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The IMF and WB launched the Heavily Indebted Poor Countries initiative in 1996 to reduce the debt burden of bilateral and multilateral debt for some of the poorest and most heavily indebted countries. Forty one countries are eligible for debt relief under the program. Another program, the Multilateral Debt Relief Initiative, was launched in 2005 for a smaller subset of the HIPC countries. This promises further debt reductions for the selected countries. The aim of the program is to return the countries to a sustainable level of debt.

The HIPC initiative and related programs are certainly signs of progress and the BW institutions should be commended for changing the line they had held until 1995 – that the multilateral debt burden was not a problem (Raffer and Singer 2001: 183). Nonetheless, there are many criticisms of the program.

Criticisms of the HIPC initiative

Let me begin with some general criticisms before proceeding to criticisms specific to the way the HIPC initiative operates. The HIPC program is too limited in terms of eligible countries. There are many other countries with a large burden of debt diverting money from poverty alleviation programs[1]. Many of them owe debts not only to bilateral and multilateral creditors – as the HIPCs mostly do – but also to private creditors. Even with the HIPC countries, some countries, banks and companies choose not to take part and cannot be compelled to do so as the IMF and WB have no formal powers over them. An adequate sovereign bankruptcy mechanism with reasonable criteria for eligibility would allow many more countries to seek debt reduction and would encompass both official and private creditors.

Moreover, if countries could apply to an independent bankruptcy mechanism rather than to the creditors themselves under the HIPC initiative, we could expect that the terms would be more favourable for the debtors. It would remove potential conflicts of interest where the creditor is in charge of a debt renegotiation or relief mechanism and could compel the BW institutions (and all other creditors) to accept responsibility for their part in creating or worsening the debt crisis.

Creditors setting the terms of eligibility and defining sustainable debt levels

Some criticisms of the HIPC program revolve around the fact that the creditors themselves – rather than a neutral third party - are in charge of various features. For example, the creditors determine the eligibility criteria, thus restricting the possibility of debt relief to a smaller number of debtors than is ideal. It should be expected – at least as a precautionary thought - that the creditor would want to minimise the sum of repayment foregone. There is an element of conflict of interests in the creditor setting the eligibility criteria. For example, the initiative focuses on a country’s debt to export ratio as a criterion for eligibility. Yet this ratio has little connection to a government’s ability to meet urgent social needs while servicing debts (Sachs et al 1999: 6). The criterion should instead be related to the amount available for government spending.

The part of a country’s debt that is eligible for reduction makes a great difference to the impact of cancellation. At present, this is the amount of the debt at the time that a country entered a bilateral or multilateral debt relief program. However, the time taken over the debt reduction process from start to finish is several years. In the meantime, additional loans may be undertaken and compounded interest also functions to raise the debt. Impressive sounding commitments to cancel 90% of the debt of a country can be less impressive in reality when the percentage is calculated on the debt level of several years ago. In the years since its inception, only 23 countries have reached the ‘completion point’ where the overseeing institutions are satisfied that the debtor has and will follow the policy conditions. It is at this point that debt relief begins.

The concept of sustainability of debt is defined by the creditors and the threshold is set by them. At present, sustainability encompasses only financial matters – the level of debt a country can be expected to repay given estimates of its future economic growth. This definition ought to be changed so that sustainability is not merely financial but also social. It should encompass the ability to provide a decent level of social services and to invest in productive development (Sachs et al 1999: 4-5). Even for the financial calculation debt sustainability, the cogency of the estimates of growth, carried out by the IMF have been criticised for being too rosy. In effect, this raises the level of debt judged to be sustainable and lowers the debt reduction to which the creditors are committed (Donnelly 2007: 127) (GAO 2000: 51-3) (Stiglitz 2006: 239-40).

