17 March 2005
1. The Commonwealth HIPC Ministerial Forum held its seventh meeting on 15-16 March 2005 in Maputo, Mozambique. Finance Ministers and officials from Cameroon, The Gambia, Ghana, Guyana, Malawi, Mozambique, Sierra Leone, United Republic of Tanzania, and Zambia attended. In addition, Ministers or officials from Kenya, Nigeria, Benin, Burundi, Democratic Republic of Congo, Mali, Niger, Senegal, Sao Tome & Principe, as well as representatives from United Kingdom, UN, IMF, World Bank, African Development Bank (AfDB), the Macroeconomic and Financial Management Institute for Eastern and Southern Africa (MEFMI), the West African Institute for Financial and Economic Management (WAIFEM), Agence Intergouvernementale de la Francophonie (AIF), Debt Relief International (DRI), CEMLA, BEAC/Pôle-Dette, Commonwealth Parliamentary Association and the Civil Society attended the meeting by special invitation.
2 Ministers applauded the resolute stewardship provided to the Forum since the Freetown Meeting by the outgoing Chairperson, Hon J B Dauda, Minister of Finance, Republic of Sierra Leone, and congratulated Hon Manuel Chang, Minister of Finance, Republic of Mozambique, on assuming the Chair.
3. Ministers were pleased that their meeting was being held as part of a cluster of meetings in Maputo which had been helpful in minimising the impact on their busy schedules and at the same time maximising the impact of their meeting through wider participation and audience from other meetings.
4. Ministers reviewed developments in the world economy as they impacted on HIPCs as well as the progress being made in implementing the HIPC Initiative, including the proposals for deeper and wider debt relief and for ensuring long term debt sustainability. They paid particular attention to the issue of high domestic debt burden and revisited the issue of public-private partnerships to promote infrastructure investment and service delivery in post conflict countries.
Progress in Implementing the HIPC Initiative
5. Ministers noted that fifteen countries had reached their completion points and expressed the hope that the remaining 12 decision point HIPCs would reach their completion points as soon as possible. They however noted that some HIPCs have slipped through the envisaged completion point dates leading to suspension of the delivery of HIPC debt relief from multilateral creditors. This had created severe budgetary constraints, which had undermined financing of poverty reduction programmes. Ministers also remained concerned about the challenges faced by the eleven potentially eligible HIPCs in starting the HIPC process in the time available within the new sunset clause. Many of these countries were mired in conflict, had considerable arrears and limited relations with the Fund. They underlined the need for the abolition of the sunset clause to ensure that all deserving HIPCs and other potentially eligible countries receive adequate HIPC debt relief. They also called for increased flexibility regarding the track record, arrears clearance and the use of debt relief funds for reconstruction and rehabilitation. They commended the AfDB's post conflict facility which would enable pre-decision point HIPCs to clear arrears and re-engage with the international financial institutions.
6. Ministers reiterated their concern at the continuing non-participation of a number of non-Paris Club bilateral, smaller multilateral and commercial creditors in the HIPC Initiative. They again stressed the need for targeted collective diplomatic initiatives to bring non-participating non-Paris Club bilateral official creditors on board, for the provision of donor support to write-off intra-HIPC debt, and for the expansion of the funding of the HIPC Trust Fund to ensure full participation of all multilateral creditors.
7. Ministers remained concerned about the behavior of some commercial creditors that had brought litigation against a number of HIPCs. They recalled the proposals made at their Meeting in St. Kitts and Nevis, in September 2004, for 'rapid reaction legal assistance' by the Commonwealth Secretariat and expressed the hope that this would be implemented rapidly and extended to other HIPC countries in collaboration with other development partners. This should also include assistance in negotiating out of court settlements and refining domestic laws, which while respecting contractual obligations, would also ensure that settlements were on terms equivalent to the HIPC Framework. They also reiterated the need for such legal protection in jurisdictions where commercial creditors resided.
Deeper and Wider Debt Relief
8. Ministers were pleased to note that most Paris Club creditors had gone beyond the HIPC Initiative and provided 100 per cent relief on all pre cut off debt claims and a significant number also on post cut off date claims. They called on those Paris Club creditors which had not provided 100 per cent relief on all past claims to do so rapidly.
9. Following the proposals by UK Chancellor of the Exchequer, which they had endorsed at their sixth meeting in St Kitts and Nevis, Ministers welcomed the announcement by Canada that it would begin paying its share of IDA and AfDB debt on behalf of eligible countries. They also welcomed the agreement by the G7 Finance Ministers on a case by case analysis of HIPC countries, with a willingness to provide as much as 100 per cent multilateral debt relief. Ministers noted that detailed proposals are to be worked out in time for agreement at the Spring 2005 IMF/World Bank meetings. In this respect, they emphasised the importance for all HIPCs to receive this additional relief, after they reach their Completion Points, as it will conclusively deal with the past debt overhang problem and for the relief to consist of additional and predictable long term financing for the MDGs. They also called for better use of IMF gold to finance deeper debt relief by the IMF.
