Nafziger Economic Development (4th ed)

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becoming increasingly resistant to new-money packages, and debtors lack incentives to undertake tough reforms designed to increase debt-servicing payments abroad. DCs can best support moderate political leaders by reducing debt so that debtor countries have an incentive to undergo reform and offer long-term benefits to their publics.

Before 1989, major creditors undertook insufficient joint action to attain success in debt reduction. From 1989 to 1993, to avoid damaging precedents for other LDC debtors, creditors generally worked out debt-reduction packages with selected large debtors, such as Mexico, Brazil, Venezuela, and Nigeria. After the midto late 1990s, with falling commercial lending, joint action was limited.

The inherent barrier to voluntary schemes with small debtors is that the nonparticipating creditor who holds on to its original claims (which will rise in value) will be better off than those participating in collective debt reduction. Creditor participants pay the cost of debt reduction, while all creditors share the benefits.

The IMF’S Sovereign Debt Restructuring Mechanism

Because LDCs are sovereign so that foreign creditors lack the rights they have in their own domestic courts, they must have other protections against borrower default. Thus, IMF Deputy Managing Director Anne Krueger explains (2003:70–71), to enforce debt obligations, lenders generally, as a last resort, must reduce future access to world credit markets.

Nevertheless, sometimes debt is unsustainable, meaning that, regardless of the country’s efforts, debt (and debt servicing) relative to GDP will grow indefinitely. In these cases, the net present value of the country’s debt is less than the face value of the debt. Debt restructuring is probably essential before the country can resume growth (Krueger 2003:71).

The keys to debt restructuring are, according to Krueger (2002),

First, to give the debtor legal protection [a payments standstill] from creditors while negotiating;

Second, to give the creditor assurances that the debtor will negotiate in good faith and pursue policies that protect asset values and restore growth . . . ;

Third, to guarantee that fresh private lending would not be restructured [and]

Finally [to] verify claims, oversee voting, and adjudicate disputes.

One way of achieving these goals, the IMF, led by Krueger, decided, was to insert collective action clauses (CACs) into new bonds and loans (Krueger 2002). Initially, however, debtors feared that CACs would brand them as vulnerable and creditors were concerned about constraints on collecting debts. But, beginning in late 2003, New York state law enabled most emerging market sovereign bonds to include CAC clauses (IMF 2004c).

CACs incorporated into bond issues after 2003 do not speak to the need for coordinating debt reduction among debts incurred before 2003. A wider Debt Reduction Consortium (DRC) could amalgamate consultative groups (CG) chaired by the World Bank, the Paris Club, London Club, and roundtables chaired by the U.N.

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Development Program. Debt relief needs to shift its focus from the Paris Club to another organization, such as the CG, where debtor countries have a better opportunity to present their case and creditors a wider perspective on the debt question. An additional problem in organizing debt relief is that DC governments and commercial banks no longer have the urgency to address the LDC debt crisis, as it no longer endangers the DC banking system. Moreover, global concerted efforts proposed in the 1930s and 1990s – a special international lending facility, injections of new funds, debt buybacks, and conversions of existing assets into new assets with different contingencies – have had limited success because of disagreements about who should fund and control the administration (Eichengreen and Portes 1989:69–86; Lancaster 1991:55–56; Mistry 1991:15; Nafziger 1993:20–21, 193–195).

Resolving the Debt Crises

Although in the 1970s and early 1980s, creditors took a case-by-case approach to the debt crisis, beginning in the mid-1980s, several policy makers advocated systematic debt relief plans. We first discuss several plans that address reducing commercial debt, mostly by middle-income countries, after which we examine measures to deal with debts to bilateral or multilateral agencies, primarily by low-income countries.

As indicated, net commercial credit to LDCs continually fell in the 1980s and subsequently in the late 1990s through 2003. Yet the external debt stocks owed fell only slightly from 1999 to 2003. Both Latin American commercial debt, at levels of several hundred billion dollars yearly, and sub-Saharan debt, substantially less than a $100 billion annually, fell during this period, whereas commercial debt of East Central Europe, the former Soviet Union, and Central Asia took up some of the slack, especially after 1997. Moreover, 64 percent of 2001 LDC (76 percent of Latin American and 33 percent of sub-Saharan) debt outstanding was to private creditors (World Bank 2002e: 220–251).

