*{Oxfam International - Advocacy - "Debt Relief and Poverty Reduction: Meeting the Challenge"Policy 
Paper
Debt relief and poverty reduction: Meeting the Challenge 
Unicef/Oxfam International Position Paper, August 1999
Executive Summary}   

For almost two decades unsustainable debt has undermined human development 
in many of the world’s poorest countries. It remains a profound threat to 
the efforts of Heavily Indebted Poor Countries (HIPCs) to achieve the 
international development targets set for the year 2015. While the recent 
reforms to the HIPC debt relief initiative do not go far enough, Oxfam and 
UNICEF strongly welcome the commitment made by the Group of Seven 
countries at the Cologne Summit to provide a permanent exit from the debt 
crisis. We also welcome the proposal to develop mechanisms for 
strengthening the linkage between debt relief and poverty reduction. This 
paper is intended as a contribution to the next phase of reform of the 
Heavily Indebted Poor Countries initiative. It focuses on strategies for 
integrating debt relief into wider mechanisms for achieving the 2015 human 
development goals.

At the heart of our proposal for reform is a new approach to eligibility. 
In our view, the track record for establishing eligibility should be 
shortened, with more emphasis placed on poverty reduction objectives. 
Human development goals must figure at the centre of macro-economic 
reform. This is the rationale which underpins the Comprehensive 
Development Framework (CDF) developed by the World Bank, as well as the 
Principles of Good Practice in Social Policy adopted by the IMF-World Bank 
Boards. The support for Sector Wide Approaches (SWAPs) provided by UNICEF 
and the wider donor community represents another example of the new 
consensus in favour of integrating human development into macro-economic 
reform.

Unfortunately, the eligibility criteria for debt relief do not reflect 
this consensus. The sole condition for access to the HIPC framework is 
compliance with Enhanced Structural Adjustment Facility (ESAF) programs, 
which prioritise short-run macro-economic targets. These targets are at 
best weakly integrated into strategies for achieving the internationally 
agreed human development goals set for 2015. If the linkage between debt 
relief and poverty reduction is to be strengthened, ESAF must be 
integrated into a broader, longer-term strategy for human development. 
With regard to eligibility for HIPC, our view is that debt relief should 
be provided at the earliest possible stage to governments demonstrating - 
through a Debt-for-Development plan - a capacity to absorb savings into 
national poverty reduction strategies.

*partie=titre Deep poverty justifies early relief *partie=nil 
The HIPCs suffer some of the deepest levels of deprivation in the 
developing world. Around 3.4 million children - almost one in five of the 
total - die before the age of five, most of them from poverty related 
infectious disease. Life expectancy is 51 years – 26 years less than in 
the industrialised countries. Around 47 million primary school age 
children are not in school, and many millions more do not complete primary 
school. To these indicators of distress can be added a wide range of new 
threats. The AIDS pandemic is contributing to the erosion of hard-won 
human development gains. Around two-thirds of all victims live in the 
HIPCs. Meanwhile, malaria claims a million lives a year in the HIPCs, most 
of them children. AIDS and the emergence of drug-resistant strains of 
malaria are imposing massive new costs on already over-stretched health 
systems, and compounding household poverty. 

Looking to the future, the majority of HIPC countries are ‘off-track’ for 
achieving the 2015 human development targets, most of them by a wide 
margin. For instance, the World Summit for Social Development (WSSD) set 
the target of a two-thirds reduction in child mortality. This implies a 
target rate of 52 deaths per 1000 live births. Projections by UNICEF 
indicate that, on current trends, the HIPC child mortality rate will be 
134 deaths per 1000 live births. To put the gap between target and 
projected outcome in context, it represents around 2 million additional 
child deaths. The picture is similarly bleak in education. UNESCO 
estimates that up to 40 million primary school-aged children in HIPCs will 
remain out of school in 2010. Projections by Oxfam suggest that this 
figure will increase by 2015. On the basis of trends since 1990, only 
seven of the HIPCs are on course for achieving the 2015 goals. Debt relief 
should be seen as one financing mechanism for closing the gap between 
current trends and the target rates needed to achieve these goals.

Unsustainable debt has contributed to the social problems facing the HIPC 
countries. Not only has it slowed economic growth, it has also restricted 
the ‘fiscal space’ available for investment in basic services, with 
excessive debt servicing undermining access to health and education. 
Converting debt liabilities into investments in primary health care, basic 
education, water and sanitation measures would act as a catalyst for 
accelerated progress towards the 2015 targets. This should be established 
as the core purpose of the HIPC initiative.

*partie=titre but not from diverted aid *partie=nil 
While the Cologne reforms mark an important step in the right direction, 
they do not go far enough. We are concerned that many countries will 
continue to face unacceptably high levels of debt servicing. At the same 
time, creditors have failed to indicate how they intend to finance deeper 
and broader debt relief. This raises the prospect of a diversion of 
development assistance into HIPC debt reduction. Such an approach would be 
both deeply inequitable and unjustifiable. It would be inequitable because 
it would deprive non-HIPC countries of desperately needed assistance; and 
it would be unjustifiable because debt relief is eminently affordable. The 
annual costs of the Cologne reforms will be in the range of $2 billion to 
$3 billion. To put this in context, it is less than one third of the 
amount cut from aid budgets since 1992.

*partie=titre Eligibility criteria are inappropriate *partie=nil 
The criteria for eligibility to the HIPC initiative need to be reviewed. 
The Chief Economist of the World Bank, among others, has noted that 
existing ESAF conditionalities are often too restrictive in terms of the 
fiscal targets set. Moreover, as noted above, ESAF conditionalities are 
developed without explicit reference to the 2015 targets. This results in 
a fragmented approach to conditionality, with short-term macro-economic 
criteria being prioritised over long-term development goals. Eligibility 
for HIPC debt relief should be determined on the basis of a more 
integrated approach, in which poverty reduction concerns are placed at the 
heart of macro-economic policy design.

