Henry Northover's Speach

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HENRY NORTHOVER’S SPEAKING NOTE AT ST CHAD’S 12TH JANUARY 2002

When we met here in 1998, I think it’s fair to say that the Jubilee 2000 movement was united in seeing the case for debt cancellation very much in ethical terms.  We were, and are, united in the belief that it is morally unacceptable that those that have the least should be repaying their debts, paying with their life chances, to those that already have the most.

Today I want to make out the case, the economic rationale, for going further with debt cancellation.  Its important to do so because we are all being actively tranquillised by the World Bank, IMF, Clare Short and other creditors.  We’re constantly being told the problem has gone away and current official mechanisms, the enhanced HIPC Initiative is taking care of the problem.

I want to argue that this is very far from the case.  To do so, I will talk about three issues:

1)      The inadequacies of the enhanced HIPC Initiative

2)      The analytical justification for going further – engaging in the debt vs aid debate

3)      Looking at the question of whether going further is possible and whether it’s affordable.

So firstly, the HIPC Initiative’s weaknesses.

Basically the Initiative has failed to meet both the policy objectives it set itself. 

-         In the Cologne G7 Summit, there was an explicit linkage made between debt relief and poverty reduction.  But the enhanced HIPC Initiative that emerged from that Summit has failed to mobilize sufficient finance to push countries towards meeting the 2015 Millennium Development Goals.  Nor has the framework anything to do with coming up with finance for poverty reduction.

-         And second, the framework has not produced the levels of reduction necessary for countries to achieve the promised “robust exit” from unsustainable debts.

24 countries have now graduated through the HIPC Initiative, so we are now in a position to judge the results.  And it doesn’t look too promising.

Tanzania will have a reduction of its debts servicing payments by about 10% per year.

Most countries will still be left above the official threshold of sustainability – the 150% debt-to-exports ratio determined by the Bank and Fund to be sustainable.  And for Uganda, its post-Completion Point debt readjustment will be the third time its debt will have been judged to unsustainable after graduating through the HIPC Initiative!

After 2005-7, most HIPCs will be left returning to their debt servicing levels prior to entering the HIPC Initiative.

Then there is the case of Ethiopia, one of the poorest countries in the world, which I think neatly encapsulates the mismatch between creditor and campaigners’ perceptions about the HIPC Initiative.

The Ethiopia government will have enough debt relief an extra dollar per year to spend on each of the country’s citizens.  

Looked at one way, that leaves room for a substantial increase in health expenditure (should the government of Ethiopia choose to spend it in that sector).  The Ethiopian government currently spends $2 per citizen on health.  So an additional dollar would mean, potentially, a respectable 50% increase.

But from our perspective this is nowhere near enough to address the health challenge facing Ethiopia.  In a country where one in every five children will not live to see their fifth birthday, clearly an expenditure of $3 per head per year is insufficient to meet the health and poverty crises.

Deficiencies of the HIPC Initiative

We would argue that the major problem with the HIPC Initiative’s policy framework is that is underpinned with a dissonance between the obligations of creditors and debtors. 

As part of the policy, debtors are supposed to come up with Poverty Reduction plans in order to be eligible for debt cancellation.

Creditors, on the other hand, are not required to come up with the debt relief (or aid) sufficient to fund those plans’ poverty reduction objectives. 

There are also a host of technical deficiencies with the HIPC Initiative.  There is the limiting of the pool of debt eligible for cancellation.  When some creditors speak of 100% or up to 90% debt cancellation, they are referring only to a limited pool of eligible debt.  That is, they will cancel only those debts acquired before the cut off date – the date when debtors first approached their creditors for relief.

Also, there’s the issue of the Bank and Fund using hopelessly optimistic projections on the levels of economic growth and aid inflows. These projections are vitally important when creditors judge how much a country’s debts should be cancelled to make them sustainable. 

The World Bank and IMF April 2001 papers made unheard of claims about future financial inflows into debtor countries.  They predict a doubling of grant aid, a doubling of economic growth and a doubling of investment flows.

They’ve also released a paper asserting that going to 100% debt cancellation would deter foreign investors and jeopardise the credibility of HIPCs in international investment markets. 

At CAFOD we put these points to some investment analysts in the City of London.  They were frankly dismissive of the Bank and Fund claims. 

So let’s remember that the Bank and Fund are unwilling to approach this issue from the point of view of evidence of what works.  Rather, they will come out with, often, completely fictious assertions.

Let me repeat that the stumbling block for the HIPC Initiative is its lack of integration with poverty reduction objectives.  Its fundamental weakness is that the criterion used for judging how much debt relief to grant is limited to the level of a country’s earnings from its exports.

We say: the issue of how much debt relief should be given to low-income countries should be settled by calculating the finance necessary to reduce their levels of poverty consistent with internationally recognised goals.  Governments should be at liberty to maximise their own resources for poverty reduction programmes. 

When judging the issue of what level of debts is affordable or “payable”, we need to start out with the level of feasible resources available to central government’s budget.  From there it’s possible to subtract the resources necessary to spend on poverty reduction.  And here we mean poverty reduction in its broader sense.  So, the calculation should go beyond essential spending on health or education to include pro-poor investments like feeder roads, inputs into small-scale agriculture and so on.

Our calculations show that if the HIPCs are to be in any position to meet the 2015 targets, they will need 100% debt write offs.  But also a significant group other countries will need debt reduction – Bangladesh, Yemen, Nigeria and so on.