Annual debt forgiveness and reduction in LDCs in the 1990s was $20 to $40 billion, of which the largest amount, sometimes as much as one-half, was Latin America, the second largest the Middle East, and the third largest sub-Saharan Africa. However, by the late 1990s and early years of the 21st century, East-Central Europe and Central Asia surpassed all other regions in benefits from debt forgiveness and reduction (World Bank 2002e:220–251).

In analyzing commercial debt, we add to issues related to debt cancellation, concerted action, and collective action clauses in newly issued debt instruments discussed above an examination of several other proposals, beginning with two plans named for American treasury secretaries, the Baker Plan (1985), which emphasized expanded lending for LDC debtors, and the Brady Plan (1989), stressing debt writeoffs and write-downs, together with debt exchanges, and the Enterprise for the Americas Initiative.

After that, we look at debt rescheduling, write-downs, and forgiveness for lowincome countries, briefly examining the 1980s and early to mid-1990s before

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discussing the HIPC (highly indebted poor countries) initiative by the World Bank and IMF.

BAKER PLAN

In the early 1980s, the U.S. government had no strategy besides declaring that debtors should pay the full interest due to American banks. However, by 1985, Washington had realized the limitations that the debt crisis placed on Latin American growth and on demand for U.S. exports. Peru’s President Garcia’s 1985 U.N. speech posing the problem as “democracy or honoring debt” forced U.S. political leaders to focus on tradeoffs. Some U.S. bankers and Treasury officials feared a debtors’ cartel. In response, at the October 1985 IMF–World Bank meeting, Secretary of the Treasury James A. Baker, III, unveiled a U.S. proposal, which called for Inter-American Development Bank, IMF credits and new surveillance (the inspiration for IMF structural adjustment lending beginning in 1986), World Bank structural adjustment loans, contributions from trade surplus countries like Japan, and additional commercial bank lending, to help the highly indebted middle-income countries. Baker provided for the IMF to continue to coordinate new bank lending, but with some centralization, so as to avoid the free-rider problem, in which individual banks could benefit by new loans from other banks. Countries receiving funds were not to sacrifice growth, as the package of budget restraint, tax reform, liberalized trade and foreign investment, the privatization of some state-owned enterprises, and setting public-sector prices closer to the market would promote efficiency without making contractionary financial policy necessary. The IMF, although under pressure from the U.S. Federal Reserve Board and Treasury and a Mexican threat of debt repudiation, contributed $1.7 billion to a $12 billion “growth-oriented” package of adjustment and structural reform, which included $6 billion from commercial banks. But the Baker initiative did not address how to go from the initial lending package to subsequent inducements for voluntary capital flows. Also, the approach did not help the poorest countries (who reduced borrowing because of low creditworthiness), and its terms did not take into account past management performance. Moreover, Latin American debtors considered the new resources inadequate and asked for a lower interest rate spread over the Eurodollar London rate (or LIBOR) and a ceiling on debt service payments (Buiter and Srinivasan 1987:411–417; Ranis 1987:189–199; Helleiner 1988:30; Sachs 1988:17–26; Cline 1989b:176–186).

Brazil’s moratorium on debt payments in early 1987 drove secondary market prices for debt down and restrained new-money packages. In response, in 1987, Secretary Baker called for a “menu approach,” including bonds for new money and debt–equity conversion, in which bank participation was tailored to individual bank interests. A limited amount of structural reform (reduced tariffs, privatization) took place, especially in Latin America. In Latin America, those countries with larger foreign resource transfers had faster growth in the late 1980s.

