TEXT: G-7 FINANCE MINISTERS REPORT ON DEBT RELIEF PLAN

(Ministers want faster, deeper, broader debt relief)

Washington -- The finance ministers from the Group of Seven (G-7) major industrialized nations

issued a report June 18 to their heads of state and government calling for faster, deeper and broader

debt relief for the world's poorest countries that have demonstrated a firm commitment to reform and

to the alleviation of poverty. The leaders adopted the report during their annual economic summit in

Cologne, Germany.

Following is the text of the G-7 Finance Ministers report on the Debt Initiative:

(begin text)

 

Report of G7 Finance Ministers on the Cologne

Debt Initiative to the Cologne Economic

Summit, Cologne, 18-20 June, 1999

 

1. Launched in 1996, the initiative to reduce the debt overhang of heavily-indebted poor countries

(HIPC Initiative) has already yielded positive results, bringing together for the first time multilateral,

Paris Club, and other official bilateral creditors in a comprehensive framework for debt relief.

Nonetheless, recent developments and experience have highlighted the vulnerability of many HIPCs

to exogenous shocks. At the threshold of a new millennium, it is now time to reinforce the initiative so

as to enhance the prospects for a robust and lasting exit for qualifying countries from recurrent debt

problems.

2. We therefore support faster, deeper and broader debt relief for the poorest countries that

demonstrate a commitment to reform and poverty alleviation. If implemented, the debt stock of

countries possibly qualifying under the HIPC Initiative would be reduced, from some $ 71 billion in

Net Present Value (NPV) remaining after traditional debt relief, by an additional $ 27 billion. These

measures, together with forgiveness of debts arising from Official Development Assistance (ODA), of

which some $ 20 billion in nominal terms are owed to G 7 countries, would lower countries' debt

service burden significantly and free resources for priority social spending.

A Framework for Poverty Reduction

3. While enhanced debt relief will reinforce debtor countries' scope for policy action, sound

economic policies must continue to be pursued, and renewed unproductive expenditure must be

avoided. At the same time, it is important that the benefits of debt relief are targeted to assist the most

vulnerable segments of population. Hence, there will have to be a strong link between debt relief,

continued adjustment, improved governance and poverty alleviation. Both better governance in

budgetary matters and financial savings derived from debt relief should allow for targeted expenditure

on basic social services.

4. The pursuit of sound social policies should be integrated with structural adjustment programs that

debtor countries are expected to implement. The new HIPC initiative should be built on an enhanced

framework for poverty reduction, developed by the International Financial Institutions (IFIs). This is

critical to ensure that more resources are invested in health, education and other social needs, which

are essential for development.

5. To that effect, the World Bank and the IMF should adapt their support under the "Policy

Framework Papers" (PFP), in particular the IMF's programs under the Enhanced Structural

Adjustment Facility (ESAF). Integrating their efforts, the World Bank and IMF should help qualifying

countries with the drafting and implementation of poverty reduction plans for the effective targeting of

savings derived from debt relief, together with increased transparency of budgetary procedures to

protect social expenditures. Throughout program design and implementation, there should be

consultations with broader segments of the civil society. Such dialogue will be the basis for deepening

the sense of "ownership" with governments and citizens in debtor countries when necessary

adjustment programs are to be adopted.

6. We call upon the World Bank and the IMF to develop by the time of the Annual Meetings specific

plans for such an enhanced framework for poverty reduction.

 

Faster Debt Relief

7. While implementation of debt relief must continue to be predicated on sound economic policies

over two stages, debtor countries should be allowed to advance the "completion point" through

improved performance. The second stage could thus be shortened significantly if a country meets

ambitious policy targets early on ("floating completion point"). This mechanism should lay out specific

priority steps needed to deepen structural reforms and enhance social sector investment, focusing in

particular on poverty reduction.

8. In addition to addressing the debt overhang, the HIPC Initiative should focus more on significantly

reducing the cash-flow burden of debt service payments, in order to release resources for poverty

reduction. The debt service burden of qualifying countries should be alleviated more quickly through

provision of "interim relief" by the IFIs even before debt reduction is implemented at the "completion

point". This is already current practice in the Paris Club for bilateral debts, and the IFIs should

provide comparable treatment. Furthermore, after the "completion point", the IFIs could frontload

debt stock reduction in a way to reduce debt service payments more strongly in the early years.

