A Plan of Action

Debt Relief for DevelopmentPublished by:The Norwegian Ministry of Foreign Affairs7. juni plassen/Victoria Terrasse,P. O. Box 8114 Dep, 0032 Oslo, NorwayE-mail: infosek@mfa.no

This publication can also be downloaded from the Internet: http://odin.dep.no/ud

Public institutions may order additional copies of this publication from:Statens forvaltningstjenesteKopi- og distribusjonsserviceP.O.Box 8169 Dep. 0034 Oslo, NorwayE-mail: publikasjonsbestilling@ft.dep.noTelefax: +47 22 24 27 86

Publication number: E-775 EISBN: 82-7177-760-2

Cover/illustrations: Corbis/Scanpix

Designed and printed by: www.kursiv 06/2004 – circulation 2500

Contents

FOREWORD BY THE MINISTER OF INTERNATIONAL DEVELOPMENT 3

1. SUMMARY: CONSOLIDATION AND NEW APPROACHES 5

2. INTRODUCTION 9

3. CURRENT STATUS OF IMPLEMENTATION OF THE DEBT 11RELIEF STRATEGY

3.1. Forgiveness of bilateral debt 123.2. Debt relief under the Fund for International Debt Relief Operations 13

(The Debt Relief Fund)

4. CRITICISM OF DEBT RELIEF INITIATIVES 154.1. The scope of the HIPC Initiative 154.2. The pace of implementation of the HIPC Initiative 164.3. Conditions for debt relief 164.4. Debt relief and “structural adjustment” 174.5. “Illegitimate debt” 184.6. “Debt tribunals” 224.7. Unilateral debt forgiveness for middle-income countries? 23

5. PRIORITY COUNTRIES IN NORWAY’S DEBT RELIEF POLICY 245.1. Countries against which Norway has claims 245.2. Criteria for the selection of priority countries 245.3. Priority countries 26

6. DEBT POLICY INSTRUMENTS AND AREAS OF FOCUS 276.1. Binding cooperation under the HIPC Initiative 276.1.1. Results and challenges under the HIPC Initiative 286.1.2. Long-term financing of the HIPC Initiative 316.2. Efforts coordinated through the Paris Club 336.2.1. The Evian approach 356.3. Unilateral reduction of bilateral debt for HIPC countries 386.4. Support for clearance of multilateral debt arrears 396.5. Special unilateral debt forgiveness for post-conflict countries 406.6. Multilaterally coordinated debt swaps with non-HIPC countries 416.7. Support for the World Bank’s Fifth Dimension Facility 456.8. Support for the World Bank’s Sixth Dimension Facility 466.9. Support for liquidating South-South debt 476.10. Support for national debt funds 476.11. Support for national debt management 47

1

2

TABLES

1. Forgiveness of bilateral debt 1998-2003 122. Allocations from the Debt Relief Fund 1998-2003 143. Norway’s claims against developing countries 254. Norway’s contributions to the World Bank’s Fifth Dimension Facility 46

BOXES

1. The Debt Relief Strategy Financing Facility 52. The Debt Relief Strategy in a Nutshell 83. The Debt Relief Fund: relevant applications 134. Priority countries for debt relief from Norway 265. The main stages in the debt relief process under the HIPC Initiative 296. Country case: Tanzania’s HIPC treatment 307. Method for calculating the need for debt relief at the HIPC completion point 318. More information on the Paris Club 349. The main elements of the Evian approach 36

10. Cancellation or capitalization of the pre-HIPC maturities of post-conflict countries 4111. Multilaterally coordinated debt swaps. Example: Poland 4312. Priority countries for multilaterally coordinated debt swaps 44

3

In October 1998, one year into my first period

as Minister of International Development, I

presented the document Towards the Year 2000

and Beyond: The Norwegian Debt Relief

Strategy. This was Norway’s first coherent plan

of action aimed at helping to solve the debt

problems of developing countries. It has provid-

ed the foundation for Norway’s debt policy for

developing countries up to the present day.

Norway is and will always be a “small coun-

try”. Nevertheless, Norway’s debt policy has

helped to influence the international agenda.

The Debt Relief Strategy became one of many

expressions of a significant strengthening of

international debt policy towards the end of the

1990s. Since then, new mechanisms have been

introduced and the conditions for debt relief

have been substantially improved.

Despite this multilateral offensive, lasting solu-

tions have been approved for only a few coun-

tries. Many countries are still struggling under

their debt burdens. We still hear demonstrators

chanting “Cancel the debt now!”. The rich

countries are still being accused of miserliness

and procrastination. Some critical voices say

that international debt relief efforts have failed.

Others condemn the Heavily Indebted Poor

Countries (HIPC) Initiative out of hand. Only

just over four years after the HIPC Initiative

found its current form, I respectfully maintain

that this is an extremely hasty conclusion.

It is true that the debt relief process has been

slower than could be desired. However, to say

that this is due to the unwillingness of creditors

is a facile argument. Why? Because debt relief

alone is not a cure-all; because debt relief alone

leads nowhere unless it is accompanied by a

policy that promotes development. In this

respect, the heavily indebted countries them-

selves have a great deal of responsibility. At the

same time, we in the rich countries have an

obligation to poor people in developing coun-

tries to ensure that debt relief benefits them.

It is a matter of quality assurance. In practical

terms, it is especially a matter of developing

countries formulating their own poverty reduc-

tion strategies so that the resources freed up by

debt relief are really put to good use. This has

often taken longer than many people believed

beforehand, myself included. However, if we had

reduced our requirements for the quality and

coherence of development strategies, we would

have done poor people a disservice. I believe

that the future will show that what now

appears to be lost time is in fact a good invest-

ment in effective, long-term development and

poverty reduction.

More than five years after the Debt Relief

Strategy was presented, the time has come to

take stock, learn from the experience we have

gained so far, react to the criticisms that have

been raised, take the temperature of the inter-

national debt dialogue, try to look into the

future – and reset our course. This updated

debt relief strategy – the Plan of Action on Debt

Relief for Development – is an attempt to do

just that. As such, it also represents a con-

cretization and amplification of the references

to debt relief in the Norwegian Government’s

Action Plan for Combating Poverty in the

South towards 2015, which was presented in

2002.

In many respects, this new plan will appear to

be travelling along well-trodden paths. This is

not a coincidence. It is simply because most of

the measures that had priority in the original

Debt Relief Strategy are as valid and relevant

today as they were five years ago. In this res-

pect, this Plan of Action entails consolidation.

However, we are also travelling along new

paths. We intend to reinforce debt relief meas-

ures for countries emerging from war and con-

flict. We give priority to multilaterally coordi-

nated debt swaps with countries that are not

covered by the HIPC Initiative by cancelling

debt on condition that these countries commit

FOREWORD BY THE MINISTER OF INTERNATIONALDEVELOPMENT

4

themselves to implementing measures that pro-

mote development and reduce poverty.

Furthermore, we help to dispel what has been

something of a debt policy taboo by also advo-

cating debt reduction for middle-income coun-

tries with obvious solvency problems. However,

this type of debt relief must not take place at the

expense of the poorest countries.

If countries whose debt is now being cancelled

return in a few years with new problems, this

will discredit current debt relief strategies. As in

the original Debt Relief Strategy, we therefore

advocate more systematic international cooper-

ation to improve debt management in the poor-

est countries. Specifically, one of our sugges-

tions is to establish a joint consultative group

for all the players that currently provide techni-

cal assistance in this field. Here, as in other

areas of international policy, we can achieve

far more together than we do individually.

We also support a proposal by UN Secretary

General Kofi Annan for the establishment of a

special international working group, represent-

ing a wide range of interests, to study the ques-

tion of a new international debt work-out mech-

anism.

It is important for the debt debate to have a

solid grass roots base. I am, therefore, pleased

that the debt debate arouses the interest of

many people, both in Norway and in many

other countries around the world. There is

absolutely no doubt that the debt relief move-

ment has helped to influence international debt

policy in a direction that has been favourable

for the developing countries. At the internation-

al level, the Jubilee movement has also made a

significant, admirable contribution. Among

other things, this movement must be given part

of the honour for the significant strengthening

of the HIPC Initiative. In Norway, the Norweg-

ian Campaign for Debt Cancellation (SLUG)

has made its mark as an important, know-

ledgeable source of information and influence.

In Norway, as in other countries, a debate on

“illegitimate debt” has been in progress for sev-

eral years. At its best, this debate has outlined

possible new criteria for debt relief that will also

apply to countries that do not qualify for it

today. However, translating these ideas into

practical policies is a major challenge. The dis-

cussion of improvements to existing debt relief

mechanisms aimed at the poorest countries

must, therefore, not be “drowned out” by the

illegitimacy debate.

The new approaches described in this plan will

be launched at the same time as we continue

our efforts to implement previous initiatives.

Norway’s debt relief policy is a mixture of prag-

matism and ambitious political objectives. New

unilateral measures and “the power of exam-

ple” are considered on a continuous basis.

However, they must constantly be weighed

against international laws of gravity that no-

one can ignore.

The Debt Relief Strategy was in many ways a

reaction to the Norwegian Ship Export

Campaign of the 1970s and 1980s, during

which Norwegian business interests overshad-

owed and dominated development policy con-

siderations. I have myself called this campaign

a disgrace. I stand by what I said. One of my

goals is to cancel the debt that was incurred as

a result of this campaign. In these efforts, I will

nevertheless stick to international rules – and I

will always ensure that the poorest countries

have first priority!

My political commitment is based on ethical

considerations. However, we must guard

against making ourselves spokespersons for an

apparently unassailable duty ethic that results

in little more than symbolic policy. A policy that

does not focus on the weakest members of socie-

ty will fail. Poverty reduction must be the yard-

stick against which all instruments in all devel-

opment policy are measured.

Hilde F. Johnson

World Debt Day

16 May 2004

Towards the Year 2000 and Beyond: The

Norwegian Debt Relief Strategy was launchedin October 1998. It was a plan for howNorway could help reduce the debt burden ofthe poorest and most indebted countries up tothe end of the millennium. The Debt ReliefStrategy comprised two main parts. The firstpart dealt with the multilateral and bilateralmechanisms through which Norway can pro-vide debt relief, including concrete proposalsfor ways in which Norway could reinforce andutilize these mechanisms over the next fewyears. The second part was country-specific,containing proposals for what Norway coulddo for 22 poor indebted countries.

The overarching strategy was for Norway toactively support the growing political agree-ment on the need to find a lasting solution tothe debt problems of the poorest countriesthrough binding international cooperation.For the first time since Norwegian ODA loanswere cancelled in the 1980s, we planned touse Norwegian debt relief strategically, boththrough unilateral measures and through ourinternational commitments. We proposed can-celling claims of up to NOK 1.3 billion againstcertain countries in the next four to fiveyears, provided that:

• debt relief was implemented as part of orfollowing multilaterally coordinated debtrelief operations, at a time when debt relief

would benefit the country and not othercreditors

• a practical assessment was carried out ineach case to ensure that debt cancellationwould have a genuine impact on the devel-oping country concerned and its impover-ished people.

At the end of 2003, Norway had cancelledNOK 1.6 billion of developing countries’ debtto Norway. The time has now come to reviewthe experience gained from the Debt ReliefStrategy and to stake out our future course.

Five years on, one of the most obvious conclu-sions is that much of the necessary work ondebt relief still remains to be done. Severalpoor countries have still not qualified for theHIPC Initiative. Of the 27 qualified HIPC coun-tries, only 13 have passed the completionpoint. Of the HIPC countries on which Norwayhas claims, only two – Tanzania and Benin –have put HIPC behind them and finally hadtheir bilateral debt to Norway cancelled. Of theDebt Relief Strategy financing facility of NOK3.17 billion, there still remains NOK 1.84 bil-lion which – given Norway’s unique budgetmodel – can be used for debt cancellation with-out drawing on the development assistancebudget. It is, naturally, a political goal to ensurethat this facility is fully utilized. Equally natural-ly, this must take place in such a way that debtrelief leads to genuine poverty reduction.