Debt relief is conditional on implementing certain economic policies

The HIPC and MDRI schemes require eligible countries to implement various economic policies as a condition for debt relief. I contend that debt relief should rest on the aim of lowering a debt acknowledged as having an unacceptable social cost. This implies no reason for the country to be forced to follow certain economic policies – other than perhaps transparency measures to ensure the money freed up from debt relief is used for social services and not funnelled into private coffers of the rulers. A country’s economic policy should ideally be determined democratically by its citizens. While the BW institutions are multilateral in design, their executive boards are known to be dominated by, and biased towards, developed world representatives. To give significant influence over domestic policy to external agents such as the BW institutions is prima facie an abrogation of the democratic expectations of the domestic citizens. It also leads to potential conflict of interest issues as the developed countries which dominate the BW institutions are also the creditors.

The conditions to be met by HIPC countries are determined in Poverty Reduction Strategy Papers. (PRSPs). PRSPs are prepared by the debtor country in consultation with domestic interest groups such as business and civil society, as well as consultation with the IMF. It might be argued that since debtor country agencies – both government and civil sector – are involved in forming the PRSP, the BW institutions’ imposition of conditions is minimal.

However, the PRSP must be approved by the IMF and WB executive boards. It can be turned down if it is judged to be flawed. Before the PRSP reaches the IMF and WB executive boards for approval, it must pass through a Joint Staff Assessment or JSA conducted by staff from both institutions. At this stage the paper can be modified as the debtor country authority is told of changes which would make the executive board more likely to accept it.

Quite aside from this vetting, the discussion leading to the PRSP in the debtor country is itself circumscribed. Civil society organizations involved in PRSP discussion have consistently reported that there were two parallel processes – one for ‘social’ issues and one for macro-economic issues. The NGOs were invited to comment on the former, but were not included on workshops discussing the latter (Rowden and Imara 2004: part 2). The social issues largely related to how money budgeted for social services is best spent. The macro-economic issues include privatization, trade liberalization, producer subsidies, industrial policy to promote particular industries, and policy to diversify the economy in specific ways. Overall, the PRSPs which have so far resulted show strong continuity with the structural reform agendas pursued by the IMF over the past decades. Macro-economic policy, in particular, remains the same (UNCTAD 2002: 170ff).

The amount of debt reduction is insufficient

Debt reduction advocacy groups such as the Jubilee Debt Campaign suggest that the institutions can afford to give bigger reductions in debt without jeopardising their operations. Given that the institutions are not in the business of profit maximising and are multilateral arrangements for the greatest benefit of all members, campaign groups argue that they should make larger reductions. As befits multilateral agencies, the articles of agreement of the lending arms of these institutions contain provisions for reducing debt burdens owed to the institutions, lengthening the repayment term and lowering interest charged (see Raffer 2007: 98).

This criticism is compounded by the existence of phantom debts. If the creditors sold their debt on a secondary market, they would get a far lower price than the face value of the debt. This is because buyers would only pay as much as they expect the debtor will repay. For many developing countries, it is commonly believed that they will never repay the face value of the debt. The debt burden is simply too great. The market value of the existing debt – the price the creditors would get if they sold the debt on competitive secondary markets – is far lower than the face value. This is simply the reappearance of risk in the credit market. The difference between the face value and the market value is phantom debt. Yet, the debt reduction plans are plans to reduce the face value of the debt. Accordingly, while creditors may seem to be absorbing quite a cost by committing to reduce the face value of a country’s debt by some large percentage, the actual cost they suffer is much smaller. The US, for example, is owed roughly $6 billion by the HIPCs in bilateral loans. Yet its official accounts hold the debt as being around 10% of the face value, as it expects the rest to be uncollectable (Sachs et al 1999: 10).

Unpredictability of debt management hinders long term development planning

Currently, HIPC countries cope with debt service burdens through arrears (failure to pay on time), new loans, grants and rescheduling of loans. These are unpredictable measures which do not lend themselves to being negotiated in advance. They can take up a large part of debtor government’s scarce resource of financial planners and negotiators. Moreover, the unpredictability hinders the formulation of long term development plans (Sachs et al 1999: 7-8).