DEBT RELIEF AND POVERTY REDUCTION: A UK SUBMISSION TO PHASE 2 OF THE HIPC REVIEW
Resources for tackling poverty
Debt relief should be structured both to provide resources for anti-poverty programmes, and to revive business confidence. This requires a choice between stock and flow relief. To achieve this,
An integrated anti-poverty programme
Debt relief should provide an opportunity to invigorate the entire government anti-poverty programme. It should not be seen as funding a separate, add-on operation. This anti-poverty programme should be informed by the World Bank and UN's work on social principles, and by the thinking around the Comprehensive Development Framework. It should incorporate a medium-term expenditure framework for the whole budget. Macro policy - and hence ESAF - should be an integral part. It should be as widely owned as possible. Hence, the anti-poverty plan needs to be built on existing processes in-country, rather then on an international blueprint. Although final agreement on IFI support for the programmes should continue to rest with countries and Bank/Fund Boards, other main players should have the opportunity to feed their comments in directly on final drafts before they go to the Boards.
One possible mechanism would be:
By decision point the government and creditors would agree a process for developing an anti-poverty framework. The key is a reliable, robust and transparent policy process, appropriate to the country concerned.
By completion point, the country would
DEBT RELIEF AND POVERTY REDUCTION: A UK SUBMISSION TO PHASE
2 OF THE HIPC REVIEW
The British Government regards a closer link between debt relief and reducing poverty as the very rationale of a revived HIPC. The Chancellor of the Exchequer has described the challenges of world poverty and international debt relief as the great moral issue of our decade. "We can meet and master the challenge of debt redemption because there are millions of people who know that now as never before, we in this generation have - within our power if we choose to use it - the means to eliminate abject poverty." The Secretary of State for International Development, speaking at the Commonwealth Secretariat, called for "a package that will deliver more substantial debt relief to countries which are adopting policies which are demonstrably pro-poor." Indeed, donors are only able to commit oda resources because there is an impact on poverty.
2. Debt relief can reduce poverty in two ways:
Each of these are examined below. Our principal suggestions are in bold. Proposals about the analysis to be undertaken as part of the HIPC Review are in italics.
RESOURCES FOR POVERTY REDUCTION: FLOW RELIEF AND STOCK RELIEF
3. Debt relief should be structured to provide resources for poverty reduction. Mozambique and Uganda pay around $100 million per year in debt service; some of this must be switched to anti-poverty spending. So in the early years, debtors need a substantial reduction in their actual debt service payments.
4. It is within the power of creditors to offer this. Stock relief - cancelling specific debts - will achieve a reduction in debt service over the whole life of the loans. If that is not sufficient to achieve the necessary cut in debt service in early years, then creditors have the option of delivering part of the NPV reduction as flow relief - reductions in debt service in early years while the loan itself remains on the books.
5. There is a parallel case for adequate stock relief. A permanent exit from debt should re-establish the economic viability of the country in the eyes of investors. Business confidence should revive. This should in turn stimulate investment - and in Africa investment levels are currently far too low to reduce poverty quickly. At the same time, governments should feel more prepared to take hard policy choices - because they know the country, rather than its creditors, will reap the benefits.
6. This requires that enough of the HIPC relief should be delivered as stock relief to remove the so-called "debt overhang". Rather little is known about this, and we would therefore propose that Phase 2 of the HIPC Review examine the evidence for the links between reducing debt overhang and stimulating investment. It should then consider the trade-off at the margin between flow relief for essential Government spending and stock relief for reducing debt overhang.
7. The balance between stock and flow relief is therefore an important issue for the country. It is also important to creditors planning how to absorb debt reduction. We would propose:
As part of the decision and completion point documentation, the World Bank and IMF should analyse the overall time profile of a country's debt service, and put forward a menu of options for achieving the required PV reduction, taking into account the procedures of different creditors;
this menu should include amongst several options one which reduces multilateral debt service by 50-75% in early years, and another which delivers as much as possible of the post-completion point relief as stock reduction;
As part of the process of developing national ownership of the anti-poverty debt relief plan, the indebted country should be invited to negotiate with the Bank and Fund around this menu of options.
8. Debt relief should be made available in support of policy packages that tackle poverty. That splits into three questions - conditionality; the mechanisms for a link to poverty; and the content of anti-poverty policy.
