June 15, 1999 Jeffrey D. Sachs A serious debt relief proposal for the Highly Indebted Poor Countries (HIPCs) should have the following components: 1. Realistic institutional mechanisms for coordinated relief by the major creditors 2. Reliable mechanisms for linking creditor actions with debtor policies. 3. Realistic targets and timetable for debt reduction 4. Funding mechanisms to achieve the necessary relief The current HIPC Initiative, launched in 1996, fails on all four criteria. First, there is no reliable mechanism for bringing all major creditors together. The "creditor dance" continues among the major creditors -- the IMF, World Bank, Bilateral donors, regional development banks -- as to who will pay the bill. Second, the current mechanisms of IMF-World Bank conditionality do not succeed in linking creditor actions with appropriate programs of long-term sustainable development. Third, the targets for debt reduction are derisory. Bankrupt countries are kept in debt bondage for years. Even the "end point" is simply a continued state of effective insolvency. Fourth, all decisions on funding the initiative have been woefully inadequate. News reports out of Europe on the eve of the Cologne Summit are both encouraging and discouraging with respect to the prospects for debt relief for the HIPCs. The encouraging news is that the G-8 countries are ready to recognize the failings of the HIPC Initiative, and therefore to launch bolder measures. The discouraging news is that they reportedly plan to keep the same basic framework (or non-framework) in place, despite its obvious and profound shortcomings. The approach likely to emerge this week from Cologne will need substantial strengthening if it is to have any chance of real success. Let me briefly consider each of the four components of the debt strategy in turn. I will argue that realism calls for very deep writedowns, indeed complete forgiveness, for many of the HIPCs. The call of worldwide Jubilee 2000 movement for such deep writeoffs, and a "shift from ‘sustainable debts’ to ‘sustainable development’" is fully justified and achievable. The Appendix contains a more detailed demonstration of the feasibility of financing comprehensive debt relief, at a scale far beyond the modest goals of the G-8. Institutional mechanisms for debt relief The current strategy is based on a series of disjointed negotiations between the indebted country and its major creditors: the bilateral donors, the IMF, the World Bank, and the regional development banks. There is no overall coordination in this process, except a loosely connected set of guidelines prepared in general by the International Monetary Fund. There is a very strong case for a consolidated action, in which all major creditor groups -- acting in one process -- confirm their participation in a major debt reduction program, and then establish a clear and bold timetable for a deep writedown of debts. This comprehensive approach would be analogous to the normal workings of a bankruptcy process, in which all creditors are brought under one "tent," the bankrupcty court, and in which a settlement involves the simultaneous adjustment of debt for all creditor classes. Even without a great stretch from current institutional arrangements, a much improved process could proceed in the following manner. All creditors of the HIPCs would place their claims within a single HIPC Trust Fund. A Steering Committee of creditors -- including the IMF, World Bank, regional development banks, and donor governments -- would be formed to approve financial workouts with the HIPCs, with votes in proportion to the size of the claims placed with the Trust Fund. As in a standard bankruptcy workout, each of the HIPC governments would be invited to make their own proposals to the Steering Committee for the reorganization and partial cancellation of their debts. These proposals would be vetted by the creditors, including no doubt the IMF and World Bank. The specific relief plans would depend on the financial, economic, and social conditions of the individual countries. The Steering Committee would vote to approve or reject the plans, with a qualified majority (perhaps two-thirds of the creditor votes) used as needed for approval. Institutional mechanisms for linking debt relief and debtor reforms The current approach is built around IMF-World Bank structural adjustment programs, especially the IMF’s own Extended Structural Adjustment Facility (ESAF), a concessional lending mechanism. This process puts the IMF at the center of the process, essentially deciding on the level of necessary relief, and on the conditions that should attach to the relief. In principle, the U.S. Government and other IMF members can monitor the IMF staff decisions through the IMF Executive Board. In practice, because of the low policy salience of most of these countries, the key decisions in fact reside with the IMF staff. This process has