For other versions of this document, see http://wikileaks.org/wiki/CRS-RL30214 ------------------------------------------------------------------------------ Order Code RL30214 CRS Report for Congress Received through the CRS Web Debt Reduction: Initiatives for the Most Heavily Indebted Poor Countries February 1, 2000 Larry Nowels Specialist in Foreign Affairs Foreign Affairs, Defense, and Trade Division Congressional Research Service ~ The Library of Congress ABSTRACT This report offers a broad overview of the debate concerning debt reduction for poor developing countries. It profiles the scope and structure of debt and reviews previous debt relief strategies and the current HIPC Initiative. It analyzes and compares competing alternatives endorsed by the Administration, congressional activists, NGOs, and other G-7 governments. Several key issues, such as costs, impact, and conditionality, of pending proposals are also assessed. The report will be updated to reflect new debt relief proposals and congressional debate. Debt Reduction: Initiatives for the Most Heavily Indebted Poor Countries Summary Many developing nations have experienced declining economic conditions while accumulating higher levels of debt, largely owed to multilateral public lending agencies, such as the World Bank and the IMF, and to foreign governments, including the United States. For the 41 nations that have been identified as the most Heavily Indebted Poor Countries (HIPC), external long-term debt rose rapidly from less than $7 billion in 1970, to $47 billion a decade later, to $158 billion by 1990, and to $169 billion today. The largest portion -- 85% -- is owed to public lenders (governments and institutions like the World Bank). Although roughly half of the HIPC long-term debt is owed to bilateral lenders, only 3.7% is owed to the United States. Since 1989, the U.S., Japan, and major European governments, recognizing that the mounting debt burden for some borrowers has undermined efforts to stimulate economic growth and to finance basic social programs, have extended a series of increasingly broad debt relief arrangements. The most recent initiative -- HIPC -- aims to reduce the debt burden of poor countries that have demonstrated sound economic and social policy reforms to manageable, or "sustainable" levels that can be serviced comfortably by export revenues and capital inflows. When it was launched, poor country debt relief proponents hailed the initiative for its comprehensive and integrated approach, especially the inclusion of World Bank and IMF participation, and for its objective to provide lasting debt solutions. But after three years, only four countries fully qualified for HIPC debt reduction terms and strong international pressure built to expand and deepen HIPC terms. Critics argued that it takes countries too long to qualify, that the conditions for eligibility are inappropriate, and that the poverty reduction focus is insufficient. U.S. and other G-7 leaders forged an agreement for expanding HIPC at the June 18-20, 2000 summit in Germany, the contents of which were adopted by the World Bank and the IMF at their annual meetings in September. Several legislative initiatives were introduced in 1999. H.R. 1095 (Representative Leach), would reform HIPC by providing debt relief more quickly, to more countries, and in greater amounts, with an emphasis on poverty reduction. Senator Mack introduced similar legislation (S. 1690), recommending that debt relief savings finance both poverty and economic reform activities. Other legislation includes H.R. 2232 (Representative Waters), H.R. 3049 (Representatives McKinney and Rohrabacher), H.R. 772 (Representative Jackson), and S. 1636, a modified companion measure to H.R. 772 (Senator Feingold). As one of the final legislative issues of the first session, Congress agreed (H.R. 3422), to $123 million for bilateral debt reduction in FY2000 and (in H.R. 3425) to authorize U.S. support for an off-market IMF gold sale to finance the Fund's participation in HIPC. (Each bill was incorporated into the Consolidated Appropraitions Act, FY2000, P.L. 106-113.) But lawmakers did not approve an additional $847 million requested by the President for debt relief through FY2003 and barred the U.S. to use any of the $123 million this year for multilateral debt reduction and contributions to the HIPC Trust Fund. Contents Debt Profile of the Most Heavily Indebted Nations . . . . . . . . . . . . . . . . . . . . . . 2 Evolution of Debt Reduction Programs for Poor Nations . . . . . . . . . . . . . . . . . . 7 Paris Club Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 U.S. Debt Reduction Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Heavily Indebted Poor Country (HIPC) Initiative . . . . . . . . . . . . . . . . . . . . . . . 13 Overview of the HIPC Initiative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 HIPC Eligibility Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 HIPC Timing and Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Financing HIPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 HIPC Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Country Eligibility and Timing of HIPC Implementation . . . . . . . . . . . . . . 19 Critics, Proposals for Reform, and HIPC Expansion . . . . . . . . . . . . . . . . . . . . 19 Setting the Stage for HIPC Expansion . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 U.S. Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 World Bank/IMF and G-7 Proposals . . . . . . . . . . . . . . . . . . . . . . . . 20 Congressional Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Critics Views of HIPC, Proposals for Change, and the Response . . . . . . . 24 HIPC Debt Relief Comes Too Slowly . . . . . . . . . . . . . . . . . . . . . . . . 24 Debt Sustainability Definitions and Targets Are Limited or Inappropriate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Performance Requirements Are Flawed . . . . . . . . . . . . . . . . . . . . . . 28 Cost Implications of Enhanced HIPC Debt Relief Measures . . . . . . . . . . . 31 Cost Burden-sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 List of Figures Figure 1. HIPC Debt 1998, by Type of Creditor . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure 2. HIPC Country Long Term Debt: 1970-1998 . . . . . . . . . . . . . . . . . . . . 3 List of Tables Table 1. Debt Profile of HIPC Countries, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . 4 Table 2. Debt Profile of Sub-Saharan Africa Countries, 1997 . . . . . . . . . . . . . . 6 Table 3. U.S. Debt Reduction, 1989-1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Table 4. U.S. Sovereign Debt Owed by HIPC and Other Countries . . . . . . . . . 10 Table 5. Selected Debt Ratios of HIPC and Other Countries . . . . . . . . . . . . . . 17 Table 7. Comparison of Debt Reduction Initiatives--Existing and Proposed . . 34 Debt Reduction: Initiatives for the Most Heavily Indebted Poor Countries For the past several decades, the United States, other industrialized nations, and international financial institutions have extended considerable financial assistance, provided as both loans and grants to developing countries -- with mixed results.1 Many developing nations have experienced declining economic conditions while at the same time accumulating higher levels of debt, largely owed to multilateral public lending agencies, such as the World Bank and the IMF, and to foreign governments, known as "bilateral" lenders, including the United States, Germany, France, Great Britain, and others. Since 1989, the United States, Japan, and major European governments, recognizing that for some borrowers the mounting debt burden undermined efforts to stimulate economic growth and to finance basic social programs, have extended a series of increasingly broad debt relief arrangements. Despite these efforts, economic difficulties for the world's most heavily indebted poor nations persist. In sub-Saharan Africa, home to most of these heavily indebted countries, after several years of improving economic performance, economic growth slowed to 2.1% in 1998 and per capita income fell by 1%. Debt is not the sole cause of this slowdown, but it is noteworthy that in 1998, total debt stock for African nations grew to about $226 billion, up from $219 billion the year before. Net foreign aid and other official transfers remained stagnant at about $12 billion in 1998, but have declined overall by more than 50% in real terms during the 1990s.2 A broad consensus emerged among creditor governments and public institutions, poor debtor countries, and non-governmental organizations (NGOs) that more aggressive debt relief measures -- centered around the World Bank/IMF Heavily Indebted Poor Country (HIPC) Initiative -- should be pursued. At their September 1999 annual meetings, the World Bank and IMF endorsed a substantial expansion of HIPC, including steps that will increase the number of qualifying countries, provide larger amounts of debt relief, potentially shorten the time required for receiving debt reduction, and strengthen the program's impact on poverty reduction. Nevertheless, questions remain on how these measures will be implemented and how donor organizations and governments will pay for the costs of a more expansive HIPC. Many issues related to an expanded HIPC are raised in an array of executive and legislative debt reduction proposals enacted and pending in the 106th Congress. President Clinton initially proposed $120 million for FY2000 debt relief funding, a figure that was subsequently increased to $970 million (over four years) in a 1 For a recent analysis of the successes and failures of foreign aid, see Assessing Aid: What Works, What Doesn't, and Why, A World Bank Policy Research Report 1998. 2 World Bank, Global Development Finance, 1999, p. 168-170. CRS-2 September 21, 1999, budget amendment to the Foreign Operations appropriations request. Congress approved in mid-November only $123 million of the recommendation in H.R. 3422, leaving much of the debate over funding for 2000. Congress also authorized in H.R. 3425 a mechanism that allows the IMF to revalue a portion of its gold holdings so that the Fund can pay for its costs of canceling debt owed to it by HIPC countries. (The legislation, however, allows the IMF to use only a part of the "profit" generated by the gold transaction for HIPC relief. Congressional leaders said they would review the issue in 2000 and consider Administration requests to lift the limitation.) H.R. 3425 further supports the expansion of U.S. debt reduction programs largely along the lines endorsed by the President, the G-7, and the World Bank and IMF.3 Still pending are other congressional initiatives introduced in the 106th Congress, some of which go beyond current Administration and World Bank/IMF plans for an expanded HIPC program or which introduce different qualification criteria for debtor country participation. This report offers a broad overview of the debate concerning debt reduction for poor developing countries. It profiles the scope and structure of debt and reviews previous debt relief strategies and the current HIPC Initiative. It analyzes and compares competing alternatives endorsed by the Administration, congressional activists, NGOs, and other G-7 governments. Several key issues, such as costs, impact, and conditionality, of pending proposals are also assessed. Debt Profile of the Most Heavily Indebted Nations For the 41 nations which have been identified by the World Bank and IMF as the most heavily indebted poor Figure 1. HIPC Debt 1998, by Type of Creditor countries (HIPC countries), external debt rose rapidly in the 1970s and 1980s.4 From less than $7 billion in Bilateral Debt 50.3% 1970, long-term debt obligations grew to $47 billion a decade later, and to $158 billion by 1990. Debt accumulation during the 1980s was affected especially by the 1979 oil Multilateral Debt crisis, rising interest rates, and 34.8% falling global commodity prices for goods developing countries Private Debt 14.9% produced. Debt levels have been more stable in the 1990s as private Source: World Bank creditors scaled back on their lending and public lenders (governments and international financial institutions) shifted from loans to grant 3 Congress passed both H.R. 3422 and H.R. 3425 as part of the Consolidated Appropriations Act, FY2000 (P.L. 106-113). 