Putting Life Before Debt
Catholic NGOs with much worldwide prestige and influence, taking advantage of the Jubilee to be celebrated in the year 2000, have committed themselves en earnest to an international campaign to demand the cancellation of the external debt of the poorest nations.
International debt is a dangerous obstacle to Human Development, forcing the world's most impoverished countries to use scarce resources to pay their debt rather than invest in the well-being of their people. CIDSE and CI jointly call for the cancellation of the unpayable debt of the most impoverished countries by the year 2000. To achieve this goal, as we detail later in this document, we advocate:
1. Drastically improving the HIPC Initiative;
2. Linking debt cancellation with investment in human development in ways that are appropriate within each country and determined after consultation between governments and civil society;
3. Ensuring decisions on debt relief are made in a transparent way. The international financial institutions, Paris Club and governments should share planning documents with civil society organizations and actively incorporate the views of civil society on debt analyses, planning and conditions placed on loans;
4. Changing the structure of international financial relations to ensure that debtors, people affected by debt and creditors are equal parties in negotiations on debt. One possibility is to set up an international bankruptcy/insolvency procedure.
The severity of today's crisis facing the poorest countries in the world, combined with the upcoming Jubilee, have inspired us to work together actively to find solutions to the international debt problem. The purpose of this document is to increase public awareness of international debt, outline the CIDSE/Caritas position, and propose actions to bring about a real change.
Who We Are The identity of CIDSE and CI member organizations is rooted in the social mission of the Catholic Church. We derive our inspiration from scripture, tradition, Catholic Social Teaching, and the daily lived experience of the poor. At the heart of our Christian faith is compassion for all humanity, especially the poor on whom the debt burden falls heaviest.
As organizations working with and for people at the grassroots level, we experience the effects of debt on the daily lives of the poor. As Church-based organizations whose concern stems from this firsthand experience, we help to illuminate the conscience of decision-makers, and have spent years advocating debt relief among them.
It is from our Catholic, Christian and cultural background that we offer this position paper and advocacy guide. It follows previous policy statements on debt, notably the joint CIDSE/CI statement at the UN World Summit for Social Development held in Copenhagen in March 1995 and the CIDSE position paper, Third World Debt, published in 1988.
While rooted in the Catholic Church, our identity is also a function of our collaboration with many individuals and organizations, both religious and secular, who join the struggle against poverty and injustice. The document owes a great deal to the contribution of our partner agencies in Latin America, Africa and Asia, to academics and activists around the world, and in particular to several nongovernmental organizations (NGOs) with long and outstanding knowledge and experience on the debt issue: the Center of Concern, the European Network on Debt and Development, and Oxfam International. It is intended to be used as a tool by people who want to understand the basics of international debt for the purpose of organizing campaigns and advocating change.
What Is International Debt? Many people have borrowed money to buy supplies, equipment or a house. Countries do the same. They borrow money from private capital markets, international financial institutions and governments to pay for infrastructure such as roads, public services and health clinics; to run a government ministry; or to purchase weapons. Like individuals, countries pay back the principal and interest on the loans they take out. But there are important differences.
If a person borrows money, he or she receives it directly and pays it back according to the terms and conditions of the loan. But if a country borrows money, the citizens are not necessarily notified or informed of the loan's purpose or its terms and conditions. In practice, many governments have used loans for projects that do not meet minimum standards of social, ecological or even economic viability. At times, these loans have been used to enrich a small group of people or have been transferred out of the country to the private bank accounts of government officials.
A second difference is that businesses or individuals unable to meet their financial obligations over time go bankrupt. A court is appointed to assess the debtor's situation and banks acknowledge that the debtor cannot fully pay his or her debts. But countries cannot file for bankruptcy—there is no such procedure, no arbitrator. At the international level, the creditors, not a court, decide whether to require the debtor country to pay its debt.
A Catholic Framework on Debt Catholic Social Teaching offers a compelling way of understanding the complexities of the debt crisis and its impact on the human community. Our tradition draws from a large body of work that, in part, addresses the moral dimensions of economic activities. We believe that ethical analysis, rooted in human dignity, is as fundamental as any economic analysis to solving the debt crisis. Catholic Social Teaching offers a set of principles, outlined below, for action in a world longing for greater justice and peace. It calls us to examine the situation of international debt and discern the opinions and commitments necessary to bring about urgently needed economic changes.