been a complete failure. The IMF is institutionally ill-prepared to lead a long-term development effort and to make core decisions regarding long-term development strategy. The current process gives very little motivation to individual countries to prepare their own strategies, and even less to the coordinated actions of governments within a region, since the IMF and World Bank lend almost exclusively to individual countries and not to regional organizations. The results, quite systematically, are that the IMF overestimates by a large extent the realistic debt servicing capacity of the country; the IMF intervenes relentlessly into the most nitty-gritty details of governance, with a severe loss of legitimacy of local politics; and the IMF misjudges the real priority issues facing the country. For these reasons, the IMF should be taken out of the lead of the debt reduction process in the poorest countries. The IMF should return to its core role as a monetary institution, and largely get out of the business of long-term development finance. Funds that would have gone to the ESAF program would better be used for outright debt relief, or transferred to other agencies (International Development Agency of the World Bank, UNICEF, UNDP, WHO, etc.) with a more appropriate role in long-term development. In practice this means three steps. First, the ESAF itself should be phased out. Real development aid should go through other channels. Second, decisions over the extent of debt relief should be made by the various creditors sitting as a group, not by the IMF as the formal or informal single judge of debt viability. Third, development strategies should be prepared by the debtor countries themselves, with collaboration but not micro-management by the international agencies. There should be a much larger role for the World Health Organization and the United Nations Development Programme than in the recent past. These development plans should be presented to the creditors for approval as part of the debt reduction process, as outlined in the previous section. Realistic targets and timetable for debt reduction The 1996 HIPC Initiative used completely unrealistic guidelines for the extent and timing of debt reduction operations. Roughly speaking, there was a six-year waiting period before relief was achieved: three years under an IMF-World Bank program until a "decision point" was reached, and another three years until a "completion point" was reached. As a result, only two countries out of the original 41 on the HIPC list -- Uganda and Bolivia -- have actually achieved any outright relief under the HIPC Initiative. All the rest are somewhere in line waiting for relief, or have been eliminated from consideration. Even worse than the timetable were the targets. The idea was that debt relief, when it arrived, would be enough to reduce debt to a "sustainable" level, with the present value of debt at around 200 percent of exports. The debt-to-export ratio was patently foolish from the start, a construction of the IMF and G-7 finance ministries, not a reflection of the economic realities of the debtor countries. The targets did not reflect real ability to pay, since they ignored the budgetary capacities of the debtor governments (who must pay the debt) as well as the social conditions within the country. Many of the HIPC countries, at least half in overall number, should pay nothing at all on their existing debts, so severe are the social and health crises confronting these countries. It would be a huge mistake to continue with the same strategy, with a mere fiddling of the targets. News reports suggest that the G-8 might agree to ease the repayment conditions by dropping the debt-to-export ratio to 150 percent rather than the current 200 percent, or by reducing the waiting period from six years to three years. Both of these changes would be completely inadequate to the real challenges. We should leave open the possibility for each of the HIPCs that the debt cancellation could be complete (i.e. cancellation of 100-percent of the official debts falling due), if economic and social circumstances warrant it, and if the debtor country itself rises to the occasion by promoting dramatic changes in economic and social policies. Bureaucratic targets that would limit debt relief arbitrarily to limits such as 150-percent-of-exports, are unrealistic, analytically unsound, and demoralizing for the countries were are trying to help. The timetable should allow for immediate cash flow relief for countries that appeal to the creditor community for a standstill on debt servicing, combined with a quick and comprehensive decision on the targets and timetable for relief. For some countries, relief should come very quickly indeed -- if justified by economic and social conditions; by a strong adjustment program; and by credibility in the implementation of reforms. For other countries, relief should come more