1. SUMMARY: CONSOLIDATION AND NEW APPROACHES

The Debt Relief Strategy Financing Facility

The part of the Debt Relief Strategy that concerns cancellation of bilateral debt (government-to-government debt) is based

on a budget model that is unique to Norway, known as the Debt Relief Strategy financing facility. The claims covered by this

facility are mainly linked to export credits, guaranteed by the Guarantee Institute for Export Credits (GIEK) and granted in

the late 1970s and early 1980s. Many of them were related to the Ship Export Campaign. Some of these guarantees were

recommended by the Norwegian Agency for Development Cooperation (NORAD) as promoting development, while others

were not submitted to NORAD for consideration. These claims must not be confused with development assistance loans

(ODA loans) previously provided by Norway, which were all cancelled in the first half of the 1980s.

BOX I

5

6

Another obvious conclusion is that there isstill a need for virtually all the instrumentsdescribed in the original Debt Relief Strategy.The basic premises for Norway’s debt reliefpolicy will continue to be as follows:

1. to strengthen and rationalise the multilater-

al debt relief mechanisms, because this is

more crucial in solving the debt problems of

poor and indebted developing countries than

what Norway does with its relatively modest

claims

2. targeted, unilateral measures that will bene-

fit countries’ development and poverty

reduction processes, with a special view to

encouraging other, larger creditor countries

to implement new, improved debt relief

measures.

At the beginning of the 1980s there was widespread default on repayment of these credits because a great many borrowers

in developing countries were in financial difficulties. GIEK’s guarantee liability was then triggered, the Norwegian exporters

were “bought out” by means of compensation payments and GIEK – on behalf of the Norwegian Government – became the

new creditor. Since government guarantees had also been provided by the borrowers, the resulting claims became govern-

ment-to-government debt. The accumulation of debt to Norway took place in parallel with a global accumulation of debt in

developing countries, often referred to as “the global debt crisis”.

All in all, NOK 3,300 million was allocated for GIEK’s compensation payments from the central government budget, of which

NOK 1,266 million was under the old general guarantee scheme and NOK 2,034 million was under the old special scheme

for developing countries. NOK 510 million of this was charged against the development assistance budget. Before the Debt

Relief Strategy was launched, debt relief amounting to NOK 127 million was provided under the special scheme, covered by

previous allocations1.

In accordance with the Debt Relief Strategy and the underlying recommendations from an inter-ministerial Committee of

State Secretaries (Deputy Ministers)2, in the Budget Proposition for 1999 it was proposed that all cancellation of Norwegian

Government claims under the Debt Relief Strategy be implemented without making new allocations from the development

assistance budget or other parts of the central government budget. The claims in question must have resulted from credits

granted prior to the restructuring of GIEK in 1994 and must have been defaulted on prior to 31 December 1997. This applied

to both debt cancellation based on multilateral agreements in the Paris Club and additional, unilateral debt cancellation

based on the criteria laid down in the Debt Relief Strategy. Other debt relief measures under the Debt Relief Strategy were,

in principle, to be covered by allocations from the development assistance budget.

During the debate on the 1999 central government budget, the Storting decided that bilateral debt relief could be provided

without new allocation up to a limit of NOK 1,266 million for GIEK’s old, general scheme and NOK 1,907 million for GIEK’s old

special scheme for developing countries, respectively. The total financing facility was therefore NOK 3,173 million. In other

words, the total financing facility was equivalent to the sum of previous allocations from the central government budget for

compensation payments under the schemes, with a deduction of NOK 127 million for the funds that had already been spent

on debt relief. All bilateral debt cancellation under the Debt Relief Strategy – including any interest accrued after the Debt

Relief Strategy was implemented – could thereafter be implemented without allocation, on the basis of annual resolutions

in the development assistance budget. This budgetary compromise has subsequently been referred to in all central govern-

ment budgets and has received broad-based support in the Storting.

The Debt Relief Strategy financing facility originally covered a group of 19 indebted low-income and middle-income coun-

tries that were priority countries and countries eligible for bilateral debt cancellation, respectively: Angola, Côte d’Ivoire,

Ghana, Guinea, Somalia, Tanzania, Vietnam, Benin, The Gambia, Senegal, Sierra Leone, Zaire/DR Congo, Liberia, Sudan, Burma,

Algeria, Ecuador, Jamaica and Peru3. In 2001 it was decided that the facility would also cover debt cancellation for the former

Yugoslavia (Serbia-Montenegro), some of which will not start to run until 2005. In 2002 it was decided that the financing

facility would also cover multi-year and ongoing debt relief for Egypt, through a lump-sum compensation of GIEK. As of

today, the Debt Relief Strategy financing facility therefore covers 21 countries, although in such a way that any future or fur-

ther debt relief for Egypt and Serbia-Montenegro (apart from the amounts to be disbursed in 2005) will not be covered by

the financing facility.

1 Cf. the guidelines in Proposition No. 103 to the Storting, cf. Recommendation No. 225 to the Storting (1991-92). 2 Committee of State Secretaries to evaluate the budgetary consequences of the Debt Strategy. The Committee present-

ed its report “Vurdering av budsjettmessige konsekvenser av gjeldsplanen” (Evaluation of the BudgetaryConsequences of the Debt Strategy) on 25 August 1998.

3 This list is the same as the first 19 countries in Table 2 (page 10) of the 1998 Debt Strategy.

These basic principles entail a number ofpractical policy approaches that are as validtoday as they were five years ago and there-fore remain firm:4

Norway will ...

" actively support the HIPC Initiative for thepoorest, most indebted countries and con-tinue to work to ensure full financing forand further improvements to this scheme

" supplement HIPC debt relief with unilater-al measures so that, on certain conditions,we cancel 100 % of HIPC countries’ debt toNorway, and work to ensure that as manycreditor countries as possible do the same

" actively support and influence the work ofthe Paris Club which, as regards bilateraldebt, is the main arena for practical imple-mentation of the HIPC Initiative and fordebt negotiations with other countries

" work to ensure that all debt relief benefitsdebtor countries and not other creditors

" support international debt operations,especially the World Bank Fifth Dimensionand Sixth Dimension facilities (the IDADebt Reduction Facility) as an importantsupplement to bilateral debt cancellation

" contribute towards cancelling the debts ofpoor developing countries to other devel-oping countries, provided that a specialmechanism is established for this purposeand such support makes good use ofdevelopment assistance funds

" consider supporting national debt funds torelieve the multilateral debt servicing bur-den of developing countries, both as a tar-geted debt policy instrument and as a spe-cial element of Norwegian budget supportin general

" work to promote more systematic multilat-eral cooperation to improve debt manage-ment in the poorest countries, includingby way of using development assistancefunds, to help prevent new debt problems.

In the light of the review of our experi-ences so far and new challenges in the debtfield, however, it is also necessary to updateand further develop the range of instruments.The “expansion” of the Debt Relief Strategycan be briefly summarized as follows:

Norway will ...

" help to pave the way for HIPC treatment forcountries that have been affected by warand conflict (post-conflict countries) by pro-viding grants for coordinated operations toclear the arrears of individual countries tointernational financial institutions

" advocate measures which ensure thatpost-conflict countries who are candidatesfor HIPC treatment do not have to spendscarce resources on servicing externaldebt, and refrain from claiming currentinterest and principal repayments fromsuch countries, and then consider 100 %debt cancellation as part of the HIPC treat-ment of these countries

" advocate multilaterally coordinated debtswaps with countries that are not coveredby the HIPC Initiative (mainly middle-income countries), so that debt reductionis granted provided that these countriesimplement development or environmentalmeasures with the funds that are freed up

" implement multilaterally coordinated debtswaps with Pakistan and Vietnam, andconduct negotiations on a multilaterallycoordinated debt swap with Ecuador

" more generally, work to ensure that mid-dle-income countries with structural pay-ment problems also have sufficiently com-prehensive debt agreements, if necessarywith debt reduction, so that repeated, fre-quent debt negotiations are renderedunnecessary

" work to ensure that the Paris Club adoptsa more flexible attitude to moving cut-offdates (which limit which debt can be rene-gotiated) in such a way as to take intoaccount countries’ solvency and creditwor-thiness

4 This list is not exhaustive

7

8

" support the proposal of the UN SecretaryGeneral to establish a special internationalworking group, representing a wide rangeof interests, to consider the question of anew international debt negotiation mecha-nism

" participate actively in international debate,introduce perspectives from civil societyinto the debate and, when this is consid-ered appropriate, put controversial ideason the agenda

" support a possible multilaterally basedstudy of “illegitimate debt”.

A clear precondition for the bilateral debtrelief that is proposed or outlined in this Planof Action is that it must be possible to cover itwithin the Debt Relief Strategy financing facil-ity. To the extent it may be relevant to grantdebt relief for other, more recent bilateralclaims than those covered by the Debt ReliefStrategy, an unsolved budgetary issueemerges. The budgetary processing of suchdebt relief will have to be submitted to theStorting. Similarly, if the financing facilityshould be “used up” at some future date, newbudgetary solutions must be sought. Anyfuture bilateral debt relief that entails budget

allocation is not covered by this Plan ofAction.

If we succeed in implementing all the bilateraldebt relief measures outlined in this revisedPlan of Action, it is assumed that this willabsorb the entire Debt Relief Strategy financ-ing facility that has not been utilized so far.However, there is a great deal of uncertaintyabout this, particularly as regards the extentto which countries that are currently affectedby war and conflict and/or poor governance(Côte d’Ivoire, Angola, Somalia, Liberia,Sudan and Burma) will qualify for HIPC treat-ment. Furthermore, due to accruing interest,the total charge against the financing facilityfor each HIPC country will depend on howlong it will take each country to complete itstreatment. There is also uncertainty aboutwhether the proposed debt swaps will beimplemented as desired.

Specific decisions concerning Norway’s debtrelief measures will in any case be madethrough ordinary administrative procedures.In other words, the Debt Relief Strategy doesnot entail processing of country-by-countrydebt relief decisions. Like its predecessor, theexpanded Debt Relief Strategy, is regarded asa “living instrument” and will be revised andupdated as and when necessary.

Bilateral debt cancellation financed through theDebt Relief Strategy financing facility without

budget allocation

• Up to 100 % debt cancellation for the current HIPC

countries Ghana, Gambia, Senegal, Sierra Leone and

D.R. Congo

• Up to 100 % debt cancellation for HIPC-qualified

Guinea, provided that it returns to its currently inter-

rupted IMF programme and thereby re-qualifies for

HIPC treatment.

• Up to 100 % debt cancellation, including possible post-

conflict/pre-HIPC forgiveness of payments as they fall

due from Côte d’Ivoire, Angola, Somalia, Liberia, Sudan

and Burma, provided that these countries emerge from

war and conflict and/or improve their governance,

qualify for HIPC treatment and thereby also for unilater-

al Norwegian debt cancellation

• Debt swap with Vietnam and, depending on the out-

come of bilateral negotiations, with Ecuador

Support for international debt relief operationsfinanced with budgetary allocation from the Fund

for International Debt Relief Operations

• Support the HIPC Trust Fund, the World Bank’s Fifth and

Sixth Dimension Facilities, multilateral arrears-clearing

operations, technical assistance for debt management,

multilaterally coordinated operations to cancel debt

between developing countries, interest subsidies for

the IMF PRGF scheme and contributions to national

debt funds

• Debt swap with Pakistan

BOKS 2

The Debt Relief Strategy in a Nutshell

Borrowing money is not necessarily a nega-tive thing. For developing countries with sub-stantial investment needs, it is normal andnatural to be in debt. When investments thatare socio-economically profitable are financedby loans, an increase in a country’s debt mayhelp to accelerate positive economic andsocial development. The question of access tocredit is therefore an important developmentpolicy issue.

A debt problem arises when a country isunable to service its debt without doing so atthe expense of important social responsibili-ties. In many cases, not only is a country’sdebt a strain on the country’s budget, in theform of debt servicing, but the amount ofdebt incurred often prevents the countryfrom obtaining new resources, in the form ofloans for necessary investments. In suchcases there is a debt overhang.