Finally, let me move on to this emerging debate over aid versus debt relief. 

That is, creditors, including the Secretary of State for International Development, believe that really there’s no longer a need for deeper debt relief.  According to the Bank and Fund and others, any financing gaps that leave low-income countries short of meeting the 2015 Millennial Goals can be made up with aid inflows.

But there are some real problems with the current state of aid-recipient country relations. 

Firstly, there’s the problem of donor coordination.  Many of you will have heard of the famous case of Tanzania.  It has to produce some 800 reports per quarter to over 50 donors.  When those civil servants could be better used improving their country’s own administration, they are tied up in a cycle of endless negotiations and report writing to an array of different donors.

There’s the related problem of donors tailoring their aid to meet their own strategic interests rather than responding to debtor countries needs.  Last month’s example of the sale of military radar to Tanzania is a case in point.

Second there’s the acute problem of donors disbursing aid.  Often they will make pledges and will delay the payments or they will be interrupted indefinitely.  For instance, many HIPCs are still waiting for the pledges for the financial year 2002.  This presents enormous difficulties in financial planning and administration. 

Many HIPCs rely on a cash accounting budget.  That is, they can spend only what they’ve got in their bank accounts.  But with the interruption and delays associated with donor aid, they are left not paying teachers or doctors for sometimes months on end. 

Debt relief, on the other hand, acts as de facto budget support.  It is probably the most predictable source of donor flows. The levels of aid inflows, even when in its in the form of budget support, is not known about sometimes weeks or even days before a budget is set.  Debt relief on the other hand gives HIPC governments predictability of additional resources for periods stretching for up to and beyond 20 years.

Also, there’s the problem of the long term decline of donor aid.  It’s over 30 years since the OECD first set the target of increasing aid flows to 0.7% of GNP.  With a few honorable exceptions, almost all donors have actually decreased their expenditure since those targets were first set. 

So depending on aid inflows to cover financing gaps is a based on a few risky or even shaky assumptions. 

But there’s a real positive benefit from debt relief.  As well as being the most predictable source of development assistance, it’s also the speediest.  And this has a direct benefit for economic growth in debtor countries. 

It is no coincidence that the only 2 countries in Africa that are likely to achieve the growth rates consistent with meeting the 2015 targets are Mozambique and Uganda.  Both countries have been the beneficiaries of the greatest inflows of aid and debt relief.   The evidence shows debt relief benefits the domestic economy.

The reason for this positive relationship is that HIPC governments often bridge their budgetary financing gaps by borrowing from their domestic credit markets.  This in turn leads to high levels of interest (often in excess of 40%) with the result that there is a permanent recessionary effect in the macroeconomy.   But debt cancellation can relieve the pressure on government finances and so release more domestic credit for economic investments. 

This positive relationship between debt relief and economic growth is something creditors have ignored.

And the linkages between debt and trade go beyond domestic trade.  You and I would not invest in a company that’s going bankrupt.  Similarly, overseas investors are not going to invest in low-income countries that are functionally bankrupt.  At the same time, current global trading rules leave low-income countries with many disadvantages.  They are left almost wholly dependent on the vagaries of commodity markets and are punished with tariff escalation when they try and export their processed produce to northern markets. 

So, in summary, with huge uncertainties over the consistency and timing of aid inflows and the volatility of commodity markets and rain-fed agricultural production, debt relief is probably the most secure and most predictable source of HIPC government revenue.  It allows recipient governments a degree of certainty of resource inflows for periods stretching over 20 years.  This is in contrast to aid inflows that are often vulnerable to the vagaries of donor sentiment or aid preferences.  And lastly, the economic benefits of debt relief are swift and dramatic. 

So the question facing our campaign is how to go further?

The Politics

If we accept that there is a strong analytical justification for going further with debt relief, then the question is – is it politically possible?   And here, I would say recent developments are extremely encouraging.

The G77 plus China grouping at the United Nations and the New Africa Initiative being taken by African leaders to the G7 all are calling for debt relief sufficient to meet the 2015 Millennial Goals.  This is consistent with what we’ve been saying all along.

So, there’s a more realistic political faultline now opening up between creditors and debtors.   Whereas before the arguments for debt relief were loudly expressed by campaigners, we are now in a more interesting time when it’s governments in the South that are making out the case.  And they are united in the belief that the amount of debt relief should be decided by the finance necessary to meet the 2015 goals. 

But the difficulty we face is that creditors – and principally the G7 - are going to fall back on their majority shareholding of the Bank and IMF to resist calls. 

In the wake of the terrorist attacks in America, this seems to me to be politically and morally and unacceptable.  At a time when global society is showing some very real strains and tensions, is it really going to be the position of creditors to keep on saying “no” to more debt relief?  No just saying no, but using their positions of power and control over the Bank and Fund to block any further progress.  Is this a tenable position? 

I would say its something we have to resist and support the voices in the rest of the world saying that there has to be some measure of justice. 

On that note, let me just finish with the last sentences in a speech by Mulima Kufekisa, CAFOD’s partner from Zambia, when she spoke powerfully at this very Cathedral during the massive human chain here at the Birmingham G7 Summit in 1998.  She said:

Standing alone in Africa we have to beg for debt forgiveness.  But standing alongside you – you my brothers and sisters – Standing alongside you, we are in a position to demand justice!  May God bless you all.