4 Unless otherwise noted, the source for the debt figures in this section is the World Bank's Global Development Finance, 1999. CRS-3 foreign aid. HIPC country long-term debt peaked at about $185 billion in 1995, fell back to $163 billion by 1997, but is estimated to have increased to $169 billion in 1998. Tables 1 and 2 provide specific details on debt owed by these 41 countries, including how much debt is owed to the United States. One of the most striking characteristics of the debt burden of the HIPC countries is the large proportion that is owed to public lenders rather than the private sector. As illustrated in Figure 1, the World Bank estimates that creditor governments and institutions account for more than 85% of HIPC debt obligations. By comparison, only 28% of Latin American long-term debt is owed to public lenders. For all developing nations, the amount is 42%. Although roughly half of the HIPC long-term debt is owed to bilateral lenders, as shown in Table 4 (page 10), only a small amount is owed to the United States:$6 billion at the end of 1997, or 3.7% of total long-term HIPC debt. For 23 of the 41 HIPC nations, outstanding debt to the U.S. totals less than 1% of their outstanding obligations. Only for a few countries -- Democratic Republic of Congo, Liberia, Somalia, and Sudan -- does U.S. debt represent a sizable portion of overall stock.5 Figure 2. HIPC Country Long Term Debt: 1970-1998 $175 $150 $125 Private Debt Multilateral Debt Bilateral Debt $100 $75 $50 $25 $0 1970 1980 1990 1997 1998 Source: World Bank 5 U.S. Department of Treasury. Various tables. CRS-4 Table 1. Debt Profile of HIPC Countries, 1997 ($s -- millions) Long-Term Debt Long-Term Debt, of which owed to: Public & Private Total Debt Publically Non- Non- Multi- US Other Stock Guaranteed Guaranteed Concessional Concessional laterals Govt Bilaterals Angola 10,160 8,885 0 2,230 6,655 234 35 2,623 Benin 1,624 1,393 0 1,265 128 871 0 519 Bolivia 5,248 4,144 426 2,965 1,605 2,681 91 1,344 Burkina Faso 1,297 1,139 0 1,077 62 1,003 0 132 Burundi 1,066 1,022 0 989 33 872 0 149 Cameroon 9,293 7,688 198 3,955 3,931 1,465 66 5,569 CAR 885 804 0 727 77 607 9 174 Chad 1,027 939 0 804 135 749 0 173 Congo, DR of 12,330 8,617 0 3,103 5,514 2,179 2,080 3,524 Congo, Rep of 5,071 4,284 0 1,554 2,730 619 58 2,774 Cote D'Ivoire 15,609 10,427 2,071 4,507 7,991 3,301 378 4,181 Equatorial Guinea 283 209 0 139 70 94 0 101 Ethiopia 10,079 9,427 0 8,633 794 2,459 90 6,523 Ghana 5,982 4,691 267 3,975 983 3,179 16 1,051 Guinea 3,520 3,008 0 2,484 524 1,557 111 1,269 Guinea-Bissau 921 838 0 666 172 387 0 451 Guyana 1,611 1,345 0 909 436 666 31 592 Honduras 4,698 3,910 259 2,287 1,882 2,303 151 1,261 Kenya 6,486 5,108 325 3,727 1,706 2,785 126 1,695 Laos 2,320 2,247 0 2,243 4 816 0 1,431 Liberia 2,012 1,061 0 585 476 405 333 132 Madagascar 4,105 3,871 0 2,679 1,192 1,661 33 2,133 Malawi 2,206 2,073 0 1,947 126 1,791 0 261 CRS-5 Long-Term Debt Long-Term Debt, of which owed to: Public & Private Total Debt Publically Non- Non- Multi- US Other Stock Guaranteed Guaranteed Concessional Concessional laterals Govt Bilaterals Mali 2,945 2,687 0 2,621 66 1,453 0 1,234 Mauritania 2,453 2,037 0 1,698 339 938 7 1,068 Mozambique 5,991 5,430 45 3,385 2,090 1,626 49 3,737 Myanmar 5,074 4,640 0 4,090 550 1,171 0 3,012 Nicaragua 5,677 4,819 0 2,509 2,310 1,571 100 2,756 Niger 1,579 1,331 96 1,057 370 881 13 437 Rwanda 1,111 994 0 986 8 850 1 141 Sao Tome&Principe 261 227 0 223 4 156 0 71 Senegal 3,671 3,110 55 2,395 770 1,803 17 1,280 Sierra Leone 1,149 893 0 733 160 494 64 329 Somalia 2,561 1,853 0 1,503 350 723 431 664 Sudan 16,326 8,998 496 4,636 4,858 2,001 1,202 4,319 Tanzania 7,177 6,054 41 5,091 1,004 2,939 35 2,827 Togo 1,339 1,207 0 955 252 717 0 491 Uganda 3,708 3,202 0 2,950 252 2,399 3 723 Vietnam 21,629 18,839 0 3,209 15,630 828 136 13,138 Yemen 3,856 3,418 0 2,411 1,007 1,390 102 1,089 Zambia 6,758 5,233 13 3,797 1,449 2,227 278 2,586 Total, HIPC 201,098 162,102 4,292 97,699 68,695 56,851 6,046 77,964 Sources: World Bank, Global Development Finance, 1999 U.S. Department of the Treasury. Note: U.S. debt figures include private debt guaranteed by the U.S. government. CRS-6 Table 2. Debt Profile of Sub-Saharan Africa Countries, 1997 ($s -- millions) Long-Term Debt Long-Term Debt, of which owed to: Public & Private Total Debt Publically Non- Non- Multi- US Other Stock Guaranteed Guaranteed Concessional Concessional laterals Govt Bilaterals Africa HIPC countries* 147,752 118,740 3,607 77,076 45,271 45,421 5,436 53,341 Africa Non-HIPC countries: Botswana 562 562 0 290 232 383 15 79 Cape Verde 220 211 0 172 39 159 0 39 Comoros 197 181 0 173 8 151 0 30 Djibouti 284 253 0 252 1 136 0 117 Eritrea 76 76 0 73 3 42 0 34 Gabon 4,285 3,671 0 971 2,700 528 81 2,932 Gambia 430 407 0 394 13 326 0 81 Lesotho 660 624 0 487 137 468 0 113 Mauritius 2,472 1,187 789 344 1,632 245 3 297 Nigeria 28,455 22,361 295 1,322 21,604 4,013 871 12,074 Seychelles 149 131 0 68 63 54 0 52 South Africa 25,222 11,246 2,633 0 13,879 0 3 0 Zimbabwe 4,961 3,124 475 1,398 2,201 1,616 53 699 Total, Africa 215,725 162,774 7,799 83,020 87,783 53,542 6,462 69,888 Sources: World Bank, Global Development Finance, 1999; and U.S. Department of the Treasury. * See Table 1 for individual country data. CRS-7 Evolution of Debt Reduction Programs for Poor Nations For the past decade, members of the G-7 have taken the lead for initiating plans to reduce or cancel public debt owed to them by severely indebted developing nations.6 Through the Paris Club, an informal forum of creditor governments that review, negotiate, and adopt debt relief programs for poor countries, the United States, Germany, Japan, France, and others have implemented a series of debt measures. Prior to 1988, the Paris Club generally engaged only in rescheduling, but not reducing debt. This solved immediate debt servicing crises, but offered no permanent relief. In some cases, reschedulings fueled mounting debt stocks of developing nations, ultimately setting the stage for a subsequent financial emergency. Paris Club Arrangements. Following the 1988 G-7 meeting in Toronto, the Paris Club endorsed a menu of debt relief options through which heavily indebted countries could receive forgiveness for as much as one-third of the net present value (NPV)7 of their public bilateral non-concessional debt that was eligible for rescheduling. Eligible debt included portions that were in arrears or due in the next 18 to 24 months, but not amounts previously rescheduled. These so-called "Toronto Terms" were broadened three years later at the G-7 conference in London where creditor countries agreed to implement "Enhanced Toronto Terms" and reduce up to 50 percent of NPV of eligible poor country public non-concessional debt. Between 1988 and 1995, Paris Club members rescheduled under Toronto and Enhanced Toronto Terms about $14.8 billion of debt owed primarily by African nations. The Paris Club further expanded debt reduction options following the 1994 G-7 summit in Naples. Under what became known as "Naples Terms," developing countries could receive forgiveness for up to two-thirds of their total NPV of non- concessional debt (not just the portion eligible for rescheduling). Paris Club members continue to use Naples Terms today, although for those countries which qualify, even more generous HIPC terms are applied (see below for a discussion of HIPC). U.S. Debt Reduction Programs. The United States did not participate in Paris Club debt reduction initiatives until 1994, although independently, the U.S. forgave about $3.58 billion in poor country debt in the late 1980s and early 1990s, and an additional $10.2 billion in debt owed by Egypt, Poland, and Jordan, 1990-1995. Each of these arrangements were implemented under special authorities legislated, and in some cases, initiated by Congress: ! Sec. 572 Debt Relief -- Section 572 of the Foreign Operations Appropriations for FY1989 (P.L. 100-461), authorized the President 6 Much of this discussion of the history of bilateral debt reduction initiatives is drawn from, Africa's Debt Burden: Proposals for Further Forgiveness, by Jonathan E. Sanford. CSIS Africa Notes, Number 189, October 1996. 7 In evaluating a country's debt burden, analysts generally examine the debt's net present value (NPV) rather than its face value. The NPV of debt takes into account the degree of concessionality -- that is, the extent to which loans carry interest rates below market levels. If a loan has an interest rate below the market rate, the NPV of debt will be smaller than the face value, with the difference reflecting the concessional element of the loan. CRS-8 to cancel debt from development assistance concessional loans owed by African and other relatively least developed countries that maintained economic reform programs with the World Bank or IMF. Over a three year period, the United States forgave 100% of $2.02 billion owed by 17 African countries, four Latin American nations, and Bangladesh. As a result of this initiative, and because the United States had shifted in the early 1980s to grant rather than loan aid, a relatively small amount of concessional debt is still owed to the United States by heavily indebted nations in Africa and elsewhere. ! Sec. 411 Debt -- Section 411 of the Agricultural Trade Development and Assistance Act, more commonly referred to as P.L. 480, authorizes the forgiveness of concessional food aid loans held by least developed countries that are either pursuing their own economic reform program or have programs with the IMF or World Bank. In 1991-92, the United States canceled $689 million of food aid loans for 12 African and Latin American nations. ! Enterprise for the Americas Initiative (EAI) Debt -- Enacted in 1990, the EAI supported economic growth goals for Latin American and Caribbean nations. One element of the Initiative authorized the President to forgive concessional food aid loans to any EAI-eligible country. Through 1993, the United States canceled $875 million in debt owed by Latin American countries that did not meet the "least developed" criteria under the Sec. 411 debt reduction program. Most debt relief went to El Salvador and Jamaica. ! Egypt Debt Forgiveness -- In recognition of the security risks taken by Egypt in signing a peace accord with Israel in 1979 and of Egypt's leadership in the Arab world following Iraq's invasion of Kuwait in 1990, the President asked and Congress approved the cancellation of military aid loans totaling $7 billion (Foreign Operations Appropriations, 1991, P.L. 101-513). Much of this debt had been incurred during the early 1980s when the United States provided most military assistance as loans bearing commercial interest rate terms. ! Polish Debt Relief -- With the collapse of Soviet control over Eastern Europe, the United States took several steps to help the emerging states transition to democratic governments and market economies. Under a special provision in the Foreign Operations Appropriations for FY1991 (P.L. 101-513), the U.S. canceled $2.46 billion in agricultural credits owed by Poland. ! Jordan Debt Relief -- Following the signing of an Israeli-Jordan peace agreement in 1994, Congress approved the President's request to relieve some of Jordan's debt to the United States. Through authority granted in the Foreign Operations Appropriations, 1995 (P.L. 103-306), and subsequent appropriation measures, the U.S. forgave $698 million of Jordan's debt. CRS-9 Table 3. U.S. Debt Reduction, 1989-1998 ($s -- millions) Debt Reduction Authority Paris Club/ Special Date Sec 572 Sec 411 EAI HIPC Legisl. Total Grand Total 2,051.6 689.1 840.1 732.1 10,161.1 14,474.0 Africa: 720.1 416.2 0.0 482.1 0.0 1,618.4 Benin 1989-91 29.8 --- --- --- --- 29.8 Burkina Faso 1991 2.4 --- --- --- --- 2.4 Cameroon 1991/98 61.4 --- --- 20.3 --- 81.7 CAR 1994-98 --- --- --- 7.0 --- 7.0 Congo, DRO 1990-91 54.1 --- --- --- --- 54.1 Congo, Rep 1996 --- --- --- 10.7 --- 10.7 Cote d'Ivoire 1990/98 17.9 --- --- 220.4 --- 238.3 Ghana 1990-91 83.7 95.8 --- --- --- 179.5 Guinea 1989/97 4.5 --- --- 4.3 --- 8.8 Kenya 1989 85.9 102.0 --- --- --- 187.9 Madagascar 1990/97 5.6 53.4 --- 24.8 --- 83.8 Malawi 1990-91 29.5 2.2 --- --- --- 31.7 Mali 1990-91 5.1 --- --- --- --- 5.1 Mozambique 1989/96 --- 52.9 --- 47.4 --- 100.3 Niger 