9. HIPC debt relief should only be available to governments seriously committed to poverty reduction. Research has shown that conditionality does not work in buying poverty reduction from governments that are not committed. Therefore, debt relief should in principle reward progress, rather than be delivered in return for promises for future action. Furthermore, poverty reduction is a long-term process. It would therefore be inappropriate to festoon debt relief with detailed micro-conditions. What matters is the overall, genuine commitment of the government.
10. That said, there are some important questions for the HIPC Review to ask about conditionality. Is it appropriate to add conditionality for a debt relief operation - and if so, what? What has been the monitorability and usefulness of social sector indicators in HIPC programmes to date? In particular, poverty reduction is a long-term process, and the impact indicators which are most relevant are unlikely to be monitorable over the short time periods prior to completion point.
11. For this reason, we are very wary of adding new conditions, and believe conditions might best be applied to process - an issue taken up in paragraph 17 below.
Mechanisms for the debt-policy link
12. Debt relief should provide an opportunity to invigorate the entire government anti-poverty programme. Debt relief should not be seen as funding a separate, add-on operation. Rather, it needs to be seen as one of the funding sources for the government's whole anti-poverty programme.
13. HIPC debt relief therefore needs to be integrated with three other developments aimed at encouraging unified national anti-poverty plans:
14. It is central to these initiatives, and to the success of any anti-poverty plan, that the plan should be as widely owned as possible. It was a lesson of the ESAF Review that the national government should make the key choices, with IMF/WB etc helping to define options rather than arriving with drafts written in Washington. To ensure continuity and broad support, there should be a process at national level to build as wide a consensus as possible - involving civil society, business and other stakeholders. The form of the process should depend on the nature of the society and polity in each country. For example, the existence of powerful vested interests, or of deep social rifts, might imply something more sophisticated than a single national conference to discuss the plan.
15. In most circumstances, the anti-poverty plan needs to be built on existing processes in-country, rather then on an international blueprint. Experience shows that it is generally easier to adapt and reform existing procedures - for example in budget planning and management - rather than uproot them.
16. The framework of ESAF conditionality and the new poverty framework need to be brought together. Nevertheless, there is a question as to how closely HIPC debt relief should be linked to ESAF, reformed along the lines of the 1998 External Review of ESAF. Two possible approaches have been discussed:
(a) Side by side: In this view, ESAF is an inappropriate instrument for embracing poverty strategies developed on a basis of consensus. But governments and donors will still require the assurances of macro economic stability which ESAF provides. The two should therefore exist side by side, and the emphasis should be on ensuring that they are consistent both in content and timing.
(b) Integrated: In this view, macro policy is part of the national consensus that is developed - with explicit decisions on trade-offs. For example, tough macro policy may be acceptable in the context of broad programmes to improve the access of the poor to economic opportunities, and to underpin their security. At the same time, macro policy should be designed to have a positive social impact, taking account of social principles, with close working between Bank and Fund as the ESAF review recommends.
We believe that the latter, integrated, approach is now required. In the light of the Comprehensive Development Framework and social principles, macro policy (and hence ESAF) needs to be an integral part of the broader anti-poverty plan.
17. In this approach - and indeed in the side-by-side approach as well - the provision of debt relief should be conditional on overall macro performance, rather than line-by-line compliance with micro-conditions. From the macro point of view, it should be sufficient for decision and completion points that the IMF affirm that the country is ontrack with its ESAF programme.
18. It is clear that whatever approach is taken - integrated or side by side - a key objective for this process should be greater ownership of programmes by all the major actors involved. This primarily involves consultation in-country during the design of the programmes. Thereafter, although final agreement on IFI support for the programmes should continue to rest with countries and Bank/Fund Boards, other main players should have the opportunity to feed their comments in directly on final drafts before they go to the Boards. One possibility would be to require each Bank/Fund document to have a paragraph which summarises the discussions they have undertaken with the other main players, and the views of those consulted, especially as to whether the parties thought the programme met the agreed objectives. These comments would then be taken into account in discussions.
A possible mechanism
19. Taking all these considerations into account, it is possible to conceive of a two stage process:
Stage 1, up to decision point:
The country establishes a 3 year track record on anti-poverty commitment and on economic policy generally. In most cases this is well underway and decision point should be before the end of 2000.
