Haiti enters HIPC but will it do

Haiti News

Debt News

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Haitian debt relief: Is the HIPIC initiative enough? An analysis from EURODAD. (12/18/06)

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Norway sets precedent by canceling $80 million in illegitimate debt (10/03/06)

Haiti has reached decision point under the Heavily Indebted Poor Countries (HIPC) Initiative of the World Bank and IMF. According to the country's decision point document, debt relief under the HIPC Initiative will total approximately US$140.3mn in net present value terms with an additional US$243mn under the Multilateral Debt Relief Initiative (MDRI) when Haiti eventually reaches completion point. Provided the final details on Inter-American Development Bank participation in the MDRI are agreed in January 2007, Haiti could obtain a further US$333mn in debt cancellation. The country's authorities say they hope to attain completion point in September 2008. However, if this is delayed by just one year, (which has been commonplace for many other countries usually due to the complex and heavy burden of numerous conditionalities), Haiti will forego US$18.6mn in debt relief.

Haiti's debt is large and unsustainable for such a fragile economy. Moreover some of the debt could easily be classified as illegitimate. Haiti's total public and publicly guaranteed debt stands at US$1.3bn in nominal terms at end-September 2005. Multilateral creditors account for 82.2% of the total (IDA 37.9% and IDB 40% respectively). The Paris Club accounts for 14.4% with Italy, France and Spain the largest bilateral creditors (with 5.2%, 4.8% and 2.9% of claims respectively). In March 2002, the World Bank in an independent evaluation of Bank assistance to Haiti from 1986 to 2001 concluded, “the development impact of IDA lending had been negligible”. Yet the country, under the current system, is forced to bear the responsibility for these joint failures alone and this debt has sat on Haiti's books ever since. Worse, in 2005 Haiti used US$40mn of its scarce international reserves to clear arrears to IDA on precisely these same debts. The case for debt cancellation is therefore extremely strong.

There is no question that Haiti urgently needs comprehensive bilateral and multilateral debt cancellation. Some could argue therefore that Haiti's progression to decision point status under the HIPC Initiative should be welcomed. Haiti is the poorest countries in Latin America and the Caribbean and amongst the poorest in the world. Income per capita stood at just US$450 in 2005 according to the World Bank. 78% of Haiti's population lives on less than US$2 per day and 54% on less than US$1. Just 53% of adults are literate and only 55% of 6-12 year olds attend school. Both health and education services are provided by predominantly non-public entities. This means that most charge fees, which citizens just cannot afford. Yet Haiti was only recently "re-categorised" as a "Heavily Indebted Poor Country" by the World Bank and had until now, and for no apparent reason, been left out of all international debt reduction initiatives despite such dire (and deteriorating) socio-economic indicators and development challenges. So should this new development for Haiti be embraced?

Debt relief under the HIPC Initiative will undoubtedly contribute to creating a certain degree of fiscal space for much needed poverty-related expenditures. Indeed in the country's decision point document the Haitian Government has stated its intention to use debt relief savings in the education, health, water supply and sanitation sectors, environmental protection and natural disaster avoidance. Individual expenditure priorities include the training of new teachers, provision of new teaching materials, a school feeding programme, improving the availability of drugs, extending immunisation, purchase of supplies for maternity clinics and improved potable water supply in rural areas. These are ambitious aims which are (understandably) likely to fuel domestic expectations yet the Bank and Fund admit that there will be "relatively limited resources from HIPC assistance" and in 2006-2007, even after the provision of HIPC Initiative assistance, debt service as a percentage of government revenue will reach as much as 14.6%.

So why are there such "limited resources" from HIPC assistance despite such clear need? The Bank and Fund have assessed the amount of debt reduction to be granted to Haiti in order to reduce the country's debt to export ratio to the debt sustainability threshold of 150%. But a more detailed look at Haiti's decision point document reveals that the IMF and World Bank have assumed economic growth rates of an average of 4.2% between 2006 and 2025 in order to arrive at a cancellation figure of US$140.3mn. Worryingly however, Haiti's growth has averaged just 1% over the last 10 years. This logically begs the question: why have such optimistic economic growth rates been forecast? The Bank and Fund argue that, despite overall low growth rates over the last half century, these have largely reflected periods of political instability. If you exclude these periods of political turbulence from the economic simulations growth has averaged around 4.5% annually, in particular in the 1970's fuelled by investment in light manufacturing and the development of tourism. However, given the IFIs' track record in accurately projecting the growth performance of countries within the HIPC Initiative programme, many civil society campaigners may question whether these assumptions are at all valid. It is true that Haiti will benefit from a more comprehensive write-down of its IDA debt under the MDRI but this will only be granted, at the very earliest, two years down the line upon satisfactory completion of the HIPC Initiative. Interim debt service relief in the meantime is based on the above assumptions. Moreover, there are no IMF loans eligible for inclusion in the MDRI because they were disbursed after the cut-off date of end-2004. In November 2006, the IMF approved US$109.5mn in new loans for Haiti under the Poverty Reduction and Growth Facility (PRGF). These new disbursements will be covered by neither the HIPC Initiative nor MDRI and will go straight back onto Haiti's balance sheet.