In global terms, the net flow of borrowed cap-ital to developing countries5 today is more orless neutral. In other words, on average,countries spend approximately as much oninterest and repayments on existing loans asthey receive in new loans. However, there aresignificant variations between regions andbetween countries.

Today, most of the poor countries with seri-ous debt problems are in Africa. For thesecountries, debt is a serious obstacle to eco-nomic and social development. It leads tomajor balance of payments problems, laysclaim to future revenues, creates an uncertaininvestment climate and ties up scarce admin-istrative resources.

In the 1998 Debt Relief Strategy, reducing theburden of debt was regarded as a necessary

element of a coherent solution to break thevicious circle. However, it was recognised thatdebt relief was not sufficient to achieve a last-ing solution to a debt problem. It was equallynecessary for countries to pursue sound eco-nomic policies and make investments thatwere socio-economically profitable in order tolay the foundations for long-term growth,development and poverty reduction.

The value of debt relief will be seriously limit-ed if a country pursues an economic policythat leads back to the same debt situation asit is being helped out of. Countries must alsodemonstrate their ability and willingness toutilise the resources that are freed up by debtrelief for measures that promote developmentand reduce poverty. Debt relief without anaccompanying strengthening of countries’own policies and efforts, for example in thefield of production and tax collection, isunlikely to make a significant contribution toeconomic and social development. Debt reliefalone is not a miracle cure.

All development assistance must be viewed inthe light of the Millennium DevelopmentGoals. Debt relief and the PRSP process areimportant contributions towards the achieve-ment of these goals, but debt relief alone can-not ensure that they are achieved.

This document is an updated version ofTowards the Year 2000 and Beyond: The

Norwegian Debt Relief Strategy. The funda-mental principles are the same. In addition,this plan outlines new debt policy approachesthat are consequent on the “expansion” of theDebt Relief Strategy6. This updated plan ofaction provides for unilateral Norwegian debtrelief for (1) certain middle-income countriesthrough multilaterally coordinated debt swaps

2. INTRODUCTION

5 Whether or not it is particularly meaningful to regard all developing countries as a single group is highly debatable.6 In summer 2001, the Stoltenberg Government decided to expand the Debt Relief Strategy, cf. Ministry of ForeignAffairs press release no. 121/01 of 20 July 2001. The Bondevik Government and a unanimous Storting have subsequentlysupported this expansion, which is translated into practical policies in this Plan of Action.

9

10

and (2) poor countries emerging from warand conflict. It also provides for debt reduc-tion for middle-income countries as an ele-ment of multilateral agreements in the ParisClub.7 The strategy has been adjusted accord-ingly and reinforced on the basis of the expe-rience gained from debt relief policy since1998.

In an international context, Norway is a minorcreditor. The effect of unilateral Norwegiandebt relief measures is minimal in relation tothe total debt burden of developing countries.A solution to the debt problems of developingcountries requires binding international coop-eration. Norway will continue to actively sup-port international efforts to find lasting solu-tions to the debt problems of the poorestcountries. In this respect, the multilateralfinancial institutions and international forumsthat deal with developing countries’ debt playan important role. Norway has for manyyears been very active in these institutions. Itis essential that the major creditors partici-pate in international debt operations.

Nevertheless, strategic use of unilateralNorwegian debt relief may be effective in cer-tain contexts. Norway’s proactive role in thedebt arena is therefore based on a pragmaticpolitical analysis, the building blocks beingboth binding multilateralism and occasionalunilateralism. The main aim of the plan is toidentify the measures that will have the great-est impact on countries’ total debt burdenover time, on the robustness of their develop-ment programmes and on the living condi-tions of their impoverished people. One of themain issues is how Norway can apply and fur-ther strengthen international debt mecha-

nisms. Ensuring that debt relief takes place ina way that is not detrimental to the creditwor-thiness of debtor countries and thereby theirpossibilities for financing future investmentsand development programmes is a major chal-lenge. For this reason, debt relief should notnormally be granted for new credits.

The Debt Relief Strategy is a “living instru-ment”. This means, among other things, thatcountries that are not eligible today may beincluded at a later date. Any changes in inter-national framework conditions should lead tonew evaluations of mechanisms and strate-gies. In its current form, the Strategy pres-ents many practical proposals, but it alsopoints to certain areas and issues that requirefurther consideration. The Strategy will befurther developed as these assessments aremade.

The Debt Relief Strategy describes Norway’sdebt policy in a broad perspective. Specificdecisions on Norwegian debt relief measuresmust and will take place through ordinaryadministrative procedures.

Norway will...

" regularly evaluate the areas of focus of theDebt Relief Strategy on the basis of theexperience that is gained, newanalyses/assessments that are undertakenand other changes in the preconditions forNorway’s contributions towards relievingthe debt burdens of developing countries

" continuously consult with stakeholdersand interested parties in Norway andabroad in connection with this effort.

7 If this should be appropriate for countries and claims that are not covered by the Debt Relief Strategy financing facility,a budgetary solution must be in place.

The overarching aim of the strategy was –and still is – to help reduce the debt burdensof the poorest and most indebted countries sothat they do not impede economic and socialdevelopment. The plan aims to free upresources for development-promoting purpos-es and help to re-establish these countries’creditworthiness. The overarching strategywas – and still is – to actively support interna-tional initiatives for a lasting solution to thedebt problems of the poorest countries.

The Debt Relief Strategy presented proposalsfor Norwegian measures to relieve the debtburdens of many poor and indebted countries.As regards bilateral debt relief, the countrieswere selected by applying criteria for the bur-den of debt and economic and political condi-tions in developing countries against whichNorway has claims and developing countriesthat have priority in Norwegian developmentcooperation. Through its active participationin international debt relief mechanisms, par-ticularly the World Bank and the IMF HeavilyIndebted Poor Countries (HIPC) Initiative8,Norway also supports debt relief operationsfor countries against which it does not haveclaims.

In connection with the debate on the 1999central government budget, the Stortingdecided that all Norwegian bilateral debt for-giveness for low-income countries, boththrough the Paris Club and in the form of uni-lateral debt relief, would take place withoutcharging it against the budget, provided thatthe Debt Relief Strategy financing facility, set

at NOK 3,173 million9, was not exceeded. Onthis basis, all Norwegian bilateral debt for-giveness under the Debt Relief Strategy hassubsequently taken place without being

charged against the budget.

In 2000, Norway was the first creditor coun-try to provide the opportunity for 100 % debtforgiveness for all types of claims against thepoorest countries. In the following period,many countries followed suit, including all theG7 countries, although they imposed manyconditions. Today only a small minority ofcreditor countries do not provide a 100 %reduction on claims relating to the periodbefore the respective debtor countries werefirst treated in the Paris Club10. A limitednumber of creditor countries, including mostof the G8 countries, also grant 100 % debtreduction for debt incurred after this date.The extent to which both concessionalcredits11 and commercial loans12 are includedin such debt relief also varies.

Norway has strongly emphasized the impor-tance of presenting the main principles of theDebt Relief Strategy to central players ininternational debt policy, such as the WorldBank, the IMF, the Paris Club and the currentchairmanship of the G7/G8. Special presenta-tions have been made in influential countries,such as the USA and the UK. Norway’s debtpolicy has gradually attracted more attentionthan our creditor role merits. Norway hascooperated with the other Nordic countries,the countries in the Utstein Group13 and, on acase-by-case basis, with other countries.

3. CURRENT STATUS OF IMPLEMENTATION OF THEDEBT RELIEF STRATEGY

8 See Chapter 6.1.9 NOK 1,266 million under GIEK’s old general scheme and NOK 1,907 million under GIEK’s special scheme for devel-

oping countries respectively. See Box 1 for further details.10 Known as pre-cut-off date debt.11 Known as Official Development Assistance (ODA) loans, i.e. loans subsidized by aid funds with a grant element of at

least 25 %. 12 Including export credits.13 The Utstein Group was established as a forum for development policy cooperation between the Netherlands, the UK,

Germany and Norway. Sweden and Canada joined later on.

11

12

There is now broad international agreementon most of the priorities set out in the DebtRelief Strategy. Norway has contributed tothis through active efforts in all relevant mul-tilateral forums. The HIPC mechanism hasbecome more flexible and debt relief hasbecome faster, deeper and broader. The ParisClub has introduced improved terms forHIPC countries and now, as a general rule,provides 90 per cent debt relief – known asCologne Terms – to these countries.14

3.1. Forgiveness of bilateral debtPriority was initially given to eight countries(Benin, Côte d’Ivoire, The Gambia, Ghana,Guinea, Senegal, Tanzania and Vietnam)against which Norway had claims and which,at the time the Debt Relief Strategy was intro-duced, were already being treated or were tobe treated under the HIPC Initiative. Of these,Tanzania’s and Benin’s debts to Norway have

been cancelled. Vietnam, which has not beengranted HIPC status, will nevertheless haveall its debt forgiven under a debt swap agree-ment. The other countries have had their cur-rent interest and repayments cancelled and,as a result of their ongoing HIPC treatment,are in the process of meeting the conditionsfor final debt forgiveness.

In accordance with the principles of the DebtRelief Strategy, as of 31 December 2003Norway had forgiven bilateral claims amount-ing to NOK 1.6 billion. More than NOK 1.3billion of this was charged against the DebtRelief Strategy financing facility15. A break-down of debt forgiveness by country may beseen in Table 1.

In principle, the Debt Relief Strategy providedfor debt relief for 29 countries. Wars, con-flicts, poor governance and the fact that not

14 Taking into account previous debt relief. In other words, total debt relief is calculated cumulatively. 15 The difference is ascribable to GIEK’s loss provisions, which are regarded as GIEK’s “own share” of cancelled debt. At

the time, this share was estimated on the basis of the interest effect of the double allocation in connection with calcula-tion of the amounts in the Debt Relief Strategy.

16 The Stoltenberg Government decided to include Yugoslavia – now Serbia-Montenegro – in the Debt Relief Strategyfinancing facility in 2001. However, the charge against the facility applies only to debt relief granted under a bilateralagreement in 2002 and debt relief that will be provided in 2005 (pursuant to a Paris Club agreement from 2001).

17 It was decided that this would be financed from the Debt Relief Strategy financing facility in 2002. Applies only to abilateral agreement entered into in 1994 pursuant to an agreement in the Paris Club in 1991 and an associated debtswap. The amount charged against the financing facility is identical to a lump sum compensation of GIEK. No further

debt relief for Egypt will be covered by the financing facility.

Table 1.Forgiveness of bilateral debt 1998-2003(in NOK 1000, by country, as of 31 December 2003)

Charged against facility Charged against GIEK Total debt reliefSenegal 191 393 33 776 225 168Côte d’Ivoire 195 946 34 578 230 525Guinea 61 689 10 886 72 575Tanzania 86 447 15 255 101 703Benin 229 055 40 422 269 477Sierra Leone 32 890 5 804 38 694Serbia-Montenegro16 84 101 14 841 98 942Egypt17 227 000 40 059 267 059D.R. Congo 99 581 66 387 165 968The Gambia 65 357 3 440 68 796Ghana 58 578 10 338 68 916TOTAL 1 332 038 275 786 1 607 824

Remaining funds in the Debt Relief Strategy financing facilityas of 31 December 2003: NOK 1,841 million

every country has had serious debt problemshave limited the window of opportunity forbilateral inputs. With the expansion of theDebt Relief Strategy, however, steps are beingtaken to ensure that more countries will beeligible for debt relief from Norway.

A significant part of poor countries’ debt toNorway is ascribable to the Ship ExportCampaign in the 1970s and 1980s. Some ofthese claims have been cancelled. Efforts willbe made to cancel the rest in a way thatensures the greatest possible developmenteffect, insofar as this is possible within inter-nationally recognized rules.

3.2 Debt relief under the Fund forInternational Debt Relief Operations (theDebt Relief Fund)Norway’s Debt Relief Strategy has sometimesbeen associated solely with bilateral debt for-giveness. However, Norway’s contribution tointernational debt relief operations – the othermain pillar of the Debt Relief Strategy – hasalso been a very important debt policy instru-ment. This contribution has been financedfrom the development assistance budgetthrough the Fund for International DebtRelief Operations (The Debt Relief Fund)18.