Human Dignity. The foundation of Catholic Social Teaching and starting point for our work on international debt is the belief that each individual is sacred. All people are created in the image of God and are the clearest reflection of God that exists in this world. The Holy Scriptures state in Genesis that "God created humans in his image, in the divine image he created them" (Genesis 1:27). Each person has a basic dignity that stems from our very creation rather than from any action on our own part. The dignity of the human person is a criterion against which all economic, political and social systems are to be judged and all aspects of the debt situation must be measured.
Rights and Duties. Human rights are moral claims to goods which are necessary to protect and promote human dignity. Rights and duties are complementary; every person possesses both. They specify the minimum conditions necessary to protect and promote human dignity in the political, social and economic order. In Catholic Social Teaching, rights and duties also extend to relationships among states. States have responsibilities to each other and to the international common good.
The Common Good/Solidarity. Dignity, rights and duties are protected or eroded by the social communities in which people live. Individual and communal duties are fulfilled in three essential communities that express the social nature of each person: the family, civil society and the wider human community. All individuals have the duty, as members of society, to contribute to it and to further the achievement of the common good. The common good is defined as the sum total of those conditions in society that make it possible for all people to achieve their full human development.
The common good has both national and international dimensions. There is currently no entity, however, which carries the responsibility and power to promote the international common good. In the absence of such an international authority, additional demands fall upon states, international institutions and private actors to accept their responsibility to promote the international common good. This responsibility demands that these bodies promote policies that increase the ability of marginalized people to participate in global economic and social systems. Such participation is implied in the principle which Catholic Social Teaching calls the universal destination of the goods of creation. This principle calls us all to see that the goods of creation are destined by God for the welfare of the whole human community. Pope John Paul II has called for the virtue of solidarity to guide our responsibilities toward others and toward the requirements of the universal common good. He speaks of solidarity as "...a firm and persevering determination to commit oneself to the common good; that is to say, to the good of all and of each individual because we are all really responsible for all." (Sollicitudo Rei Socialis, 38).
The Church views the current debt situation as a factor contributing to the erosion of the international common good and calls for governments and institutions to actively seek solutions that assure human dignity, protect human rights and accomplish the international common good.
Preferential Option for the Poor. The preferential option for the poor calls each individual to give a weighted concern to the needs of the poor in all economic, political and social decisions because it is the rights and dignity of the most impoverished people that are most often violated. The preferential option for the poor is a principle that enters the universal social teaching with Pope John Paul II but reflects a moral demand as ancient as the Hebrew prophets. It is clearly conveyed in Jesus' words that whatever we do unto the least of our brothers and sisters we do unto Him, and it has more recently come to light in liberation theology. Those members of society with the greatest needs require the greatest attention and response. By assisting those who are most vulnerable, an option for the poor strengthens the entire community, for the deprivation and powerlessness of the poor wounds the whole community. Such wounds are healed only by a greater solidarity with the poor and marginalized.
Archbishop Renato R. Martino, Vatican nuncio to the United Nations, explained this principle in a 1997 statement to the UN: "If the process of globalization taking place in our world is to be truly human, it requires the construction of a truly global community." In such a community, he said, there must be concern for all and "especially for the weakest."
International Debt. Catholic Social Teaching sees the international debt of poor countries as both a complex policy issue and a profound moral challenge. In moving toward resolution of the problem, neither its complexity nor its moral character can be ignored. International debt is complex in size and scope. It affects the welfare of millions of people, scores of countries, international financial institutions and private sources of funding. International debt also presents a moral challenge—the particular concern of the Church in addressing this problem—in how it affects the human dignity, human rights and human welfare of some of the most vulnerable men, women and children in the global community. But the moral structure of international debt also includes the proper definition of the duties, responsibilities and rights of a complex fabric of individuals and institutions. The moral dimensions of the international debt problem extend to how it was contracted, who was involved in key decisions, which institutions are now primarily responsible for its resolution, and what moral criteria should be used to articulate, structure and adjudicate this fabric of relationships.
