HIPC Completion Point: The Challenge of Debt Sustainability

Dibussi Tande

On May 1, 2006 the International Monetary Fund and the World Bank confirmed that Cameroon had successfully reached the completion point of the Heavily Indebted Poor Countries (HIPC) Initiative. As a result, these institutions cancelled 1,400 billion CFA (2.1 billion euros, 2.7 billion dollars) of Cameroon’s 4,000-billion-CFA external public debt (See Press Release No. 06/85).

The decision of the donor institutions was received with elation within Government circles in Cameroon, and the official media has been painting the rosy picture of a new nation where the funds freed up as a result of the debt relief will be "reinvested in the fight against poverty".

In an address to the nation on Friday, May 12, 2005, President Biya reiterated that the HIPC debt relief “unquestionably creates very bright prospects for the economy” because “the debt service which was constraining our development will be considerably reduced”. According to the President,

“…broader access to HIPC funds should enable significant progress in the social and infrastructure sectors. The management of these funds will be strictly monitored. Strong measures will also be required to improve the business environment, foster investment and stimulate competitiveness. Lastly, the major projects which I have often mentioned to you in the areas of energy, industry and agriculture should be implemented without further delay.”

While the focus has understandably been on the benefits that Cameroon will reap as a result of officially becoming a member of the HIPC club, enough attention has not been paid to the much-needed strategies and policies required to ensure that the country does not end up once again in the vicious cycle of irrational borrowing, debt mismanagement, painful debt servicing and rescheduling, stalled economic growth, and continued dependency.

Thus, as the nation salivates on the expected HIPC windfall, it must no lose sight of the fact that the much-anticipated economic revival will occur only if Cameroon is able to judiciously manage its external debt in the long run – what economists refer to as “debt sustainability”.

According to 2001 World Bank paper on this topic, a country is said to have attained debt sustainability “…if it can meet its current and future external debt service obligations in full, without recourse to debt rescheduling or the accumulation of arrears and without compromising growth.”

The report rightly points out that without a clear and concerted attempt to address those “fundamental causes that triggered the debt buildup in the first placed,” countries that have reached the HIPC completion point will most likely end up with a crippling debt load down the road.

“Those fundamental causes include weak macroeconomic management, inconsistent implementation of policy reforms and poor governance, as well as external factors such as worsening terms of trade and protectionist policies that restrict access to export markets. Also, HIPCs, typically the poorest members of the international community, have a narrow production and export base, heavily dependent upon a few primary commodities, which make them particularly vulnerable to external shocks.”

Therefore, for HIPC countries to be on the path to sustainable economic growth, they would have to implement “…sound economic policies that establish an environment conducive to growth and poverty reduction”. Prominent among these policies are:

“(i) Macroeconomic policies, including monetary, fiscal and exchange rate policies which, with timely adjustment in the face of economic shocks, provide a stable environment for economic activity; (ii) Structural policies, including trade, tax and sector policies and regulatory environments which affect incentives for private investment and production; (iii) Public sector management, whereby public sector institutions provide services complementary to private initiatives such as infrastructure and social services; (iv) Governance and market institutions, including the rule of law (the judiciary and the police) and reduction of corruption, and (v) Social inclusion, which embraces the full participation of society through social services that reach the poor and disadvantaged, including women and minorities.”

In addition, HIPC countries must imperatively design policies and strategies for managing their debts and refine their borrowing habits:

“An important factor that contributed to the accumulation of unsustainable levels of external debt was poor debt management and imprudent borrowing practices of the debtor countries. Public sector external borrowing was not carefully managed both in terms of the amount and the terms. Borrowed resources were often used without regard to economic return and debt servicing in the future. In addition, a lack of macroeconomic policy adjustment in the face of shocks led to excessive borrowing for consumption and greatly exacerbated debt problems. To maintain external debt sustainability therefore will require significant strengthening of HIPCs’ debt management capacity, and implementation of prudent policies on non-concessional and concessional borrowing.”

To this end, the report calls for much more transparency in the management of the external debt:

“HIPCs need to strengthen the transparency and accountability of public debt management through improved information disclosure and public oversight. Better public insight and understanding, often through parliament and regular publication of debt statistics could therefore help reduce the scope for corruption and increase the effectiveness of debt management. Staff training and institutional reforms to improve debt monitoring and analysis would be critical for developing and implementing consistent debt management strategies...”

In the final analysis, states the report,

“…. Unless capital inflows are all non-debt creating, HIPCs will continue to accumulate debts in order to finance their development efforts… Most critical in considering long-term debt sustainability is the often neglected requirement that the growth of debt and interest payments do not continuously exceed the growth of exports and income.”

Click here to read, print or download the World Bank report.

Tags: HIPC World Bank IMF Debt Sustainability Africa Cameroon