*partie=titre Debt relief is not a stand-alone strategy *partie=nil 
Debt relief should be seen as one element in a broader financing strategy 
for achieving, on a country-by-country basis, accelerated progress towards 
the 2015 human development goals. Even after receiving debt relief, 
concessional development assistance will remain vital to poverty reduction 
and economic recovery. As with any form of development assistance, debt 
relief will be most effective where the general policy environment is 
conducive to achieving broad-based growth and improved access to basic 
services.

The central challenge to be met in the next phase of HIPC reform is 
maximising the resources available for poverty reduction, while at the 
same time ensuring that the resources, which are released, are efficiently 
used. Debt relief can provide both an incentive and a sustained flow of 
resources to accelerate progress towards the 2015 targets. However, HIPC 
reform should be seen as part of a wider resource mobilisation effort, 
encompassing national and international efforts, to reduce poverty.

*partie=titre The policy environment is now conducive to a poverty-focused HIPC 
initiative *partie=nil 
Changes in the wider policy environment have improved the prospects for 
successful development of a poverty-focused debt relief strategy. The 
development of Sector-Wide Approaches (SWAPs) is supporting a transition 
in development assistance from a project-based approach to a program-based 
approach under government leadership. The parallel development of 
Medium-Term Expenditure Frameworks (MTEFs) is helping to create a budget 
environment in which longer-term planning, transparency, and priority 
setting in resource allocation become possible. At the same time, donors 
are developing strategies which place poverty reduction at the heart of 
macro-economic planning. 

Perhaps the most important development of recent years has been the move 
away from stringent conditionality. Donors now recognise that even the 
strongest conditionality will fail in the absence of national ownership, 
and that financial aid will only have a lasting impact in an environment 
conducive to poverty reduction. An important element in fostering national 
ownership is engagement with civil society. Participation makes sense not 
only because it is important in its own right; but also because it leads 
to improved identification of poverty problems and solutions. Many 
governments are now prioritising participatory approaches to poverty 
reduction, with donor support.

How can HIPC reform build on this environment? First, by providing 
interested governments with additional resources for their fight against 
poverty. Second, by mobilising resources needed to achieve the 2015 
targets. Where governments can demonstrate a clear commitment to an 
economic reform process, allied to a capacity to absorb savings from debt 
relief in a way which accelerates poverty reduction, we believe they 
should receive early debt relief. No country able to meet these criteria 
should have to wait more than one to two years for debt relief. And 
countries with a viable poverty reduction strategy should not have to wait 
at all. 

*partie=titre Towards a new model *partie=nil 
We propose a simple two-phase approach for integrating HIPC debt relief 
into national poverty reduction efforts. We recognise that some 
governments already are in the process of formulating poverty reduction 
strategies and plans in collaboration with their partners. Our proposal 
would help consolidate such efforts.

*partie=titre Phase 1 To Decision Point *partie=nil 
Countries would be required to establish a track record indicating a 
commitment to economic reform and poverty reduction. Macro-economic reform 
and stabilisation would remain important elements, but a new framework – 
going beyond ESAF - would be established. This would include indicators of 
fiscal sustainability, developed in consultation with the IMF, as part of 
a broader anti-poverty framework. The length of the track record would 
vary depending on country-specific circumstances, but would not exceed two 
years.

During this initial track-record period, governments would be expected to:

- Demonstrate progress towards an effective poverty reduction strategy. 
Benchmarks would include: the development of a transparent budget system; 
specified targets for increasing the proportion of budget resources 
allocated to basic services and marginal areas; and policies for achieving 
broad-based growth. Weight would be attached to the level of participation 
by civil society in developing anti-poverty programs.

- Develop a poverty reduction plan, which is integrated into 
macro-economic planning. Developed in dialogue with civil society, this 
would set out policy and financing provisions, including strategies for 
the development of sector plans, public spending priorities, and a 
medium-term financial framework.

Obviously, such plans and strategies would build on existing efforts by 
governments and their partners where these are already in process.

Phase 2 The Interim Period to the Completion Point
The interim period between the Decision Point and the Completion Point 
would not be fixed. Governments able to demonstrate a capacity to absorb 
debt relief resources into a poverty reduction strategy could proceed 
directly to the Completion Point. Others would receive an interim flow of 
debt relief, including multilateral debt relief, during the development of 
an effective poverty reduction plan.

Performance criteria for progress in the development of a poverty 
reduction strategy would include both macro-economic and social policy 
indicators. Special weight would be attached to:

- Strengthened budget management, including the prioritisation of 
expenditures and adherence to budget allocations across spending 
categories; progress towards the integration of recurrent and development 
budgets; Public Expenditure Reviews (PERs) which evaluate performance 
against the approved budget frame and output targets; and improved 
transparency, including the timely publication of PERs.
- The development of a Medium Term Expenditure Framework, which 
establishes clear priorities for annual budgeting.
- Progress towards poverty-focused public spending priorities, including 
commitments geared towards achieving the 2015 targets.

The sole requirement for proceeding to Completion Point, when countries 
receive debt stock reduction and exit from the HIPC framework, should be a 
Debt-for-Development Plan. This would specify in broad terms how the 
resources released from debt relief would contribute to poverty reduction 
and accelerate progress towards the 2015 targets. The Debt-for-Development 
Plan would be formulated in collaboration with the relevant United Nations 
agencies, the World Bank and bilateral donors and be submitted to the 
national Consultative Group. The Poverty Action Fund developed by the 
Government of Uganda provides one model, which could be explored.

The Debt-for-Development Plan would also help to identify the most 
appropriate flow of relief. Countries with a more developed institutional 
capacity would clearly be in a position to absorb more resources up front, 
while those with less developed capacity would be guaranteed heavier flows 
of relief as institutional reforms took root.