In Catholic teaching, lending money is a legitimate moral enterprise if key conditions of justice are met on the part of the lender and borrower. This principle applies to both individuals and states, although the latter problem is much more complicated in its definition of responsibilities. It is this latter issue which today occupies the concern of many in the international community. The key principles to evaluate the moral problem in Catholic teaching are those of justice (commutative and social justice) and the option for the poor.
Commutative justice governs the kind of contractual obligations incurred in international lending and borrowing. But this contractual justice must be located within the broader context of social justice, since the international debt problem is today a moral challenge not only for lenders and borrowers, but for the international community as a whole. To focus only on the terms of the loan and the nations or institutions involved rather than on the conditions under which the loans were contracted, the purposes for which they were used and the impact on individuals today as the terms of repayment are set is to isolate commutative justice from its social context.
The principles of social justice focus in this instance on the broad range of institutions that must be mobilized if the debt's moral dimensions are to be addressed. Hence, responsibilities exist not only for the debtor countries and their creditors, but for international institutions (some of which hold debts), the more significant states with major economic roles in the world, and nongovernmental organizations (some of which are deeply involved in the lives of debtor nations).
Interpreting the norms of social justice will require attending to the principle of the option for the poor. This principle calls attention to the condition of those in debtor nations who had no voice in the contracting of debts but whose lives are deeply affected by the choices made in resolving the debt problem. It is this principle, in combination with the requirements of social justice, that has led many in the Church to follow the leadership of Pope John Paul II in urging a substantial reduction or even cancellation of the international debt.
Cardinal Roger Etchegaray stated in his introduction to the 1987 Vatican document, "At the Service of the Human Community: An Ethical Approach to the International Debt Question," "Debt servicing cannot be met at the price of the asphyxiation of a country's economy, and no government can morally demand of its people privations incompatible with human dignity," He says further that, "[I]n a world of increased interdependence among nations, an ethic of expanded solidarity will help to transform economic relations (commercial, financial and monetary) into relations of justice and mutual service, while at present they are often relations based on positions of strength and vested interests. Due to their greater economic power, the industrialized countries bear a heavier responsibility which they must acknowledge and accept...the time is over when [the industrialized countries] can act without regard for the effects of their own policies on other countries."
Why Now? We are approaching the great celebrations around the new Millennium. The Jubilee is both a time of repentance when injustices are put right and the symbolic beginning of a new era. Jubilee symbolizes a fresh start for the poor, an opportunity to reestablish justice and equity throughout the world. In the Hebrew Scriptures, the Jubilee was to have occurred every fifty years. It was a time to free slaves, return land to its rightful owners and forgive debts. Linking this biblical concept to the coming millennium, Pope John Paul II states: "Christians will have to raise their voice on behalf of all the poor of the world, proposing the Jubilee as an appropriate time to give thought...to reducing substantially, if not cancelling outright, the international debt which seriously threatens the future of many nations." (Tertio Millennio Adveniente, 51). We see the Jubilee in the Year 2000 as the time for a new beginning for impoverished nations, an opportunity for justice and the solution to the international debt problem.
It is not only the approach of the Third Millennium that makes this a time ripe for change. Within the last decade, old animosities between East and West have broken down and new, stronger and wider allegiances between rich nations have developed. The time is right to rectify relations between North and South. Shared economic growth, fairer trading links, increasingly stable political relationships, sustaining the environment—these goals benefit North and South. Development is an expression of the common good.
The upcoming Jubilee, combined with the devastating poverty of the least developed countries, the widening gap between rich and poor worldwide and the relative failure of past attempts to reduce the debt make up a scenario in which we cannot fail to act. Guided by the spirit of solidarity between nations and peoples of North and South, we have an obligation to promote an authentic and substantial solution to the foreign debt problem.
What Produced the Debt Crisis? The debt crisis blew up in 1982, when Mexico announced that it could not pay its foreign debt, sending shock waves throughout the international financial community as creditors feared that other countries would do the same. The immediate cause of the crisis had occurred in 1973 when the members of the Organization of Petroleum Exporting Countries (OPEC) quadrupled the price of oil and invested their excess money in commercial banks. The banks, seeking investments for their new funds, made loans to developing countries, often without appropriately evaluating the loan requests or monitoring the use of the loans. In fact, due to irresponsible practices of creditor as well as debtor governments, much of the money borrowed was spent on programs that did not benefit the poor—armaments, large-scale development projects and private projects benefiting government officials and a small elite. The 1973 oil price increase also triggered inflation in the United States and other industrialized countries.