The Baker Plan, which stressed saving U.S. banks at the expense of the IMF, the World Bank, multilateral banks, and Japanese creditors, was vastly underfunded. Yet the plan did, however, forestall a major writeoff of third world debts that threatened

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the nine major U.S. banks in the early 1980s. Latin American debtors ceased threatening to form a cartel. This lessened the concerns of top creditor banks about LDC default and gave them time to reduce gradually their exposure to LDC borrowers. Baker also reduced the vulnerability of money-center banks by enlisting the IMF, World Bank, and DC lenders in an effort to reduce bad debts. Indeed, in the next few years these multilateral agencies and lenders strengthened their sanctions against unilateral LDC default. The insistence of the World Bank, bilateral lenders, banks, and export credit agencies on IMF approval of macroeconomic stabilization (usually involving credit and budgetary restraints) left LDC borrowers few other funding sources. Furthermore, the Baker initiative made time available for the U.S. Federal Reserve and bank regulators to support U.S. money-center banks through measures such as increased reserve requirements (Lissakers 1989:67–73; Sacks and Canavan 1989:176–186; Weeks 1989b:41–63).

Thus, by 1987, Harry Huizanga (1989:129) could say that “bank stock prices to a large extent already reflect the low quality of developing-country loans. Thus, no major U.S. bank goes under if it gets a return on its developing-country debt that is consistent with developing-country prices observed in the secondary market (Huizinga 1989:129). More important, the Baker Plan’s averting a possible debtors’ cartel and widespread unilateral LDC default enabled the top creditor banks to reduce their LDC-debt exposure, so they could boycott reschedulings and new-money packages and insist on LDC full servicing while no longer fearing their own collapse. Ironically, the major money-center banks’ newfound immunity from LDC defaults contributed to the death of Baker’s efforts to spur increased bank lending to LDCs.

BRADY PLAN

By the 1980s, commercial banks no longer deemed most balance-of-payments financing compatible with their fiduciary obligations, so net commercial credit to LDCs continually fell, becoming negative between 1983 and 1989. In March 1989, U.S. Treasury Secretary Nicholas F. Brady presented a plan for debt, debt-service reduction, and new-money packages on a voluntary and case-by-case basis, relying on World Bank, IMF, and other official support. The Brady Plan asked commercial banks to reduce their LDC exposure through voluntary debt reduction or writeoffs whereby banks exchanged LDC debt for cash or newly created bonds partly backed by the IMF or the World Bank, or debtor countries converted or bought back debt on the secondary market (Huizinga 1989:129–132). Although the IMF and World Bank were to set guidelines on debt exchanges, negotiations of transactions were to be in the marketplace, according to Brady (World Bank 1989g:Vol. 1, 24).

Debtor countries preferred debt reduction to new money, which enlarged debt and constrained growth. Debt overhang acted as a tax on investment and income increases. In the early 1980s, when financial flows dried up, many debtors needed trade surpluses to service debt.

The World Bank and IMF set aside $12 billion (one-fourth of policy-based lending) for discounted debt buybacks, with $12 billion matching funds from the Bank and $4.5 billion from the Japanese government; thus, total Brady Plan government or

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multilateral resources were $28 billion, 1990 to 1992. In 1989, Mexico was the first country to benefit from the plan, receiving $3 billion from the World Bank and InterAmerican Development Bank and $2 billion from the Japanese to issue conversion bonds, which could purchase debt with a $10 billion face value for a secondary market price of $5 billion (that is, 50 percent of face value) (Cline 1989a:187–191; World Bank 1989g:Vol. 1, 21). Secondary market trading increased exponentially from $65 billion in 1989 to $2.7 trillion in 1995 to $6 trillion in 1997. However, Brady bonds carry the stigma of previously rescheduled debt. So, finally market consolidation, uncertainty about future crises, and Ecuador’s default on a Brady bond in 1999 adversely affected secondary market activity, reducing trading to $4.2 trillion in 1998 and less than that in 1999 (Chamberlin 1999; World Bank 2003e:53).

However, replacing commercial bank debt with World Bank/IMF funds reduces flexibility for recipients, as debt to the Bank and Fund, which require first claim on debt-servicing, cannot be rescheduled. Still, the increase of IMF quotas by 50 percent in 1990 made more short-term funds available for debt reduction (FAO 1991:6).