10. Ministers emphasised the need to consider all other IDA-only countries carefully for their indebtedness levels so that all potentially eligible countries are included and benefit under the HIPC Initiative. At the same time, for reasons of equity, it was important to extend the G7 agreement for up to 100 per cent multilateral debt relief to other IDA only countries. Ministers also called for careful consideration of requests for debt relief from blend countries, including through the Evian Approach, which can provide tailored treatment suited to individual circumstances. Noting that debt relief came from donors' aid budgets, which could lead to distortions in aid allocations, they called for significant additionality of aid resources that benefit all poor countries in an equitable way to achieve the MDGs.
IMF/World Bank Framework for Debt Sustainability
11. Ministers gave a cautious welcome to the Framework for Debt Sustainability in Low Income Countries (LICs), prepared by the IMF and the World Bank and noted that the IDA Deputies had sought to operationalise its application with respect to determining grant allocations under IDA-14. They were pleased to note that the proposed thresholds would be treated only as indicative guideposts, the underlying empirical analysis would be reviewed periodically, and the World Bank's Country Policy and Institutional Assessments (CPIA) would be opened up to outside scrutiny. They felt however that given CPIA's subjective nature, its preparation should involve broader participation than that of the World Bank. Ministers were particularly concerned about the exclusion of revenue indicators for thresholds applied under IDA-14 and reiterated the call made by the 10th HIPC Ministerial Meeting in Washington, for debt service to revenue to be given the pride of place as the most important indicator.
12. Ministers emphasised the need for a comprehensive coverage of debt, including private and domestic debt, in the Debt Sustainability Analysis (DSA) and for strengthened co-operation between the Fund and the Bank on this matter. They also underlined the importance of full involvement by LICs themselves in the preparation of DSAs. They noted that the Framework had proposed a classification of debt distress taking into account the indicators generated by DSAs under baseline and alternative scenarios and a country's past debt servicing record and expressed the hope that this would replace as soon as possible the current methodology of debt distress classification for grant allocation under IDA-14.
13. Ministers noted that the concessional windows of regional development banks were also considering possible grant allocation mechanisms and called on the IMF to consider a similar mechanism. They reiterated their call on all DAC donors, which had so far not done so, to provide 100 per cent grant financing to all LICs, including HIPCs. They also stressed the need for effective donor co-ordination to ensure debt sustainability in LICs.
14. Ministers re-emphasised the need to ensure adequate concessional financing and/or further debt relief for countries subject to exogenous shocks and export shortfalls due to adverse trends in commodity prices. In particular, Ministers recalled the proposals they had supported for the establishment of a concessional contingency financing facility in the IMF and for a real commodity price adjustment mechanism under the HIPC Initiative involving a timeframe extending to 2010. In this respect they recognized that another possibility was the establishment of a separate shocks facility administered by IDA and/or AfDB, as appropriate, but funded with resources additional to the proposed IDA-14/ADF-X base cases.
15. Ministers noted that domestic debt servicing burden in HIPCs remained high because of the relatively high interest service payments and short maturity structure. Moreover, the scope for expanding domestic debt was complicated by their shallow financial depth and narrow investor base. They were particularly concerned that in some countries domestic debt and debt servicing was emerging as a major problem. They noted that this was partly a result of the increased PRSP poverty related expenditure commitments and the volatility and shortfalls in aid flows, which had necessitated an increase in domestic borrowing and/or arrears to domestic suppliers.
16. Ministers recognised that the key for dealing with the high domestic debt service burden lay in reducing the high cost of domestic borrowing and extending the short maturities of existing debt, which implied the need to maintain a low inflationary environment to ensure that both nominal and real interest rates remain low and gradual expansion of longer term issues to take advantage of falling risk premiums, without significant increases in yields. Policies were also needed to broaden the investor base, including the promotion of investment by retail and institutional investors, and deepening of financial sector development.
17. Ministers noted that in some countries IMF-supported programmes had emphasised reduction in domestic debt as a key to establishing macroeconomic stability and boosting medium term growth by freeing resources for the private sector. In all programmes one of the key instruments in reducing the domestic debt burden was the use of external concessional resources. Ministers emphasised that donors should play a critical role in reducing the domestic debt stock where this was high, especially in clearing arrears and reducing the stock of treasury bills. They also stressed the importance of donor assistance for financial sector development that can help HIPCs lengthen the maturity structure of their debt and broaden the investor base. They further called on donors to reduce the volatility in their aid flows, including investigation of mechanisms that could assist in providing bridging finance.