In 1979, OPEC raised the price of oil a second time. Meanwhile, the US Federal Reserve adopted extremely tight monetary policies to reduce the inflation, producing a domestic recession. The combined impact of the rising price of fuel and rising interest rates led to a worldwide recession.
Developing countries were hurt the most. Their exports declined as the domestic cost of production rose and the major importers reduced their purchase of goods from overseas. Latin American governments that had taken out loans from commercial banks at "floating" interests rates (rates that vary according to the current market interest rate) saw the interest on their debt skyrocket. African governments, reacting to the worldwide collapse in commodity prices, borrowed heavily from other governments and multilateral banks at both market interest rates and concessional (very low) rates.
When Mexico finally announced that it could not pay its foreign debt, the international financial system appeared on the brink of collapse. The world's major creditors acted to save the commercial banks and the world economy.
Impact in the South The existence of debt has both social and financial costs. Heavily indebted poor countries have higher rates of infant mortality, disease, illiteracy and malnutrition than other countries in the developing world, according to the United Nations Development Program. The UNDP estimates that Sub-Saharan African governments transfer to Northern creditors four times what they spend on the health of their people. If governments invested in human development rather than debt repayments, an estimated three million children would live beyond their fifth birthday and a million cases of malnutrition would be avoided. According to an April 1997 Oxfam International position paper titled "Poor Country Debt Relief: false dawn or new hope for poverty reduction?," the cost of debt servicing represents more than the financial resources needed to achieve significant human development in six out of the following seven very poor and highly indebted African countries: Benin, Ethiopia, Mozambique, Burkina Faso, Mali, Zambia and Niger.
On the financial side, heavy indebtedness is a signal to the world financial community that the country is an investment risk, unwilling or unable to pay its debt. As a result, impoverished countries are either cut off from the international financial markets or pay more for credit. The UNDP estimates that in the 1980s, the interest rates for poor countries were four times higher than for rich countries due to inferior credit ratings and the expectation of national currency depreciations. Another cost of debt is the absence of infrastructure such as roads, schools or health facilities that could both fight poverty and create the conditions for more economic growth. A different type of cost is associated with the time civil servants spend negotiating debt repayments. Oxfam International estimates that there have been over 8,000 debt negotiations for Africa since 1980.
Heavily indebted countries face enormous pressure to generate foreign exchange in order to pay their debt service and to purchase essential imports. The international financial institutions often offer financial assistance to countries in this situation and use their leverage to compel the countries to accept and stabilization policies. The structural adjustment policies (SAPs) and austerity measures associated with them can have a strongly negative impact on the poor, both initially and for extended periods.
SAPs are designed to: 1) stabilize faltering economies by reducing inflation and correcting the balance of payments; and, 2) increase growth by making economies more productive and efficient and opening them to market forces. Major elements in structural adjustment programs typically include:
Raising taxes to increase government revenue and balance the budget
Eliminating price and interest rate controls
Reducing the size and scope of government and privatizing state-owned enterprises
Reducing tariffs and other foreign trade restrictions
Reducing regulations on businesses and on capital flows to encourage local and foreign investment.
Although SAPs may help a country become more competitive in the global arena, they can severely harm the poor at home. This happens when:
Social expenditures (especially for health, education and welfare) are cut back in order to meet targets for reducing fiscal deficits
Public sector employees are dismissed in government down-sizings without retraining or other economic opportunities
Local companies close in the face of competition from abroad
New investment is slow and does not create jobs at the rate expected
SAPs can also create an environment that values global competition above all else, resulting in lower wages and worsening labor conditions for workers. Deregulation of labor markets can result in situations where workers cannot exercise their rights and local entrepreneurs and multinational corporations maximize their profits by operating sweatshops. Women and children, the majority of sweatshop workers, are hurt the most by starvation wages, long hours and unsafe or unsanitary conditions.