The Debt-for-Development Plan provides a broad contract between creditors 
and debtors against which to measure performance. It would not provide a 
checklist through which micro-level conditionality could be imposed. In 
the event of extreme departures from agreed priorities, the flow of 
resources could be adjusted. 

*partie=titre Debt relief and poverty reduction: Meeting the Challenge *partie=nil 
    
1,1 Unsustainable debt is part of the poverty problem. Debt relief has 
the potential to be part of the solution. Following the Cologne Summit, 
the next stage of the review of the Heavily Indebted Poor Countries 
(HIPCs) initiative provides an opportunity to strengthen the linkage 
between debt relief and poverty reduction. 

1,2 We believe that HIPC reform should be seen as an integral element 
in a wider financing strategy aimed at accelerating progress towards the 
human development targets for the year 2015. As agencies working directly 
with poor communities and the governments of many HIPCs, we share a 
widespread concern to ensure that the poor and marginalised capture the 
benefits of debt reduction. As one Zambian non-governmental organization 
has put it: “resources freed up in debtor nations because of cancellation 
of debt must be oriented towards serving the needs of the poor.” 

1,3 A well-designed debt strategy can provide both the incentive and 
the sustained flow of resources needed to strengthen poverty reduction 
programs. By releasing resources for investment in basic services such as 
health, education and rural infrastructure, debt relief can help to reduce 
needless child deaths and achieve universal primary education. Such 
investments can in turn help to develop the more equitable patterns of 
growth needed to meet the goal of halving extreme income poverty by 2015. 

1,4 We propose that HIPC reform should be guided by the following 
principles:

- The HIPC initiative should be seen as one element in a renewed 
international commitment to achieve the 2015 goals set by the World Summit 
for Social Development and the OECD Development Assistance Committee. 
Poverty reduction should be seen as the core objective of the reformed 
HIPC framework.

- The HIPC initiative should reinforce the strategies developed by 
national governments and the international community to promote poverty 
reduction and sustainable development. These strategies include 
Sector-Wide Approaches (SWAPs), Medium-Term Expenditure Frameworks 
(MTEFs), and the 20/20 initiative for financing universal access to basic 
social services. Debt relief, like any other form of development 
assistance, will have a greater impact in an environment characterised by 
a strong political commitment to poverty reduction.

- HIPC reform should achieve the twin objectives of providing a clear 
‘exit’ from the burden of unsustainable debt stock, while at the same time 
reducing the budgetary burden of debt to levels commensurate with 
accelerated attainment of the 2015 targets. The precise balance between 
debt stock relief and debt flow relief should be determined on a 
country-by-country basis.

- The revised HIPC framework should provide stronger incentives to 
convert debt liabilities into human development investments. It should not 
make debt relief contingent on compliance with more stringent 
conditionalities related to economic reform.

- HIPC reform should be financed through new and additional financial 
resources, rather than by the diversion of aid. Robbing Peter to pay Paul 
is not a financing strategy consistent with a commitment to the 2015 
goals.

1,5 We stress that we do not see debt relief as a stand-alone strategy 
for poverty reduction. But while HIPC reform is not a sufficient condition 
for achieving the international community’s shared human development 
goals, we are convinced that it is a necessary condition. If the HIPCs are 
to achieve the 2015 targets, they will need access to increased net flows 
of development assistance; and both donors and debtor country governments 
will need to strengthen the policy environment for poverty reduction. Yet 
since the early 1990s the net flows to HIPCs have been declining. This 
situation must be reversed. 

*partie=titre 2 Poverty in the Heavily Indebted Poor Countries (HIPCs) *partie=nil 

2,1 Citizens of the HIPCs account for a minority of the world’s poor, 
but they suffer some of the deepest levels of deprivation. The following 
facts tell their own story:

- Average life expectancy is 51 years. This is 12 years less than in the 
developing countries as a group, and 26 years less than in the 
industrialised countries.

- The under-five mortality rate averages 156 per 1000 live births. This 
translates into 3.4 million deaths annually, most of them resulting from 
infectious diseases which could be averted through low-cost interventions.

- There are some 47 million primary school-aged children out of school – 
more than one third of the total world-wide. The majority of these 
children are girls. More than a third of the children who start school 
drop out before having gained basic literacy skills.

- About half of all households lack access to safe water and sanitation. 

- HIPCs account for 30 of the 44 countries which fall into the ‘low human 
development’ category in the UNDP Human Development Report. On average, 
more than one quarter of the population of these countries is not expected 
to reach the age of 40, rising to more than one third in countries such as 
Burkina Faso, Ethiopia and Niger.

2,2 Such indicators point to the persistence of deep-rooted poverty. 
They are a consequence of past policy failures on the part of national 
governments and the international community – including, in the latter 
case, the failure to resolve the debt problem. 

2,3 Today, the HIPCs must not only address the legacy of past problems. 
They also face new challenges, which threaten to reverse painstakingly won 
human development gains. Most of the 5,500 deaths every day from HIV/AIDS 
occur in the HIPCs. The rapid increase in the incidence of tuberculosis in 
Africa is linked closely to the AIDS epidemic. Along with HIV/AIDS, 
efforts to control malaria are being jeopardised by microbial evolution. 
Nine out of ten of the annual 1 million malaria deaths occur in 
sub-Saharan Africa, where most of the HIPCs are located. The vast majority 
of victims are young children. Effective responses to these challenges, 
including increased public investment in preventive and curative 
interventions, are urgently needed if the 2015 target of reducing child 
mortality by two thirds is going to be achieved. 

2,4 Enormous new pressures are being placed upon already over-stretched 
and under-financed basic services. To take only one of many grim 
statistics, HIV/AIDS is claiming the lives of 600 Zambian teachers each 
year – equivalent to about half of the total number of new university 
graduates. Tuberculosis and malaria are bringing many health systems to 
the brink of collapse. And the inability of basic services to cope with 
new demands is intensifying pressure on the coping strategies of 
households. Young girls and women in particular are absorbing the stress 
of caring for the sick and for AIDS orphans, with girls often being taken 
out of school as a result.