At decision-point - or earlier - the government and creditors agree a process for developing an anti-poverty framework. The key is a reliable, robust and transparent policy process, appropriate to the country concerned. It should include information and monitoring systems, and structures for consultation and accountability which take account of poor people's perspectives.
Stage 2, between decision point and completion point:
The country implements this process of detailing the anti-poverty framework. The output would be a plan that covers all government programmes and funding sources - for example ESAF and World Bank programming as well as debt relief. Once this is in place and implementation has visibly started, with a couple of milestones achieved, HIPC can move to completion point.
20. So we would see three things being in place at completion point:
21. We understand that the Bank are thinking of developing the concept of a poverty link by pilots in a number of countries approaching HIPC decision point. We support this idea. These pilots will provide an opportunity for HIPC countries to participate in the review process, building in an element to the review which has so far been missing.
22. It has been proposed, for example by the Government of Uganda, that indebted countries set up Poverty Action Funds, into which debt relief is paid and from which payments are made for additional anti-poverty spending. Where the country wishes it, we would support such funds, not least because there may be advantages in promoting transparency and accountability, and in mobilising donor support. Our biggest concern is that, to avoid problems of fungibility, such a fund be integrated into a medium term expenditure framework for the whole budget. And of course such funds would be part of a poverty strategy going well beyond the utilisation of debt service savings.
Content of policy for poverty reduction
23. Phase 2 of the Review will need to examine not just the mechanism for linking debt relief to poverty, but the content of anti-poverty policy. Happily, the Review can build on considerable thinking underway internationally. In particular, contact should be made with Bank and UN staff working on social principles, with the Special Programme for Africa, and with the team preparing the 2000/2001 World Development Report on Poverty, drawing on the extensive consultations they have carried out. The work within the Bank on poverty measurement and indicators of progress towards the International Development Targets, especially in the Bank's Poverty Network is also relevant. Again there is an opportunity here for HIPC to bring a number of different strands together.
24. The goals in an anti-poverty plan should be linked to International Development Targets, modified as necessary to reflect local conditions and goals. The process of setting such targets - including indicators, milestones, benchmarks, and local engagement in monitoring and planning - should be an integral part of developing the government's overall anti-poverty framework.
25. Any plan should include resource allocations to achieve these goals. Sectoral programmes are likely to include increased spending on basic health and education, as well as other key anti-poverty areas such as credit, rural roads and support to livelihoods.
26. The plan will go beyond increasing resources to issues of policy. Often the emphasis will need to be on improving the composition and effectiveness of public expenditures targetted at poverty reduction. The quality of primary education, for example, is as important as expanding its coverage. In some countries the critical issue may be to make the distribution of benefits of expenditure more equitable.
27. We would expect that a pro-poor policy framework should address wherever possible key causes of structural inequality. Research that DFID commissioned to feed into the World Development Report on Poverty indicates that the degree of inequality is a very important determinant of the chances of achieving the International Development Targets. The analysis of inequality needs to take into account dimensions of social difference (including gender, ethnicity, regional disparities) if it is to produce effective frameworks for policy action. There are likely to be powerful interests which will resist appropriate policies. The issue of empowerment of poor people is therefore important. One critical route to empowerment is improving the transparency and accountability of the process of developing anti-poverty policy frameworks.
28. In line with the basic principle behind the CDF, there should be no single blueprint of an anti-poverty strategy. Plans should differ according to particular country circumstances.
MOBILISING INTERNATIONAL RESOURCES AND SUPPORT
29. Debt relief is provided only for heavily indebted countries - yet the majority of the world's poor live elsewhere. We would therefore like to see analysis of how much has debt relief distorted the optimum allocation of aid resources as analysed by the Bank in recent models produced by David Dollar?
30. The other side of that coin is to ask To what extent has
this been counteracted by genuinely additional resources for development?
There has been massive public support worldwide for debt relief.
We believe there is scope for the development community as a whole
to build on this commitment to encourage a new wave of international
public opinion in favour of poverty reduction more generally.
HM TREASURY & DEPARTMENT FOR INTERNATIONAL DEVELOPMENT