25.04.2004 | Bangkok, Washington, D.C.
Statement submitted to the 69th meeting of the Development Committee, (Joint Ministerial Committee of the Boards of Governors of the World Bank and the IMF on the Transfer of Real Resources to Developing Countries)
The two issues for consideration by this 69th Development Committee Meeting - long-term debt sustainability in low-income countries (LICs) and progress towards the poverty reduction and related U.N. millennium development goals (MDGs) - are by no means new items on the agenda. The Committee has long been grappling with the inter-related problems of debt and poverty which, despite overall progress, have remained largely unresolved.
The need to curb debt and fight poverty is particularly pressing for severely indebted LICs, a highly diverse group of mostly African nations which rely predominantly on official aid to meet their development financing requirements. Unsustainable levels of external debt, low savings and investment, limited access to external sources of financing, high export concentration, and HIV/AIDS continue to depress output growth in these countries, which are characterized by very weak policies, institutions, and administrative capacities. In a concerted attempt to reduce the external debt and debt-service burdens of eligible LICs to sustainable levels, the international development finance community in September 1996 launched the Heavily Indebted Poor Countries (HIPC) Initiative. The HIPC Initiative aimed at providing a solid foundation for debt sustainability in LICs. By removing the debt overhang, the Initiative would enhance access to new resources for development finance, help generate savings and investment, and jump-start the development process.
The OPEC Fund for International Development (the OPEC Fund) actively participated in the new Initiative from the start and contributed its fair share of the burden, even as the eligibility criteria were broadened to provide deeper and faster debt relief to a larger group of countries. Out of the 24 LICs for which the Fund approved debt relief by the end of 2003, thirteen had received full or partial disbursement. This relief has been truly additional financing drawn from the Fund's resources. In October 2003, the Fund hosted the second annual meeting of multilateral development banks (MDBs) at its headquarters in Vienna, Austria.
Experience suggests that despite broader, faster, and wider debt relief, and multiple measures taken by LICs themselves to device national strategies to expand their economic opportunities, the impact of the HIPC Initiative on long-term debt sustainability in LICs has been limited to date. Debt relief and reduced debt service notwithstanding, debt burdens in "graduated" HIPCs have risen again, partly as a result of commodity price declines, and debt ratios in other LICs also increased. Many LICs remain dependent on grants and concessional loans, and will unlikely be able to meet their debt-service obligations should official aid recede. Progress in almost a dozen other potentially eligible HIPCs has been stalled by violent conflict. Consequently, providing debt relief and/or increasing the grant component of MDB operations is, in itself, not a guarantee for long-term debt sustainability. Even after full implementation of the suggested switching from loans to grants, HIPCs would likely continue to face unsustainable debt and need more debt relief, which could lead to a continual cycle of lending and forgiving.
Achieving long-term debt sustainability requires a combination of sound debt, investment, and macro-economic management policies. Even if macroeconomic and debt management systems were to be strengthened, and the design of the Initiative were to be further refined, long-term debt sustainability in LICs, once attained, would remain fragile at best. This is because efforts to free LICs from the scourges of poverty and debt can have lasting effect only to the extent to which they are supported by a fully inclusive and equitable world economy which can smoothly integrate the LICs, as called for by world leaders in the March 2002 Monterrey Consensus.
Limited progress has been made to date towards implementing the Monterrey Consensus, and bridging the gap between rich and poor. This gap has continued to widen, with the ratio of per capita income between the top and bottom 20% of the world's population more than doubling from 30 to one in 1960 to 74 in 1999. The world's poorest countries, which have increased in number from 21 in 1971 to 49 in 2000, have suffered most, and threaten to become increasingly marginalized from the mainstream of the world economy. Countries that have so far lost out in the development race are more prone to systemic violence, as poverty and debt may cause war, and war may cause debt and poverty. Declining state capabilities have fuelled socio-economic instability, civil unrest, and armed conflict.
The importance of a peaceful and secure environment for sustainable development is fully underscored by OPEC member countries, which over the past 40 years have been at the forefront of global efforts to create and maintain a stable international political and economic climate. They have carried out this task in two major ways. First, they have ensured the adequacy of global oil supplies, and thus, helped safeguard the stability of the international economy. Second, they have provided a constant stream of financing for development, driven by the common and shared vision that fighting poverty is a necessary investment in peace and stability for the whole of mankind. The development aid provided by OPEC member countries has been financed mainly from the revenues of oil - a commodity on which their economies continue to be heavily dependent, and which they know shall be depleted one day - in spite of their own domestic political and economic difficulties and in some cases high external debt, and has constituted a true sacrifice.