DC commercial banks have faced increasing constraints on lending in the 1990s, with a perception of low creditworthiness of debtor countries, difficulties of implementing reform programs, increased regulatory and competitive pressure of banks, the effect of depressed secondary market prices of LDC loans on bank share prices, the reluctance of U.S. and Japanese banks to increase exposure to highly indebted LDCs, the riskiness of new-money approaches, and the free-rider problems of banks collecting full interest due without contributing to fresh-money loans (see later). Furthermore, commercial banks concentrated loan arrangements on Brazil and Mexico rather than smaller Latin American or sub-Saharan debtors. Indeed, financing concentration increased in Latin America throughout the early 1990s and commercial lending was sparse for sub-Saharan Africa throughout most of the 1990s (World Bank 1989g:Vol. 1, 12; World Bank 1993g:Vol. 1, 170–89; UNCTAD 2003d:35).

Debt-reduction measures include the exchange of foreign debts against domestic assets (debt–equity conversions), which can contribute to accelerating inflation and higher interest rates if assets acquired by the creditor are private but guaranteed by government. The exchange of discounted foreign debt for another foreign asset requires that the new asset be more secure and that its probability of servicing be larger than that of the old debt.

Buying back a debt at a discount with foreign exchange is not feasible for most LDC debtors, who have little foreign exchange available. Few creditors have been willing to reduce interest rates on existing debt instruments. Attracting reflows of flight capital may require higher risk premiums and high real interest rates. Moreover, reflows may be put in highly liquid form rather than in investments in expanding productive capacity (Husain and Mitra 1989:199–209).

DEBT EXCHANGES

One approach, the market-based “menu” approach – buybacks, debt–equity swaps, debt exchanges, and exit bonds discussed later – allows commercial banks and debtor countries to fine-tune instruments case-by-case. However, buybacks and debt–equity

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swaps actually increase banks’ short-term financing requirements. Moreover, creditors have used the menu mainly for major Latin American debtors, with little application to Africa (Bouchet and Hay 1989:146–51; Husain and Underwood 1992:29; World Bank 2002e). Furthermore, as of the late 1990s, these forms of debt exchanges have been used less frequently, replaced by other forms of debt restructuring.

Debt–equity swaps. Debt–equity swaps involve an investor exchanging at the debtor country’s central bank the country’s debt purchased at discount in the secondary market for local currency, to be used in equity investment (Claessens and Diwan 1989:271). From 1982 to the early 1990s, the active market for the swapping or selling of commercial bank claims on LDCs grew rapidly, but declined thereafter. Usually, with a swap, a DC commercial bank (Citicorp led here) sells an outstanding loan made to a debtor-country government agency to a multinational corporation, which presents the loan paper to the debtor’s central bank, which redeems all or most of the loan’s face value in domestic currency at the market exchange rate. The investor, by acquiring equity in an LDC firm, substitutes a repayment stream depending on profitability for a fixed external obligation. In the 1990s, U.S. firms and banks made these arrangements with some Latin American countries, such as Mexico, Brazil, Argentina, Chile, and Ecuador that were experiencing depressed economic conditions. Many bankers doubt that a country that lacks foreign exchange for debt service should make exchange available for repatriating corporate income (World Bank 1989g:Vol. 1, 18; IMF Survey, July 11, 1988, p. 226). Rudiger Dornbusch (1990:324) even argues that the U.S. government has been “obscene in advocating debt–equity swaps and in insisting that they be part of the debt strategy.” According to him, the U.S. Treasury has made these swaps a dogma, and the IMF and World Bank, against their staffs’ advice, have simply caved in.

Debt buybacks. In late 1989, the World Bank created a Debt Reduction Facility (DRF) for IDA-eligible countries, countries poor enough to be eligible for International Development Association concessional lending. The DRF provides grants to eligible countries (21 Sub-Saharan African countries, a few Latin countries, and Bangladesh) of as much as $10 million to buy back commercial debt instruments. Because much of the debt of these countries has been discounted by 80 to 90 percent, a small amount of cash has substantial impact in reducing debt stocks and service. The debt facility is open to countries with a World Bank or IMF adjustment program and (in the Bank’s judgment) a credible debt-management program.