2,5 Preliminary estimates by UNICEF and Oxfam indicate that, on current 
trends, the international development targets for the year 2015 will be 
missed by a wide margin in the HIPCs. In Rwanda and Zambia the child 
mortality rate is projected to rise, while no change is projected in Chad, 
the Democratic Republic of Congo, Côte d’Ivoire, Liberia and Mauritania. 
On current trends, the child mortality rate for the HIPCs will be 134 in 
2015, rather than the target rate of 52. UNESCO estimates that up to 40 
million primary school-age children in HIPCs will remain out of school in 
2010. Estimates by Oxfam suggest that this figure could rise to over 50 
million by 2015. The same estimates indicate that the international goal 
of universal primary education by the year 2015 will be missed in all but 
seven of the HIPCs unless trends since 1990 are reversed. 

*partie=titre 3 Debt and poverty *partie=nil 

3,1 Unsustainable debt acts as a barrier to poverty reduction. Debt 
overhang has created uncertainty for domestic and foreign investors, 
thereby restricting growth. Heavy debt servicing has also acted as a brake 
on growth by undermining public investment in social and economic 
infrastructure. In most of the HIPCs, more than one fifth of the limited 
public revenue is being diverted to debt repayments. Once again, growth 
has suffered because the infrastructure needed to develop markets has been 
lacking. And by restricting the ‘fiscal space’ available to governments, 
debt repayments have limited the resources available for investment in 
basic services essential to the poor. A UNICEF-UNDP study shows that six 
HIPCs in Africa spent more than one third of the national budget on debt 
servicing but on average less than 10 per cent on basic social services, 
ranging from 4 to 11 per cent. The upshot is that growth has been slow 
and, in most countries, highly inequitable. Those living in poverty have 
been denied access to the social and economic infrastructure, which might 
enable them to raise productivity and participate more effectively in 
markets.

3,2 Unsustainable debt represents a barrier to the development of 
public policies capable of addressing these immense challenges. Countries 
such as Burkina Faso, Mozambique, Niger and Tanzania are spending $3-$6 
per capita a year on their health systems, which is insufficient to 
finance a package of basic health interventions. Yet each of these 
countries spends more than double on debt servicing what is spent on 
primary health care. In Zambia – where infant mortality rates are 
increasing, over half a million children are out of school, and illiteracy 
is rising – debt servicing claims more of the national budget than health 
and education combined. 

3,3 The fiscal burden of debt generates extreme pressures on the 
recurrent budgets of HIPCs. These pressures are transmitted in turn to the 
children who are sitting in classrooms without books or blackboards, and 
to the households who stay away from health clinics which lack the drugs 
that could help to save lives. In Tanzania, each child in primary school 
represents a public investment equivalent to $1. In rural areas only one 
in 20 children has access to a textbook. Meanwhile spending on debt is 
more than double the spending on primary education. 

3,4 It is not just the supply-side of basic service provision that is 
affected. Debt-related pressures on national budgets have resulted in the 
burden of financing being transferred away from public budgets, and onto 
poor households. Formal and informal systems of cost recovery in areas 
such as basic health care and basic education are placing further strains 
on the budgets of desperately poor households. All too often, children are 
being kept out of school and diseases left untreated for the simple reason 
that households are unable to afford the costs. UN agencies and the World 
Bank have called for cost-recovery to be considered only as a financing 
option of last resort. But in the absence of a reduced debt burden, it is 
difficult to see how many governments can significantly reduce the 
household costs of basic services. 

3,5 The case for converting debt servicing into human development 
investments is not only a moral imperative. It also makes good economic 
sense. Take the health sector. According to the World Health Organization, 
the program for integrated management of childhood illness, which embraces 
a group of cost-effective preventive and curative interventions, could 
reduce the death toll from malaria by 400,000. Such programs could be 
supported through debt relief. This would not only advance efforts aimed 
at achieving the 2015 target of reducing child mortality by two thirds, 
but would also reduce the demands on health system budgets, of which over 
one third is absorbed by the treatment of malaria in many HIPCs.

3,6 It is a similar story in education. Achieving good-quality 
universal primary education in sub-Saharan Africa would cost somewhere 
between $2 billion and $3.6 billion per annum for ten years, according to 
estimates by UNICEF and Oxfam. To put this figure in context, it 
represents between one sixth and one third of current debt servicing. 
Converting debt servicing into education investments makes sense. As a 
basic right, universal education is an end in itself. But it is also a 
means to other ends, including reduced child mortality, increased 
productivity, and more rapid and equitable growth. It can also break the 
intergenerational poverty cycle. Advances in education will therefore 
generate high returns across a wide range of areas.

3,7 It is not just the scale of the current human development deficit, 
which justifies a poverty-focused debt relief strategy. As suggested 
earlier, most of the HIPCs are currently off track for meeting the 2015 
targets – and they are unlikely to get back on track in the absence of 
debt relief.

3,8 These outcomes are not inevitable. They are, however, distinct 
possibilities, unless effective policy responses are developed. If 
anything, they may understate the problem. For instance, failure to close 
the widening education gap between the HIPCs and the rest of the world has 
profound implications for their place in an increasingly knowledge-based 
global economy. Denying children the opportunity for a good-quality 
education today means increased marginalisation and poverty tomorrow. It 
also point to a future of slow and inequitable growth, placing out of 
reach the 2015 target of halving extreme poverty.

3,9 Debt relief has the potential to act as a catalyst for human 
development, creating a new impetus behind the 2015 targets. If it is 
structured and provided in a way which improves access to, and the quality 
of, the social and economic services used by poor people, the benefits 
will be large and mutually reinforcing. As more children pass through the 
education system, child mortality will fall, public health will improve 
and household incomes will start to rise. Improvements in public health as 
a result of increased investment in basic services will reduce the 
vulnerability of poor households, raise productivity, and improve the 
learning capacity of children entering the education system. 