Flexible budget funds, primarily through theDebt Relief Fund, have been crucial toNorway’s high profile in the debt policy area,including its proactive role in important indi-vidual cases. It is often necessary to lead theway, as when the Nordic countries took theinitiative to the establishment of the WorldBank Fifth Dimension Facility at the end ofthe 1980s19, and when Norway exerted pres-sure to achieve organized financing of theHIPC mechanism by establishing the HIPCTrust Fund at the end of the 1990s20. For arelatively small country like Norway, it isessential to be able to follow up political posi-tions with practical financial instruments inorder to succeed in international negotiations.This applies, not least, in the multilateralfinancial institutions and in forums such asthe Paris Club.

Since it was established in 1988, total dis-bursements from the Debt Relief Fund haveamounted to more than NOK 3.2 billion.Since the Debt Relief Strategy was launchedin 1998, Norway has contributed NOK 915million to the HIPC Trust Fund alone, whichwill refund parts of the debt relief provided bythe multilateral financial institutions under theHIPC Initiative, so that other support for

The Debt Relief Fund: relevant applications

The Fund for International Debt Relief Operations can be used for:

" Contributions to the HIPC mechanism (the HIPC Trust Fund) to cover multilateral debt relief

" The World Bank Fifth Dimension Facility – to repay poor countries’ remaining World Bank debt on ordinary terms

(IBRD debt)

" The World Bank Sixth Dimension Facility (the IDA Debt Reduction Facility) – for very reasonably priced buyback and

subsequent cancellation of poor countries’ debt to commercial creditors (banks)

" Internationally coordinated operations to clear individual countries’ arrears in multilateral financial institutions (the

World Bank, the regional banks and the IMF)

" Measures to strengthen debt management capacity in poor and indebted countries

" Multilaterally coordinated debt swaps with countries that are not covered by the Debt Relief Strategy financing facility

" Multilaterally coordinated operations to cancel “South-South debt”

" Contributions to interest subsidies in the IMF’s low-interest lending facility (PRGF)

" Contributions to national debt funds earmarked for servicing multilateral debt

BOX 3

18 Ch. 172, item 70 of the aid budget. 19 See Chapter 6.7.20 See Chapter 6.1.

13

developing countries from these institutionsis not reduced as a result of their contributionto HIPC debt relief. This is substantially morethan our “allotted” share, whether it is meas-ured in terms of creditor size or the amountof funding provided. Table 2 provides a con-centrated summary of the use of resourcesfrom the Debt Relief Fund.

Table 2Allocations from the Debt Relief Fund1988-2003 (NOK million)World Bank Fifth Dimension Facility 1 524HIPC Trust Fund 915World Bank Sixth Dimension Facility 61Other international debt operations 944TOTAL 3 444

14

At the end of the 1990s, the World Bank andthe IMF, and indirectly the Paris Club as well,were under pressure, especially from civilsociety, to improve the HIPC mechanism. Themain elements of this criticism were that debtrelief was proceeding too slowly, was too lim-ited and applied to too few countries. Thiscriticism, which was made not least by theumbrella organization Jubilee 2000, made apositive contribution to the expansion of theHIPC mechanism in 1999, when a resolutionwas adopted to provide quicker, more robustdebt relief. There is no doubt that this move-ment has helped to set the international debtpolicy agenda.

Nevertheless, some parts of the “debt reliefmovement” still criticize the scheme, and insome cases more or less write off the HIPCInitiative and advocate totally different debtrelief mechanisms.

4.1. The scope of the HIPC InitiativeSome people have advocated that the multilat-eral financial institutions should immediatelycancel their claims. From a purely intuitivepoint of view, it may perhaps not seem unrea-sonable for these institutions to cancel debt inthe same way as other creditors. However,total, immediate cancellation of the claims ofall the multilateral financial institutions wouldmean that these institutions would not bereimbursed, by means of repayments onloans, for funds they have lent. It is totallyunrealistic to believe that rich countries willincrease their contributions to these institu-tions by so much and so quickly that they willbe able to make up for this loss of resources.In practice, it would therefore be impossibleto compensate for large-scale cancellation ofmultilateral debt.

Everything that is paid into the multilateralinstitutions’ development funds for the poor-

est countries (such as the World Bank’s IDA)goes out again in the form of financing fordevelopment programmes in these countries.Massive debt cancellation would therefore, toa large extent, affect the poorest countriesthemselves, since their source of essentialdevelopment financing would dry up. In thecase of middle-income countries, it is highlylikely that massive debt cancellation fromtheir borrowing window in these institutions(such as the World Bank’s IBRD) wouldresult in more expensive loans because thecreditworthiness of the financial institutionswould be affected. In other words, immediatecancellation of multilateral debt would meangiving with one hand and taking back withthe other.

In Norway’s view, it is important for debtrelief, as far as possible, to be additional, i.e.to come in addition to and not instead ofdevelopment aid and loans that can help pro-mote further development. This is a funda-mental principle of the HIPC Initiative andthus something that the donor countries arecommitted to. In Norway’s case, this isensured by not charging bilateral debt reliefagainst the development assistance budget.For the multilateral HIPC creditors, the addi-tionality of debt relief is ensured partly byusing internal funds that do not impact ontheir operational activities and partly byfinancing from donor countries through theHIPC Trust Fund, which is managed by theWorld Bank.

Norway will ...

" work to ensure that debt relief throughmultilateral institutions is not provided atthe expense of other multilateral financingfor the poorest countries

4. CRITICISM OF DEBT RELIEF INITIATIVES 15

16

4.2. The pace of implementation of the HIPCInitiativeDespite the fact that the HIPC Initiative wasstrengthened in 1999, implementation hasproceeded more slowly than anticipated.There are several reasons for this, the mostimportant being conscious focus on quality

assurance.

One of the main aims of debt relief is toensure that the funds that are freed up help topromote development in the countries con-cerned. Consequently, to be granted debtrelief under the HIPC Initiative, a countrymust first be able to refer to a period21 inwhich it has pursued an economically andsocially responsible policy22. A country mustalso have in place a coherent, poverty-orient-ed development strategy (PRSP)23. It isessential for the country’s further develop-ment, and not least to ensure debt sustainabil-ity, that the country’s PRSP meets qualitativestandards and is formulated with the activeparticipation of the country’s population andits elected representatives. People must there-fore accept that this work must take sometime. This time is not wasted; it is a goodinvestment in long-term poverty reduction. Ifwe were to reduce the requirements for thequality of PRSPs in order to increase the paceof implementation of the HIPC Initiative, thiswould do impoverished people a disservice.

At the same time, we must recognise thatdebt relief is an urgent matter. In 2002,Norway and certain other countries thereforeadvocated that a preliminary draft of a PRSP(an “interim PRSP”) should be sufficient for aresolution on debt relief to be passed. Thiswas agreed in 2001.

Most HIPC countries are in sub-SaharanAfrica. Many of these countries are in a situa-tion of armed conflict. Consequently, several

countries are still not qualified for debt relief.Nor should they be, since debt relief wouldfree up resources to buy weapons, etc. andthereby help to prolong the conflict.

For countries emerging from conflict, it isextremely difficult to implement the reformsand political measures that are necessary toachieve genuine poverty reduction – andthereby be granted debt relief under HIPC.The countries that have been or are in conflictinclude countries that owe debt to Norway,such as Sudan and Liberia. There can be nopoint in bringing such countries in for HIPCtreatment before the conflicts have ended andrelative political stability has been restored.

Part of the explanation for the slow pace ofimplementation under the HIPC Initiative isthat some bilateral creditors who are notmembers of the Paris Club, as well as severalsmaller multilateral creditors, have delayedconcluding the necessary agreements withdebtor countries. However, some commercialcreditors have refused to take part in theHIPC mechanism and have even tried torecover their claims through courts of law.There is every reason to criticise this.

Norway will ...

" work to ensure that the HIPC Initiative isimplemented at a pace that ensures asmuch poverty reduction as possible foreach dollar and krone of debt that is for-given.

4.3 Conditions for debt reliefThe fact that creditors impose conditions forimplementing debt relief measures is some-times criticised. Their demands are often setagainst the desires and needs of poor peoplein developing countries. However, the critics

21 This period was originally three years, but is now usually one year.22 See the description of the various phases of the HIPC mechanism in Box 5.23 National Poverty Reduction Strategy Papers (PRSP) is a concept launched jointly by the World Bank and the IMF. The

PRSP includes the macro-economic, structural and social aspects of the development process. The authorities of thecountry concerned are themselves responsible for the strategy paper, which must be formulated on the basis of broad-based consultations with civil society. In principle, the PRSP requirement means that countries must formulate theirown policies and choose their own reforms. The intention is for all players in the development assistance arena to basetheir activities on the country’s own development and poverty reduction strategy so that, with the authorities in thelead, they all pull in the same direction.

ignore the fact that much of the debt reliefthat is actually granted is development moti-

vated and therefore based on the same goalas other development cooperation.

In other words, debt relief is granted on thebasis of a credible poverty reduction anddevelopment policy. In the same way as otherforms of development assistance, debt reliefthat is granted on the basis of other criteria isunlikely to benefit the country’s population.There is a growing realization that debt reliefalone does not lead to development, and thatunconditional, immediate debt relief is not aviable path to follow. If debt relief is to benefitthe poorest members of the population, acountry must itself initiate comprehensive,coherent development strategies, with specialfocus on poverty reduction (PRSPs). Thesestrategies specify how countries will manageand invest their national resources, develop-ment assistance and other external financing,and the funds freed up by debt relief.

The purpose of such conditions is to helpensure that the country pursues a policy thatdoes not lead it back into a hopeless debt situ-ation, and that the resources that are freed upare spent on development and poverty reduc-tion. It has been shown that, although we maystill be far from satisfied with the situation,the countries that are granted debt relief sig-nificantly increase the resources they spendon sectors such as health and education. Ifthese countries’ debt had been cancelledunconditionally, there would have been farless chance of debt relief benefiting impover-ished people.

Many poor countries have a bad startingpoint in terms of corruption, human rightsand democracy. Debt relief is not only a mat-ter of freeing up funds but also of helping tomake the governments of poor countries takeresponsibility for their populations – andthereby of democratization and strengtheninghuman rights. The rich countries clearly havea responsibility for helping to relieve the debtburden, but the critics have often omitted topoint out the responsibility of governmentsand elites in poor countries for their own pop-ulations.

Norway will ...

" work to ensure that, as a condition fordebt relief, realistic demands are made foractive, development-promoting policies indebtor countries, with emphasis on pover-ty reduction.

4.4. Debt relief and “structural adjustment”Some critics believe that the conditions thatare currently imposed for debt relief are acontinuation of the “structural adjustmentprogrammes” that were implemented in con-nection with loans from the internationalfinancial institutions 15-20 years ago. The crit-ics are right in saying that many of these pro-grammes failed, especially in the poorestcountries. However, today’s programmes arefar removed from their less sophisticated andoften stereotype predecessors.

Today, the emphasis is on the connectionbetween macro-economic, structural andsocial conditions, with poverty reduction asthe main goal and national ownership as afundamental prerequisite. Today, many of thereforms focus on strengthening the educationand health sectors and combating corruption.There is strong emphasis on poor people tothe greatest possible extent being protectedfrom the immediate negative consequences ofnecessary adjustment measures. There is,therefore, little sense in comparing the condi-tions that are set for debt relief – i.e. thatdeveloping countries must implement strate-gies and measures which ensure that debtrelief benefits the poorest people – with theformer “structural adjustment programmes”.

We should certainly not conceal the fact thattoday’s economic reform programmes oftenappear to be drastic remedies. However, thecritics must also realise that many countriesneed extensive reforms and restructuringmeasures to get their economies on an evenkeel. In the absence of a massive increase inaid from the rich world, many countries mustunfortunately shoulder heavy burdens them-selves. It is easy to criticise, but the criticsoften have a rather facile attitude to basic eco-nomic realities.

