International Monetary and Financial Committee and
April 29, 2001
1. The HIPC Initiative
We very much welcome the progress made in implementing the HIPC Initiative since mid-1999. The overall picture is encouraging. The debt ratios of HIPC countries that already passed the decision point should drop substantially over the next two years. On average their debt-ratio will be below non-HIPC developing countries, leading to debt levels last witnessed in the 1970s. Also, increased attention is now being paid to how debt relief relates to poverty reduction, and debt management is being addressed more systematically than in the past. More recently, the Bank and the Fund started to reflect on how to strengthen public expenditure management and related systems to meet the requirements of both the HIPC Initiative and the PRSP process.
Many challenges remain, however. We still have not fully funded the Initiative. The ultimate goal of the Initiative is to help poor countries make long-term external debt sustainable. We will fail in this attempt if we simply reallocate development resources towards debt relief without paying attention to additionality, i.e., without increasing the total amount of aid. We will equally fail to achieve sustainability, if we do not succeed in removing the single most important reason for the debt overhang of the HIPCs, namely their poor growth record over the past decades. Low rates of growth are as much the cause as the consequence of the current rates of indebtedness. Long-term external sustainability of the HIPCs will not be achieved without steady, broad based and sustained economic growth. Discussions on the outlook for the HIPCs should thus focus on how to create the conditions for growth: how can macroeconomic and institutional environments favourable to private domestic investment and the inflow of foreign capital be created; and how can the export sectors of these countries be diversified to increase their resilience to external shocks. This implies that when we assess long-term external viability we should focus more strongly on the overall economic perspectives of HIPCs, rather than just on debt ratios and social expenditure levels. Finally, if countries want to reach debt sustainability, it is imperative that Governments be firm and the Bank and the Fund be consistent in following-up in the fight against corruption, including money laundering. They also have to commit to reducing military expenditures and spending on luxury goods.
Another important issue is how to deal with heavily indebted transition countries, such as the Kyrgyz Republic or Tajikistan. The principle of equal treatment of all member countries requires that we apply the same thresholds and criteria for judging the debt sustainability of IDA-only CIS countries as are defined under the HIPC Initiative. In our view, the HIPC Initiative is a generally applicable framework for assessing the sustainability of external indebtedness of poor countries. A rescheduling of Paris Club debt on highly concessional terms is a precondition for HIPC assistance to these countries, and we therefore strongly urge bilateral creditors to consider such action.
2. Enhancing Poverty Reduction
The Poverty Reduction Strategy Paper (PRSP) has become a major tool for governments to set development priorities, coordinate the many donors, and ensure that sector programs and macroeconomic policy are aligned. Political representatives, economic actors and private associations play a direct role in the elaboration and monitoring of the PRSP. The PRSP has become the main source for the program with the World Bank, defined in the CAS and is a precondition for a country to benefit from debt relief under HIPC.
Poverty reduction strategies are not a magic wand. Their quality and usefulness will improve over time. The Interim strategies presented so far to the Board are of variable quality, while the four full PRSPs were impressive. Still, it takes at least four to five years to develop a comprehensive and participatory poverty reduction strategy. Therefore, I have no problem that a country may update, refine, and improve its PRSP over time. It is an iterative process, and work plans can be established to guide it.
I have noticed that the international community has the tendency to push for very comprehensive PRSPs; everything should be included in it, as it is such a powerful planning tool. I would like to caution that the PRSP should not lead to a revival of five-year (or even 10-year) "central plans." It should remain a succinct document focusing on priority actions and policy measures to reduce poverty. More detailed programs should be described in separate sector strategies as needed.
The PRSPs are also the basis for the design of the new Poverty Reduction Support Credits (PRSCs). I welcome this new lending instrument as it promises to improve cooperation between the World Bank and the IMF and to integrate policy reforms, sector investment programs, and institution building. It also rewards countries that are able to define coherent poverty reduction strategies. However, we would like to emphasize that a PRSC should not attempt to cover all actions mentioned in a PRSP. It should select some priority areas and actions, and focus its monitoring and evaluation on those. It should contribute to the sequencing of a country's many, but sometimes unaffordable, reforms. As this instrument has not yet been tested, a cautious introduction is important. Management and the Executive Board should agree now on the benchmarks which will be used to evaluate the first group of PRSCs.