3,10 These mutually reinforcing benefits have important implications 
for the design of HIPC debt relief. Achieving the 2015 targets will 
require an integrated approach to development. Focusing on education to 
the exclusion of health, or vice versa, will diminish the potential gains 
in both areas. Achieving universal primary education in a situation where 
the vast majority of children are undernourished or ill is not a 
prescription for good education outcomes. And focusing on social sectors 
in the absence of a reform environment conducive to equitable growth and 
other poverty reduction measures will act as a brake on human development 
across the board. For this reason, the HIPC initiative must go beyond 
financing ‘bolt-on’ projects in particular sectors. Debt relief must be 
designed to support and reinforce integrated poverty reduction strategies, 
which are placed at the centre of macro-economic design.

*partie=titre 4 Deeper, broader and earlier debt relief: the Cologne initiative *partie=nil 

4,1 The problems with the HIPC framework before the Cologne Summit were 
comprehensively set out in HIPC Initiative - Perspective on the Current 
Framework and Options for Change – the paper presented by IMF and World 
Bank staff to members of the IMF Executive Board in April 1999. The 
positions of UNICEF and Oxfam were explained in this document. Briefly 
summarised, our view is that the HIPC framework has been failing because:

- The debt relief provided has been too shallow. This was underlined by 
the experience of Uganda, the first country to pass through the HIPC 
framework. This year, collapsing world coffee prices drove the NPV (net 
present value) debt/export level above the 200 per cent threshold, 
underlining the need for far deeper debt relief in countries dependent on 
a narrow range of commodities. The cash-flow benefits of HIPC debt relief 
have been minimal. For instance, Mozambique saved only around $13 million 
on a debt service bill of $111 million – and the country was left with 
repayment obligations in excess of public spending on primary education 
and basic health. Because of an undue emphasis on debt stock (see below), 
much of which was not being serviced, headline NPV figures have overstated 
the real benefits of the HIPC initiative. For at least two countries – 
Burkina Faso and Mali – the old framework would have resulted in increased 
debt servicing as scheduled payments fell but actual payments rose as 
future creditor claims were met in full.

- The fiscal dimension of unsustainable debt has received insufficient 
attention. The HIPC initiative was designed primarily to reduce debt 
stocks to ‘sustainable levels’, while setting a ceiling on debt service in 
relation to exports. Both objectives are important in terms of restoring 
investor confidence and releasing resources. However, from a human 
development perspective, budget revenue is a more relevant denominator 
than exports. For many HIPCs the liquidity burden imposed by debt 
servicing has been intolerable, with over a quarter of budget revenues 
being absorbed in a large group of countries. These are revenues, which 
could – and should – be invested in creating the social and economic 
conditions for accelerated human development. Although the fiscal 
sustainability criteria recognise the problem of budget liquidity, the 
thresholds set with regard to export performance and revenue collection 
were unrealistic – and, in the case of the export requirement, unrelated 
to the issue of debt sustainability.

- Debt relief has been provided too slowly. The requirement that 
countries comply with two successive IMF programs, allied to a restrictive 
treatment of track record, has slowed implementation of the HIPC 
initiative. High levels of slippage and breakdown in IMF programs have 
also contributed to this problem. Only one third of ESAF programs are 
completed within their scheduled time frame. Wider problems associated 
with the use of ESAF conditions in providing debt relief are discussed 
below. 

- Insufficient attention has been paid to human development goals. 
Despite some encouraging language, there has been no systematic attempt to 
strengthen the linkage between debt relief and poverty reduction. This has 
placed the HIPC initiative outside of mainstream development assistance 
programs, which increasingly emphasise the need for poverty reduction to 
be set at the heart of policy development. It has also represented a 
wasted opportunity for human development.

4,2 To what extent does the Cologne initiative address these problems? 
The jury is still out on this question, though there are a number of 
positive elements:

- The lower debt sustainability thresholds will double the NPV value of 
debt stock reduction.

- The provision of interim debt relief by the international financial 
institutions in advance of Completion Point could significantly reduce the 
cash-flow burden of debt service payments.

- The commitment to ‘front-load’ debt relief in the early years could 
generate a substantial increase in resource flows.

- The Group of Seven statement unambiguously transforms the HIPC 
framework into a mechanism for poverty reduction: “The central objective 
of this initiative is to provide a greater focus on poverty reduction by 
releasing resources for investment in health, education and social needs.”

*partie=titre 5 Problems with the new framework: financing, conditionality and the 
depth of debt relief *partie=nil 

5,1 The new framework will significantly reduce debt servicing for a 
large group of countries. It has been estimated that Uganda will save in 
excess of $40 million over and above the $37 million savings from its 
initial HIPC debt relief. However, what matters is not just the overall 
savings, but the absolute level of debt service repayments in relation to 
domestic financing needs. Strong grounds for concern remains. To date, no 
reliable figures have been made available converting NPV debt stock 
reductions into future debt service projections. Even so, it appears that 
for several countries debt servicing will remain excessive in relation to 
spending on basic services:

- Mali will continue to spend more on debt servicing than on primary 
health care and basic education combined. The country has one of the 
world’s highest child mortality rates and fewer than half of primary 
school age children are in school.

- Mozambique will continue to spend twice as much on debt servicing as on 
primary education, even though the country has 1.2 million children out of 
school.

- Burkina Faso will continue to spend more on debt servicing than on 
primary health care, despite an average life expectancy of 46 years. 

- Côte d’Ivoire will continue to spend three times as much on debt 
servicing as on primary health care.

Such outcomes suggest that the need for an urgent review of the fiscal 
implications of the Cologne reforms. In short, it is unacceptable for 
countries with some of the world’s worst indicators on health and 
education to be spending more on debt servicing than on the basic needs of 
their own citizens. The overall aim must be that of setting debt service 
ceilings consistent with the need to substantially increase investment in 
basic services. 

