Debt Relief Vital To Economic Turnaround
by Rajendra Rampersaud
After a long period of discussion, the International Monetary Fund and the World Bank finally agreed last week to endorse the successful completion of the Highly Indebted Poor Countries (HIPC) initiative for Guyana. Under this arrangement, Guyana will benefit from debt relief totaling some US$256 million in net present value terms or some US$530 million in nominal terms. This represents a major breakthrough for Guyana since its late President, Dr. Cheddi Jagan, was one of the chief pioneers that had long struggled for this initiative from multilateral financial institutions (IMF, World Bank and IDB). However, despite this initiative, Guyana is not yet out of the woods and every effort will have to be made to secure more enhanced terms and put the country on the most viable path of economic and social prosperity. The period of the seventies saw Guyana accumulating massive debt as a result of external borrowing to fill gaps on both internal and external balances. It was also a period when the PNC Government pursued senseless nationalization policies with extremely generous compensation that further added to the country’s external indebtedness. In fact, C. Y. Thomas claims this represents more or less a "commercial repurchase of Guyanese assets". He further states that the "effect of such a commercial repurchase was to turn Guyana’s national assets into a national foreign debt denominated in an external currency. This meant that a heavy pressure was placed on all future foreign exchange earnings". In 1964, when the PPP was removed from office, the external debt was a mere US$59 million. By 1978, it was US$404 million, an increase of over 750%. This amount doubled in 1982 to US$ 807 million as Guyana hit the beginning of its arrears period when it was unable to service its debt and was deemed uncreditworthy. The decade of the '80s was the worst in Guyana’s history for the Guyanese people. Senior Ministers in the PNC were admitting that the country was in the red and was facing bankruptcy. Guyana approached the International Monetary Fund in 1988 for a standby and ESAF arrangement while current external arrears stood at US$1.2 billion of a external debt of US$1.8 billion. It is important to note that these loans by the PNC never produced a rate of return to offset their cost. Moreover, during this period, Guyana borrowed heavily from private commercial institutions, adding to its woes. The latter part of 1992 saw a change in administration with the PPP/Civic Government taking office after Guyana’s first free and fair election in nearly three decades. The new PPP/Civic Government headed by a very pragmatic Dr. Cheddi Jagan took the challenge to address the debt issue at every international forum he participated in. His radical position found favours with a number of social organizations especially the United Nations and the Copenhagen Summit on Social Development in 1995. Thus, the elevation of Dr. Jagan to office added a new dimension and dynamism in the struggle for debt forgiveness and social justice, not only in Guyana but the World over. As the PPP/Civic Government took office in October 1992, not only did it inherit a huge external debt that was racing past the two billion US dollar mark but an economy that had a huge outstanding labour and social debt as a result of years of decline in real wages, due to devaluation and high inflation under the PNC, while investment in the social sector was cut to its bone under the PNC programme. In the early days of the new PPP/Civic Government, it was severely constrained to make the full investment in the social sector and reconstruct social capital in the economy, as physical infrastructure rehabilitation required even larger investment. The total debt stock in 1992 of some US$2.1 billion was equivalent to 730% of the GDP with a per capita debt of some US$2,785 while external debt servicing was budgeted at some 70% of current revenue and 45% of export earnings. However, the government secured rescheduling on bilateral terms that led to a 50% reduction on payments. By 1992, the structure of the external debt had changed dramatically as debts to multilateral creditors rose to US$779.7 millions or 40%, bilateral creditors US$1,082.4 million or 55%, with the country’s debt to Trinidad and Tobago being US$487 million or 25% of the total debt stock. A residual amount constituted private and commercial debt. The policy of the PPP/Civic Government was to address the sustainability as well as the liquidity issue on the debt. The PPP Civic Government took part in an active debt reduction effort that resulted in some US$263 million in debt forgiveness from Brazil, Canada, Netherlands, United Kingdom and United States. The World Bank also provided Guyana with an US$11 million