Monitoring and evaluation systems continue to be weak in most countries. I would like to stress the importance of involving civil society in monitoring the implementation of the PRSP through appropriate participatory processes.
The CDF pilots were launched before the PRSP process was established. While the PRSPs are based on CDF principles and are fully consistent with them, a practical problem of "planning overload" and administrative parallelism has arisen. In some countries, different ministries have the lead for the CDF and for the PRSP process. I recommend to start streamlining the various planning instruments of the World Bank, the IMF and other agencies and to reduce the number of policy documents that a government has to produce at the request of donors.
3. Improving Market Access for Developing Country Exports
Trade liberalization is an important element in fostering growth. This is particularly true for poorer developing countries. There clearly is also a considerable potential to liberalize trade regimes of developing countries and increase trade opportunities between the developing countries themselves. While trade in goods and services can help to produce higher economic growth, trade benefits often do not reach the poor. For this reason, trade development has to be complemented by appropriate measures to integrate the poor into the economic process.
Among the various elements to be taken up in an eventual mandate for a New Round of multilateral trade liberalization, we consider market access for industrial products, including textiles, and for agricultural products an important issue. As regards industrial products, the elimination or substantial reduction of tariff peaks and tariff escalation are among our priorities. This would considerably improve market access for processed agricultural and textile products from developing countries as tariff peaks and tariff escalation are a particular problem in these sectors. Switzerland is prepared to negotiate a further opening of its markets for agricultural products, always taking into account the non-commercial interests and multifunctionality of the agricultural sector. This would entail a further reduction of domestic subsidies.
Independent of a new round of multilateral trade liberalization, I have the pleasure to announce that Switzerland is about to implement a zero tariff initiative for the poorest countries.
4. Supporting Post-Conflict Countries
We welcome the efforts to enhance the Fund's and the Bank's assistance to post-conflict countries. The ultimate aim is to develop instruments and procedures to bring these countries back to a path of sustainable development. In particular, we see much merit in the efforts to develop a new framework for assessing performance of countries affected by conflict and for allocating scarce IDA financing. The regular CPIA and country performance ratings are not appropriate in this context, nor is ad-hoc decision making satisfactory. We agree that governance is a key dimension, even though certain reforms take time, are challenging, and usually receive little donor support and limited technical assistance. This is particularly true, for example, for the reform of the defence sector or in the context of incorporating off-budget expenditures into the budget.
Regarding debt relief under the HIPC Initiative for post-conflict countries, the scope for flexibility should be looked at very carefully and on a country by country basis. This is necessary to ensure that the quality of the HIPC process is maintained. When assessing the track records and the I-PRSPs of post-conflict countries, the main emphasis should be on rebuilding institutional and administrative capacity and on improving governance. Plans to address regional inequalities and to ensure a transparent management of revenue drawn from natural resource development will be especially important, as these issues have been a source of conflict in many cases.
I caution against a heavy front-loading of debt relief for post-conflict countries, especially if combined with an early decision point. For one, this could undermine the incentive for reaching the completion point and for implementing reform measures during the interim period. Second, it is unlikely that HIPC resources can effectively be channeled towards poverty reduction during the early phase of reconstruction, since it takes considerable time to build up the necessary absorption capacity and monitoring systems.
We welcome the discussion of the various mechanisms to clear the arrears of HIPCs towards the Bank and the Fund. The recent case of Sudan could serve as a reference for further work. However, we have to be realistic about support under HIPC to the countries currently in protracted arrears towards the international financial institutions. It will take considerable time and money to regularize their relations with bilateral and multilateral creditors. In this respect, the Bank should elaborate further on the financial implications and burden-sharing requirements to deal with the major conflict affected countries.
Finally, I would like to point out that the World Bank needs to adapt its regular instruments to deal with other aspects of conflict. We need to develop new approaches to promote institution building and governance. The Bank should strengthen its analytical and operational capacity to use development assistance for conflict prevention. I would appreciate a paper on these issues by the time of the next Development Committee meeting in October 2001. Such a paper would also benefit the IDA 13 negotiations, which will deal with post-conflict issues.