5,2 One of our central concerns with the Cologne reforms relates to 
financing. To date, creditors have not indicated how they intend to 
finance the new framework. This suggests that the protracted dispute over 
this issue before the Cologne Summit has not been resolved. Certainly, 
commitments to the HIPC Trust Fund have been derisory in relation to the 
required resource levels. An added problem is that some of the smaller 
financial institutions – such as the Inter-American Development Bank and 
the African Development Bank – are in no position to cover their share of 
the costs of additional debt relief. The danger, from our perspective, is 
that debt relief will be financed through a diversion of development 
assistance, either from non-HIPCs to the HIPCs, or within individual 
HIPCs. 

5,3 We are opposed to this approach on several counts. First, the 
diversion of aid resources from non-HIPCs, many of which suffer equally 
deep and pervasive levels of poverty, is unjustified. It threatens to 
weaken international efforts aimed at linking development assistance to 
good poverty reduction policies. Second, the diversion of aid into debt 
relief will do nothing to strengthen poverty reduction efforts in the HIPC 
concerned. Third, aid budgets are already in decline. Since 1992 official 
development assistance from the OECD countries has fallen by more than one 
fifth in constant dollar terms, representing a decline from 0.33 per cent 
to 0.23 per cent of their collective GNP between 1992 and 1998. Despite 
the Group of Seven’s commitment in the Cologne communiqué to increase aid 
volumes, there is little evidence of this trend being reversed.

5,4 There is another reason to oppose the diversion of aid: namely, the 
Cologne reforms are well within the range of affordability. While the 
headline NPV figure is large – at around $50 billion – it does not 
represent a payment up front. Payments will be stretched out over many 
years as debtor countries reach Completion Point and then receive a flow 
of debt relief. Moreover, bilateral creditors, who account for one half of 
the costs of debt reduction, have already discounted projected debt 
service receipts from HIPCs. As a result, part of the debt reduction 
exercise involves a bookkeeping operation rather than the mobilisation of 
new funds. On an annual basis, we estimate HIPC debt reduction would cost 
in the order of $2 billion to $3 billion over the next seven years. To put 
this figure in context, it represents around one third of the decline in 
official development assistance between 1992 to 1998. Viewed from a 
different perspective, it is roughly equivalent to what was spent during 
three months of military conflict in Kosovo. Political will, rather than 
affordability, is the ultimate determinant of resources available for debt 
relief. For our part, we believe that HIPC debt relief should be financed 
entirely out of new and additional resources, rather than through resource 
diversion.

5,5 With regard to the timing of debt relief, the Cologne initiative is 
ambiguous. It acknowledges the need for early debt reduction and states: 
“the second stage could thus be shortened significantly if a country meets 
ambitious policy targets early on.” This implies an arrangement similar to 
those developed under the ‘floating tranche’ schemes in World Bank Higher 
Impact Adjustment Lending. As we suggest below, there is some merit to a 
floating Completion Point. But what precisely does the Group of Seven 
finance ministers mean by “ambitious policy targets”? Poverty reduction is 
one clearly identified element, which we endorse. But the parallel 
requirement that HIPCs should deepen economic reforms in advance of 
Completion Point represents an ill-conceived and unwarranted extension of 
conditionality. Some creditors have indicated an intention to link HIPC 
debt relief to new policy areas ranging from privatisation, to trade and 
investment liberalisation, and a vaguely defined governance agenda. 

5,6 Our concern is not with economic reform per se. We recognise that 
human development cannot be advanced on a sustained basis in an unstable 
macro-economic environment. However, using debt relief to impose more 
stringent economic conditionalities will inevitably delay debt relief. 
Moreover, there is a danger that enforced conditionalities in areas such 
as privatisation and trade liberalisation will at once weaken national 
ownership and lead to inappropriate policy choices. Using HIPC reform to 
develop a ‘Christmas tree’ approach to conditionality, with creditors 
unilaterally selecting what to hang onto ESAF programs, represents an 
unwarranted distortion of the debt relief process.

5,7 In our view, the HIPC review should look critically at existing 
eligibility requirements, rather than seeking to enlarge them. There are 
problems at two levels. The first problem, as the Chief Economist of the 
World Bank and others have argued, is that fiscal conditionality is 
sometimes too tight, and therefore an impediment to the public investment 
needed to finance improved access to basic services. While nobody 
seriously questions the principle of fiscal prudence, the existing ESAF 
approach of seeking to achieve a primary budget surplus before grants is 
inappropriate in most cases. For countries with secure long-term 
commitments of aid, grants can for practical purposes be treated as a 
legitimate source of revenue, especially where domestic revenue collection 
is increasing. Given the very high returns to public investment in areas 
such as primary education, basic health, water and sanitation and other 
core poverty reduction measures, fiscal targets should be amended to take 
into account the requirements for achieving the 2015 targets.

5,8 The second problem concerns the discrepancy between detailed and 
high-level detailed macro-economic conditionality on the one side, and the 
emphasis of donors on national ownership and integrated approaches to 
poverty reduction on the other. Donors increasingly stress the need to 
integrate social policy and macro-economic reform policies within a 
single, integrated framework geared towards the achievement of the 2015 
targets. This is the spirit of the Principles of Good Practice in Social 
Policy developed by the World Bank and some United Nations agencies, and 
of Sector-Wide Approaches (SWAPs) in areas such as health and education. 
Yet approaches to conditionality remain deeply fragmented. ESAF conditions 
dominate the policy environment because of the unique authority bestowed 
on the IMF through the principle of cross-conditionality, under which 
almost all donors seek compliance with IMF programs. In effect, HIPCs may 
be locked into conditionality arrangements, which prioritise short-run 
macro-economic goals over longer-term human development considerations, 
with damaging implications for the 2015 targets.