gradually, and especially should wait until the debtor country is able to demonstrate a coherent program of adjustment, reform, and long-term development. Funding mechanisms to achieve the necessary relief The cruelest joke in the whole debate on debt relief is the claim of the rich countries that they are "too poor" to heed the call of deep debt cancellation. The World Bank says it would love to agree, but doesn’t have the funds. The IMF says the same thing. The creditor country leaders, such as President Clinton, claim that they would like to agree as well, but can’t do it politically. All are mistaken. There is no technical or political obstacle to facing reality in this case. This is spelled out in the Appendix, with a summary in the following paragraphs. The HIPCs owe about $128.75 billion in total to the IMF, World Bank, international commercial banks, regional development banks, and rich-country governments. The IMF is sitting on $27 billion of unrealized capital gains on its gold reserves, since it values its gold at $47 dollars per ounce rather than the true market value of $262 per ounce. By selling around a third of its gold reserves, it could achieve the $7.8 billion needed to write off the HIPC debts in their entirety, without even touching the remaining balance sheet. In addition, the IMF balance sheet already abounds with special reserve accounts designed to absorb loan losses in an orderly way. Similarly, the World Bank could readily absorb a full writedown of its claims on the HIPCs out of its own resources. It would have to use special reserve funds already set aside for loan losses, plus dip slightly into its capital base, plus agree to slim down its future lending to the HIPCs out of a special program known as IDA for low income countries. But with debt relief, the HIPCs would no longer need these special IDA funds at the same level. The commercial banks in total have claims of about $19 billion, a tiny fraction of their lending to developing countries. Most of this is already written off in their balance sheets, so that a full writeoff would be easily absorbed. The easiest solution of all would be for the money owed to the rich governments. The U.S. Government isn’t so foolish as to count its $6 billion of claims on the HIPCs at face value. These loans are already carried on the books at around 10 percent of their face value, or around $600 million. Thus, to cancel entirely the U.S. claims on the poorest countries would require a budget outlay of just $600 million. The situation is analogous for other creditor governments. Dramatic challenges and dramatic opportunities for the poorest countries Many poor countries have been making valiant efforts at economic reform and recovery. But the deeper truth is that most of the countries are facing a vertiginous crisis of health, population, and environmental degradation that threatens to destroy the livelihoods, and maybe the lives, of hundreds of millions of people. Sub-Saharan Africa has 20 million HIV/AIDs infected individuals, two thirds of the world’s total. The still explosive epidemic is probably the worst since the Bubonic Plague killed a third of the European population in the 14th century. There is absolutely no money to address it. Malaria continues to kill at least one million a year, and is spreading further as a result of growing drug resistance of the malaria parasite. In countries such as Guinea Bissau, Ivory Coast, Malawi, Nigeria, and Zambia, at least three out of ten people die before the age of forty. Life expectancy is rarely much above 50 in the HIPCs, and is often in the low 40s. A third or so of children under 5 suffer from chronic malnutrition. These are the deep problems that we must address in the years ahead. In a key sense, the debt is a sideshow: it can’t be paid in any event, and actually should not be paid given the enormity of the challenges facing most of the HIPC countries. And yet a sideshow can distract critical time, attention, and resources away from the areas where they are really needed. There is strong reason to believe that most of the HIPCs are ready for a decisive breakthrough in their own economic and social policies. Throughout Africa, reform governments are being brought to power via the ballot box. Nigeria’s newly elected President Obasanjo, South Africa’s new elected leader Thabo Mbeki, Mauritius’ outstanding Prime Minister Navin Ramgoolam, and Uganda’s dynamic and successful President Museveni, are just some of the exciting new generation of African leadership. It is time -- indeed, it is the unique time -- to join with these leaders and with their societies, in a bold new quest for deliverance of the poorest of the poor. Jeffrey D. Sachs June 15, 1999 ------------------------------- Robert Naiman <[EMAIL PROTECTED]> Preamble Center 1737 21st NW Washington, DC 20009 phone: 202-265-3263 fax: 202-265-3647 http://www.preamble.org/ -------------------------------