1994-96 6.9 --- --- 8.5 --- 15.4 Nigeria 1990-91 64.8 --- --- --- --- 64.8 Rwanda 1998 --- --- --- .9 --- 0.9 Senegal 1989/94 --- 34.5 --- 10.2 --- 44.7 Tanzania 1991/97 79.7 59.1 --- 18.9 --- 157.7 Togo 1989 7.4 --- --- --- --- 7.4 Uganda 1991/98 8.6 16.3 --- .9 --- 25.8 Zambia 1989/96 172.8 --- --- 107.8 --- 280.6 Latin Amer. 1,039.9 272.9 840.1 213.3 --- 2,366.2 Argentina 1993 --- --- 3.8 --- --- 3.8 Bolivia 1991/95 339.6 --- 30.7 58.6 --- 428.9 Chile 1991 30.6 --- --- --- 30.6 Colombia 1992 --- --- 31.0 --- --- 31.0 El Salvador 1992 --- --- 463.9 --- --- 463.9 Guyana 1992/96 76.3 40.3 --- 9.9 --- 126.5 Haiti 1991/95 --- 98.9 --- 7.9 --- 106.8 Honduras 1991/96 333.9 108.9 --- 77.0 --- 519.8 Jamaica 1991 --- --- 310.8 --- --- 310.8 Nicaragua 1991/98 259.5 24.8 --- 59.9 344.2 Uruguay 1991 --- --- 3.7 --- --- 3.7 Other 291.6 --- --- 36.7 10,161.1 10,489.4 Bangladesh 1991 291.6 --- --- --- --- 291.6 Bosnia 1998 --- --- --- 36.7 --- 36.7 Poland 1991 --- --- --- --- 2,464.7 2,464.7 Egypt 1990 --- --- --- --- 6,998.1 6,998.1 Jordan 1995-98 --- --- --- --- 698.3 698.3 Source: U.S. Department of the Treasury. CRS-10 Table 4. U.S. Sovereign Debt Owed by HIPC and Other Countries (as of December 31, 1997 -- $s - millions) Non-Concessional Debt US Debt Concession as % of al Direct Private Loans Total World Debt US Guaranteed by Debt Debt* Loans US HIPC: Angola 28 7 0 35 0.4% Benin 0 0 0 0 0.0% Bolivia 24 53 14 91 2.2% Burkina Faso 0 0 0 0 0.0% Burundi 0 0 0 0 0.0% Cameroon 0 57 9 66 0.9% CAR 0 9 0 9 1.1% Chad 0 0 0 0 0.0% Congo, DR of 445 1,635 0 2,080 24.1% Congo, Rep of 32 26 0 58 1.4% Cote D'Ivoire 91 241 46 378 3.6% Equatorial Guinea 0 0 0 0 0.0% Ethiopia 88 2 0 90 1.0% Ghana 0 8 8 16 0.3% Guinea 103 8 0 111 3.7% Guinea-Bissau 0 0 0 0 0.0% Guyana 25 6 0 31 2.3% Honduras 0 89 58 147 3.8% Kenya 38 49 39 126 2.5% Laos 0 0 0 0 0.0% Liberia 257 76 0 333 31.4% Madagascar 0 33 0 33 0.9% Malawi 0 0 0 0 0.0% Mali 0 0 0 0 0.0% Mauritania 0 7 0 7 0.3% Mozambique 0 49 0 49 0.9% Myanmar 3 0 0 3 0.1% Nicaragua 18 81 2 101 2.1% Niger 0 13 0 13 1.0% Rwanda 0 0 1 1 0.1% Sao Tome&Principe 0 0 0 0 0.0% Senegal 0 17 0 17 0.5% Sierra Leone 64 0 0 64 7.2% CRS-11 Non-Concessional Debt US Debt Concession as % of al Direct Private Loans Total World Debt US Guaranteed by Debt Debt* Loans US Somalia 201 230 0 431 23.3% Sudan 493 709 0 1,202 13.4% Tanzania 0 31 4 35 0.6% Togo 0 0 0 0 0.0% Uganda 0 1 2 3 0.1% Vietnam 136 0 0 136 0.7% Yemen 99 3 0 102 3.0% Zambia 134 144 0 278 5.3% Total, HIPC 2,279 3,584 183 6,046 3.7% Non-HIPC Africa: Botswana 15 0 9 24 4.6% Cape Verde 0 0 0 0 0.0% Comoros 0 0 0 0 0.0% Djibouti 0 0 0 0 0.0% Eritrea 0 0 0 0 0.0% Gabon 0 81 0 81 2.2% Gambia 0 0 0 0 0.0% Lesotho 0 0 0 0 0.0% Mauritius 3 0 5 8 0.7% Nigeria 0 871 26 897 4.0% Seychelles 0 0 0 0 0.0% South Africa 0 3 141 144 1.3% Swaziland 9 0 0 9 0.1% Zimbabwe 52 0 151 203 6.5% Memo Item: Total Africa 2,053 4,307 441 6,801 4.2% Other "IDA-Only": Albania 0 0 0 0 0.0% Bangladesh 502 0 13 515 3.5% Cambodia 361 0 0 361 17.8% Haiti 16 4 0 20 2.2% Mongolia 0 0 0 0 0.0% Nepal 1 0 27 28 1.2% Sri Lanka 687 0 125 812 12.2% Tajikistan 26 0 0 26 3.9% Source: U.S. Department of the Treasury. *U.S. debt owed as a % of total worldwide long-term public and publically-guaranteed debt. CRS-12 Under authority first granted by Congress in 1993 (Foreign Operations Appropriations, section 570, P.L. 103-87), the United States began in 1994 to participate in Paris Club arrangements to reduce non-concessional debt owed by developing nations with strong economic reform records. This authority, which has been annually re-enacted in each Foreign Operations measure since 1993, allows the U.S. to cancel partial repayment on loans issued under U.S. Agency for International Development (USAID) housing and other credit programs, military aid loans, Export-Import Bank loans and guarantees, and, for Latin American nations, agriculture credits guaranteed by the Commodity Credit Corporation. All of these loans and loan guarantees are made on non-concessional terms. In order to be eligible, countries must be able to borrow only from the World Bank's concessionary loan window, the International Development Association (IDA),8 and comply with a series of standards regarding excessive military expenditures, terrorism, narcotics control, and human rights. Since 1994, the United States has reduced $732 million in non-concessional debt through the Paris Club, on both Naples and HIPC terms. Two new U.S. bilateral debt reduction programs took shape in 1998. As one element of the President's Africa Initiative to boost trade, investment, and development opportunities, the United States intends to cancel 100% of concessional debt owed by the strongest performing African nations. Only about $2.1 billion in concessional debt remains, however, and most -- $1.44 billion -- is owed by poorly performing countries mired in conflict and without near-term prospects for economic recovery: Congo/Zaire, Liberia, Sierra Leone, Somalia, and Sudan. The second new program -- Debt Relief for Tropical Rainforest Countries -- originated in Congress and was enacted into law in P.L. 105-214. Modeled after the EAI debt relief program, it authorizes the President to buy back, swap, or cancel concessional U.S. economic and food aid loans in order to generate local currencies that will be used to support tropical forest conservation programs. 8 Such countries are commonly referred to as "IDA-only" nations. In most cases, the World Bank designates countries with a 1997 per capita GNP of less than $925 as IDA-only borrowers. CRS-13 Calculating the Cost of Debt Reduction Initiatives and the Role of Congress As noted in the discussion above, Congress must authorize U.S. participation in new debt reduction programs. Under provisions of the Federal Credit Reform Act of 1990, Congress must also appropriate, in advance, the anticipated costs to the U.S. government of canceling such debt. The appropriated amount, which is usually included in the annual Foreign Operations spending measure, equals the estimated loss to the U.S. treasury of implementing the debt reduction agreement. Each year's federal budget assumes that a certain amount of loan reflows, or off-setting receipts, will be received. Over time, the appropriation off-sets the loss of these reflows. The calculation of how much money must be appropriated to reduce or cancel a certain amount of debt is complicated, and depends on a number of factors including the value of debt (whether it is concessional or non-concessional) and the likelihood of repayment by the debtor. For loans that bear interest rates at or above current levels that were made to countries with a good repayment history, the amount of appropriations will be much higher than for concessional loans to countries that pay late or default. For example, during the 1990s Congress appropriated $386 million to cancel roughly $700 million of debt owed by Jordan. Since Jordan had a good debt service record and held loans bearing above market interest rates, Jordan's debt forgiveness was a more "expensive" initiative in budget terms. On the other hand, for the poorest countries that have less capacity to service their debt, which consists mainly of highly concessional loans, the cost and the appropriation is much smaller. In FY1999, the Treasury Department estimated that it would use $43 million appropriated the previous two years to cancel $376 million (face value) of debt owed by 11 HIPC countries. In other words, Jordan's debt was more "valuable" to the U.S. government in terms of anticipated repayment than loans made to poorer countries. Heavily Indebted Poor Country (HIPC) Initiative The series of incremental and sometimes uncoordinated debt rescheduling and relief plans during the late 1980s and early 1990s did not produce the degree of sustainable debt reduction that international aid agencies and debtor governments had envisioned. The stock of long-term debt owed by the severely indebted low-income countries actually grew from $61 billion in 1980, to $245 billion in 1995, while their debt as a percent of exports had risen from 102% to 421% during the same period. Further, the share of debt owed to international financial institutions (IFIs), such as the World Bank, increased sharply in the early 1990s -- from 21% in 1990 to 27% in 1995.9 One of the major criticisms of earlier debt relief initiatives was the absence of participation by the IFIs. World Bank and other IFI officials asserted that to engage in debt reduction, they would have to pass the costs on to their middle-income country borrowers. Instead, the IFIs increased lending on highly concessional terms to the poorest countries. Nevertheless, under growing pressure from non- governmental organizations and some creditor governments, especially Britain, the 9 World Bank, Global Development Finance, 1997, vol. I, p. 204. CRS-14 World Bank and IMF sponsored the initiation in September 1996 of the Heavily Indebted Poor Countries Debt (HIPC) Initiative. HIPC remains the centerpiece international debt workout plan of today. Overview of the HIPC Initiative The intent of the HIPC Initiative is to reduce the debt burden of poor countries that have demonstrated sound economic and social policy reforms to manageable, or "sustainable" levels that can be serviced comfortably by export revenues and capital inflows. When it was launched, poor country debt relief proponents hailed the initiative for its comprehensive and integrated approach, especially the inclusion of IFI participation, and for its objective to provide lasting debt solutions. HIPC Eligibility Criteria. To be selected for possible HIPC status, countries must meet specific criteria: ! receive only concessional financing from the World Bank and IMF (that is, borrowing only from the World Bank's International Development Association (IDA) and from the IMF's Enhanced Structural Adjustment Facility (ESAF)). ! establish a track record of economic reforms under IMF and World Bank-sponsored programs. ! hold a debt burden that is unsustainable under existing (Naples terms) relief arrangements. Through an initial analysis in 1996, the World Bank and IMF identified 41 heavily indebted countries -- the 41 HIPC countries.10 HIPC Timing and Terms. The HIPC process is divided into two phases. During an initial three-year period, beginning at what is called the "entry point," countries must successfully follow World Bank and IMF adjustment programs. At the conclusion of this phase, the Bank and Fund conduct a debt analysis to determine whether a country still requires extraordinary debt relief beyond Naples terms. It was presumed that during this three-year period, some countries might improve their economic position to the extent that they could manage their debt burden without the need for HIPC terms. The analysis is intended to determine whether the country can service its debt based on a medium-term balance of payments projection. The economic indicators used in the Bank/Fund analysis are the relationship between the present value of external debt and the export of goods and services. For the first three years of HIPC, if a country's debt-to-export ratio fell above a range of 200- 250%, and debt service-to-exports exceeded 20-25%, its debt burden was categorized as unsustainable, making the country eligible for HIPC terms. As discussed below, critics charged that these thresholds were too high and prevented the cancellation of sufficient debt to make a long-lasting difference. Consequently, the World Bank and IMF have lowered the debt-to-export target to 150%. 