Here are a few examples. Niger bought back its commercial bank debt of $108 million at 18 cents per dollar with $10 million DRF and $9.5 million from France and Switzerland in early 1991. Uganda completed a buyback of $153 million in debt obligation, 89 percent of its outstanding commercial bank debt, at 12 cents on the dollar with DRF, European Union, German, Dutch, and Swiss funds in early 1993. Bolivia eliminated most of its commercial bank debt by retiring $170 million at 16 cents per dollar with DRF, U.S. Agency for International Development, Swedish, Swiss, and Dutch funds in mid-1993. Yet creditors and donors were reluctant to

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use the resources of the facility to avoid setting precedents for large debtors, such as Brazil, Mexico, Argentina, and middle-income countries where exposure is larger (U.N. 1988:45–47; Humphreys and Underwood 1989:45, 52–53, 57; World Bank 1989g1:31, 41–49; World Bank and UNDP 1989:14–16; Nafziger 1993:97–98; World Bank 1993g:Vol. 1, 38–39).

Who benefits from a self-financed debt buyback? Paul R. Krugman and Maurice Obstfeld (1994:703–704) argue that creditors gain and a heavily indebted country loses from buying back part of its own debt on the secondary market. The debtor loses even if a donor provides aid (if that aid has an opportunity cost within the debtor country) to a debtor country to buy back part of its debt. The case of Bolivia in 1988 shows how a buyback plan meant to help a debtor can degenerate into a large giveaway to creditors. In 1988 Bolivia received $34 million from donors to buy back a portion of its commercial debt. Before the buyback was planned, the market valued Bolivia’s foreign debt of $757 million at 7 cents on the dollar or $53 million. After the buyback, the remaining debt sold for 12 cents on the dollar, a value on the market of $43.4 million. Bolivia’s benefit from the $34 million gift was the reduction in its total expected debt payments from $53 million to $43.4 million, equal to $9.6 million. Creditors received the lion’s share of the gain, $24.4 million, that is, the $34 million bought back minus the $9.6 million reduction in expected debt payments.

Debt-for-nature swaps. Although DCs contribute disproportionately to carbon dioxide, methane, and nitrous oxide emissions that exacerbate global warming (Chapter 13), LDC emissions are also a problem. LDC leaders argue that DC interest in resolving the debt problem and the environmental crisis provides an opportunity to connect the two issues. Developing countries might repay debt in local currency, with half the proceeds made available to an international environmental fund that spends to protect the local environment and the remaining local-currency payments made available for population or development projects. David Bigman (1990:33–37) suggests that G7 and other industrial countries use a tax on fossil fuels to finance the environmental fund and an environmental protection corps of young DC volunteers serving for one year.

Inevitably, growth in low-income countries will increase environmental pressures. The prevailing environmental problems are desertification (from irregular rainfall and overuse), deforestation (reduced forest and woodland cover, deteriorating soil protection, and fuelwood shortages), contamination and loss of groundwater, and urban and water pollution (especially from inadequate sewerage treatment and industrial discharges) (African Development Bank and ECA 1988:29–98).

Environmental stress increases with population growth. Reducing government expenditures to cope with the debt crisis also reduces resources, especially imports, available for accelerating economic growth, cutting environmental degradation, or slowing population growth. From 1987 to 1993, nongovernmental international environmental organizations and DC governments raised $128 million at an initial cost of $47 million (an average discount of 62 percent) to purchase debt instruments

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in 31 LDCs, mostly in Latin America. For example, in 1992, an environmental organization bought $2.2 million of Brazil’s commercial debt (at a 66 percent discount) to establish the Grande Sertao Verde National Park in northern Brazil (World Bank 1993g:Vol. 1, 115).