17

18

Norway has advocated greater flexibility inthe macro-economic conditions and thatreforms be better adapted to the situation ineach individual country. We have brought upthese matters both generally and in connec-tion with specific country situations. Thereforms are based on countries’ own strate-gies in which, in contrast with the formerstructural adjustment programmes, there isemphasis on the active participation of civilsociety.

However, we must admit that several of thePRSPs that have been presented do not clear-ly reflect the necessary holistic thinking orthe desired national ownership. There havealso been PRSPs which, to too great anextent, are in the nature of unprioritized wishlists. Furthermore, some PRSPs have takentoo little account of the country’s unique polit-ical and social characteristics. In the yearsahead, it will therefore be important to fur-ther develop the PRSP concept as a consis-tent, action-oriented and credible instrumentfor implementation of development measures.Not least, stronger national ownership will beimportant as a basis for negotiations on newconcessional loans from the World Bank andthe IMF.

Norway will ...

" continue its efforts to achieve greater flex-ibility in the macro-economic conditionsthat are set for indebted developing coun-tries, and to promote further developmentand improvement of the PRSP concept.

4.5.“Illegitimate debt”The criteria for debt relief are not carved instone. On the contrary, they are the subject ofcontinuous review. This process of changemust be based on debate among both profes-sionals and the general public. A discussion offresh ideas and conceptual innovations mustbe welcomed.

International common law is based on thepremise that new regimes take over the inter-national obligations of their predecessors,regardless of the nature of the former regime.There are a few historical examples of thiscommon law being challenged and wholly orpartially set aside24. The international debtrelief movement has recently begun to referto these examples in its arguments in favourof cancelling what is now called “illegitimatedebt”.

Non-governmental organizations usuallydefine debt as being “illegitimate” when:

1. the debt was incurred by an undemocraticregime

2. the borrowed funds have been used forwhat are regarded as morally reprehensi-ble purposes (such as the purchase oflandmines or the financing of suppressiveregimes)

3. repayment is a threat to fundamentalhuman rights

4. the debt has grown to unmanageable pro-portions as a result of external factors overwhich the country has no control (e.g.higher market interest rates), and when

5. debt that was originally commercial istaken over by the government of a debtorcountry (through the triggering of govern-ment guarantees).

The sum of these criteria for “illegitimacy” isa very finely-meshed net, in fact it is so finely-meshed that it appears to catch all debt. If allthese criteria are accepted (including items 4and 5 above), to advocate cancelling “illegiti-mate debt” may easily be seen as a recom-mendation to cancel all developing countries’

debt. This can hardly be regarded as eitherappropriate or desirable.

– For example, if a country takes up a loan atlow market interest rates and interest ratessubsequently rise, it is difficult to regardthe resulting increase in debt as “illegiti-mate”. Or vice versa, if a country takes up a

24 After the USA took over Cuba from Spain in 1898, the US authorities refused to pay Cuba’s debt to Spain on thegrounds that the debt had been incurred on behalf of the Cuban people without their consent and with the use ofarmed force. Reference is also made to the debt settlement with Germany in 1953 and a debt agreement withIndonesia in 1967 as (partial) examples of cancellation of “odious” debt.

loan at what at a given time appears to be afavourable fixed interest rate and marketrates subsequently fall, this cannot be usedas an argument in favour of illegitimacyeither. Both market loans and fixed interestloans entail interest rate risk. This riskapplies to both the debtor and the creditor,and both parties must take this intoaccount when they make their strategicchoices.

– Nor is the fact that debt often occurs whengovernment guarantees are triggered a goodargument in favour of regarding this debt as“illegitimate”. The way credit functionstoday, government guarantees are usually anecessary precondition for credits for pri-vate companies in poor countries. Whenprojects go wrong and the borrower cannotservice the loans, it is not unreasonable forthe government that has provided the guar-antees to be held liable. If governmentswere permitted to provide guarantees with-out risk of having to step into the borrower’sshoes, this would result in careless projectevaluation and lax provision of guarantees,which would have highly unfortunateresults.

However, the part of the debt relief move-ment’s argument that is limited to “dictatordebt” (cf. items 1-3 above) has immediate mo-ral appeal. Most people would instinctively feelthat it is unreasonable and unfair for poor peop-le in today’s D.R. Congo to be liable for debtincurred by the brutal, corrupt dictator Mobu-tu; that today’s Iraq should be responsible forloans taken up by Saddam Hussein; that demo-cratic South Africa should be liable for debtincurred by the apartheid regime; or thattoday’s Argentina should be liable for the partof its foreign debt that was incurred during themilitary dictatorship in the 1970s and 1980s.

Nevertheless, it is a long step from the moralappeal of the illegitimacy concept to its trans-lation into practical-political action. This ispartly due to extremely difficult delimitation

problems and partly due to the fact that thepractical implications of legitimacy-based debtforgiveness are extremely problematic.

The most important delimitation problems in

the illegitimacy debate include the followingquestions:

1. Who will – and how will they – decidewhich regimes are to be regarded as“undemocratic” and which heads of stateare to be regarded as “dictators”? In somecases it will even be necessary to stipulatea dividing line in the same head of state’speriod in power. Should Zimbabwe’sPresident Mugabe be regarded as an “ille-gitimate” borrower, and when did hebecome one? It is questionable whether itis possible to set objective criteria for thisat all, or to establish non-partisan panelsthat are authorized to “judge” such cases.

2. How do we deal with loans that are provid-ed for more or less undemocratic regimesbut where the borrowed funds are never-theless invested in future productioncapacity, employment and development, tothe benefit of the impoverished people?

3. How do we deal with loans that were cer-tainly provided for undemocratic regimesor regular dictatorships, but whose mainpurpose was actually to prevent a seriouseconomic crisis? What if a refusal of theloan application would have helped to trig-ger the crisis? What if this would havemost likely resulted in mass poverty anddistress? Is it really very relevant to askwhether a loan of this type was granted ata time when generals were sitting in thegovernment offices?

4. How do we deal with loans provided bycommercial banks? For example, theapartheid regime’s debt consisted almostentirely of loans from commercial banks.Should it be a public responsibility tofinance cancellation of this debt, which inthe case of most creditors would have tocome from development assistance funds?Should this be done even though SouthAfrica does not have a serious debt prob-lem?

5. How do we deal with loans taken up bydemocratic, and possibly even well-respect-ed regimes when the purpose can never-theless be described as “illegitimate” (the

19

20

purchase of landmines, for example). Is itreasonable to relieve the regime of respon-sibility for such a purchase?

Due to such delimitation problems, it isextremely difficult to use “illegitimacy” as areasonable and fair guideline for debt relief. Ifone implication of the illegitimacy debate isthat developing countries have no responsibil-ity for having taken up loans for “illegitimate”purposes, this is a very problematic premise.Both debtor and creditor must clearly beresponsible for ensuring that loans are finan-cially justifiable, that the funds are spent onmeasures that promote development, and thatthey can in no way be instrumental in under-mining fundamental human rights.

Multilateral creditors with active memberstates are the best guarantee that lendingmeets these requirements. For example,loans from the World Bank may not be usedfor military purposes, or for investments inthe tobacco or alcohol industries. Loans areonly granted after thorough assessments ofthe development effect of the investment orprogramme that is being financed. The condi-tions that are now imposed on borrowingcountries, i.e. that they must present a coher-ent strategy for development (PRSP), help toensure that borrowing countries, includingcivil society, maintain their responsibility forand their control of the use of the borrowedfunds.

The main practical-political arguments against

encouraging debt relief on the basis of legiti-macy considerations are as follows:

1. To set aside the premise that a regime isalso responsible for the debt of the previousregime would lead to unknown conse-quences for the flow of capital in the globalfinancial markets. The result would mostprobably be that capital flows to countrieswith external financing needs would bereduced, while the associated interest costswould rise. In a world with a crying need for

all kinds of development financing, whereloans from capital markets will be essentialfor success at a certain stage in the develop-ment process, and where, through the UNMillennium Development Goals, we aim tohalve the most extreme poverty by 2015,this is a worrying scenario.

2. If, at a later date, we were to be able todefine debt as “illegitimate” on the basis offactors that were impossible to predictwhen the loan was granted, the risk for alltypes of lenders might become extremelyhigh. This in itself would mean less accessto financing and more expensive loans,especially for the poorest countries.

3. If – contrary to expectations – we were tobegin to cancel debt on the basis of a con-cept that has no precise, internationallyagreed definition, this would give rise to agreat deal of uncertainty among lendersand guarantors. This in itself would resultin (yet another) obstacle for developingcountries due to their reduced individualand collective creditworthiness. Manycountries that are today balancing on avery thin knife-edge in terms of lenders’creditworthiness assessments might expe-rience a veritable “credit drought”.

4. In many cases, the demand for debt cancel-lation on the grounds of “illegitimacy”,sometimes defined as “dictator debt”,applies to middle-income countries25. Thishas important implications in terms of debtvolume. For example, the total foreign debtof Iraq, Argentina and the Philippines isestimated to be USD 309 billion26. Thedebt of these three countries alone is morethan three times as great as the total debtof the 27 countries that have so far quali-fied for the HIPC Initiative, which isapproximately USD 99 billion27. If debtcancellation based on legitimacy assess-ments were to become a reality, this wouldnecessarily entail a dramatic change in thedistribution of international debt relief. In

25 In some cases this applies to countries that have substantial revenues from extractive industries.26 Iraq USD 120 billion (estimated), Argentina USD 137 billion and the Philippines USD 52 billion. Source: World Bank

Global Development Finance, 2003 and (for Iraq) preliminary estimates by the IMF and the Paris Club. Iraq’s warreparations are not included.

27 Source: World Bank Global Development Finance, 2003.

practice it would be the relatively betterplaced developing countries that wouldbenefit most from debt relief – at theexpense of the poorest countries.

5. In addition to this comes the practical-polit-ical reality that all creditor countries, withthe exception of Norway, actually chargethe bilateral debt relief that is providedagainst the development assistance budget,

whether it is provided for poor countries orfor middle-income countries. From thisperspective, there is reason to note thatthe debt of the three countries namedabove is equivalent to between five and sixglobal development assistance budgets. Ifwe were to cancel “illegitimate” bilateraldebt to middle-income countries on thescale many people in the debt relief move-ment now wish, this would bleed aid bud-gets dry worldwide and lead to massivecuts in the development assistance thattoday goes to the poorest people. Global

development assistance would be redirectedtowards countries with more resources.This corresponds badly with the poverty

orientation of other development policy.

6. Nor is multilateral debt relief free ofcharge; it also has to be financed. Thedevelopment banks have very limitedresources of their own for this purpose.Unless donor countries compensate thefinancial institutions with aid funds, mas-sive multilateral debt cancellation wouldaffect the developing countries themselves,including the poorest countries, becausethe institutions would have less money tolend. Unless such compensation isfinanced by a corresponding increase inaid budgets, other development assistancewould necessarily decline. In the absenceof a sharp increase in global aid funds, it isimpossible to ignore this fact. In this casetoo, we risk that the countries most inneed of development assistance would bethe losers.

There is also an important situational argu-ment against allowing the legitimacy debateto gain the central position that the debt reliefmovement now advocates: this debate mayeasily direct attention away from important

challenges under the HIPC Initiative. Amongother things, an extensive illegitimacy debatemight overshadow a necessary and highlydesirable debate on the financing of multilat-eral debt relief under the HIPC Initiative – aquestion that is far from resolved. This wouldbe very unfortunate.

For the HIPC countries, such as D.R. Congo,the illegitimacy debate would, in any event, beof limited practical importance. Most creditorcountries, including Norway, will in any casecancel 100 % of their claims against thesecountries if they complete their HIPC treat-ment. If the motivation is somewhat differentfrom that desired by the debt relief move-ment, the final result may well be the same.

