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Multilateral Debt Relief for HIPC Countries: Just Re-Arranging Furniture?

G8 finance ministers agreed last week to cancel the debts of 18 HIPC which have passed their ‘completion points’ to IDA, the IMF (PRGF) and the African Development Fund, virtually eliminating their external debt. These debts amount to $40 billion. A further 9 countries could soon also benefit. They owe the three institutions an estimated at $ 55 billion. Do these countries stand to gain greatly from the agreement? If so who pays the price? And what are the consequences for the future of aid?

Winners: The debts to be written-off are ‘soft’ credits, for the most part interest-free and, for IDA and the AfDF, very long term. Are they much of a burden? Much less, thanks to existing relief for HIPCs payments on external debt. But the burden is still significant: The 18 countries at the top of this list will be relieved of an estimated $1.2 billion p.a. in repayments. This only adds 10% to their $12 billion of net aid receipts in 2003; For all 27 countries due payments are in any case falling from $3.2 billion in 2000 to $2.2 billion in 2005, dropping from 3.5% of their GDP to 1.7%. Virtually all of this will now be cancelled. But their net ODA receipts were $20 billion in 2003. At most debt relief gives them and additional 10%. How far the cancelled payments will be a net addition to their existing net aid remains to be seen. The past writing-off of HIPCs’ bilateral debts, however, gave them some increase in net resource inflows. What is more, debt relief is a more predictable source of extra resources for development than new aid because its provision is not at the whim of donors.

Losers: The immediate losers are the three creditor institutions. For all three, repayments of past credits to poor countries are an important source of funding for new aid activities. IDA obtains about 50% of its resources from repayments of past credits. However, the G8 countries, at least, are committed to compensate them for the reflows they lose for a period of ten years. Other major OECD contributors to their replenishments will doubtless follow suit. The IMF, moreover, will mobilise more of its own general reserves to make up for the shortfall of repayments to its Poverty Reduction and Growth Facility. New multilateral aid is therefore not in immediate jeopardy. The problem arises in the longer term. First, there is no promise that they will receive full compensation for reflow shortfalls after the first ten years. Meanwhile, new assistance from the three institutions to HIPC countries will almost certainly be treated as grants, further eroding the institutions’ reflow receipts. Second, the institutions will be more exposed to the whims of donor countries now required to contribute more lavishly to their replenishments. Some contributors, especially the United States, have repeatedly exercised political leverage over multilateral institutions by reducing or delaying their due contributions. If they become simple conduits for donors’ grants to poor countries the multilateral donors’ autonomy and professionalism could become corroded.

If the bilateral donors live up to their commitment to compensate the reflow shortfalls in full will this represent a net increase in global ODA? Most likely not. The bilaterals will finance their compensation payments from their national aid budgets. These budgets are increasing in a number of cases following pledges made by the US and EC member states at the Financing for Development conference in Monterrey in 2002. But it is unlikely that donors will further increase their allocations for aid specifically to cover multilateral debt. If donor country taxpayers are safe, who are the losers? Answer: other developing countries whose receipts from donors’ bilateral aid programmes are reduced to pay compensation to the multilaterals e.g. poor countries in South and Central Asia. Some less poor, middle income, bilateral aid recipients could also lose. Official debt relief charged to aid budgets always has the effect of distorting net aid in favour of debtor countries. This case is no different, though it may wreak some redistribution from the better-off to the worse off among recipients.

In sum … The aid cake will not grow - except for the extra subsidy from IMF members’ general reserve. A precedent has been set which could in time compromise the status and autonomy of reflow-dependent multilaterals. The distribution of the aid cake will alter, though arguably so making it more effective as a tool for poverty reduction.