10 See Table 1 for a list of HIPC countries. Originally, Nigeria was a HIPC country, but because it is eligible for both concessional (IDA) and non-concessional World Bank loans, it was removed from the list. Subsequently, Malawi was added. CRS-15 At this stage of the process, known as the "decision point," a country with unsustainable debt may begin to receive from bilateral creditors a reduction of non- concessional debt through Paris Club arrangements. During the first three years of HIPC, creditor governments would cancel up to 80% of eligible debt (as opposed to 67% under Naples terms). G-7 leaders agreed, however, during their June 1999 summit, to increase the ceiling to 90%.11 At the decision point, countries begin a second period -- originally three years, but modified in September 1999 to an unspecified amount of time that may result in more rapid qualification -- during which they must continue to display good performance under a Bank/Fund program. At the end of the second phase, referred to as the "completion point," a country becomes fully eligible for HIPC debt relief. In addition to the 90% reduction from Paris Club debt, the World Bank, IMF and other IFIs adjust debt levels to a "sustainable" amount -- so that a country's present value of total debt as a percent of exports does not exceed 150%. Special treatment may be given to nations with very open economies12 where the debt-to-export ratio falls below 150%, but still face a heavy debt burden in relation to its fiscal revenues. In these cases, creditors will reduce debt so that the present value of debt equals 250% of fiscal revenues.13 (For the first three years of HIPC, this target had been 280%.) Although debtor countries become fully eligible only at the completion point, World Bank and IMF modifications in September 1999 will result in "interim" relief by IFIs during the second stage, with a reduction in annual debt service payments through what the IFIs are calling "front-loaded" assistance. Financing HIPC. A key enhancement to previous debt reduction arrangements introduced in the HIPC process is a more systematic method of burden-sharing of the costs of implementing debt relief programs. Bilateral creditors, largely through the Paris Club, meet the costs according to the budget rules that apply to their respective national governments. In the case of the United States, Congress must appropriate funds in advance of debt cancellation, providing an amount equal to the present value of loans to be reduced. For poor countries, this can be a very small portion of the loans' face value -- perhaps 10% or less. The reduction of multilateral debt is financed through the IDA-managed HIPC Trust Fund which receives resources in several ways. The World Bank pays for the costs of canceling its loans by transferring net income and surplus from its market-rate lending facility -- the International Bank for Reconstruction and Development (IBRD) -- to the HIPC Trust Fund. The IMF initially covered the cost of its 11 G-7 leaders further adopted a U.S. proposal that they forgive 100% of concessional or "foreign aid" debt owed by poor debtor countries. More recently, on September 29, President Clinton announced that the United States was prepared to cancel 100% of all -- concessional and non-concessional debt -- debt owed by HIPC countries, and urged others to follow. Britain has endorsed the same policy while others have the issue under review. 12 Very open economies are those where the export-to-GDP ratio is higher than 40% and the fiscal revenue-to-GDP ratio exceeds 20%. 13 Most countries have, or are expected to have their debt reduced based on the debt-to-exports ratio. The World Bank estimates that three countries may receive assistance under the fiscal criteria. CRS-16 participation through an interim arrangement that drew on ESAF resources to service debt obligations of eligible HIPC countries. In order to establish a permanent means to cover IMF debt reduction costs, the IMF and several of its largest contributors agreed on a plan to sell some of IMF's gold holdings. Fearing that a large IMF gold sale would further depress its value on global markets, U.S. gold firms and African gold producing nations strongly objected to the proposal. At the September annual meetings, the IMF and its members abandoned the gold sale approach, and instead proposed to introduce a mechanism whereby the Fund would be able to "re-value" about 14 million ounces of gold. This would generate enough money to pay the IMF's share of canceling HIPC country debt.14 Other IFIs, however, do not have sufficient resources to fully cover their costs of reducing HIPC debt. As a result, bilateral donors are asked to contribute to the HIPC Trust Fund to fill this financing gap. HIPC Contributions. As of December 31 1999, bilateral contributions to the HIPC Trust Fund totaled $327 million. The Netherlands ($108 million) were the largest donor. Pledges amounted to another $1.7 billion, including $600 million from the United States.15 Germany ($80 million) Italy ($70 million), and the European Union (about $730 million) are among those that have also made large pledges, but not directly contributed. The U.K. says it will add $200 million to the $25 million already paid. Germany, one of the other major aid donors that has not contributed to the Trust Fund, has pledged DM 50 million.16 Notwithstanding these contributions, the Treasury Department estimated in February 1999 -- before the G-7 and World Bank/IMF agreement to expand HIPC -- that the HIPC Trust Fund faced a $2 billion funding shortfall.17 With more recent estimates that show a doubling of the costs of the HIPC initiative, the Trust Fund shortfall will be much greater. 14 The actual process by which the gold would be re-valued involves several steps. First, the gold, which is carried on the IMF books at the original price of $48 per ounce, would be purchased at current market value (over $260 per ounce) by a member country about to make a large payment on an IMF loan. After buying the gold, the country will immediately make its loan payment to the IMF, but in gold that it just purchased, rather than hard currency. The IMF will invest the "profits" of its gold transaction in a security instrument and use the earned interest to pay for the costs of canceling HIPC debt over a 20 year period. While many IMF members have endorsed this approach, it requires the agreement of 85% of the Fund's voting shares. Congress must authorize U.S. support for the proposal, and since the United States holds more than 15% of the votes, the gold re-valuation plan cannot be implemented without U.S. -- and congressional -- approval. 15 Congress, in H.R. 2606, the FY2000 Foreign Operations Appropraitions, denied all HIPC Trust Fund requests. President Clinton vetoed H.R. 2606, in part because of reduced funding for debt relief. Subsequently, Congress increased (in P.L. 106-113) bilateral debt reducton funding from $33 million in H.R. 2606 to $123 million, but blocked any of these funds for the HIPC Trust Fund. 16 World Bank, HIPC Trust Fund -- Bilateral Donor Funding (as of Dec. 15, 1999). Available online at the World Bank HIPC web site [http://www.worldbank.org/hipc]. 17 U.S. Department of the Treasury. Treasury International Programs: Justification for Appropriations, FY2000. CRS-17 Table 5. Selected Debt Ratios of HIPC and Other Countries (Present Value of Debt) Debt as % of Debt as % of Debt Service as Exports GNP % of Exports 1996 1997 1996 1997 1996 1997 HIPC: Angola 219 165 310 200 13.3 15.9 Benin 215 160 57 46 6.8 9.1 Bolivia 270 270 57 51 30.9 32.5 Burkina Faso 241 161 31 29 10.8 11.8 Burundi 538 546 47 58 54.6 29.0 Cameroon 399 315 106 93 23.6 20.4 CAR 242 244 51 52 6.3 6.2 Chad 181 195 51 35 9.5 12.5 Congo, Dem. Rep. of 693 783 127 215 2.4 .9 Congo, Rep. of 342 249 260 247 11.7 6.2 Cote D'Ivoire 299 268 171 141 26.2 27.4 Equatorial Guinea 157 52 124 46 2.6 .5 Ethiopia 1,093 791 149 131 42.2 9.5 Ghana 208 229 56 58 26.4 29.5 Guinea 298 330 61 67 14.7 21.5 Guinea-Bissau 2,312 1,136 248 253 48.7 17.3 Guyana 236 134 252 145 15.1 14.4 Honduras 200 157 92 83 26.0 20.9 Kenya 177 161 64 49 27.5 21.5 Laos 177 217 45 53 6.3 6.5 Liberia --- --- --- --- --- --- Madagascar 426 370 97 85 9.4 27.0 Malawi 294 182 76 46 18.6 12.4 Mali 261 240 56 72 17.9 10.5 Mauritania 318 377 157 169 21.7 24.2 Mozambique 1,344 785 411 171 32.3 18.6 Myanmar 296 289 34 --- --- 8.0 Nicaragua 763 441 322 244 24.2 31.7 Niger 284 329 45 56 17.3 19.5 Rwanda 682 373 47 33 20.3 13.3 Sao Tome & Principe 2,268 1,146 651 382 31.5 53.8 Senegal 150 152 53 55 15.9 15.3 Sierra Leone 515 779 78 89 52.6 21.2 Somalia --- --- --- --- --- --- Sudan 1,964 2,421 260 170 5.0 9.2 Tanzania 499 427 114 72 18.7 12.9 CRS-18 Debt as % of Debt as % of Debt Service as Exports GNP % of Exports 1996 1997 1996 1997 1996 1997 Togo 191 129 80 60 10.8 8.1 Uganda 294 239 32 31 20.0 22.1 Vietnam 322 168 123 81 3.5 7.8 Yemen 160 75 88 56 2.4 2.6 Zambia 389 374 161 138 24.6 19.9 Total, HIPC --- 272 --- 98 --- 15.1 Non-HIPC Africa: Botswana 17 --- 11 9 4.9 --- Cape Verde 107 103 50 53 2.9 5.5 Comoros 334 331 96 102 2.3 3.9 Djibouti 132 122 61 57 5.4 3.1 Eritrea 6 9 3 4 .0 .1 Gabon 123 128 86 94 26.2 13.1 Gambia 113 97 64 57 1.4 11.6 Lesotho 69 62 33 35 6.1 6.4 Mauritius 73 92 45 55 7.2 10.9 Nigeria 240 148 114 72 16.0 7.8 Seychelles 46 40 30 28 4.7 4.0 South Africa 67 65 18 19 11.1 12.8 Zimbabwe 154 136 67 49 21.2 22.0 Other "IDA-Only" Albania 101 99 32 22 3.5 7.1 Bangladesh 166 130 30 20 11.7 10.6 Cambodia 191 175 54 53 1.2 1.1 Haiti 297 272 30 21 13.2 15.9 Mongolia 65 89 36 47 9.7 11.7 Nepal 102 87 26 25 7.7 6.9 Sri Lanka 97 79 41 35 7.3 6.4 Tajikistan 69 86 24 34 .1 4.6 Sources: World Bank, World Development Indicators, 1998 and 1999. World Bank, Global Development Finance, 1999. CRS-19 Country Eligibility and Timing of HIPC Implementation On the basis of the most recent debt sustainability analysis and announcements in September 1999 for the substantial expansion of HIPC terms, the World Bank and IMF estimate that 36 of the 41 HIPC countries potentially could qualify for HIPC assistance based on the debt-to-export threshold, an increase of seven from pre- September assessments.18 In addition to lowering the eligibility thresholds, the decline in global commodity prices during the past year is a main reason why some nations which Bank and Fund staff previously thought would achieve sustainable levels of debt without extraordinary HIPC relief now fall within the HIPC parameters. These countries are positioned at various stages in the HIPC process. Only four -- Uganda, Bolivia, Guyana, and Mozambique -- had reached their completion points under the "old" HIPC program. Uganda, Bolivia, and Mozambique are expected to be among the first to receive a "topping up" of debt relief under HIPC's new, more generous terms. (Guyana has fallen out of compliance with an IMF arrangement and will not be eligible for early review.) Altogether, these three plus six others19 may come before World Bank/IMF boards for full HIPC debt relief consideration by April 2000. It is less certain when or whether remaining countries will eventually reach the decision and completion points. Critics, Proposals for Reform, and HIPC Expansion Setting the Stage for HIPC Expansion Although the majority of creditor and debtor governments, development institutions, and non-governmental organizations (NGOs) supported the general concept of the HIPC Initiative, many were disappointed with the results achieved since 1996 and recommended substantial reforms. Numerous NGOs advocated extensive modifications to, if not abandonment of the HIPC process. The strongest critics sought immediate, unconditional forgiveness of poor country debt. Foremost among the NGO activists has been Jubilee 2000, a campaign launched at the June 1997 G-7 Denver Summit, and spearheaded primarily by Catholic and Protestant organizations from over 60 countries that have been involved in debt relief and poverty issues for many years. U.S. Policy. While acknowledging weaknesses with the current HIPC structure, global public financial institutions and creditor governments examined since spring 1999 ways to strengthen, but not replace HIPC. President Clinton announced in mid- March the outlines of a U.S. plan that would form the basis for a continuing American campaign for the expansion of HIPC debt relief terms. Since its inception in 1996, the 18 The five that are not expected to need relief at HIPC terms are Angola, Equitorial Guinea, Kenya, Vietnam, and Yemen. Four of the 36 that appear to qualify on debt sustainability grounds may not participate. Sudan, Somalia, and Liberia are not close to meeting the economic reform criteria. Ghana has said it may not want HIPC debt relief since it would lose the ability to borrow from Japan, an important aid donor, if it participates. 