SAPs are based on economic theories considered universally applicable and thus are often applied uniformly. Yet the specifics of the timing and sequencing of SAPs may not adequately take into account a country's political and institutional culture or its ability to absorb the adjustments. Governments are then forced to decide which public sectors to cut and which to save. Unfortunately the poor and the vulnerable are the ones least able to protect themselves in this process.
Debt and structural adjustment policies can harm the environment. When countries need to generate more foreign exchange to service their debt, they increase exports. But because many developing countries depend on exports such as logging, mining or a single agricultural crop, there is a serious risk that they will exploit these resources in a way that will cause major damage to the environment. Unless effective environmental protection programs are put in place, export orientation can have a devastating impact on the land and its people.
Early Attempts to Reduce Debt Mexico's announcement of a unilateral moratorium on its debt repayments shocked the financial community. It also galvanized citizen's groups—churches, NGOs and others who experienced the impact of the debt crisis—to step up their advocacy on debt. In response, the major creditors—commercial banks, governments (also known as bilateral creditors) and international financial institutions—sought new ways to address the problem.
Commercial banks. Through the 1989 Brady Plan, commercial banks reduced about 20% of the commercial debt owed by middle-income debtor countries (about 35% in the cases of Mexico, Brazil, Argentina, Costa Rica, Morocco, the Philippines and Peru). The banks were supported in the process by guarantees from governments and international financial institutions, in effect shifting the credit risk from commercial to bilateral creditors.
Bilateral creditors. Bilateral creditors fall into two categories: Paris Club and non-Paris Club. The Paris Club is primarily the group of wealthy donor nations which also belong to the Organization of Economic Cooperation and Development (OECD). The non-Paris Club major donors include Eastern Europe, the former Soviet bloc (with the exception of Russia, a Paris Club member since 1997) and the Arab states.
Bilateral creditors were the first to provide debt relief in the early 1980s. Today, the Paris Club provides qualifying countries with some reduction or rescheduling of debt. The criteria are strict, but if a country qualifies, it can get a 67% reduction of a portion of its outstanding debt, and up to 80% under the Heavily Indebted Poor Country (HIPC) Initiative. (Non-Paris Club donor nations have on occasion provided relief on Paris Club terms.) The portion of debt eligible for reduction is that which:
has not previously been rescheduled is not concessional was incurred prior to the cut-off date—the date the country first requested assistance from the Paris Club. For most countries, the cut-off date is in the early 1980s. The debt incurred since then is ineligible for relief.
Often, the net result is that debt relief is insignificant.
International Financial Institutions. The international financial institutions include the World Bank, International Monetary Fund (IMF) and regional development banks. They are governed by member nations, virtually every nation in the world. These institutions raise the majority of their capital on international financial markets at very favorable conditions because of their triple-A rating—received because their borrowing is guaranteed by all member nations. Because the international financial institutions offer the best terms available and have been given a special role in the international financial system, they insist on "preferred creditor status," which means that they must be paid back prior to other creditors. If the debtor country does not make its loan payments on time, it is considered "off track" and will ordinarily not receive loans from other creditors.
HIPC Initiative The international debt remains a serious obstacle to human development. Many impoverished countries are forced to use their scarce resources, including bilateral aid, to pay their creditors rather than invest in the health and education of their people. However, through continuous pressure and long-term commitment, civil society organizations and some concerned governments have attempted to reduce the debt of the world's poorest countries. This has made a marginal, yet helpful difference in peoples' lives.
In October 1996, another possibility for debt relief emerged. The World Bank and IMF reached agreement on the Heavily Indebted Poor Country (HIPC) Initiative, the first ever comprehensive debt reduction plan to enable the most impoverished countries to pay back their loans without compromising economic growth or building up arrears again in the future.
In so doing, these two organizations acknowledged that debt is a severe obstacle to development and responded to advocacy efforts from civil society organizations. The initiative is designed to reduce the multilateral, bilateral and commercial debt of HIPCs over a period of about six years to a "sustainable" level, one at which the country is considered able to make debt payments. Despite its historic importance, however, first experiences of the HIPC Initiative reveal that it is far from sufficient.