A tactical argument must also be included inthis evaluation. Norway is in a situation ofhaving government-to-government claimsagainst very few of the countries and regimesthat have so far been central to the illegitima-cy debate. For example, Iraq, South Africa,Argentina and the Philippines do not owe gov-ernment debt to Norway. There is, therefore,a limit to how active Norway can be in rela-tion to such issues in international debt nego-tiations in the Paris Club. It is important toensure that we manage our proactive roleamong creditor countries in such a way thatwe are regarded as a serious, credible player;a player who, through cooperation with othercreditors, can gain support for its views onimportant debt issues. This considerationmust also weigh heavily in the evaluation ofnew debt initiatives and creative proposals inthe debt area.

This does not necessarily mean that the debateon “illegitimate debt” is a blind alley. Firstly,the debate itself may result in loans not beinggranted for countries and regimes which, onmoral grounds, should not receive them today.This would simply be a consequence oflenders choosing to pursue a more cautiouspolicy than they would otherwise have done,well knowing that such loans might be thefocus of stricter critical scrutiny than before.As long as this type of lending conservatismdoes not turn into a credit drought for coun-tries that both need and deserve fresh capital,this type of effect would be positive.

21

Secondly, in some cases the debate entailsstronger focus on countries emerging fromwar and conflict. Independently of the illegiti-macy debate, Norway has taken the initiativein advocating that poor post-conflict countriesshould receive faster, deeper debt relief evenbefore they are granted HIPC status28.

Thirdly, we cannot exclude the possibility that,at some time in the future, it will be “lawfully”determined that dictators like Iraq’s SaddamHussein or the Philippines’ Ferdinand Marcoshave taken up loans that must be regarded asillegitimate29.

Fourthly, this perspective might be helpfulwhen democratic regimes try to reclaim per-sonal assets which dictators have built up ille-gally, partly through loans. More than thelending itself, this type of activity representsthe most illegitimate aspect of this complexproblem. The new UN Convention againstCorruption gives us new instruments in thisarea.

We can expect further work to be done onthese issues. Norway is willing to supportmultilaterally-based studies in this area.

Norway will ...

" support a possible study of “illegitimatedebt”, carried out by the relevant multilat-eral institutions, the goal of which is tomake practical, implementable recommen-dations.

4.6.“Debt tribunals”Over the years, many proposals have beenlaunched for the establishment of new institu-tions in the debt field, often independent ofthe Bretton Woods institutions, in many casesinspired by US bankruptcy legislation, and insome cases linked to the UN. The purpose ofsuch institutions has often been “arbitration”between creditors and debtors, possibly fol-

lowed by a “ruling” and often with the aim ofpromoting more comprehensive debt relief,on the basis of an assessment that this wouldbe fairer than the current debt relief arrange-ments.

Many of these proposals have come from aca-demic institutions, which in turn have inspiredthe international debt relief movement to pro-mote these ideas itself. One of many examplesis the proposal for Free and TransparentArbitration Processes (FTAP), which has beenpromoted by the Jubilee movement and is nowsupported by the Norwegian Campaign forDebt Cancellation (SLUG).

The debt relief movement’s agitation in favourof alternative debt work-out mechanisms hasin some cases also inspired internationalorganisations to present their own proposals.Thus, in 199830 UNCTAD launched a propos-al for an international bankruptcy court. In hisMillennium Report31, UN Secretary GeneralKofi Annan suggested that the internationalcommunity should consider the establish-ment of what he called a debt arbitration

process with greater balance between theinterests of creditor and debtor countries.Kofi Annan’s proposal was not explicitlylinked to the illegitimacy debate. This link hassubsequently been made by the debt reliefmovement itself.

In November 2001 Anne O. Krueger, DeputyChairman of the IMF, presented a proposalfor a comprehensive Sovereign DebtRestructuring Mechanism (SDRM) for earli-er, quicker, cheaper and less painful debt set-tlement. The SDRM was originally conceivedas a joint framework for settling the commer-cial and official debt of middle-income coun-tries, with the IMF itself playing a centralrole. However, this proposal was significantlymodified as the debate progressed. In spring2003, the proposal was de facto put on ice, pri-marily due to opposition from the USA (whowanted a more “market oriented” version)and some middle-income countries (who

28 See Chapter 6.5.29 In an editorial on 18 October 2003, The Economist advocated that the part of Iraq’s debt that was taken up by Saddam

Hussein must be regarded as illegitimate on both economic-political and moral grounds.30 Trade and Development Report, 1998.31 We the Peoples. The Role of the United Nations in the 21st Century, 2000.

22

feared that the SDRM might have a negativeimpact on their creditworthiness).

Nevertheless, work is still in progress on acouple of less ambitious instruments. Theyare Collective Action Clauses (CACs) to per-suade commercial creditors to negotiate joint-ly and a Code of Conduct for commercial credi-tors and their interaction with official credi-tors. Norway welcomes this work, but regretsthat it has not been possible to reach interna-tional agreement on an SDRM.

Since the SDRM debate, among other thingsprior to the 58th UN General Assembly inautumn 200332, the UN Secretary Generalhas, in a way, re-launched his proposal.Specifically, he proposes the establishment ofan open and informal group of experts as partof the follow-up to the UN Conference onFinancing for Development33, with a mandateto formulate a proposal for a debt work-outmechanism that can achieve broad support.Norway supports this proposal, but it has sofar met with opposition from influential cir-cles. Norway will nevertheless continue itssoundings on the proposal. If such a groupwere to be established, it must be on condi-tion that all the institutions that have played acentral role, both in connection with the UNconference and in the SDRM debate, such asthe World Bank and the IMF, be included inthis work. Both these institutions must be “onboard” if a new debt negotiation mechanismis to be able to function in practice.

Norway will ...

" work to ensure that the debate on theSDRM is reopened, with a view to realiz-ing as many as possible of the main inten-tions of this mechanism

" as part of this work, continue soundings inconnection with the proposal of the UNSecretary General for the establishment ofan international working group, represent-ing a broad range of interests, to study thequestion of a comprehensive, practicallyimplementable debt negotiation mecha-nism.

4.7 Unilateral debt forgiveness for middle-income countries?In Norway, the illegitimacy debate has culmi-nated in a demand from non-governmentalorganizations for the cancellation of middle-income countries’ debt to Norway as well.However, unilateral, unconditional debt can-cellation for middle-income countries is notdesirable. As a rule, these countries do nothave any instruments equivalent to the devel-opment strategies (PRSPs) of the poorestcountries. Consequently, it is far more diffi-cult to ensure that the resources freed up bydebt cancellation will actually benefit thecountry’s development and its impoverishedpeople. If we cannot be reasonably sure thatdebt cancellation will result in poverty reduc-tion, the basis for Norwegian debt relief willbe invalid. In other words, if unilateral debtreduction for middle-income countries is to beconsidered, we must try to establish a substi-tute for the PRSP. This is also the core of thedebt swap concept, for which Norway haslaunched an international initiative – both inthe Paris Club and vis-à-vis the G834.

32 See External Debt Crisis and Development. Report of the Secretary General (A58/290) and Implementation and Follow-

up to Commitments and Agreements made at the International Conference on Financing for Development. Report of the

Secretary General (A58/216).33 Monterrey, Mexico, March 2002.34 Reference is made to Chapter 6.6.

23

24

The Debt Relief Strategy covers developingcountries against which Norway has claims,developing countries that have priority inNorwegian development cooperation, devel-oping countries covered by the HIPCInitiative, and other developing countrieswhich (on an ongoing basis) are included forpolitical reasons. Developing countries aredefined as the countries on the OECDDevelopment Assistance Committee (DAC)list of countries which, on the basis of theirrevenue levels, are entitled to receive OfficialDevelopment Assistance (ODA). However,countries against which claims have arisenafter 31 December 1997 are not covered bythe Debt Relief Strategy financing facility.

5.1. Countries against which Norway hasclaimsTable 3 shows all Norway’s government-to-government claims at the end of 2003, com-pared with claims at the end of 1997.

5.2. Criteria for the selection of prioritycountriesIn order to identify which countries are quali-fied for Norwegian debt relief measures, wemust assess the country’s debt burden andthe economic situation of each country andtake into account political considerations –including human rights, democracy and cor-ruption – as well as special factors in the rela-tionship between Norway and the debtorcountry concerned.

In accordance with Norwegian developmentpolicy, low-income countries should have spe-cial priority for debt relief measures. These aredefined as developing countries which, on the

basis of their poverty level and lack of credit-worthiness, can only obtain loans through theWorld Bank International DevelopmentAssociation (IDA)40. Of course, they must alsohave debt problems. Middle-income countrieswith serious debt problems should also be eli-gible for Norwegian measures, either bilateral-ly or through international debt operations.

To be eligible for Norwegian debt relief meas-ures, a country must pursue a policy thatdemonstrates that it will be able to utilize thefreed-up resources (which would otherwisehave been spent on interest and repayments)for measures that will promote developmentand reduce poverty. The country must com-mit itself to implementing necessary econom-ic reforms through programme cooperationwith the International Monetary Fund (IMF)and/or the World Bank. To achieve an agree-ment with the IMF and/or the World Bank onsupport from these institutions’ lending facili-ties for the poorest countries41, a countrymust have formulated a coherent PovertyReduction Strategy Paper (PRSP).

Countries that are not expected to formulate aPRSP (mainly middle-income countries) mustprove in some other way that debt relief willpromote poverty reduction and development.Debt swap agreements, which specify whatthe freed-up funds will be spent on, are thusan alternative to PRSPs42.

In all cases, demands must be made for meas-ures to combat corruption and promote goodgovernance. The resources that are freed upby Norwegian debt relief must be spent onmeasures that, as far as possible, are integrat-

5. PRIORITY COUNTRIES IN NORWAY’S DEBT RELIEF POLICY

40 IDA – the World Bank International Development Association – lends funds to the poorest developing countries onextremely favourable terms: interest-free (only an annual administration fee of 0.75 per cent) and with a grace periodof up to 10 years. The repayment period is up to 40 years.

41 At the IMF it is a Poverty Reduction and Growth Facility (PRGF) and at the World Bank it is IDA.42 See Chapter 6.6.

Table 3.Norway´s claims against developing countries35 36

Countries covered by the Debt Relief Strategy financing facility in bold face(NOK million as of 31 December 1997 and 31 December 2003 by size in 2003)

Land Debt 1997 Debt 2003 Regulated by Outsideagreement37 agreement

Peru 759 583 583 0Sudan 318 320 127 193Ecuador 319 304 304 0Egypt38 306 256 256 0Pakistan 0 255 255 0Senegal 398 232 232 0Burma 232 232 0 232Côte d´Ívoire 319 191 191 0Algeria 166 139 139 0D.R. Congo 197 122 122 0Croatia 181 103 103 0Zimbabwe 0 101 0 101Serbia-Montenegro39 101 96 96 0Guinea 125 89 89 0Liberia 82 83 63 20Indonesia 0 80 80 0Sierra Leone 69 66 66 0Jamaica 149 55 55 0Vietnam 37 36 36 0Ghana 202 8 8 0Gambia 49 8 8 0Angola 6 6 0 6Somalia 6 6 0 6Benin 225 0 0 0Tanzania 77 0 0 0Mexico 71 0 0 0Venezuela 44 0 0 0Albania 18 0 0 0Iran 7 0 0 0Bosnia 5 0 0 0Macedonia 2 0 0 0

TOTAL 4.470 3.371 2.813 552TOTAL Debt ReliefStrategy countries 4.142 2.832 2.375 451

35 Defined as countries on the OECD/DAC List of Aid Recipients, Part 1: Developing Countries and Territories (Official

Development Assistance).36 For countries such as Sudan, Liberia and Burma, accrued interest – which due to long-term arrears has not been cal-

culated – may amount to substantial sums. These will come in addition to the figures in the table. 37 Regulated through a multilateral framework agreement (Agreed Minute) in the Paris Club and in turn translated into

a legally binding bilateral agreement with Norway. 38 Only debt relief that has already been granted is covered by the Debt Relief Strategy financing facility.39 Only debt relief granted in 2002 and debt relief that will be granted in 2005 (pursuant to a Paris Club agreement from

2001) are covered by the Debt Relief Strategy financing facility.

25

26

ed into the country’s overall developmentefforts.