18. Ministers noted with concern with concern that the current DSA framework does not include the issue of domestic debt in empirical thresholds and had advocated an approach tailored to individual country circumstances through a consistent macroeconomic response and focused IMF conditionality. In this respect, Ministers pointed out that historical data on domestic debt was beginning to emerge and supported the efforts at improving domestic debt recording and management, through the Commonwealth Secretariat's CS-DRMS2000+ software and capacity building programme. They further pointed out that DSA of total debt including domestic debt, have been carried out in a number of countries, including in the context of IMF-supported programmes and in this respect expressed their strong support for MEFMI and WAIFEM training programmes. They noted that a number of advanced and emerging economies had set fiscal responsibility thresholds for total overall debt and fiscal deficits in relation to GDP, and although in LICs the bulk of the borrowing came from external sources at highly concessional rates of interest, this should not preclude working out prudential ratios of domestic debt to GDP in these countries based on their financial depth and financial sector development. They called for more research and analysis in this area, as this would help determine assistance donors would need to provide when domestic debt burdens become excessive.
19. Ministers reiterated their concern that the burden of domestic debt was curtailing development prospects in a manner that could undermine political stability and repeated their call on the Commonwealth to play a leading role in advocacy for a comprehensive approach to address the domestic debt problem within the context of the new debt sustainability framework.
HIPCs and the Global Economy
20. Ministers were pleased that the world economy had been on an upward recovery path underpinned by strong growth in the United States and emerging markets and that most HIPCs were also sharing in this strong growth. They however were concerned about the risks to global growth emanating from higher oil prices, possibilities of higher inflationary expectations and interest rates, global imbalances and abrupt changes in exchange rates, and hard landing in China, which could impact adversely on HIPCs. They particularly emphasised the need for HIPCs to carefully manage the windfall gains from commodity prices.
21. Ministers were concerned that HIPC growth rates may not be sustained over the medium term and that, even if sustained, they were inadequate to achieve the MDGs. They recognized the need to entrench macroeconomic stability, promote private investment, develop infrastructure, deepen institutional reform, improve governance, eliminate corruption and further advance pro poor policies, including on education and health care, with a particular focus on HIV/AIDS. But they required strong support from the international community and in this respect welcomed the Report by the Commission for Africa to be presented at the next G8 Summit. Ministers re-emphasised the critical importance of improved access to developed country markets for products of particular interest to poor countries, revisiting barriers such as rules of origin and product specific standards that inhibited market access and product acceptability under preferential arrangements, and lowering subsidies for agricultural products in industrial countries. They also called on the international community to make progress on the proposals for doubling aid, including the creation of the International Finance Facility.
22. Ministers recalled their discussions at the Freetown meeting, which had underscored the importance of raising investment levels, especially export oriented investment and improving and expanding physical infrastructure, with expanded private participation. Ministers welcomed the study on how best to harness existing financing facilities to promote private-public partnership for infrastructure investment and service delivery in post-conflict countries and thanked DFID for its financial assistance to prepare the study. They called on the Secretariat to implement the recommendations of the study in a few strategically chosen pilots in order to evaluate and test the feasibility of the proposed approach and its applicability internationally and report back on the progress at their next meeting in Barbados in September 2005.
Conclusion and Appreciation
23. Ministers, noting the valuable contribution of the Civil Society and their communiqué, encouraged them to continue engaging with the Commonwealth HIPC Ministerial Forum. They thanked the Commonwealth Foundation for facilitating Civil Society participation. They also welcomed the participation of the Commonwealth Parliamentary Association at the meeting.
24. Ministers welcomed increased co-operation between the Commonwealth Secretariat and the Agence Intergouvernementale de la Francophonie (AIF) and were particularly pleased at the participation and contribution of Ministers and officials from a number of Francophone HIPCs at their meeting, noting that they were also issuing a simultaneous Ministerial Statement.
25. Ministers agreed that their statement should be forwarded to the Joint Implementation Committee of the IMF and World Bank and IMFC and the Development Committee as well as Finance Ministers of key Commonwealth donors by the Chairperson of the Meeting, Hon. Manuel Chang. They also agreed that the Chair should continue efforts to promote the action points from their previous meetings, including on the issue of public-private partnerships. The Chair should further consult with other Commonwealth and international development partners to promote a comprehensive approach to the domestic debt problem.
26. Ministers expressed their appreciation to Hon Luisa Dias Diogo, Prime Minister for the Republic of Mozambique, for opening the meeting. They also expressed their gratitude to the government and people of Mozambique for their warm hospitality and for the excellent arrangements for the Meeting.
Joaquim Chissano International Conference Centre
16 March 2005