As a condition of debt relief under this initiative, the eligible country must implement SAPs approved by the World Bank and IMF. After it has established a track record of economic reform over a three-year period, the Paris Club creditors provide a 67% reduction in eligible debt stock. This point is called the "decision point."
All other creditors (non-OECD bilateral creditors and commercial banks) are supposed to provide comparable reductions (commercial banks are major creditors for only a few HIPS, such as the Ivory Coast). If these actions do not result in a sustainable debt, the country moves to the second three-year stage, during which time it might get support from the international financial institutions for economic reform and poverty reduction.
At the end of six years, provided the country has established an acceptable track record by implementing required economic reforms, it will receive up to 80% reduction in eligible Paris Club debt stock. This point is called the "completion point." The second period of three years might be shortened for countries which already have a track record of strong performance. At the completion point, the multilateral creditors themselves provide debt relief only if all other reductions are not enough to reduce the country's debt to a sustainable level.
The Initiative's Shortcomings Too few countries eligible. The World Bank classifies 41 countries as HIPCs, yet only a few will get relief through the HIPC Initiative as it is currently designed. Like Paris Club debt relief, qualifying for HIPC is difficult and countries that do qualify will likely find its impact limited. For example, Nicaragua may not qualify under the HIPC Initiative because of its poor track record in carrying out structural adjustment programs. To qualify, Nicaragua would have to start an economic reform program which would likely require even more drastic cuts in government expenditures. Such reductions in a country still recovering from civil war and considered the second poorest country in the hemisphere would be devastating for its people, far worse than the benefits that a small amount of debt relief would bring.
Too little relief. Bilateral and multilateral creditors are not writing off debt, rather they are to pay for debt reduction. As a result, they want to minimize its cost. Some powerful G-7 countries, as well as some middle-income countries that are unlikely to be eligible for HIPC debt relief, have not committed sufficient resources to bilateral debt relief. The IMF will provide multilateral relief only through an existing fund, the Enhanced Structural Adjustment Facility (ESAF). The World Bank, on the other hand, has set aside $2 billion for debt relief—an important commitment—but will release it only after bilateral creditors show their financial commitment by contributing to a separate debt relief fund.
Narrow definition of debt sustainability. The HIPC Initiative is designed to restore the debtor country's ability to repay its loans. The amount of debt considered sustainable was decided by looking at what middle-income Latin American countries actually paid to service their debt. The concept did not take into account that many Latin American countries paid their debt at the expense of their people's welfare, paying more than they should have. The percentage of exports that went to debt service then became the standard for what low-income countries were considered able to pay.
Too long a wait. Eligible countries must establish a track record of economic reform for at least three years before receiving bilateral relief and six years before receiving multilateral relief.
Connection with structural adjustment policies. The HIPC Initiative requires countries that want debt relief to carry out SAPs. SAPs can reform economies in positive ways but can also contribute to poverty.
Arbitrary cut-off dates for Paris Club relief. The cut-off date is the date the country first requests assistance from the Paris Club. Debt that builds up afterward is ineligible for reduction under the HIPC Initiative.
CIDSE/CI Position On the Debt CIDSE and Caritas Internationalis call for outright cancellation of the unpayable debt of the most impoverished countries by the year 2000. In the short term, we call for significant improvements in the Heavily Indebted Poor Country (HIPC) Initiative. In addition, we call for debt cancellation to be linked with investment in human development and for decisions on debt relief to be made in a transparent way. In the long term, we will work to change the structure of international financial relations.
1. Cancel the unpayable debt by the year 2000.
The principle of Jubilee calls for the cancellation of debts. Applied to the HIPCs, it is the most simple and direct of all the options for reducing the debt. Jubilee 2000 campaigns have emerged around the world to advocate debt cancellation.
Despite the fact that many highly indebted countries have already repaid the principle—the amount they first borrowed—but not the interest, debt cancellation is a politically difficult option. Barring the complete cancellation of debt, it raises questions as to how debt cancellation should take place, which countries should benefit, what portion of debt should be canceled, and how to ensure that the country does not again become indebted.