The political situation in the country con-cerned must also be taken into account.Contraventions of human rights will reducethe likelihood of debt relief being granted.Debt relief must not benefit authoritarianregimes. When conditions improve, suchcountries will be assessed in relation to therecommendations laid down in the DebtRelief Strategy. The same applies to countriesthat no longer have a central authority, or arestill in a state of civil war. When the situationchanges for the better, such countries mayalso be given priority under the Debt ReliefStrategy. A credible peace treaty after anarmed conflict and a subsequent coordinatedinternational effort to support stabilization

and reconstruction are regarded as being suf-ficient qualification for debt relief43.

The Debt Relief Strategy also covers coun-tries that already receive or will be eligible fordebt relief under the HIPC Initiative but arenot indebted to Norway. For these countries,Norway may provide assistance through theFund for International Debt Relief Operationsfor a range of debt-related purposes.

5.3. Priority countriesThe list of priority countries for debt relieffrom Norway, selected on the basis of theabove criteria, may be found in Box 4 below.This list must not be regarded as final andbinding for Norway’s debt policy, but ratheras a living instrument that offers possibilitiesfor additions and deletions.

Priority countries for debt relief from Norway

Among the countries against which Norway has claims, the following have first priority44:

Senegal, D.R. Congo, The Gambia, Ghana, Sierra Leone, Vietnam, Ecuador, Pakistan, Côte d’Ivoire, Guinea,45

Sudan and Liberia,46

These countries are eligible for HIPC debt relief, unilateral debt relief from Norway in addition to the HIPC terms, debt swaps

(Pakistan, Vietnam and Ecuador) and unilateral post-conflict debt relief from Norway (Liberia and Sudan). With the excep-

tion of Pakistan, debt relief for these countries will be financed through the Debt Relief Strategy financing facility.

Among partner countries for Norwegian development cooperation against which Norway does not have bilateral

claims, the following have priority:

Tanzania, Mozambique, Uganda, Zambia, Malawi, Bangladesh, Nepal, Ethiopia, Eritrea, Mali, Sri Lanka,Guatemala, Nicaragua, Kenya, Madagascar and Afghanistan

These countries are eligible for various types of international debt operations, financed from the Fund for International Debt

Relief Operations (The Debt Relief Fund)47.

43 See Chapter 6.5.44 It is assumed that Angola, Somalia and Burma have a long way to go before relations with creditor countries and the

international financial institutions are normalized. The disposition of the Debt Relief Strategy financing facility outlinedin this Plan of Action nevertheless also allows for these countries to become eligible for Norwegian debt relief.

45 It is assumed that Côte d’Ivoire and Guinea, which are currently “de-railed” from their IMF programmes, will comeback on track and thereby qualify for debt relief under the HIPC Initiative (for which Guinea was qualified until 2003).

46 In the case of Sudan and Liberia, the conditions are lasting peace solutions, that these countries clear their arrears vis-à-vis to the international financial institutions with the help of international support operations, and that they quali-fy for HIPC treatment.

47 In the case of 11 of these countries (Tanzania, Mozambique, Uganda, Zambia, Malawi, Bangladesh, Ethiopia,Nicaragua, Afghanistan, Kenya and Sri Lanka) Norway has already supported one or more operations.

BOX 4

There are several mechanisms available toNorway in its efforts to reduce the debt bur-den of the poorest developing countries. Mostof these mechanisms have been developedand are administered by the multilateral finan-cial institutions, and are regarded as effectivemeans of alleviating the debt situation ofdeveloping countries. Creditor country statusis a prerequisite for participation in some ofthese mechanisms.

Describing Norway as a “small country in theworld” may be a somewhat hackneyedphrase, but it nonetheless has political signifi-cance in many contexts, particularly wheredebt is concerned. Norway is and will remaina small creditor, the very smallest in the ParisClub seen as a whole.48 It can be tempting totake huge steps forward on our own. In thelong run, however, a debt policy based onimmediate, unilateral debt forgiveness wouldhave very little positive effect, partly becausewe are small, partly because we would inpractice be withdrawing from the fora inwhich new debt policy is formulated and part-ly because that type of unilateral debt forgive-ness would primarily benefit other creditors.

Norway is therefore definitely a multilateral-ist, in the field of debt policy and elsewhere.That is also why the HIPC Initiative is a cor-nerstone of Norwegian debt policy. The HIPCInitiative is not “made in Norway”, but wehave influenced it to a greater extent thanmight be expected of a “small country”, and itis the best, most comprehensive debt policyinstrument currently in existence.

However, binding multilateralism must neverserve as an excuse for a lack of initiative onour part. Sometimes it makes sense to be out

in front leading the way, particularly when wecan set the agenda and help create interna-tional momentum. As far as Norway is con-cerned, binding debt policy cooperation ininternational fora has always been accompa-nied by active unilateralism. In some areas,particularly as regards unilateral forgivenessof the debt of poor countries, we were thevery first to take action. More recently, wehave initiated new debt relief measures forpost-conflict countries and middle-incomecountries. We have played, still play and willcontinue to play a proactive role in the field ofdebt policy.

6.1. Binding cooperation under the HIPCInitiativeIn order to solve the debt problems of thepoorest developing countries, the World Bankand the IMF, after lengthy negotiations in thegoverning bodies of these institutions, estab-lished the Heavily Indebted Poor CountriesInitiative (the HIPC Initiative) in 1996. This ini-tiative is aimed at reducing the debt burden ofthe poorest developing countries to a level thatdoes not impede their economic and socialdevelopment. Under the initiative, which cov-ers around 40 countries (most of which are inAfrica), the World Bank and the IMF will joint-ly carry out an analysis of each country toascertain whether the country has an unsus-tainable burden of debt. One of the basic prin-ciples of the HIPC Initiative is that debt reliefmust be provided in addition to other develop-ment assistance. The initiative is estimated toprovide debt relief totalling around USD 50 bil-lion. On average, the debt of each country isexpected to be reduced by two-thirds.

In 1999 the initiative was strengthened byincluding more countries and providing more

6. DEBT POLICY INSTRUMENTS AND AREAS OF FOCUS

48 Nevertheless, Norway may be a substantial creditor for some countries. For instance, Norway was Benin’s thirdlargest bilateral creditor (in terms of commercial credits) until the country’s debt was forgiven as part of the comple-tion of Benin’s HIPC treatment in autumn 2003.

27

28

debt relief more rapidly. Furthermore, debtrelief was linked even more closely to effortsto reduce poverty by requiring each country,with the active participation of its population,to present a Poverty Reduction StrategyPaper (PRSP), a development strategy inwhich poverty reduction is one of the primaryobjectives. Thirty-eight countries are eligiblefor debt relief under the HIPC Initiative, 2749

of which have qualified for such relief. HIPCtreatment of thirteen of the latter countrieshas been completed.50 Most of the 11 coun-tries that have yet to be included are in thethroes of armed conflict and/or under poorgovernance.51 This means that they have notbeen able to implement PRSPs or other meas-ures that are necessary to ensure that debtrelief benefits the country’s population.

The HIPC Initiative represents an importantexpansion of scope compared with previousdebt relief initiatives, particularly since itgathers all creditors in a single, joint debtrelief operation for each debtor country. Allcreditors must contribute to reducing thisburden of debt to a sustainable level in rela-tion to the country’s anticipated export rev-enues and budget situation.

The HIPC Initiative represents an innovativeapproach to solving the debt problems of thepoorest developing countries. The fact thatthis is largely a pioneering effort means thatthe economic analyses on which individualdebt relief operations are based are somewhatuncertain. This uncertainty creates a need fora reasonable degree of flexibility as regardsthe eligibility criteria for debt relief under theinitiative and measures to make the mecha-nism more robust.

The most important fora for discussing theHIPC mechanism are the governing bodies ofthe World Bank and the IMF. Norway partici-pates in constituency groups in both institu-tions with the other Nordic countries and theBaltic states. There is close Nordic coordina-

tion on matters submitted for consideration,including HIPC issues.

In Norway, there is close contact between theMinistry of Foreign Affairs and the Ministryof Finance/The Central Bank, the authoritiesresponsible for Norwegian participation inthe governing bodies of the World Bank andthe IMF, respectively. This type of ongoingcontact is particularly important with regardto HIPC issues, which are dealt with by bothinstitutions. The Ministry of Finance alsotakes part in discussions on Norwegian posi-tions on HIPC issues.

Issues related to the participation of othermultilateral financial institutions in the HIPCmechanism are dealt with by the governingbodies of the institutions concerned.Responsibility for Norwegian participation inthese fora lies mainly with the Ministry ofForeign Affairs. The same applies to responsi-bility for Norwegian participation in the ParisClub, where the HIPC participation of bilater-al creditors is discussed.

In all these fora, Norway has attached impor-tance to playing a consistent, active role inHIPC-related negotiations, with a view toensuring that the detailed design of the HIPCmechanism conforms as far as possible toNorwegian policy.

6.1.1. Results and challenges under the HIPCInitiativeTwenty-seven countries currently benefitfrom debt relief under the HIPC Initiative.When these countries have completed theHIPC cycle, their debt will have been reducedby approximately USD 41 billion in nominalvalue. In real value, their debt will have beenreduced by about two thirds.

Besides alleviating countries’ burden of debt,one of the key goals of the HIPC Initiative isto ensure that the funds that are freed up bydebt relief contribute to social and economic

49 Benin, Bolivia, Burkina Faso, Mali, Mauritania, Mozambique, Tanzania, Uganda, Cameroon, Chad, DemocraticRepublic of Congo, Ethiopia, The Gambia, Ghana, Guinea, Guinea Bissau, Guyana, Honduras, Madagascar, Malawi,Nicaragua, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone and Zambia.

50 Uganda, Bolivia, Mozambique, Tanzania, Burkina Faso, Mauritania, Benin, Mali, Guyana, Nicaragua, Niger, Ethiopiaand Senegal.

51 Ivory Coast, Burundi, Central African Republic, Comoros, D.R. Congo, Laos, Liberia, Burma, Somalia, Sudan andTogo.

development in the countries concerned. Ithas therefore been emphasised that freed-upfunds must be spent on measures that pro-mote development, primarily in the healthand education sectors, within the frameworkof a PRSP. Public expenditure is a key factorin combating poverty, and an importantaspect of the PRSP approach is ensuring thatthe budget targets the poor to a greaterdegree. To strengthen the link between debtrelief and poverty reduction, HIPC countriesare required to document how public fundsare used to reduce poverty. Over 25 multilat-eral and bilateral donors, including Norway,provide technical and professional assistance

to strengthen public administration in HIPCcountries.

The World Bank has estimated that the first22 countries to reach their decision pointsunder the HIPC Initiative would increase theirspending on social measures by an average ofUSD 1.7 billion per year in 2001 and 2002.Around 40 per cent of these funds wereexpected to be spent on the education sectorand 25 per cent on the health sector. Thefunds would be spent on basic infrastructure,governance reforms and measures to combatHIV/AIDS. On average, these countries willhave spent about seven per cent of their GDP

The Main Stages of the Debt Relief Process under the HIPC Initiative:

1. The countries concerned must draw up a coherent development strategy called a Poverty Reduction Strategy

Paper (PRSP), which also forms the basis for the provision of other assistance by the World Bank and the IMF and, to

a growing degree, by other donors. The PRSPs are updated regularly.

2. The World Bank, the IMF and the debtor country conduct a joint debt sustainability analysis to determine

whether the country’s debt situation is sustainable. If the country’s foreign debt exceeds 150 % of annual export

revenues and/or 250 % of the government’s disposable income, the debt is regarded as unsustainable and the

country may qualify for debt relief. In some cases where the country in question has a very open economy and is

therefore particularly vulnerable to changes in external parameters such as commodity prices, the country may be

eligible for debt relief even if its foreign debt and/or debt servicing burden are smaller than the above-mentioned

criteria.