19 Nicaragua, Burkina Faso, Tanzania, Honduras, Mali, and Senegal. CRS-20 United States supported HIPC as a means to promote economic growth and poverty alleviation, and to reward those countries with the best performance records with the cancellation of debt that most likely would never be paid. At the same time, U.S. officials emphasize that any debt relief program must be carefully designed so that it does not result in negative incentives that will undermine the capacity of poor country governments to borrow in the future. The United States also endorses HIPC for its broad and comprehensive approach to debt reduction that involves bilateral and multilateral creditors alike. Because the U.S. holds such a small amount of what is owed by the most heavily indebted poor nations -- less than 4% -- unilateral American action would have minimal impact on relieving the severe debt overhang. World Bank/IMF and G-7 Proposals. Under pressure from member governments and NGOs, World Bank and IMF officials said at their spring 1999 meetings that they would review HIPC and be prepared to propose substantive reforms at the organizations' annual meetings in September. Subsequently, Bank and Fund staff prepared a policy modification paper to which the IMF Executive Board gave a favorable review in mid-August.20 G-7 leaders, meeting in Cologne, Germany, at their annual economic Summit, further issued a joint position statement endorsing many of the recommendations put forward by the United States and those incorporated into Bank and Fund staff papers. As expected, at the World Bank/IMF annual meetings in late September 1999, the institutions endorsed broad expansion of the HIPC Initiative, the details of which draw heavily from proposals issued earlier by President Clinton, the British government, and congressional legislative initiatives (see below). Many NGO concerns are also accommodated in the expanded outlines of HIPC, although groups remain concerned about how the modifications will be implemented and whether the promised financing will materialize. The major enhancements, discussed in more detail below, to the expanded HIPC Initiative announced in September 1999 include: ! Broader debt reduction -- Debt to export and fiscal qualification thresholds are lowered so that 36 countries, up from 29, are expected to qualify. (These numbers include Sudan, Somalia, and Liberia which are unlikely to qualify for other reasons.) ! Deeper debt reduction -- With lower export and fiscal thresholds now used to define "sustainable" debt, qualifying countries will have more debt canceled. ! Faster debt reduction -- Instead of the previous requirement for back-to-back three year periods of good economic performance, debtor nations can now gain full HIPC benefits using a "floating" completion point in which they must reach agreed-upon economic reform targets anytime following successful implementation a the first three-year program. IFIs have also agreed to extend interim 20 See, Modifications to the Heavily Indebted Poor Countries (HIPC) Initiative, July 23, 1999, found at [http://www.worldbank.org/html/extdr/hipc/mod072399/paper.htm]. See also, IMF Executive Board Reviews HIPC Initiative Modifications, August 13, 1999, found at [http://www.worldbank.org/external/np/sec/pn1999/pn9976.htm]. CRS-21 assistance between the decision and completion points, and to "front- load" debt service relief in some cases. ! Poverty reduction emphasis -- The World Bank and IMF pledge to place greater emphasis on the poverty reduction goal of debt relief, reform ESAF arrangements, and to require that debtor nations prepare and implement a Poverty Reduction Strategy Paper that will ensure that debt relief savings will be utilized to increase spending on health, education, and other basic social programs. Congressional Initiatives. During the 106th Congress, several bills have been considered that endorse a significant expansion of U.S. debt relief policy. Some are consistent with current U.S., G-7, and World Bank/IMF plans to broaden HIPC relief terms while others go well beyond these proposals. Although formal action on any of these bills did not begin until early November 1999, the discussion prompted by their introduction helped shape U.S. policy changes and provided momentum for many of the HIPC expansion initiatives recently announced by the World Bank and IMF. In the final days of the 106th Congress, 1st session, the White House and congressional leaders negotiated the text of authorizing legislation (H.R. 3425, incorporated by reference into the Consolidated Appropriations Act, FY2000, P.L. 106-113) that provides the Administration with authority to implement enhanced debt reduction terms. But the legislation excludes a number of provisions that debt relief advocates had sought in other bills, especially directives to reduce or eliminate the role of IMF structural adjustment programs as a qualifying criteria for debt relief. A more expansive debt relief framework -- H.R. 1095 -- had been reported by the House Banking Committee in early November 1999, and drew broad support from NGOs, Jubilee 2000, and other activists in the debt debate. H.R. 1095, however, faces stiff opposition from the Administration. Table 7, found at the end of this report, compares major elements of H.R. 3425, the new authorizing bill enacted on November 29, with H.R. 1095, terms of the original HIPC program, and the "Expanded HIPC" recommendation endorsed by the G-7. International Debt Relief Act. This legislation (title V of H.R. 3425, P.L.106- 113) represents the outcome of executive-legislative negotiations during the final days of the 1st session over the terms of enhanced U.S. debt relief programs and authorization for U.S. officials to support the IMF off-market sale of gold and use of a reserve account to finance the Fund's participation in HIPC.21 In general terms it approves HIPC qualification requirements that are in line with current Administration policy, including several measures to strengthen the linkage between debt relief and poverty reduction. The bill further authorizes U.S. support for the IMF to sell enough gold to generate 2.226 billion Special Drawing Rights in profits. The sales will take place only between the Fund and member countries (mainly Mexico) in nonpublic 21 H.R. 3425 is entitled, Making Miscellaneous Appropriations for FY2000. It is enacted by reference in H.R. 3194, the Consolidated Appropriations Act of FY2000, legislation that represents the final "budget package" for FY1999. President Clinton signed H.R. 3194 on November 29, 1999. CRS-22 transactions so that the IMF retains possession of the gold at the conclusion of the exchange. "Profits" from the sales will be invested, with the earnings available to finance IMF debt relief for HIPC countries. H.R. 3425, however, limits to 9/14 the amount of earnings on investments that may be used by the Fund. Congressional leaders pledged that Congress will review the issue during the first half of 2000 and consider authorizing the use of the full amount. Debt Relief for Poverty Reduction Act of 1999. H.R. 1095 aims to reform the HIPC Initiative much along the lines recommended by Jubilee 2000/U.S., Bread for the World, Oxfam America, and many other NGOs. Introduced by Representative Leach on March 11, 1999, H.R. 1095 addresses only debt reduction issues and not the broader array of African aid and trade policy raised in some other legislative proposals. On several points -- lowering the eligibility thresholds, emphasizing poverty reduction goals, and extending more rapid debt relief -- it is consistent with the expanded U.S. HIPC debt relief policies and those announced at the World Bank/IMF annual meetings in September. But on other issues, it goes beyond Administration plans and would result in broader and deeper debt reduction for more developing countries. H.R. 1095, reported by the House Banking Committee on November 18, would require reforms that would expand by 10 the number of countries, including Nigeria, that are expected currently to receive HIPC terms. The legislation would also add several additional eligibility criteria relating to slavery practices, labor conditions, female genital mutilation, and MIA cooperation. It further "urges" lower debt-to-export thresholds than currently agreed upon. H.R. 1095 does not fix a cost to expanding debt relief but authorizes the appropriation of "such sums as may be necessary." Debt Relief for Poor Countries Act of 1999. S. 1690, introduced by Senator Mack and others on October 5, follows much of the same outlines of H.R. 1095 but without several eligibility requirements added during committee markup. In addition to emphasizing poverty reduction goals, the legislation further requires debtor nations to establish a mechanism through which debt relief savings will be used for economic reform programs that promote sustainable growth and provide widely shared benefits throughout the population. Human Rights, Opportunity, Partnership, and Empowerment for Africa Act (HOPE for Africa Act). H.R. 772, introduced by Representative Jackson on February 23, 1999, represents a broad, comprehensive approach for a new U.S. policy towards sub-Saharan Africa, including a commitment to cancel all African debt, increase U.S. development aid to the region, provide preferential access to U.S. markets of African goods, and ensure that such products are produced consistent with sound labor, human rights, and environmental standards. It is an alternative proposal to President Clinton's Africa initiative launched in 1998 and to legislation passed by the House last year and that is under consideration again in the 106th Congress (H.R. 434/S. 1387).22 22 For a discussion of the Clinton African initiative and related legislation, see CRS Issue Brief IB98015, African Trade and Investment: Proposals in the 106th Congress, by Theodros Dagne and Lenore Sek. CRS-23 Debt forgiveness provisions of the HOPE for Africa Act are based on the basic principles that sub-Saharan Africa's debt burden is a serious obstacle to economic, political, and social development in the region, that any policy aimed at promoting growth and sustainable development in Africa must include unconditional debt cancellation, and that IMF, World Bank, and other structural adjustment programs have imposed "enormous preventable suffering on African people." H.R. 772 essentially rejects the HIPC Initiative, substituting a policy of immediate, unconditional debt forgiveness of the entire $6.8 billion of African debt owed to the United States government,23 as well as all debt owed to American private lenders, and advocating the implementation of similar policies by other creditor governments and IFIs. H.R. 772 is the most expansive of the congressional bills, promoting 100% immediate debt forgiveness, without conditions, for all sub-Saharan African nations. If fully implemented, the HOPE for Africa bill would result in the forgiveness of about $226 billion for all 48 African nations, plus potentially up to about $1 billion of debt owed to U.S. persons. To cover the costs of U.S. debt forgiveness, H.R. 772 authorizes for FY2000-2002 the appropriation of "such sums as may be necessary," but does not attach any specific amount to the new policy. HOPE for Africa Act of 1999. Senator Feingold introduced S. 1636, a modified version of the House HOPE for Africa Act. Like H.R. 772, it would apply to all 48 sub-Saharan African countries and result in 100% cancellation of all debt owed the United States by these countries. It would not require, however, the forgiveness of private debt held by U.S. persons, as in H.R. 772, but instead call for a report by January 1, 2000, from the Treasury Department setting out a plan for the U.S. government to acquire this private debt. No specific amount of money is authorized for implementation of S. 1636. Debt Relief and Development in Africa Act of 1999. H.R. 2232, like H.R. 1095 and S. 1690, is focused directly on debt reduction issues and promotes improvements to the HIPC process, not its abolishment. While similar in scope to the Leach and Mack bills, legislation offered by Representative Waters on June 15, 1999, would extend deeper debt reduction to a smaller group of nations, add additional eligibility requirements for debtor countries, and explicitly reject the need for nations to comply with an IMF structural adjustment program. Portions of the bill that required HIPC countries to implement plans to protect their natural resources were incorporated into the marked-up text of H.R. 