9. In order both to make the HIPC process more predictable and to simplify the modalities of earlier

cash-flow relief, the amount of debt reduction should be determined at the "decision point" on the

basis of the situation prevailing at that time. This will provide greater certainty about the level of debt

relief.

10. A number of the very poorest countries with heavy debt burden have not yet embarked on the

HIPC process. We call on the IFIs and the Paris Club to make it a priority to assist them to begin the

process.

 

Deeper and Broader Debt Relief

11. In order to achieve lasting debt workouts for qualifying HIPCs and to support their efforts to

alleviate poverty, the international community should commit to new steps to free up resources.

Target ratios indicating the level where debt sustainability can be assumed, should be reassessed and

lowered. Thus, we support bringing down the debt/exports ratio from a current 200-250 percent

range to 150 percent. In addition, the alternative debt/revenue ratio should be given more attention

and be lowered from currently 280 percent to 250 percent. This suggests also a revision of the

sub-criteria designed to avoid moral hazard under this alternative and describing the minimum GDP

ratios of exports and tax revenues; these sub-criteria could be lowered from 40 percent and 20

percent, respectively, to 30 percent and 15 percent. These combined revisions would result in deeper

debt forgiveness, take greater account of debtor countries' fiscal positions and broaden the HIPC

Initiative to more countries.

12. While bilateral creditors in the Paris Club currently grant countries qualifying for the HIPC

Initiative debt forgiveness of up to 80 percent on commercial debt, we support an even deeper

degree of cancellation. To achieve debt sustainability, we would be prepared to forgive up to 90

percent and more in individual cases if needed, in particular for the very poorest among these

countries. For poor countries not qualifying under the HIPC Initiative, the Paris Club could consider a

unified 67 percent reduction under Naples terms and, for other debtor countries, an increase of the

existing limit on debt swap operations with due regard to appropriate transparency.

13. While many bilateral creditors have forgiven debt arising from Official Development Assistance

and/or extend ODA to poor countries only in the form of grants, remaining ODA debt continues to

be a source of the debt overhang in many countries. We therefore call on all creditor countries to

forgive bilaterally, through a menu of options, all ODA debt of qualifying countries on top of the

amounts required to achieve debt sustainability. We are aware that such forgiveness would present a

special burden on some creditor countries. In order to help ensure that HIPCs do not face new debt

problems in the future, new ODA should preferably be extended in the form of grants.

Financing

14. We recognise that these changes will entail significant costs, in particular arising from debt owed

to the IFIs. However the final costs of the initiative are subject to many uncertainties, and actual

outlays will be spread over a long period of time. We are prepared to support a number of

mechanisms to meet these costs, recognising the importance of maintaining an adequate concessional

lending capacity by the IFIs:

-- To meet the IMF's costs, the Fund should mobilise its resources, while maintaining an appropriate

level of reserves, through: the use of premium interest income; possible use of reflows from the

special contingency account or equivalent financing; and use of interest on the proceeds of a limited

and cautiously-phased sale of up to 10 million ounces of the IMF's gold reserves.

-- The multilateral development banks should build on the work they have begun to identify and

exploit innovative approaches which maximise the use of their own resources.

-- The costs to the IFIs will also require bilateral contributions. We have pledged substantial

contributions to the existing HIPC Trust Fund. We will consider in good faith contributions to an

expanded HIPC Trust Fund.

-- In meeting the costs, we call for appropriate burden sharing among donors taking into account all

relevant aspects, including the magnitude and quality of ODA already extended and past ODA

forgiveness, and recognising the contributions of countries with high ODA loans outstanding relative

to GDP.

15. On the basis of this framework, we call upon the IFIs and the Paris Club to provide faster,

deeper and broader debt relief. Concrete proposals should be agreed by the time of the next Annual

Meetings of the IMF and World Bank.

(end text)