Kamau Thugge, and Anthony Boote
Published Date:
December 1999
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The HIPC Initiative is not a panacea for all of the economic problems of the HIPCs. Even if, hypothetically, all of the external debts of the HIPCs were forgiven, most would still continue to need large-scale concessional external assistance; as noted earlier, currently their receipts of such assistance are much larger than their debt-service payments. Given their high levels of poverty and limited domestic resources available to meet the costs of social programs that address the needs of the poor, most HIPCs are likely to continue to be dependent on aid. The HIPC Initiative does not imply a cessation of aid to HIPCs: if it leads to withdrawal of aid, it will fail. However, given the pressures on aid budgets in major donor countries, which are likely to prevail in the foreseeable future, continuing aid will be most effective if it catalyzes private financial flows, particularly investment. There is a limit to the extent to which these flows can be debt creating, if future overindebtedness is to be avoided. This suggests a need for institution building that is essential for attracting private investment as well as for providing support for putting in place necessary infrastructure.

Some HIPCs also need to address problems of governance, particularly as they influence investor confidence, such as the establishment of appropriate commercial codes of conduct, functioning judicial systems, and the effective application of the rule of law. To attract foreign investors, who can transfer technology, HIPCs need to provide much more information in a transparent way, remove red tape, and strengthen legal systems—on such issues as property rights. They also need to improve their financial systems, including payment and settlement systems. HIPCs are competing with other countries in attracting such foreign investment, and given adverse investor perceptions, have to offer attractive combinations of rate of return relative to risk.6 All of these are difficult issues that are likely to take a long time to resolve even with the full support of the international community. Most of the HIPCs will need to continue to pursue adjustment and reform policies to meet the economic aspirations of their citizens for long after they have benefited from Naples terms stock-of-debt operations or from enhanced debt relief under the HIPC Initiative.

The HIPC Initiative is intended to complete the array of instruments available to the international community for dealing with debt problems of low-income countries. The Initiative deals with the external debt of HIPCs in a comprehensive way that involves all creditors, and thus establishes a new paradigm for international action. Not all HIPCs will need assistance under the Initiative in order to achieve sustainable debt levels. However, for the HIPCs for which traditional debt-relief mechanisms are unlikely to achieve debt sustainability, the Initiative involves a commitment by the international community to take such additional action as may be required to reduce the debt burden to sustainable levels, and for the country to exit from the rescheduling process, provided that it is prepared to adopt and pursue strong programs of adjustment and reform. The Initiative should eliminate debt as an impediment to economic development and growth and enable HIPC governments to concentrate on the difficult policies and reforms for achieving sustainable development.

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