1095. Like the HOPE for Africa Act, H.R. 2232 applies only to countries in sub-Saharan Africa, rather than the world-wide focus of HIPC and H.R. 1095/S. 1690. Debt Emancipation to Enable Democracies (DEED) Act of 1999. The DEED Act (H.R. 3049), introduced by Representatives McKinney and Rohrabacher on October 7, adds as an eligibility requirement for debt relief that countries promote democracy through the holding of free and fair elections, maintaining civilian control over the military, and other democratic principals. H.R. 3049 further adds Haiti to the list of HIPC countries, bans any U.S. funds to the IMF until the institution cancels all debts owed by HIPC nations and abolishes ESAF, and permits operations of the 23 The $6.8 billion represents the total as of the end of 1997. More recent estimates suggest that the figure has grown to about $7.5 billion. CRS-24 Overseas Private Investment Corporation (OPIC) only in those HIPC countries that are using the savings from debt forgiveness for poverty reduction purposes. Debt Forgiveness Act of 1999. H.R. 1305, introduced by Representative Campbell on March 25, 1999, has a far more limited scope than the other bills. Under the Campbell legislation, the President must first cancel 100% of concessional and non-concessional debt owed to the United States by all 41 HIPC countries before the U.S. can transfer funds to the IMF. Last year, in P.L. 105-277, Congress appropriated $17.9 billion to fund U.S. participation in an IMF quota increase and for the Fund's New Arrangements to Borrow facility. Critics Views of HIPC, Proposals for Change, and the Response While debt relief proponents have found fault with many aspects of the HIPC Initiatives, the most significant concerns over which there is wide agreement center on three issues: the speed of debt relief, how much relief is provided, and eligibility requirements for HIPC participation. The discussion below explains each of these criticisms and identifies reform proposals adopted by the G-7 and the World Bank/IMF, and those included in congressional legislation. HIPC Debt Relief Comes Too Slowly. Most agreed that a qualifying period that can take up to six years was too long. Critics asserted that such delays were actually counter-productive to the success of economic reforms undertaken by HIPC countries; that debt relief provided during, rather than after completion of a structural adjustment program can accelerate and strengthen the reform efforts. Moreover, they argued, that countries emerging from conflict or have been victimized by a natural disaster, such as Hurricane Mitch, should be provided with special accommodation so that their debt obligations do not complicate reconstruction efforts. While most support the requirement for some qualifying period, the issue becomes how long a track record of good economic performance is sufficient to ensure that debt relief is not wasted and that it will have lasting benefit.24 The World Bank and IMF have maintained in the past that a second three-year period after a country reaches its decision point may be necessary to guarantee that the full range of complex structural reforms have time to take hold. But the institutions also pointed out that the six year requirement was applied flexibly for the seven countries at or near the end of the HIPC process -- that Uganda and Bolivia, for example, had their second stage shortened to one year. One implication of shortening the qualifying period is the possibility of additional costs. By reducing the time, countries would receive debt relief earlier, before the full 24 Not all debt relief proponents, however, endorse the need for a qualifying period of economic reforms, arguing instead for immediate cancellation. This position is generally based on the premise that much of the past debt was acquired illegitimately for reasons unrelated to the development needs of the poor: that it was accumulated with the encouragement of international financial institutions at a time when they had a capital surplus; that it was thrust upon U.S. and Soviet Cold War client states, or that it was obtained by prior, corrupt regimes that either squandered or stole the money. CRS-25 impact of reforms had a chance to strengthen their economic position. As a result, the debt-to-export ratios on which the amount of debt relief is calculated, would likely be higher at an earlier point and would require more assistance to lower the debt stock to the sustainable target of around 200%. An analysis by the World Bank estimates that shortening the second three-year qualifying stage by one year would add $2 billion, while the elimination of the second stage would raise HIPC costs by $6.6 billion.25 From the perspective of the debtor country, the advantage under an accelerated qualification scenario would be the receipt of earlier and higher amounts of debt relief.26 World Bank/IMF Modifications. At their annual meetings, the Bank and Fund endorsed G-7 proposals for multilaterals to extend "interim relief" and to establish "floating completion points" that could shorten the time it takes a country to receive HIPC debt relief. Instead of a fixed three-year second stage, nations could reach the completion point once they had successfully met agreed-upon economic policy targets. This, according to Bank and Fund officials, would offer strong incentives for governments to implement reform programs more quickly and to assume more direct control over how rapidly they become fully eligible for HIPC relief terms. Congressional Recommendations. Except for H.R. 3425, each of the broadly focused debt reduction bills propose to shorten the interim period. By not stating a timing preference, H.R. 3425 would allow the President to implement debt reduction programs at an accelerated pace as recommended by the G-7. ! The Leach and Mack bills (H.R. 1095 and S. 1690) propose to shorten the eligibility period to no more than three years, with special accommodation for countries emerging from conflict of natural disasters. ! The HOPE for Africa measures (H.R. 772 and S. 1636) include few specific dates for initiating debt relief actions, but through a series of required reports by the President to Congress, the legislation implies that rapid movement should occur. Beginning on December 31, 1999, the President must report annually on unilateral debt relief for African nations; within nine months of enactment, the Secretary of State must report on how other creditor governments have responded to U.S. appeals for them to forgive bilateral Africa debt; and within a year of enactment, the Secretary of the Treasury must notify Congress how World Bank and IMF members have reacted to U.S. proposals for the Bank and Fund to fully and unconditionally cancel Africa's debt. 25 World Bank. HIPC Initiative: Perspectives on the Current Framework and Options for Change -- Supplement on Costing. Table 5. April 13, 1999. Modified May 12, 1999. 26 For example, the GAO estimated that if the second stage for Guyana was reduced to one year instead of three, HIPC assistance would be 68% higher with an increase of $103 million in the present value of debt canceled. General Accounting Office. Status of the Heavily Indebted Poor Country Debt Relief Initiative. September 1998, p. 38. CRS-26 ! The Debt Relief for Development in Africa Act of 1999 (H.R. 2232) would make HIPC terms available immediately once a debtor country is determined to have a debt-to-export ratio above 100% and has created a Human Development Fund and a Natural Resource Development Plan. Debt Sustainability Definitions and Targets Are Limited or Inappropriate. Many HIPC critics believed that the debt-to-export and debt service-to-export thresholds were set too high, excluding some heavily indebted countries from qualifying for HIPC terms or from being included among the HIPC countries. Bangladesh, Haiti, Comoros, among other poor countries, were not part of the HIPC process, even though their debt-to-export ratios fell between 150-300%. Setting targets too high, according to these critics, further restricted the amount of debt relief provided, undermining the prospect that HIPC would provide a "permanent exit" from an unsustainable debt burden. A downturn in global commodity prices or other negative external factors, they argued, can shift a country from a sustainable to unsustainable debt position. Debtor nations would be far less vulnerable to such factors if HIPC provided deeper debt relief. Some of these same critics also believed that HIPC places too much emphasis on reducing debt stock and not enough on cutting the amounts of debt service. Targets based on the relationship between debt and exports, they believed, are less important than indicators focused on debt service and government revenues. Reducing debt service obligations frees up resources immediately that can be used to finance social and other poverty reduction programs. Many observers were dismayed by World Bank and IMF admissions that debt service payments for the early qualifiers of HIPC relief would not be much different than before; indeed, debt service for Mali and Burkina Faso was expected to rise.27 Critics believed that indicators drawing on the relationship between debt service and government revenues were more appropriate for poor countries and would help achieve the duel goals of debt reduction and increased spending on education, health, and other social programs. The World Bank and IMF did not necessarily disagree with these concerns, and acknowledged that HIPC targets were "judgmental rules of thumb" that should not represent "discrete cutoffs." They cautioned, however, that changes made to the targets or the introduction of different indicators also raised serious implications. Establishing an appropriate debt service target that would achieve debt sustainability, they asserted, would be more difficult and lack a strong analytic basis. Bank and Fund officials further said that a country's capacity to service debt involves more than just the collection of revenues, and needs to be examined in a full budgetary context. They have also expressed concern that a substantial expansion and deepening of HIPC relief would not necessarily lead to increased amounts of external aid -- that because of fiscal constraints of participating creditor governments and institutions, more debt 27 World Bank. HIPC Initiative: Perspectives on the Current Framework and Options for Change -- Annex 1. Implementation of the Initiative and Resource Flows. April 2, 1999, p. 45. CRS-27 assistance might come from funds that would otherwise go for development assistance, which is already in decline.28 G-7 Proposal. Following recommendations issued by the White House in March, G-7 leaders endorsed raising the level of canceled Paris Club bilateral non- concessional debt from 80% to 90%, and even higher for the very poorest. Also at the June Summit, participants proposed that the World Bank/IMF debt sustainability targets be lowered from a debt-to-export ratio of 200% to 150%, and that the alternative debt-to-revenue ratios decline from 280% to 250%. Not only would this modification cancel a larger portion of debt held by eligible countries, it would also increase the number of countries that would likely qualify for expanded-HIPC terms. Analysts believed that the pre-September World Bank estimate of 29 potentially qualifying nations would grow to 36 under ratio reductions recommended by the G-7. The G-7 further endorsed a plan, also backed earlier by the United States, for bilateral lenders to forgive all concessional foreign aid loans and to extend future concessional financing mostly in the form of grant aid. Since the United States has extended nearly all foreign aid as grants for over a decade, this latter proposal would have no impact on current U.S. policy. This would also be the case for most other donors. But for a country such as Japan, which in 1997 offered about 17% of its aid as loans, this policy would require adjustments. World Bank/IMF Modifications. Bank/Fund proposals follow closely those endorsed by the G-7. They recommend that the NPV debt-to-exports ratio decline form the current 200-250% range to a single target of 150%; that the NPV debt-to- revenue ratio decline from 280% to 250%; and for those countries with very open economies that