The Köln Debt Initiative: An Initial Response

In many ways, it can be seen as the end of the beginning, rather than the beginning of the end.-Roy Culpeper, President the North-South Institute

The Köln Initiative, measured by its rhetoric, is two steps forward, one step backwards. In reality we may not have moved much at all.- Derek MacCuish, Programme Coordinator, Social Justice Committee of Montréal

The Halifax Initiative, a broad-based coalition of Canadian non-governmental organizations, welcomed the desire to improve the HIPC Initiative by the G7 governments expressed in the Köln Debt Initiative. Unfortunately, this welcome is qualified by the concern that two major issues remain unresolved, so that the effort to lift the debt burden of the poorest countries remains insufficient. The welcome is also qualified due to a wariness of the gap between what the G7 may wish and what the IFIs may do.

Hopeful Aspects

Building debt reduction on an "enhanced framework for poverty reduction".

The Köln Initiative considers debt reduction in a human development context to a much greater extent than what we have seen in the HIPC Initiative to date. When the program began in 1996, NGOs were asked not to demand too much of the HIPC Initiative and were presented with the argument that putting human development objectives and the use of social indicators into the program would be placing a burden on it that it could not bear. Halifax Initiative supports any movement towards the placing of debt reduction in an effective development context.

Deepening sense of ownership with governments and citizens and consultations with broader segments of civil societies.

The recognition that the process for achieving social progress must be authored at the national level with effective civil society participation reflects a perspective on development that has been absent from HIPC discussions in the past. These requests have been made of the IMF and the Bank consistently, however, most recently in the external review of ESAF and in the Bank’s Comprehensive Development Framework with little results too date. However, the recognition by the G7 that ownership and civil society participation in the design and implementation of debt reduction programmes and development plans is welcomed.

Development banks to identify and exploit innovative approaches to using their own resources.

The recognition that these institutions must find ways to achieve effective debt reduction is welcomed as is the sale of IMF gold. We interpret this as a recognition of the role that the development institutions have played in the creation of the debt crisis.

Unresolved Issues

Level of debt relief

The lowering of the debt-to export ratio and the Net Present Value debt-to-fiscal revenue is positive if the desired outcome is debt reduction. The budgetary impact, the impact on debt servicing, this will have in each country is questionable. The existing HIPC Initiative barely reduced debt servicing, as the amount of debt reduction was commensurate with the amount resulting from an incapacity to pay. As commodity prices continue to fall, disasters take place, domestic spending pressures grow, the capacity of many of these countries to pay their debts from an economic perspective, continues to shrink. Some countries may not see reductions in their debt servicing as a result of an Enhanced HIPC Initiative. Assuming the Paris Club agrees to the G7 recommendations of 90% or more, $30 billion for debt reduction will result, and assuming ODA loan write-offs of $20 billion, $25 billion in contributions to the Enhanced HIPC Initiative, combined with $25 billion committed to the existing HIPC Trust Fund, then $100 billion will be available for debt reduction. This amount is approximately equal to the amount of low-income debt that is not being serviced. Debt reduction that does not reduce debt servicing is a hoax. It is an attempt by IFIs to clean up their accounts.

A first assessment of the implications of the Enhanced HIPC Initiative for specific countries done by Jubilee 2000 UK shows that benefits vary widely - debt payments of Laos, Rwanda and Zambia will at least halve; of Mozambique, Ethiopia, Malawi, Mauritania, Uganda and Guinea-Bissau will be a third less; for seven more countries at least a fifth less; while eleven others will hardly benefit.

A write-off rather than a write-down remains off the agenda. The Köln Initiative does not recognize poor country debts as unpayable. The IFIs must be tasked to write off these debts. As this would fundamentally reform the institutions, it remains off the agenda. However, the situation demands that write-off mechanisms be discussed. The G7 request that the IFIs identify and exploit innovative approaches to debt reduction may however open space for the discussion of a write-off.

ESAF conditionality

Despite that concern for poverty is now explicitly the raison d'etre of debt relief, this relief continues to be conditioned on ESAF, which just as explicitly excludes social considerations.

HIPC-eligible countries have undergone IMF ESAF programmes for decades with poor results, yet these continue to remain a prerequisite. The Köln Debt Initiative requires three years of an IMF ESAF programme and then a second period of up to three years based on a country’s efforts on poverty reduction. Support to ESAF, acutely in the context of debt reduction, flies in the face of the G7's expressed commitment to pro-poor, country-owned development.

ESAF itself is not a development programme. Its first objective is not poverty reduction. Widely, the process by which the Fund through ESAF pursues a stable macroeconomic environment is understood as a means to extend Fund control over national economies and to force the implementation of free market policies. The impacts of ESAF on poverty and inequity are not measured. Mandating debt relief on the implementation of ESAF programmes will be, if history is any indicator, counterproductive in terms of moving countries towards poverty reduction. When any debt dividend is meant to be used to narrow the gap between rich and poor, debt relief conditioned on programmes which may potentially increase the gap, such as ESAF, is rejected by the Halifax Initiative.

ESAF conditionality impairs ownership. ESAF is an existing, IMF designed and controlled package of policy prescriptions. The uniqueness of each country’s development context is recognized by the institutions in that they cannot predict the level of debt relief resulting from the Enhanced HIPC Initiative until careful examination and discussion takes place. Yet ESAF, an IMF designed package of policy prescriptions, is a requirement of debt relief. A cookie-cutter approach to conditioning debt will no more effective than the cookie-cutter approach to economic stability and growth. Policy dialogue directed at facilitating country-specific prescriptions for development must be the first condition to debt relief.

Over to the IFIs - What’s Next.

We look forward with great interest to the Fall meetings to see how the IFIs will respond to the Köln Debt Initiative. We hope that they will both implement and improve on it.

Improvements can be made by

* commitment to work on a country-by country basis to determine appropriate conditions and time lines for debt write-down. This process will maximise debt-servicing reductions and ownership of national governments and increase accountability for any debt dividends.
* analysis and research into the impacts of debt write-offs on the IFIs.
* as 'partners', IFIs should engage in a critical look at lending patterns and re-orient to pro-poor lending in order to complement pro-poor spending patterns of national governments.