5,9 In the light of these considerations, we recommend an alternative 
approach. Existing macro-economic conditions, including those associated 
with ESAF programs, should be reviewed and reformed to bring them into 
line with the requirements for accelerating poverty reduction. IMF staff 
are already addressing this problem. Leaving aside the broader question of 
whether the IMF is the most appropriate gatekeeper for debt relief, an 
effective poverty-focused debt relief strategy requires a poverty-focused 
macro-economic framework. 

5,10 With regard to the question of conditionality between the Decision 
Point and Completion Point, no new macro-economic conditionalities should 
be introduced as a result of HIPC reform. Instead, the focus should be on 
the development of incentives for converting debt relief into poverty 
reduction investments.

*partie=titre 6 Mechanisms for linking debt relief to poverty reduction *partie=nil 

6,1 In their Cologne Summit report on HIPC reform, the Group of Seven 
finance ministers called for a mechanism to “lay out specific priority 
steps needed to … enhance social sector investment, focusing in particular 
on poverty reduction.” Any such mechanism will have to meet the challenge 
of integrating debt relief into national programs for poverty reduction. 
It will also need to take into account the limitations of conditionality 
as a policy instrument.

6,2 Cross-country evidence confirms that conditionality is unlikely to 
bring about rapid poverty reduction where the domestic political 
commitment is lacking. As with other forms of development assistance, debt 
relief will be most effective in promoting human development in a policy 
environment conducive to poverty reduction. Attempts to ‘buy’ policy 
reform, or to link assistance to good projects in a bad environment, have 
failed. 

6,3 The development of poverty reduction mechanisms in the HIPC 
framework needs to be considered in the light of wider efforts to develop 
integrated poverty reduction strategies. These include:

- The Comprehensive Development Framework (CDF) which is being piloted by 
the World Bank. The CDF is an attempt to integrate macro-economic and 
financial policy reforms in a single planning matrix with social and human 
development concerns.

- The Principles of Good Practice in Social Policy adopted by the World 
Bank-IMF Development Committee. These emphasise the achievement of 
universal access to basic social services, through an integrated strategy 
which places ‘social capital’ development at the heart of macro-economic 
planning and institutional development.

- The 20/20 initiative, which seeks to enhance the equity and efficiency 
of public spending by donors and governments in pursuit of shared human 
development goals.

Each of these initiatives is helping to develop policy environments which 
are conducive to poverty reduction strategies. Three other important 
developments at program level are:

- Sector-Wide Approaches (SWAPs). SWAPs are an attempt to move away from 
project-based financing towards longer-term sector strategies. The aim is 
to build on national ownership, with donors providing long-term support 
against well-defined social policy objectives.

- Improved budget management and Medium-Term Expenditure Frameworks 
(MTEFs). Strong public finances are an essential element in development 
assistance strategies aimed at poverty reduction, not least because of the 
problem of fungibility. MTEFs are important because they provide a 
longer-term planning framework for financing social sector investments.

- More participatory approaches to development. Poor people have a 
critical role to play in identifying poverty problems and the policy 
responses needed to resolve them. Participatory Poverty Assessments have 
been effectively used in several countries in the elaboration of human 
development strategies. More generally, participation helps to create 
demand for transparency and accountability on the part of governments and 
service providers. 

6,4 How can the HIPC initiative be geared most effectively towards 
poverty reduction goals in the new policy environment? There is no 
blueprint. Strategies and mechanisms are needed which adapt to processes 
and problems on a country-by-country basis, taking into account the state 
of national planning for poverty reduction. 

6,5 Debtor countries themselves have already developed a number of 
innovative approaches. For instance, the Poverty Action Fund in Uganda has 
provided a framework for channelling budget savings from debt relief into 
financing for priority social sector investments. The country is now 
enrolling about 2 million additional children in primary education as a 
result of debt relief. The example is a powerful one for two reasons. 
First, it is an integral part of a national human development strategy – 
the Poverty Eradication Action Plan – which is in turn a central element 
of a well-defined MTEF. Second, the Ugandan Government has designed and 
administered the Poverty Action Fund in a manner, which combines budget 
transparency with a high level of civil society participation. The Poverty 
Action Fund approach is symbolically important in the sense that it 
signals a high-level commitment to poverty reduction. More recently, the 
Government of Ghana has proposed a Debt for Development Fund, which would 
link budget savings from debt relief to broad targets for raising 
expenditure in key social areas. These two approaches are described in a 
recent Oxfam note on Examples of National Strategies For Linking Debt 
Relief To Poverty Reduction to illustrate possible avenues for linking 
debt relief to the 2015 targets. *{(see Annex).}

6,6 An important consideration in the development of any debt relief 
strategy for reducing poverty is that of capacity. The pace and timing of 
debt service relief need to be regulated to secure maximum benefits for 
human development. The fact that debt relief is released on a flow basis, 
rather than as a lump-sum payment, helps in this respect. At the same 
time, ‘weak capacity’ should not be used as a rationale for protracted 
delay in the provision of debt relief. Capacity can often be developed 
rapidly, especially where it has recently been eroded through 
underfinancing. And in situations where large numbers of children lack 
access to schoolbooks, primary health care clinics lack basic drugs and 
trained staff, and rural communities lack access to basic feeder roads, 
the returns to capacity development are likely to be high.

*partie=titre 7 A framework for strengthening the HIPC initiative as a vehicle for 
poverty reduction *partie=nil 

7,1 Bearing in mind the need to avoid detailed blueprints, a broad and 
flexible framework is needed to make the HIPC initiative a more effective 
mechanism for poverty reduction. To this end, we propose a two-phase 
approach. As acknowledged above, some governments are already in the 
process of formulating poverty reduction strategies and plans in 
collaboration with their partners. Our proposal would help consolidate 
such efforts.