Debt-for-development swaps. Here an international agency buys LDC debt in the secondary market at substantial discount, exchanging the debt at a prearranged discount with the debtor country, which issues a bond or other financial instruments. In the early 1990s, UNICEF purchased debt to finance child development programs in Bolivia, Jamaica, Madagascar, the Philippines, and Sudan, such as health, sanitation, and primary education. Harvard University bought $5 million of Ecuadorian debt for $775,000, a discount of 84 percent, to finance for 10 years traveling expenses and stipends for 20 Ecuadorian students at Harvard and 50 Harvard students and faculty to perform research in Ecuador (World Bank 1993b:114–117).

Other debt exchanges. Other types of conversions include debt–debt conversions, in which foreign currency debt is exchanged for obligations in domestic currency, informal debt conversions by private companies and citizens, and exit bonds for creditor banks wishing to avoid future concerted lending. A debtor country can offer to settle arrears with individual banks by trading debts for long-term bonds, with a long grace period and an amortization period of 25 to 35 years.

An exit bond is a buyback financed by future cash flows. Debtor countries invite banks to bid to exchange their loans for bonds with a future stream of interest payments on a reduced principal (say) fully secured by U.S. Treasury securities. The African Development Bank initiated this type of securitization in Africa (Claessens and Diwan 1989:271; World Bank 1989g:Vol. 1, 18; World Bank 1991g:Vol. 1, 126).

THE ENTERPRISE FOR THE AMERICAS INITIATIVE

In June 1990, U.S. President George Bush announced the Enterprise for the Americas Initiative (EAI), which included reducing part of the $12 billion official debt owed the United States by Latin American countries undergoing World Bank/IMF reforms. To be eligible for debt relief, the Latin American country needed to (1) receive IMF approval for a standby agreement, extended arrangement, or structural adjustment facility, (2) obtain World Bank approval for a structural or sectoral adjustment program, and (3) agree to a satisfactory financing program for debt service reduction with its commercial bank lender.

Under the EAI, the country exchanges United States Agency for International Development or other U.S. official concessional debt for new and restructured debt with a reduced face value. The U.S., which determines the discount or amount forgiven case by case, charges a concessional interest rate on the new debt, which cannot be further restructured. The country must pay the principal on the new debt in U.S. dollars. However, as in the case of Bolivia, Chile, and Jamaica in the early 1990s, a country with an Environmental Framework Agreement with the U.S. government can pay interest in local currency, depositing the funds to finance debt-for-nature

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projects. From 1991 through 1993, the United States wrote down 54 percent of the $1.6 billion official debt of Chile, Bolivia, Jamaica, Colombia, El Salvador, Uruguay, and Argentina (World Bank 1993g1:35–36, 115).

RESCHEDULING DEBT

In the late 1980s and early to mid-1990s hundreds of billions of external debt stock was rescheduled. In 1988, in Toronto, Canada, the G7 (Group of Seven major industrialized countries – the United States, Canada, Japan, the United Kingdom, Germany, France, and Italy) agreed to reschedule concessional debt, canceling it at least in part, with the balance to be repaid with a 25-year maturity including 14 grace years.

In 1990, British Chancellor John Major proposed Trinidad terms for low-income debt-distressed countries: (1) rescheduling of the entire stock of debt in one stroke instead of renegotiating maturities only as they fall due at 15to 18-month intervals, (2) increasing the debt cancellation from one-third to two-thirds of outstanding debt stock, (3) capitalizing all interest payments at market rates on the remaining one-third debt stock for five years and requiring phased repayment with steadily increasing principal and interest payments tired to debtor-country export and output growth, and (4) stretching repayments of the remaining one-third debt stock to 25 years with a flexible repayment schedule. The present value of the eligible (poorest) sub-Saharan African countries would be reduced by $18 billion (rather than $2 billion under Toronto terms). Percy S. Mistry (1991:18) indicated that the Trinidad terms “represent a significant departure from business-as-usual by a weighty creditor country.”

After the United States and Japan objected to the G7 nations adopting Trinidad terms, Prime Minister Major announced in late 1991 that Britain would unilaterally implement these terms to $18 billion bilateral debt of poor African countries. In late 1994, the G7 and Paris Club adopted Trinidad terms.