grant to buy back some US$85 million in commercial debt. In May 1996, the Paris Club agreed to a stock of debt reduction of some US$550 million that further reduced Guyana’s debt stock to US$1.4 billion. Paris Club stock of debt treatment did not provide the anticipated debt exit strategy for Guyana and many other highly indebted countries. In 1996, the IMF and World Bank, on the recommendation of the Development Committee, accepted the Highly Indebted Poor Country (HIPC) Initiative for selected countries with a track record of six years of good economic performance. It agreed to grant relief based on Debt Sustainability terms defined as the ratio of debt to export in the range of 200-250%. Under this criterion, Guyana would have been a borderline case. However, a second criterion was added to the HIPC in April of 1997. The fiscal criterion was added for countries with export of at least 40% and revenue of 20% to GDP and the sustainable level being calculated as total debt to revenue of 280%. Under this criterion, Cote d’Ivoire and Guyana immediately qualified for HIPC benefits with the stronger case being Guyana. In December of 1997, the IMF, World Bank and the IDB accepted Guyana’s case with a completion point of one year. Guyana received very favorable treatment due to a strong record of economic performance under the PPP/Civic administration, thereby qualifying for some US$256 million in total debt forgiveness under HIPC. While the IMF/World Bank accepted a higher debt write-off of US$256 million, the debt to fiscal burden after HIPC is expected to remain high at some 337% in 1999, while the debt service to revenue is estimated at some 33%. The debt sustain-ability has not reached its 280% target at the completion point, thereby increasing Guyana’s chances for enhanced HIPC terms. In response to an appeal by popular international social organization on the HIPC relief under the slogan, "too little too late" the Development Committee of the Fund/Bank agreed to consider enhanced HIPC terms for eligible countries. These enhanced HIPC terms are expected to lower the threshold for debt sustainability, reduce the performance period and deepen debt relief to provide wider margins to cushion against adverse shocks. Uganda and Mozambique and now Guyana are sample countries for the HIPC. After achieving its completion point, a fall in coffee prices pushed Uganda’s debt service above the sustainable 200% target while Mozambique's actual debt service is now larger than its accumulated arrears. While the G-7 nations have supported the laudable HIPC objective, financing for the present HIPC arrangement is terribly under-funded. The enhanced facility requires some US$10 billion more in new money. So far, most rich countries led by the US have contributed little or nothing to the HIPC Trust Fund or new concessionary resources to help poor countries out of their present misery. As outgoing head of the UNDP, Games Spith so aptly put it ‘the debt crisis is not simply a balance of payment crisis or a crisis of repayment, it is a human crisis, a social crises, a human rights crises. In struggling to meet debt service payments, the poorest countries move resources away from the human development need of the poor -- health, education and nutrition’. At this present juncture, the success of HIPC is on trial since for the countries it has not provided the promised exit treatment. Financial benefits are extremely tight while countries are burdened with additional conditionalities that are too rigid. As Speth warned, the "HIPC as it stands will not leave most countries with resources to provide Human Development." He warned against swapping developmental aid for debt relief. In conclusion, I would like to state that while Guyana’s HIPC was being discussed, strong sentiments were expressed. It was decided not to delay present benefit to Guyana, under current terms. However, given the stage of discussion for enhanced HIPC terms which would be applied on a case by case basis Guyana will come up for review in the future. While the present HIPC relief is welcome, it falls short of the financial requirement to support the government's investment in the people. Moreover, the PPP/Civic government's track record on social sector investment and the creation of social capital is second to none even with limited resources. The HIPC initiative is a fitting tribute to the heroic struggle waged by Dr Cheddi Jagan for total economic emancipation and social justice. Guyana now becomes the third country to successfully achieve HIPC status since its introduction and is certainly the deserving and credible case for enhanced HIPC relief. This would put the country clearly on the path of sustainable development and reconstruct social capital to its fullest. 
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