*partie=titre 7,2 Phase 1 To the Decision Point *partie=nil 

Debtors would be required to establish a track record indicating a 
commitment to a continued economic reform process and poverty reduction. 
However, the eligibility criteria would be reformed. The preferred option 
would be for the World Bank, the IMF, United Nations agencies and other 
donors to reach an agreement with the government on more flexible criteria 
for macro-economic adjustment, geared towards poverty reduction goals. 
Alternatively, ESAF targeting parameters must be brought into line with 
the policy requirements for achieving the 2015 targets.

The length of the track-record period should be set in a more flexible 
manner, depending on country-specific events, shocks and other conditions. 
It should not be longer than two years and in most cases should vary 
between one and two years.

During this initial track-record period, governments would be expected to:

- Demonstrate progress towards an effective poverty reduction strategy. 
Benchmarks for measuring progress would have to be established on a 
country-by-country basis. For illustrative purposes, these might include 
the following indicators: equity in public spending, such as trends in the 
sector and geographic distribution of spending (perhaps drawing on the 
20/20 targets); progress towards budget transparency, including the 
publication of budgets and public expenditure frameworks; and progress 
towards macro-economic adjustment, including fiscal deficit closure and 
revenue collection. 

- Develop through dialogue with civil society and donors a clear profile 
of the underlying causes of poverty and inequality, including regional and 
gender inequalities. These would be set out in a national poverty 
assessment.

- Develop a poverty reduction plan, which addresses the challenges set 
out in the poverty assessment. This would lay down a coherent framework 
for accelerating poverty reduction. It would include medium-term budgetary 
provisions, poverty-focused public spending priorities, sector plans, and 
mechanisms for strengthening engagement with civil society. The plan 
would:

- Set out clear priorities for action, along with well-defined targets 
and budgetary provisions. 
- Identify timetables for the development and implementation of SWAPs in 
areas such as health and education.
- Demonstrate how poverty reduction goals would be accommodated in a 
medium-term financial framework.
- Provide for annual publication of public expenditure reviews and 
budgets.
- Set out strategies for engagement with civil society in the design, 
implementation and monitoring of poverty reduction strategies.
- Establish mechanisms for evaluating and monitoring the impact of 
economic reforms and public spending on poverty and inequality

Performance benchmarks should be developed with a view to capturing the 
pace, scale and quality of reform, rather than absolute levels of 
achievement. As with 'floating tranches' under the World Bank’s Higher 
Impact Adjustment Lending, there would be no fixed time frame for 
preparing a poverty reduction strategy. But such a strategy would be a 
requirement for proceeding to Completion Point. Countries reaching 
Decision Point with a strong national poverty reduction plan already in 
place could proceed straight to Completion Point. Thus both Bolivia and 
Uganda would have received debt relief more than one year earlier than 
they did under the current framework. 

Under this arrangement delayed progress towards Completion Point should be 
seen not as a mechanism for punishing bad performance or delaying debt 
relief, but as a means of ensuring that the flow of debt relief after 
Completion Point is used with maximum efficiency. 

7,4 *partie=titre Phase 2    The Interim Period to the Completion Point *partie=nil 

At the Completion Point, governments will receive debt stock reduction and 
will exit from the HIPC framework. To reach this point countries will be 
required to meet just one condition: namely, a demonstrable capacity to 
absorb debt relief into the national poverty reduction strategy. While 
some countries could proceed immediately to the Completion Point, generous 
interim debt relief flows would substantially reduce the costs of delayed 
progress for HIPCs with less well-developed poverty reduction strategies.

Performance criteria measuring progress in the development of a poverty 
reduction strategy would include macro-economic and social policy 
indicators. Particular weight would be attached to:

- Strengthened budget management, including the prioritisation of 
expenditures and adherence to budget allocations across spending 
categories; progress towards the integration of recurrent and development 
budgets; Public Expenditure Reviews (PERs) which evaluate performance 
against the approved budget frame and output targets; improved 
transparency, including the timely publication of PERs.
- The development of a Medium Term Expenditure Framework, which 
establishes clear priorities for annual budgeting.
- Progress towards poverty-focused public spending priorities, including 
commitments geared towards achieving the 2015 targets.

In order to demonstrate the capacity to absorb debt relief into the 
national poverty reduction strategy, government will be required to 
develop, in co-operation with civil society and donors, a 
Debt-for-Development Plan. This would set out how savings released as a 
result of reduced debt servicing will contribute to accelerated progress 
towards the 2015 human development targets. The Ugandan Poverty Action 
Fund could serve as a useful model, though not as a blueprint. The 
Debt-for-Development Plan would detail:

- The proportion of debt relief which will be channelled into basic 
social services 
- The outcome targets related to increased spending on basic services, 
over and above those envisaged in existing sector strategies and projected 
trends
- Infrastructure investments specifically benefiting the poor, such as 
support for rural feeder roads, micro-credit, irrigation and marketing 
support, specifying the regions and districts to be targeted
- Monitoring and evaluation arrangements with civil society to assess the 
outcome.

The aim of the Debt-for-Development Plan would be to provide a broad 
indication of expenditure plans, and to focus attention on the 2015 goals. 
It would be developed with bilateral donors, United Nations agencies and 
the World Bank, and presented to the national Consultative Group. The Plan 
would not provide a checklist for project-by-project auditing, but would 
act as an agreement of understanding between creditors and debtor 
governments over spending intentions. In the event of extreme departures 
from the defined spending priorities, which weaken the poverty focus of 
public spending, future resource flows could be adjusted.

The Debt-for-Development Plan would also help to define the most 
appropriate rate of disbursement for debt relief. Where countries have 
well-developed national poverty reduction strategies, but their full 
implementation is constrained more by finance than by institutional 
capacity, debt relief may be provided up front (subject to the need to 
avoid future humps in payments). In other cases, there might be an 
emphasis on institutional development in the early phases, with heavier 
flows of debt relief coming on stream in, say, years three and four. In 
Zambia, for instance, donors spent two years supporting national efforts 
to develop effective, decentralised health structures before channelling 
substantially increased resource flows through those structures.