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IMF and HIPC: Ghana is not there

The Highly Indebted Poor Country (HIPC) Initiative in a poverty reduction program was 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 debts. 

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 governments 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, 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 Bank through HIPC the Initiative are only seeking to provide debt relief assistance to countries with debt management crisis. 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 servicing 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;

  1. 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.
  2. Have an unsustainable debt burden
  3. Have a track record of reform and sound policy with the assistance of IMF and World Bank support programs
  4. Develop a participatory Poverty Reduction Strategy Paper
  5. Have per capita to GDP of less than $700

Countries classified as HIPC become beneficiaries stand to gain from debt relief and other incentives to help reduce poverty in such countries. Conversely, such 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's 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.

The success of HIPC program is having fewer countries being eligible for debt relief. This, therefore, informs us that, few poor countries are unable to manage their debt. Having more countries take creditors' interest on loan benefit 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 Throne that, “a Lannister always pays his debts", we are certain to have a promise fulfilled.





Nathaniel Dwamena

He is an urban Geography, free-market enthusiast, and the Research and Development Manager at the Institute for Liberty and Policy Innovation (ILAPI).

2020-11-05 17:07:15

Source: ILAPI