There are several precedents for debt cancellation. After World War II, Germany's creditors reduced almost all its debt to a 5% debt service-to-export ratio. In contrast, creditors reduce the debt of eligible HIPC countries to a debt service-to-export ratio of between 20% and 25%. In 1990, the US cancelled about 50% of Poland's debt. In 1991, both Egypt and Poland received a 50% reduction in their bilateral debts owed to the Paris Club. Since then, several countries have changed their approach to debt cancellation. In 1992, for example, the US Credit Reform Act prohibited future cancellations on the part of the US, requiring congressional appropriations for any debt relief.
2. Improve the HIPC Initiative.
A limited yet option is to improve the HIPC Initiative. Several types of improvements are essential:
* Shorten the time frame. Indebted countries need relief now, not three or six years in the future as the HIPC framework suggests. Most eligible countries will not receive debt relief under the HIPC Initiative before the year 2000. But each year of delay translates into less debt relief because the macroeconomic indicators are recalculated and often adjusted to reflect higher expected growth as a result of the SAP reforms.
* Broaden eligibility. Of the 41 countries that the World Bank and IMF identified as heavily indebted, only 8-20 are expected to get relief. All 41 should be eligible.
* Redefine debt sustainability. In their evaluations of the first countries eligible for relief, the World Bank and IMF used narrow criteria for defining the amount of debt a country could pay, based on the experience of Latin American middle-income countries. They also used overly optimistic assumptions about the patterns of growth, inflation and credit availability. These criteria do not take into account the sacrifices required of extremely poor countries to continue paying their debts. If human development, rather than ability to pay, were considered the goal of debt sustainability, then debt repayments would not take away from government resources required for basic social needs and productive activities. An alternative approach to debt sustainability would require measurable criteria to determine the effectiveness of spending for the poor and marginalized segments of the population.
* Provide more relief. HIPCs need more multilateral debt relief than has been provided under the Initiative. They also need more bilateral debt relief in addition to current levels of Official Development Aid (ODA). If debt relief is offset by development aid reductions, its impact could be limited. Even in times of domestic budgetary problems and growing isolationism, ODA levels among the OECD nations should rise to the target level of 0.7% of annual Gross Domestic Production reaffirmed at the 1995 World Summit for Social Development in Copenhagen. ODA must be made more effective and better targeted to benefit poor people.
* Remove Paris Club cut-off dates. The date after which the Paris Club will not consider a country for debt relief should be determined on a case-by-case basis with the goal of achieving real and substantial debt relief. The date should take into account factors such as the amount and type of debt, whether the country is recovering from civil war, natural disaster or economic instability.
* Consult civil society on conditions for relief. Because both macroeconomic and microeconomic conditions directly affect people's well-being, organizations of civil society should be consulted on the scope, type, timing, sequence and monitoring of conditions for debt relief.
3. Link debt cancellation with investment in human development.
We believe that just as the debt burden is felt most severely by the poor, so too should debt cancellation benefit the poor. As CIDSE and Caritas member organizations, we believe that international debt is a major cause of poverty and threatens the development of people living in the most impoverished countries of the world. Thus, debt cancellation should free resources for investment in human development and productive capacity. This position is informed particularly by Southern Caritas members who call for linking debt cancellation with increased spending on health and education.
Because not all governments can be counted on to invest resources freed through debt relief in the poor and marginalized sectors of society, there is a case for making a strong link between investing in human development and debt cancellation. However, such "social conditionalities" imposed in the framework of the existing international financial system can be counterproductive. On the one hand, a too-narrow definition of acceptable social spending could limit a country's investment in its productive capacity, such as small-scale agriculture, in favor of investment in health and education. On the other hand, creditor nations can misuse social conditionalities as an excuse to delay debt relief, as in the case of Uganda.
For these reasons, CIDSE and Caritas member organizations call for debt cancellation to be linked with investments in human development in ways that are appropriate within each country and determined after consultation between governments and civil society. Such consultation, however, presupposes an environment in which people are free to speak and are heard. As development agencies in the North and South, we are acutely aware of the crucial role that civil society plays in the successful planning and implementation of projects and policies. We have witnessed widespread failure when programs and policies are designed and carried out without dialogue and joint decision-making by civil society.
