The Highly Indebted Poor Country (HIPC) Initiative is a poverty reduction program launched by the International Monetary Fund (IMF) and the World Bank in 1996. The HIPC Initiative aims to help poor countries with unsustainable debt burden to manage and reduce their debt.
Though principles of economics teach us that nothing is free under the sun, most politicians in Africa portray their irrespective governments as if they can do everything for free. In reality government either tax or borrow highly to undertake its program. Since the government is a level 4 spender thus they use other people’s money on someone else, and there is little incentive on their part to spend or borrow wisely. In the end, the borrowing prowess of the government engulfs the country into an unmanageable debt crisis.
IMF and World through HIPC Initiative are only seeking to provide debt relief assistance to countries with debt management crises. Since inception, HIPC Initiative has managed to provide support to thirty-six (36) countries out of which thirty (30) are African countries including Ghana. As I write, three other African countries (Eritrea, Somalia, and Sudan) are waiting for IMF and World Bank Executive Board to decide on their eligibility for debt relief. Hopefully, this will bring the total countries under the HIPC Initiative to thirty-nine (39).
Debt servicing takes a toll on developing countries’ export earnings and domestic revenue which makes it difficult for economic growth and poverty reduction. Before HIPC, Ghana’s economy was burden with a debt of $3.8 billion and the poverty rate was at 29% in 1999. Ghana used about 187% of export earnings and 51% of GNP for debt serving according to the Government of Ghana in 2000. This made Ghana susceptible to HIPC.
To qualify for HIPC, a country should be able to do four (4) things;
- Eligible to borrow from both World Bank’s International Development Agency and IMF’s Poverty Reduction and Growth Trust which provide interest-free, and loans at low rates.
- Have an unsustainable debt burden.
- Have a track record of reform and sound policy with the assistance of IMF and World Bank support programs.
- Develop a participatory Poverty Reduction Strategy Paper.
Countries classified as HIPC become beneficiaries and stand to gain from debt relief and other incentives to help reduce poverty in such countries. Conversely, such a benefit becomes a cost to creditors since expected interest would be lost fully or partly. In some instances, countries are directed to use what would have been a debt payment to build social facilities like schools, hospitals, toilets, etc. for their citizens to help reduce poverty. This is seen in Ghana on the many infrastructures that were labeled ‘HIPC benefit’ under former President John Agyekum Kuffour.
According to the IMF, debt relief under the HIPC Initiative is estimated at $76 billion at the end of 2017. This cost has been incurred for helping countries under the HIPC Initiative. Currently, the IMF uses moral suasion to get debt relief from its creditors since creditor participation is voluntary. The largest among these creditors includes the World Bank, the African Development Bank, the IMF, Inter-America Development Bank, and all Paris Club Creditors.
The objective of the HIPC Initiative is to help eligible countries to mitigate poverty by increasing spending on health and education instead of paying the debt. Countries are expected to improve their debt management and reduce debt servicing.
In 2015, Ghana enjoyed an IMF bailout of $918 million to help stabilize its economy. The Extended Credit Facility aimed to ‘restore debt sustainability and macroeconomic stability to foster a return to high growth and job creation while protecting social spending’. Ghana’s debt to GDP ratio in 2015 and 2019 are 54.83% and 63.76% respectively. The difference in percentage terms is 8.93% in 4 years. Whether debt relief helps to reduce poverty would be a story for another day. This is because there is little commitment to reducing borrowing on the path of poor and lower-middle-income countries like Ghana.
Ghana completed its Extended Credit Facility (ECF) program with the IMF in 2019, which was initiated by the previous government. The ECF program sought to address Ghana’s macroeconomic imbalances while also restoring debt sustainability. Despite the completion, Ghana’s public debt-to-GDP ratio has risen in recent years. Currently, Ghana’s debt-to-GDP stands at 93.5% from 75.9% in September 2022 according to the Bank of Ghana, putting the country’s fiscal sustainability and creditworthiness at risk if not addressed. This has necessitated another staff-level agreement between Ghana and IMF for another bailout. The current state of Ghana’s economy can be attributed to the government’s relentless on cutting down its size, and reducing spending and waste through spending on certain flagship programs like NABCO, YouStart, Planting for Food and Job, and Free SHS.
The success of HIPC Initiate is having fewer countries eligible for debt relief. This, therefore, informs us that, a few poor countries are unable to manage their debt. Having more countries take creditors’ interest on loan benefits away would not sit well with creditors. It is not surprising that countries that are eligible to borrow from the IMF enjoy HIPC Initiative once. Japan’s decision not to extend new loans to Ghana in the early 2000s favors the narrative that as a creditor- like the IMF- you stand to lose should there be more countries on HIPC Initiative.
On any day, creditors would be glad to have debtors who can pay their debt, manage their debt well, and also reduce their poverty level. As it is famously said in Game of Thrones that, “a Lannister always pays his debts”, we are certain to have a promise fulfilled.
Article by Nathaniel Dwamena
Nathaniel is a free-market policy analyst and president of the YAFO Institute. He engages in activities that promote civil liberty and economic freedom in Ghana. He was part of the team consulted by Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ Ghana) to undertake a study on business red tape in Ghana. He has a background in law, geography, and economics.