This is ironic because in the same decision point paper, the Bank and Fund make an undisputed case for urgent and deeper debt cancellation. The IMF and World Bank have conducted a detailed debt sustainability analysis of Haiti and flag the potential for future debt distress in the event of lower export or economic growth rates. These "stress tests" reveal the real extent of Haiti's sustained socio-economic vulnerability. The document projects that if economic growth does not increase by the projected 4.2% but is instead a full 2 percentage points lower, Haiti will once again be unsustainable by 2025. Worse, if export performance is lower than projected Haiti could once again be unsustainable as soon as 2011, says the paper. Thus, argue the IMF and World Bank, Haiti's export performance is vital to economic reinvigoration and to avoid future unsustainable debt. But the emphasis on exports, while food security remains a key concern, may sound alarm bells for many local groups. In addition to these vulnerabilities, Haiti will remain extremely dependant on often volatile external donor assistance for over 50% of the government budget.

Finally on the issue of sustainability, some might say that it comes as no great surprise that the IMF and World Bank are quick to point the finger at Venezuela and underscore its potential role in aggravating Haiti's debt sustainability profile over the medium term. Haiti has recently concluded an agreement to obtain new concessional finance from Venezuela under the "PetroCaribe" agreement. Under the deal, Haiti will pay 60% of the price of its oil imports upfront and pay the remaining 40% over 25 years with a two year grace period at 1% interest. The grant element is highly concessional at an estimated 49%. Despite the highly concessional nature of the deal, the Bank and Fund say they are concerned that repayments to PetroCaribe could reach as much as 1% of GDP in 2013. If Haiti does not use the resources from PetroCaribe in investment projects which generate a high return, this deal could worsen the country's medium-term outlook. Clearly, such deals must be closely scrutinised but it is also obvious that these concerns actually underscore the need for more, not less and immediate, not "somewhere down the line", debt cancellation from all of Haiti's multilateral and bilateral creditors.

Haiti faces a bewildering array of conditionalities over the next two years if it is to reach completion point on schedule. These span macroeconomic conditionalities, public financial management and governance, tax policy and administration, social sectors and external debt management. The IMF and World Bank describe these conditionalities as "essential to the success of the HIPC Initiative". But Haiti's weak institutional capacities, continued security concerns and lack of trained personnel probably mean that many of these detailed reforms - which span the entire range of government activities and interventions - will be a challenge to implement. So what are some of the economic, governance and social conditions the Haitian Government will have to comply with in order to progress through the HIPC Initiative?

There are plans "to improve the management of public enterprises and road maintenance. The Government will modernise public enterprises to increase their efficiency and maximise their profitability. Particular emphasis will be given to improving governance and transparency". Whether this means privatisation is not clear. The central bank will be reformed and part of it will be sold in a recapitalisation operation. Investment and tax laws are to be revised in order to spur private sector development which the Bank and Fund describe as "key" for economic growth in the country. In many other HIPCs, this has generally translated into corporate tax breaks which have not spurred the increases in private investment and job creation it was hoped for nor generated significant revenues for the host government. And like other HIPCs before it, Haiti will also undertake significant public sector reforms, including the "rationalisation of employment and salary policy". In other countries, such as Honduras, this meant large lay offs and wage ceilings for public sector employees which in turn have generated significant social unrest. Further reforms span strengthening customs controls and public expenditure management, increasing agricultural productivity and diversification, protection of private property rights, strengthening procurement procedures and key audit reforms. While some of these measures will arguably improve transparency and accountability enabling local citizens to hold their government to account, the Haitian authorities have voiced openly their concern that these reforms will be difficult to implement and will delay much-needed debt cancellation.

Several groups in Haiti and outside have protested that the HIPC Initiative is not what Haiti needs. Haiti needs immediate debt cancellation. The only condition some groups feel should apply is that the funds freed-up via cancellation be open to public scrutiny and invested in priority area poverty reduction expenditures. No more than that. Given the above considerations, the case for this position is extremely strong. Regrettably, it seems as though the international community has opted for the "business as usual" approach. Paris Club creditors - which hold 14.4% of claims on Haiti - met earlier this week and confirmed their commitment to reduce Haiti's debt stock but "as soon as Haiti reaches the completion point". This week Belgium, Canada, Denmark, France, Germany, Italy, the Netherlands, Spain, UK and US met and agreed on a restructuring package for Haiti rather than an immediate and comprehensive cancellation. Under the terms of the package, interest payments have been deferred until 2010 and just US$7.2mn has been written-off. More claims will only been written-off if Haiti satisfactorily completes all the requirements of the HIPC Initiative. We may also assume that this "exceptional" assistance will count towards donors' ODA. Given Haiti's critical state, it is all very sad and represents yet another wasted opportunity to do the right thing today in support of Haiti's people and the Millennium Development Goals. In this context, civil society organisations locally and around the globe will continue to campaign vigorously for the cancellation of Haiti's debts today - and not tomorrow.