4. Ensure that decisions on debt relief are made in a transparent way.
Historically, international financial institutions and the Paris Club have been relatively closed organizations. In most cases, the specific conditions of loans are kept secret between the IMF and the country's Finance Ministry. Civil society organizations rarely have access to documents that outline planning goals and strategies for the country. Yet, they are the ones who experience the effects of projects, policies and loans provided by the international financial institutions. In recent years, the World Bank has approved, at least in principle, the concept of participation by beneficiary groups in the project approval cycle. The IMF has not established a similar policy. Both the IMF and World Bank should actively incorporate the views of government ministries, local churches, trade unions and active NGOs to ensure that on-ground realities are appropriately reflected in debt analyses, planning and the conditions placed on loans. Citizen groups should help define SAPs, their terms and their implementation.
The Paris Club should be more transparent in its decision-making processes, which are both cumbersome and secretive. Debtor countries currently meet with the Paris Club every 18 months to 3 years. First, they agree on the rules of renegotiation, then the debtor travels separately to each Paris Club member to negotiate individual bilateral agreements. A simple and more transparent implementation mechanism would make more efficient use of time and resources and more openly convey the terms and conditions of any agreements.
Borrowing governments share responsibility for the debt and its solution. They, too, must be more transparent in their negotiations on debt vis a vis other government agencies, parliaments and civil society organizations. They must share information on exactly how debt relief is used as well as on the conditions for debt relief. Finance ministries should exchange information on debt with other government ministries and national parliaments whose programs will be affected by the level of debt repayment. We are encouraged by recent dialogue among citizens' groups and governments on national budget priorities, particularly military expenditures, education and the environment.
5. Change the structure of international financial relations.
The pattern of international financial relations must be fundamentally reformulated to establish a fair process between debtors and creditors. Current debt management practices are characterized by the creditors' double role as judge and plaintiff. They do not reflect the fact that the responsibility for today's unbearable debt burden in many Southern countries rests not only with debtors but with debtors and creditors alike. Therefore, the current practice should be replaced by a fair and transparent procedure that provides a framework for fair and equal relationships between debtors and creditors.
The introduction of an international insolvency/bankruptcy procedure has been proposed as one possibility to achieve these fundamental changes. It could be modeled after experiences of local governments in the United States which are entitled to legal protection from their creditors if they become insolvent/bankrupt. One major element of an international procedure would be to establish neutral courts of arbitration that allow those affected to voice their views and concerns regarding the impact of the proposed solution.
All these objectives can only be reached with the strong mobilization of public opinion in both creditor and debtor countries. CIDSE and CI urge their constituencies to learn more about debt, build awareness at the grassroots level, launch or join public opinion campaigns and lobby decision-makers. On the basis of shared Catholic Social Teaching, CIDSE and CI believe that organizations associated with the Church have a responsibility to work with decision-makers on this issue. In the spirit of solidarity among nations and peoples, CIDSE and CI believe they have an obligation to work together to promote an authentic and substantial solution to the debt problem now and in the coming years.
Qualifying Criteria for HIPC InitiativeQualifying Criteria for HIPC Initiative To qualify, countries must be:
IDA-only and heavily indebted. IDA-only means the country's average annual per-capita income must be below US$900. Most highly indebted countries have average annual per-capita incomes under US$400.00 Have a strong track record of performance under an IMF-supported structural adjustment program. If the country strays, it has to wait longer for relief.
Exhaust all existing debt relief mechanisms without reaching a sustainable level of debt. Sustainable means: 1) the Net Present Value of the country's debt does not exceed 200-250% of its annual export earnings; and 2) the country's annual debt service does not exceed 20-25% of its annual export earnings. Specific targets within these ranges are determined on a case-by-case basis.
Uganda: a Telling ExampleUganda, the first country evaluated for accelerated relief in April 1997, was found eligible due to its strict adherence to structural adjustment policies for over ten years- four more than required by the HIPC Initiative. As a result, it must only wait one year, but even that results in up to $200 million less in debt relief. Of a total debt burden of $1.7 billion, Uganda will get $338 million in debt relief.
A document by Caritas Internationalis (CI) and International Cooperation for Development (CIDSE), released in December 1997. Edited and abbreviated by envío. CI is a network of 146 national relief, development and social service organizations in 194 states and territories throughout the world. CIDSE is a network which brings togther 16 Catholic development organizations located in Europe, North America and New Zealand.