On 18-20 June 1999 the Finance Ministers of the Group of Seven industrial nations met to consider modifications to the Heavily Indebted Poor Countries (HIPC) Initiative in the light of criticisms from a number of quarters, including the United Kingdom Government. The outcome was a statement entitled the Cologne Debt Initiative and was welcomed and endorsed by the Heads of Mission. In essence the report supported ‘faster, deeper and broader debt relief for the poorest countries that demonstrate a commitment to reform and poverty alleviation’. Thus for the first time an explicit link was created between debt relief and the relief of poverty. With this end in view the Ministers asked for modifications in existing programmes of support by the World Bank and the IMF, in particular the IMF’s Enhanced Structural Adjustment Facility, adhesion to which had been a condition of entry into the HIPC process. The Bank and the Fund were asked to help qualified poor countries to formulate plans for the use of savings derived from debt relief for the reduction of poverty.
The suggested role of the Bank and the Fund in the formulation and implementation of plans for the reduction of poverty might be seen as intervention in matters of domestic responsibility. It is important, therefore, that the International Financial Institutions proceed with sensitivity and restraint in seeking the co-operation of the governments of the highly indebted countries involved. The Ministers called upon the Bank and the Fund to develop plans for poverty reduction in time for the Annual Meetings of these bodies in September.
The Ministers were concerned about the slow pace of the HIPC programme. While retaining the programme’s two stage structure, they recommended that the debtor countries should be allowed to bring forward the ‘completion point’ through improved performance. The second stage could thus be shortened significantly in the case of countries meeting ambitious policy targets.
The amount of debt relief granted is intended to bring the remaining debt burden down to a level that can be sustained without further international intervention. The debt relief calculation depends on a variety of factors, including the ratio of debt to exports. The Ministers suggest that the present target ratio should be brought down from 200 -250 percent to 150 percent. Combined with other adjustments, this reform will lead to a deeper level of debt relief. The Ministers also propose that greater attention should be given to the serious budgetary consequences of debt servicing.
It is not easy to specify with certainty the benefits that Tanzania will enjoy as a result of the Cologne Debt Initiative, but it is hoped that the Tanzanian Government will be in a position to press for earlier access to the completion point of the HIPC process and that there will be benefits resulting from other changes in the HIPC Initiative. Finally, it is understood that Tanzania is benefiting from technical assistance with respect to the monitoring and management of external debt. It is plainly of first rate importance that machinery should exist to avoid a new debt overload once the burden of debt has been brought down to sustainable levels.
J Roger Carter