BY MATT GRAINGER
One of the poorest countries in Africa is about to undergo a process of debt reduction with a difference. It will be paying more in debt servicing after creditors provide debt relief than it is at present, with devastating consequences for poverty.
The country in question is Zambia. But the failure of the Heavily Indebted Poor Countries (HIPC) Initiative to provide levels of debt relief consistent with the human development needs of poor countries raises far wider questions. The Zambia case reinforces evidence from other countries pointing to the need for an urgent review of the debt sustainability targets set by creditors.
In headline figure terms, Zambia will make large budgetary savings if the boards of the International Monetary Fund and the World Bank accept staff recommendations to provide the country with HIPC Initiative debt relief. Debt servicing in 2001-02 will fall to less than half of the level that will be required under existing debt relief arrangements, with savings amounting to over $200m a year.
But headline figures on debt relief are more misleading than usual in the case of Zambia.
The debt sustainability analysis carried out by IMF/World Bank staff shows that: actual debt service payments will increase sharply, from $136m in 1999 to $170m in 2000 before peaking at $235m in 2002; debt repayments will increase from 24% of government revenue today to 35% in 2001-02; and average repayments for 2001-02 will be 46% higher than for 1997-98.
The main cause of the sharp hike in debt service payments over the next few years is an increase in repayments of principal on loans contracted from the IMF. Payments to multilateral creditors will rise from $92m in 2000 to over $170m for 2001 and 2002. Over 80% of these payments will be directed towards the IMF.
Under this scenario, debt servicing will continue to dwarf government spending on health, education and other basic services. In 1998, debt servicing represented 1.25 times the combined budgets for primary education and basic health. By 2002, debt repayments will represent more than double projected spending in these priority social areas.
The increase in debt servicing comes at a time when health and education budgets are falling in real terms, despite government efforts to improve equity in public spending.
The human development costs of this diversion of government revenue are enormous. More than eight out of 10 households in rural areas live in extreme poverty. Child death rates are increasing. Under-five malnutrition rates have increased by 25% during the past decade.
Zambia's experience highlights a deeper problem in approaches to debt sustainability. The HIPC Initiative is ultimately geared towards a narrow financial understanding of debt sustainability.
It focuses on what governments are able to pay to creditors through the national budget, rather than on what they can afford to pay in the light of pressing human development needs.
[From Oxfam United Kingdom.]