qualify based on the fiscal window, that the current 40% of exports- to-GDP fall to 30% and the 20% of revenues-to-GDP decline to 15%. Addressing concerns over debt service burdens, the institutions recommend "front-loading" more debt relief after countries have reached their completion point. They further endorse the lowering a debt service-to-exports ratio to a range of 15-20%. Congressional Recommendations. H.R. 3425, as enacted, and three of the pending debt reduction bills address the debt sustainability targets. Since the Jackson and Feingold bills (H.R. 772 and S. 1636) propose full debt cancellation for all sub- Saharan African nations, debt targets would not be an issue. ! The International Debt Relief bill (title V of H.R. 3425, P.L. 106- 113), the Debt Relief for Poverty Reduction Act of 1999 (H.R. 1095) and the Debt Relief for Poor Countries Act of 1999 (S. 1690) all propose lowering the debt-to-export eligibility threshold to 150%. They further recommend deeper debt reduction by setting a sustainability level of 150% debt-to-exports ratio. H.R. 1095 and S. 1690 go beyond H.R. 3425 and Administration policy by requiring that annual debt service payments are not larger than 10% of annual government revenues generated from internal sources. This requirement especially could expand the amount of debt relief 28 World Bank. Perspectives on the Current Framework and Options for Change. CRS-28 provided and hasten the benefits for the debtor country. Although there are no estimates of how much debt would have to be canceled to meet the 10% requirement, it appears that debt service payments would fall dramatically for some. Mozambique, for example, with government revenues of about $448 million, paid $104 million servicing its debt in 1997 and is projected to pay $71 million on average through 2005 now that it has reached its completion point.29 Under the 10% ceiling, Mozambique would have paid $45 million in 1997. While the relief provided may be dramatic, the costs to creditor governments and institutions might be as well. ! The Waters bill (H.R. 2232) would extend deeper and broader debt relief than other pending initiatives, except for the HOPE for Africa legislation. The debt-to-export ratio eligibility threshold would fall to 100%, making about 38 African nations eligible.30 The amount of debt relief received would deepen due to a requirement that a country's debt burden be reduced so that the NPV of debt-to-exports does not exceed 100% and that annual debt service payments are not larger than 5% of annual government revenues generated from internal sources. As noted above, the latter target especially would deepen the debt relief and accelerate its impact for financing poverty programs. The costs to creditor governments and institutions also would grow, perhaps significantly. Performance Requirements Are Flawed. For years, NGOs and many developing countries especially have argued that IMF-sponsored structural adjustment programs have in most cases not achieved their goals of expanding economic growth, while inflicting a substantial negative impact on poverty reduction efforts in poor countries. As such, the HIPC requirement to maintain such a reform arrangement through the IMF's Enhance Structural Adjustment Facility (ESAF), these critics asserted, was not appropriate for HIPC eligibility. They believed that ESAF programs should be replaced with alternative performance links with a poverty focus emphasis. Debtor countries would be required to establish social development plans that would result in increased spending on education, health care, environmental protection, and other basic services.31 29 World Bank. Global Development Finance, 1999, volume II. Also, HIPC Initiative: Perspectives on the Current Framework and Options for Change, Annex 1, p. 46; and Modifications to the HIPC Initiative, July 23, 1999, p. 23. 30 Possible African countries that would not qualify because they are not "IDA-only" borrowers or have a debt-to-export ratio below 100% are Botswana, Eritrea, Gabon, Lesotho, Mauritius, Namibia, Nigeria, Seychelles, South Africa, and Zimbabwe. 31 Uganda, the first country to receive full HIPC benefits, now deposits $40 million it saves annually from debt write-offs into a special poverty action fund. Ugandan officials argue, that while creditor governments and institutions have set international poverty reduction targets, they have not provided the means to finance them. Debt reduction targets based on debt service levels rather than export earnings, they say, would provide needed resources. (The Guardian, May 26, 1999, p. 11.) CRS-29 The IMF rejects claims that ESAF structural reform programs have failed, arguing that external evaluations have found that such activities have had positive effects on growth and income distribution in poor countries.32 Bank and Fund staff further stress that the HIPC Initiative has always pursued dual objectives of achieving economic growth and alleviating poverty. Requiring countries to develop comprehensive plans for poverty reduction and social development, they caution, may be beyond their current capacity because of financial considerations. Sufficient time would be required to design such initiatives, they say, a factor that might be counter- productive to efforts to accelerate the pace of debt relief. According to other observers, given the evidence that HIPC will not provide much in the way of early debt service relief for some countries, a requirement that debtor governments increase spending on basic social programs, derived from debt reduction "savings," may be asking countries to spend funds that will not have been generated. G-7 Proposal. Although G-7 leaders continue to support IMF and World Bank policy reform programs for HIPC countries, they issued a strong recommendation for the Bank and Fund to build an enhanced poverty reduction framework, especially within the IMF's ESAF programs. G-7 finance ministers called on the Bank and Fund to help HIPC countries design and implement poverty reduction plans through a transparent and participatory process that will ensure that debt relief savings would be invested in health, education, and other social programs. World Bank/IMF Modifications. The Bank and Fund now agree that an enhanced HIPC initiative should include a stronger framework for poverty reduction, although the details on how this might affect ESAF policy reform programs or requirements for debtor countries to establish social development plans remain to be worked out. IMF Board Directors have noted that proposals for interim assistance and front-loaded relief on the part of the multilaterals could be a means to help HIPC nations to find additional resources for social and other poverty-related activities. Moreover, the IMF will require in the future that countries receiving debt relief must develop and implement a Poverty Reduction Strategy Paper that has the full participation of civil society. Fund officials have further implied that successful implementation of these strategy papers may become a factor in IMF decisions whether to proceed with ESAF loan transfers. (The IMF has subsequently re-named ESAF as the Poverty Reduction and Growth Facility (PRGF).) Congressional Recommendations. Of the bills introduced and considered in the 106th Congress, H.R. 3425, as enacted, is the only initiative that expressly requires a country to adhere to a "social and economic reform program." None of the other broadly focused debt reduction bills would continue ESAF reform program compliance as a requirement for HIPC eligibility. On the other hand, each, including H.R. 3425, either requires or recommends additional standards connected with strengthened poverty reduction spending on the part of debtor governments. The issue of ESAF policy reforms linked with debt reduction eligibility was extensively debated during the House Banking Committee markup of H.R. 1095 on November 3. 32 See, for example, IMF. External Evaluation of the ESAF. 1998. CRS-30 ! H.R. 3425, as enacted, requires that a qualified debtor nation maintain a social and economic reform program that, among other things, is designed through transparent and participatory processes, integrates poverty-oriented development strategies and ensures that the debt savings are used to reduce poverty and environmental degradation, and expands the private sector. The legislation further requires the U.S. to work through the IMF to modify the Fund's ESAF programs, incorporating provisions with a poverty reduction focus. ! H.R. 1095 would directly strengthen the poverty reduction requirements of HIPC. The bill, as reported, requires that any economic and social conditions placed on country eligibility include measures for poverty reduction and environmental protection. The bill further adds an additional requirement that in order to receive relief, a debtor nation must establish a "Human Development Fund," into which funds saved from debt relief measures be deposited and spent on basic social services. Through this, proponents intend to ensure that debtor governments invest more of the country's resources in education, health, clean water, and other poverty focused programs. During the markup session, the Committee adopted an amendment by Representative Frank aimed at assuring that a debtor nation's eligibility for U.S. debt relief would be determined not by the terms of an IMF structural adjustment program, but by conditions established by the United States, including those required by H.R. 1095. Another amendment by Representative Sanders "urges" the President to seek changes in the HIPC process that would eliminate the need for an IMF reform program as a condition of eligibility. Other amendments intended to bar the requirement for IMF structural adjustment programs or to cancel debt unconditionally were either withdrawn or defeated. ! S. 1690 includes similar poverty spending requirements as in H.R. 1095, plus an additional condition that governments use the debt relief savings for economic reform programs that promote sustainable development with benefits shared widely throughout the population. ! The HOPE for Africa Act (H.R. 772) authorizes unconditional debt relief for African nations, thereby eliminating any pre-conditions regarding ESAF or other policy reform requirements. The Jackson bill, however, includes a requirement for the Secretary of State to encourage African governments to allocate 20% of their national budgets to support the U.N.'s 20/20 Initiative.33 33 The U.N. 20/20 Initiative calls on foreign aid donors to focus 20% of their assistance on poverty reduction programs and aid recipient governments to commit 20% of their revenues to basic social programs. CRS-31 ! The companion HOPE for Africa Act (S. 1636) includes standard legislative eligibility requirements that countries not violate human rights, promote terrorism, engage in drug production or trafficking, or spend excessive amounts on their militaries. Like H.R. 772, the bill endorses that African governments support the 20/20 Initiative. ! The Debt Relief and Development in Africa Act of 1999 (H.R. 2232) explicitly prohibits the use of structural adjustment programs as a condition for HIPC eligibility. The Waters bill, like H.R. 1095, also requires debtor nations to establish a Human Development Fund which will be used to expand government financial allocations for basic social programs. In addition, H.R. 2232 further mandates that countries create a Natural Resource Development Plan that will clearly identify, among other things, which natural resources are being developed, to what extent companies involved in their development will profit, the quantity of revenues that will be generated through such development and how the government plans to use the money, and government conservation and environmental protection proposals. The bill authorizes the U.S. Agency for International Development and directs international financial institutions to assist debtor countries in creating the Plan and negotiating the terms of contracts with foreign investors involved in the development of natural resources. Further, H.R. 2232 bans U.S. Export-Import Bank support for any private American business involved in natural resource development in debtor nations unless there is full public disclosure of their contracts