In 1990, during the Persian Gulf War, the U.S. government extended generous terms to two middle-income countries, canceling $6.7 billion in military debt owed by Egypt (a “debt for war” swap) and 70 percent of the $3.8 billion U.S. government debt of Poland (favored because of the large Polish-American communities in Chicago and other politically crucial northern states), thus allowing both to evade IMF prescriptions (Food and Agriculture Organization of the U.N. 1991:7; Lancaster 1991:52–54). Mistry (1991:52–54) saw no economic explanation for bilateral creditors’ “desultory foot-dragging over the debt crises of Africa and Latin America,” whose countries are subject to an IMF and World Bank short leash, while finding more than $13 billion for Egypt and Poland at terms more generous than Toronto terms. For Mistry, this piecemeal approach involved an “embarrassing ad hoc improvisation when G-7 decides to favor debtor countries for some expedient political reasons (e.g., Poland and Egypt) and, by the same token, to punish others using the Damoclean sword of debt as a tool for foreign policy leverage).” These selective initiatives set no precedents for poorer countries in Africa and Latin America but instead, according to Mistry (ibid.), imparted chaos to international debt management.

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RESCHEDULING AND WRITING DOWN THE DEBT OF HIPCs

Highly-indebted poor countries (HIPCs) owe almost their entire debt to official bilateral or multilateral creditors. HIPC creditors may be able to reduce poverty by decreasing the HIPC’s high debt-service ratio. The HIPCs’ 1985–94 scheduled debtservice ratio was 64.0 percent, with the ratio actually paid 22.2 percent (UNCTAD 1997), meaning that more than one-fifth of annual export receipts was used to pay debt servicing. Reducing the debt overhang not only removes a major barrier to investment (Deshpande 1997) but also increases the adjustment time horizon, so that political elites, many of whom have inherited their debt burden from previous regimes, have time to plan more stable structural changes.

After 1990, Chancellor and (subsequently) Prime Minister John Major and Prime Minister Tony Blair (with Chancellor Gordon Brown) had taken the initiative, in advance of other G8 nations, in rescheduling the entire stock of debt owed by African low-income countries to Britain in one stroke, increasing their debt cancellation, and stretching and increasing the flexibility of the repayment schedule of the fraction of their debt remaining. Nongovernmental organizations and churches in Britain, and subsequently its government, with Brown’s 1997 presentation of a Commonwealth “Mauritius Mandate,” calling for firm decisions on debt relief for at least threefourths of the eligible HIPCs by 2000, helped spur a movement for Jubilee 2000, debt remission for selected HIPCs.

The World Bank/IMF HIPC initiative, begun in 1997, usually required successful adjustment programs for three to six years, after which Paris Club official creditors would provide relief through rescheduling up to 80 percent of the present value of official debt (UNCTAD 1997a). The Bank and Fund, in principle, maintained the conditions (sound macroeconomic policies and improved governance) for debt writeoffs, to avoid a vicious circle in which HIPCs would return to get newly acquired debt forgiven.

In response to critics, who complained that the time for adjustment was too long, the Bank and Fund announced an enhanced HIPC initiative in 1999 to reduce the requisite adjustment to three years before relief. Still, by the end of 2000, the IMF and Bank, with a flurry of activity, under pressure from Jubilee 2000, had provided (or was scheduled to provide) concessional funds, based on profits from lending and the sales of gold, to begin the three-year process of reducing the debt of 22 HIPCs. However, because the G8 failed to commit to front loading debt write-downs, the immediate effect in decreasing actual debt-service payments, once the debtor meets conditions, is small. Moreover, reducing debt payments in later years will depend on uncertain private and government donations to HIPC funds.10

By early 2004, 10 countries – Benin, Bolivia, Burkina Faso, Guyana, Mali, Mauritania, Mozambique, Nicaragua, Tanzania, and Uganda – had completed adjustment under the enhanced initiative. At the same time, 17 countries – Cameroon, Chad,

10 World Bank official Isac Diwan admits that only 40 cents of every dollar of cancelled debt constitutes additional resources for debtors (World Bank Development News, February 15, 2001). Nafziger (1993:190–192) discusses the complicated reasoning behind statements similar to Diwan’s.