In the current international economic environment, LICs are trapped in a corner: neither trade, nor aid, nor FDI seem to offer a way out of the vicious circle of poverty, debt, disease, and violent conflict. Despite several mega-summits organized around the turn of the millennium, the level of ODA has declined, trade negotiations have stalled, and private capital inflows to developing countries have receded. Decisive action needs to be taken at the global level to address poverty reduction from the perspective of finance as a coherent and integrated whole - as called for in the Monterrey Consensus - by making structural and lasting changes at the global level. A series of interventions could be taken by the global community to create a more development-friendly, inclusive, and participatory international economy that could smoothly integrate the LICs, and help them realize the MDGs and long-term debt sustainability. While some measures have already been taken, further action is urgently required in particularly the following areas:
- Diversifying the Export Base: Means should be explored to enhance the competitiveness and diversify the economic and export base of LICs, which remains very narrow. Agriculture continues to be the most important economic activity in Africa, contributing a third to national outputs, occupying some 60% of the labor force, and providing a major share of export earnings and government revenues. However, agriculture and rural development in LICs have not sufficiently developed due to various reasons. These include: (i) inadequate infrastructures, (ii) limited access to land, credit, information, appropriate technologies, fertilizers, and improved seeds varieties, and (iii) adverse weather conditions. The sector has also not received adequate attention of the international donor community, with the proportion of ODA going to agriculture dropping from about 20% in the late 1980s to about 12% today. Per capita food production in Africa has fallen by 23% over the last 25 years, and 200 million Africans continue to be malnourished;
- Reducing Vulnerability to Exogenous Shocks: A country's capacity to service debt depends on its ability to use resources effectively for development and pro-poor growth, and its vulnerability to exogenous and largely unpredictable shocks, including the impact of commodity price fluctuations in world markets. The export performance and growth of LICs continues to be heavily influenced by developments in the prices of a few primary commodities on which they are typically dependent, such as coffee and cotton, and their commodity export dependency ratio (defined as the ratio of the three main commodities in total exports) averages about 60%. This, in turn, is related to macroeconomic uncertainty and low investment. There remains a clear need to safeguard the economies of LIC against the impact of exogenous price shocks;
- Liberalizing Trade in Agriculture: The HIPC Initiative recognizes the importance of exports and market access for long-term debt sustainability in LICs. Trade in agriculture could offer many LICs real opportunities for growth, if not hindered by high agricultural subsidies in the North. Africa's share in world exports fell from 6.3% in 1980 to 2% in 2000. Its share in world primary non-fuel exports dropped from 6% to 4% over the same period, highlighting the importance of enhancing the region's competitiveness and access to global markets. However, multilateral trade negotiations in Cancun, Mexico, September 2003 ended in stalemate, reflecting deep rifts on implementation of the Doha Development Agenda, notably on market access for agricultural products from the South. Efforts towards long-term debt sustainability, if to be successful, must be supported by a more fair and balanced rule-based multilateral trading system, and a reduction of trade barriers on products in which LICs have a comparative advantage in the post-Cancun round of multilateral trade negotiations;
- Increasing the Volume and Effectiveness of ODA: Most LICs continue to depend heavily on ODA to meet their basic social and development needs. However, ODA fell back to US$49.1 billion in 2002, less than half the US$100 billion required each year to achieve the MDGs, and was outpaced by worker's remittances as a source of external financing for development. More effort should be made to raise the level of ODA from its current 0.22% of gross national product to reach the U.N. target of 0.7% (or more), and to improve its overall effectiveness through harmonization, alignment, and by adopting a more results-oriented approach;
- Attracting a Higher Share in Private Investment Inflows: The 42 HIPCs attracted a negligible share of 0.002% in aggregate global portfolio direct investment flows and less than 0.5% of world FDI flows in 2001 - the latter being directed mainly towards the extractive rather than productive sectors - which again bears evidence of their marginal status in the world economy. Without higher shares in long-term private investment flows, the vicious circle of low growth and export diversification, and high debt and vulnerability will likely continue.
In view of ongoing developments, the OPEC Fund for its part has taken steps to strengthen its analytical capacity, diversify its tools and instruments, and considerably expand the level of its financial assistance in order to be able to continue to provide an adequate response to the changing needs and priorities of its client base.