with the government. ! The DEED Act of 1999 (H.R. 3049) conditions any future transfers of U.S. resources to the IMF on the abolishment of ESAF. Instead of a poverty-focused requirement included in most other debt relief bills, the McKinney-Rohrabacher legislation stipulates that only governments that were chosen through free and fair elections and which promote civilian control of the military, the rule of law, and strengthened political, legislative, and civil institutions of democracy, are eligible for debt relief. Cost Implications of Enhanced HIPC Debt Relief Measures While approval for altering HIPC policy, terms, and conditions has occurred, there is less certainty whether sufficient funds will be committed to implementing the considerably higher costs of a reformed HIPC initiative. The World Bank/IMF estimate that changes announced at their annual meetings in September will increase HIPC costs from about $12.5 billion to $27.4 billion. Cost Burden-sharing. Financing and establishing some burden-sharing arrangement among participating creditor governments and institutions could be a difficult hurdle in future HIPC reform negotiations. World Bank/IMF estimates show that expenses for bilateral creditors participating in HIPC through Paris Club debt relief would increase from $5.2 billion under the previous framework to $11.5 billion for an enhanced HIPC program. Multilateral creditor costs would grow from $6.2 CRS-32 billion to $13.3 billion, with the World Bank share climbing from $2.4 billion to $5.1 billion, and that of the IMF from $1.2 billion to $2.1 billion. Multilateral Financing and IMF Gold Revaluation. For the costs of multilateral debt write-downs under the original HIPC structure, the World Bank and IMF agreed to draw from their own resources while other regional MDBs would require some assistance from bilateral donors and their contributions to the HIPC Trust Fund. Under an expansion of HIPC, World Bank officials seem more cautious about the ability of the Bank to cover the additional costs and suggest they may have to "borrow" International Development Association (IDA) resources to implement debt relief. This would reduce IDA lending to these same poor countries, at least in the short term, raise concern among international development proponents who oppose extending debt relief at the expense of development aid. For the IMF, the situation is more complicated. The Fund had planned to finance part of its participation under the earlier framework from the sale of gold. After gaining the support of G-7 governments, including the United States, for the gold sale, the original plan was abandoned in the face of significant opposition from gold mining business interests and gold-producing countries in Africa who believe the sale would force the price of gold down. The IMF modified its gold proposal so that through a complicated process, some of the Fund's gold assets would be revalued from the "book" price of about $48 an ounce to the current world market price of more than $260 per ounce. In short, the "profit" from the revaluation of gold could be used for writing off poor country debt owed the IMF.34 As noted above, Congress approved legislation (H.R. 3425) that allow the U.S. to support the proposed mechanism, although with certain limitations. U.S. Costs. For the United States, full implementation of the enhanced HIPC modifications requires additional appropriations of $970 million provided over several years. President Clinton had earlier asked Congress to provide $120 million for debt relief (including $50 million for the HIPC Trust Fund) in FY2000. After G-7 agreement to expand the terms of HIPC, the White House, on September 21, 1999, amended its pending request, adding $850 million for a total of $970 million. Of this, $370 million was sought for FY2000, with the balance provided in increments of $200 million in each the following three years. Of the total, $650 million would pay for U.S. contributions to the HIPC Trust Fund. These estimates, however, are highly tentative and could fluctuate widely. For example, if conditions in Sudan, Somalia, and Liberia would change so that it became possible for their participation within HIPC, U.S. expenses, especially for bilateral debt reduction, would grow considerably. Since these three countries account for roughly $2 billion of the $6 billion owed the U.S. by the 41 HIPC nations, the costs of bilateral debt reduction for the United States might grow by as much as one-third Moreover, at the World Bank/IMF meetings, President Clinton announced that the United States was prepared to cancel 100% of all bilateral debt, going beyond the 90% level endorsed by the G-7 for non-concessional loans. This will push U.S. costs up, although the White House says the initiative can be accommodated within the 34 See footnote 13, above, for details on how the process would work. CRS-33 recent budget amendment. A main reason why U.S. costs for an expanded HIPC would fall heavily on financing the multilateral dimensions rather than the bilateral portion of debt owed directly to the United States is because the U.S. has previously written off a large portion of concessional debt and has not extended foreign aid on a loan basis for over 15 years. Thus far, Congress has supported only a very small portion of the President's funding request for debt relief. As cleared for the White House on October 6, H.R. 2606, the FY2000 Foreign Operations Appropriations bill, provided only $33 million for debt relief programs, none of which could be transferred to the HIPC Trust Fund. President Clinton vetoed H.R. 2606 on October 18, largely because of spending reductions, including those for debt relief measures. More recently, on November 18 and 19, the House and Senate, respectively, approved another Foreign Operations appropriations (H.R. 3422) that increases debt reduction spending to $123 million for FY2000 but still bars the use of funds for multilateral debt relief. President Clinton signed H.R. 3422 into law (as part of the Consolidated Appropriations Act, FY2000, P.L. 106-113) on November 29, but said he would seek the remaining HIPC appropriations in subsequent budget requests. CRS-34 Table 7. Comparison of Debt Reduction Initiatives--Existing and Proposed Expanded HIPC International Debt Relief Debt Relief for Poverty & HIPC Terms, 1996 to mid-1999 G-7 Proposal-June 1999 (title V of H.R. 3425, PL 106-113) Development (HR 1095) For good economic performing For good economic performing To authorize actions for bilateral debt To improve existing debt relief countries, debt level reduced to a countries, debt reduced so countries relief and to improve multilateral debt mechanisms & ensure savings Goal "sustainable" level. can meet basic needs and spur relief. from debt can-cellation will economic growth. finance poverty reduction - good economic record - good economic record -IDA-only statusa -IDA-only statusa or Nigeria Country -World Bank/IMF program -IDA-only statusa -NPV debt-to-export ratio over 150% -NPV debt-to-export ratio over Eligibility -IDA-only statusa -NPV debt-to-export ratio over 150% -NPV debt-to-fiscal revenue ratio over 150% -NPV debt-to-export ratio over 200% -NPV debt-to-fiscal revenue ratio 250% -NPV debt-to-fiscal revenue -NPV debt-to-fiscal revenue ratio over 250% -maintain a social and economic ratio over 250% over 280% reform program -"urges" no ESAF program requirement. Legislative requirements regarding human rights, For U.S., legislative requirements terrorism, drug cooperation, Other --- regarding human rights, terrorism, Legislative requirements regarding excessive military spending, Eligibility drug cooperation, excessive military human rights, terrorism, drug slavery practices, and SE Asian Criteria spending, and expropriation of U.S. cooperation, and excessive military countries failure to cooperate on owned property. spending. POW/MIA matters. President also to consider child labor conditions & workers rights, and a country's female genital mutilation record. Deposit debt savings into a Poverty Modify World Bank & IMF programs Modify World Bank and IMF programs Human Development Fund to Focus Nothing explicit. to emphasize poverty reduction; to be consistent with debtor country finance poverty reduction Requirement channel debt relief savings into Poverty Reduction Strategy Papers. programs; broaden access to education, health and other social basic social services, education, programs. health, clean water, environmental protection. Number 29 36 36 46 Potentially (25 in Africa) (30 in Africa) (30 in Africa) (35 in Africa) Eligible CRS-35 Expanded HIPC International Debt Relief Debt Relief for Poverty & HIPC Terms, 1996 to mid-1999 G-7 Proposal-June 1999 (title V of H.R. 3425, PL 106-113) Development (HR 1095) Multilateral Reduction in debt owed so that: Reduction in debt owed so that: "Urges" the reduction in debt Debt Relief: owed so that: NPV debt-to-exports ratio is 200- NPV debt-to-exports is 150%. NPV debt-to-exports is 100%. Targets and 250% None stated Ratios Annual debt service consumes For very open economies,b NPV debt- For very open economies,b NPV no more than 10% of to-fiscal revenue ratio is no more debt-to-fiscal revenue ratio of 250% government revenues raised than 280% domestically. Bilateral "Urges" Concessional Not applicable. 100% None stated 100% Debt Relief Bilateral Non Up to 90%; higher in exceptional "Urges" Concessional Up to 80% cases. 100% 100% Debt Relief U.S. policy 100% Bilateral: Begin after 3 years of an Retain two stage, 6-year process, but Bilateral: Immediate, after IMF reform program. with the possibility of a significantly Human Development Fund shorter second stage; a "floating U.S. should "urge" the World Bank created. Timing Multilateral: Begin after up to 6 completion point." and IMF to complete by 12/31/00 a years of an IMF reform program. debt sustainability analysis for as many Multilateral: After Human Multilateral: Early cash flow relief HIPC countries as possible. Development Fund and Natural by international institutions. Resources Development Plan created. Bilateral creditors through Paris Club Bilateral creditors through Paris Club Bilateral: Unspecified authorization of Bilateral: Unspecified arrangements. arrangements. appropriations through 2004. authorization of appropriations through 2004. Financing World Bank & IMF with own Authorize the IMF to sell gold and Multilateral: none stated. resources. utilize a reserve account to finance its Multilateral: Unspecified participation. Authorizes IMF "off-market" gold sale authorization of appropriations Other multilaterals with own that will generate 2.226 billion Special to the HIPC Trust Fund through resources and contributions from Bilateral donors may have to increase Drawing Rights. Only 9/14 of the 2004. creditor governments. Trust Fund contributions. earnings from investments of the gold sale profits can be used. Authorizes IMF "off-market" gold sale up to 14 million ounces. HIPC eligibility World Bank/IMF World Bank/IMF World Bank/IMF For bilateral debt relief, terms responsibility set by U.S. government. CRS-36 Expanded HIPC International Debt Relief Debt Relief for Poverty & HIPC Terms, 1996 to mid-1999 G-7 Proposal-June 1999 (title V of H.R. 3425, PL 106-113) Development (HR 1095) New Aid to No position. Preferably grant aid. None stated "Sense of Congress" for grant HIPCs aid only. Sources: World Bank, U.S. Department of the Treasury, G-7 Finance Ministers Report to the G-7 Economic Summit (6/18/99), Department of Treasury testimony before House Banking Committee (6/14/99), Bread for the World, and Oxfam America. a Countries eligible to borrow only from the World Bank's concessionary lending facility, the International Development Association. Generally, countries with an annual per capita GNP of $925 or less are designated as "IDA-only." b Very open economies under the original HIPC program referred to those countries where the export-to-GDP ratio exceeds 40% and fiscal revenue-to-GDP exceeds 20%. Under the G-7 recommendation and H.R. 1095, "very open economies" are those with an export-to-GDP ratio above 30% and fiscal revenue-to-GDP above 15%. ------------------------------------------------------------------------------ For other versions of this document, see http://wikileaks.org/wiki/CRS-RL30214