3. If the country qualifies for debt relief under the HIPC mechanism, it must, before debt relief is provided, carry out

specific measures based on its PRSP in order to ensure that the debt relief contributes to development and poverty

reduction. When these measures have been implemented, the country reaches the decision point, when the

amount of debt relief that must be provided in order to render its debt sustainable is calculated on the basis of the

above-mentioned criteria. As a rule, the Paris Club creditor countries provide 90 % debt relief when the decision

point is reached. Other bilateral creditors are expected to do the same. On this basis, a calculation is then made of

the amount of debt relief the multilateral creditors, such as the World Bank and the IMF, must provide to reduce the

debt to the targeted level of sustainability. When the decision point is reached, agreement is also reached as to

which further measures – which must be based on the country’s PRSP – must be carried out in order for the coun-

try to be able to reach its completion point. Debt relief may be stopped during the interim period between the

decision point and completion point if the conditions for debt relief are not met. The length of the interim period

will depend on the implementation of the PRSP and associated conditions, but the period is normally two to four

years.

4. When the completion point is reached, the volume of the country’s debt is reduced so that its future debt situa-

tion is sustainable based on the criteria mentioned in point 2. This means that the country is guaranteed the

agreed debt relief for a period that often extends 10-15 years beyond the completion point, depending on the situ-

ation in the individual country. Several of the Paris Club creditors forgive all remaining debt at the completion

point. Norway was the first country to introduce this practice. The multilateral creditors continue to forgive a cer-

tain percentage of debt to ensure that the country’s debt burden remains sustainable. When the completion point

is reached, an updated debt sustainability analysis (“recalculation”) is carried out. If the analysis shows that, due to

exogenous shocks during the interim period, the debt ratios will exceed 150/250 %, a decision may be made to

give the country additional debt relief (“topping up”) in order to enable it to meet the debt sustainability criteria.

BOX 5

29

30

on social measures in the period 2002-2005. Incomparison, annual expenditure on debt ser-vicing after HIPC treatment in the sameperiod is estimated to be two per cent of GDP.

For the 27 countries that have received HIPCdebt relief so far, the World Bank has estimat-ed that debt servicing measured in relationto annual export revenues fell from an aver-age of 16 % in 1998 to 10 % in 2002. Annualexpenditure on interest and loan repaymentswill be about 30 % lower in 2001-05 than in1998 and 1999. Expenditure on poverty reduc-tion initiatives (particularly health and educa-tion programmes) in 2002 was almost fourtimes as high as spending on interest andloan repayments. In 1999, the ratio was atbest one to one. During this period, the HIPCcountries’ social-sector investments increasedfrom around 6 % to around 9 % of GDP. Inother words, a significant turnaround hastaken place over a short period of time; thedebt servicing burden has decreased substan-tially, while expenditure on health and educa-tion has increased significantly.

These positive trends are expected to contin-ue. According to the World Bank’s latest stud-ies, direct, poverty-reducing expenditure inthe 27 countries that have received HIPC debtrelief is expected to double from around USD

6 billion in 1999 to USD 12 billion in 2005.It has previously been unclear whether thedebt relief provided so far under the HIPCInitiative has been given in addition to or atthe expense of other assistance. In its latestanalyses, however, the World Bank concludesthat to all appearances the debt relief hasbeen additional. In other words, the HIPCInitiative appears to function as intended inthis respect as well.52

When a country qualifies for debt relief underthe HIPC Initiative and reaches the decisionpoint, a calculation is made of the amount ofdebt relief that is necessary to ensure that thecountry’s debt situation is sustainable53 whenHIPC treatment is concluded. This calculationrequires that future export income and othernational revenues and expenditures upon con-clusion of debt relief also be computed. Onseveral occasions, the amount of debt reliefcalculated at the completion point has provedto be insufficient to achieve a sustainable debtsituation. This is due to both significantchanges in commodity prices in the disfavourof developing countries and the weak eco-nomic policies of the HIPC countries them-selves.

Furthermore, the economic growth calcula-tions used by the World Bank and the IMF

Country case: Tanzania’s HIPC treatment

In April 2000 it was decided that Tanzania was to receive debt relief under the HIPC Initiative. The debt relief was to

total USD 2026 million, which was a 54 per cent reduction in Tanzania’s total debt as of 31 June 1999. During the peri-

od up to the completion point, Tanzania was to receive around USD 94 million in interim support from the World Bank

and the IMF. Norway, for its part, cancelled approximately NOK 54 million of debt that fell due for payment during the

interim period. In August 2000 Tanzania presented its first PRSP, which was approved by the Executive Boards of the

World Bank and the IMF in the months that followed, with the support of the Nordic and other countries. In order to

strengthen Tanzania’s economic development and orient public budgets to a greater degree towards reducing pover-

ty, structural and economic reforms were necessary. The reform process was launched prior to implementing debt

relief. One of the criteria that had to be met in order to be eligible for debt relief was the implementation of measures

to combat corruption. It was also required that at least 75 per cent of children under two years of age in Tanzania be

vaccinated against measles, and that a national campaign to prevent HIV/AIDS be carried out. These and several other

criteria were met, and Tanzania reached its completion point under the HIPC Initiative on 31 June 2001. In 2002,

Norway cancelled the remainder of its claim against Tanzania, which amounted to over NOK 47 million. From 1998/99

to 2000/01, Tanzania increased its transfers to the education and health sectors by 88 % and 45 %, respectively. This

growth is expected to continue.

BOX 6

52 It should be noted that Norway’s bilateral debt relief under the HIPC Initiative is guaranteed to be additional, due toNorway’s distinctive budget solution.

53 In the HIPC context, a debt is defined as sustainable if it represents less than 150 % of the country’s annual exportearnings. The country’s general economic vulnerability is also assessed.

have often been overly optimistic. This hasmade it necessary to recalculate the amountof debt relief at the completion point.However, there is no guarantee that the recal-culated debt relief will be sufficient to achievea sustainable debt situation after the HIPCprocess has been completed. This will largelydepend on the country’s own policy andtrends in external parameters, including inter-national commodity prices and debtor coun-tries’ access to markets in industrialized coun-tries. To the extent that ordinary HIPC debtrelief proves to be insufficient to ensure sus-tainable solutions for developing countries,and this is due to exogenous economicshocks over which the countries have no con-trol, Norway is in favour of a flexible “toppingup” of debt relief under the HIPC Initiative.

There will presumably be growing discussionon the subject of debt sustainability, whichmay result in policy adjustments. Norway hasinitiated an ongoing research project in theWorld Bank on precisely this issue, which willnaturally be followed up when the findingshave been presented.

Norway will ...

" follow up an ongoing, Norwegian-financedstudy by the World Bank to ensure thatpoor countries achieve debt sustainability

" consider further financing of more work inthis field

6.1.2. Long-term financing of the HIPCInitiativeThe countries treated under the HIPCInitiative also receive assistance through theWorld Bank’s International DevelopmentAssociation (IDA) Fund, and other similardevelopment funds for the poorest countries.Cancelling these funds’ claims against debtorcountries will initially result in a correspon-ding reduction in the funds’ future support fordevelopment programmes in poor countries.This will in turn give rise to the absurd situa-tion that the poor countries themselves willbe bearing a significant share of the burden ofdebt relief under the HIPC mechanism.

Box 7.

Method for calculating the need for debt relief at the HIPC completion point

While the HIPC mechanism requires all creditors to provide their share of debt relief proportionate to their relative

size as creditor, Norway – and gradually several other creditor countries – have chosen to cancel all their claims, as a

supplement to the HIPC Initiative. In practice, in most cases this is done by increasing the debt reduction from 90 %

(taking into account previous debt relief ) to 100 % (subject to a number of reservations stipulated by many creditor

countries). This additional input can be seen as a “precautionary” insurance premium to ensure durable debt sustain-

ability.

In autumn 2001, the World Bank and the IMF began to include this type of extraordinary bilateral debt relief when cal-

culating total debt relief provided under the HIPC Initiative. This means that such unilateral debt relief is computed as

part of the coordinated HIPC debt relief, instead of coming in addition to it, and thus does not function as an extra

guarantee of debt sustainability. Furthermore, it means that the debt relief provided under the HIPC Initiative itself is

less than it otherwise would have been. The creditors that provide 100 % debt reduction thereby subsidise those that

do not, and the multilateral institutions’ proportionate share of total debt relief is reduced. The debtor countries, for

their part, are deprived of debt relief that was intended as additional assistance.

This unfortunate method of calculation is the result of the unwillingness of major creditor countries to participate in

fully financing the HIPC Initiative. Norway is very dissatisfied with this arrangement. Efforts are being made to create a

majority in favour of changing this aspect of the method. From summer 2003, Norway has postponed the decisions

on extraordinary cancellation of debt until the countries in question have reached the completion point and the cal-

culation of any extra debt relief under the HIPC mechanism has been carried out. In this way, Norway’s extraordinary

forgiveness of debt will not contribute towards reducing the financing obligations of other creditor countries, and the

additional assistance provided will benefit only the debtor countries.

BOX 7

31

32

However, it is a basic principle that multilater-al debt relief under the HIPC Initiative mustnot lead to a reduction in the assistance pro-vided through such funds, but be additional tosuch assistance. This principle was estab-lished in a communiqué issued by theDevelopment Committee54 in autumn 1999and has since been confirmed on severaloccasions.

In 1999 Norway played an important role insecuring this principle. We put forward ademand for formal, regular negotiationsbetween all donor countries throughout thelifetime of the HIPC Initiative on full financingof multilateral debt relief under the mecha-nism. This initiative was controversial when itwas presented and was opposed by the G7countries and others. After a series of consul-tations, including a meeting in summer 2000between like-minded countries and the WorldBank in Oslo, a procedure was adoptedwhereby negotiations are held on the replen-ishment of a HIPC Trust Fund in parallelwith, but separately from, the regular negotia-tions every third year on the replenishment ofIDA. In addition, an annual “technical meet-ing” is held to deal with current issues andfinancing needs under the HIPC mechanism.The Nordic countries acted as a block duringthese negotiations, which contributed to thegood result.

So far, financing of the HIPC Initiative hasbeen secured until around 2005, provided thatall pledged contributions are paid in55. Sincemultilateral debt relief under the HIPCInitiative is provided when payments fall due,when the debt should otherwise have beenserviced by the debtor country itself, the debtrelief covers a period of several years. Thishelps to spread costs over time. However, it isextremely important that efforts to fullyfinance the multilateral debt relief providedunder the HIPC Initiative are successful, so asto make the financial situation of HIPC coun-tries more predictable. This will require sub-stantial additional voluntary contributionsfrom donor countries to ensure that the abili-

ty of the multilateral institutions to assist thepoorest countries is not reduced as a result ofdebt forgiveness.

Norway will ...

" seek to achieve a reasonable andincreased degree of flexibility in the HIPCmechanism:

– countries that are borderline cases withregard to qualifying for HIPC treatmentmust, after a detailed assessment, be eli-gible for inclusion in the scheme

– temporary hitches in reform pro-grammes must not result in countrieshaving to begin anew on the process ofbuilding up their track record

– in the event of unforeseen, exogenouseconomic setbacks for individual coun-tries, the debt relief required to ensurethese countries a sustainable debt situa-tion must be recalculated

– final debt forgiveness must take placewhen there are grounds for it (floatingcompletion point), rather than in accor-dance with a previously establishedschedule

" work to achieve reasonable burden sharing

among the various stakeholders by ensur-ing that the G8 countries are aware oftheir particular responsibility and that allthe multilateral institutions assume theirshare of debt relief

" work to ensure that binding multilateral

negotiations are held at regular intervalson full financing of multilateral debt reliefto achieve full compensation for IDA

" continuously urge other donor countriesto pay their pledged contributions to theHIPC Trust Fund so as not to affect theoperations of the multilateral institutions

54 The Development Committee is a joint committee for the World Bank and the IMF, which meets at ministerial leveltwice a year to discuss North-South resource flows and selected topics from the international development agenda.

55 As of 31 January 2003, the countries that have contributed to the financing of the HIPC have paid in around USD 2.2billion of pledged contributions, which total approximately USD 3.4 billion, to the HIPC Trust Fund.

" make active efforts to ensure that bilateraland multilateral creditors that have not yetcommitted themselves to providing debtrelief under the HIPC mechanism con-tribute their proportionate share of totaldebt relief as soon as possible

" build alliances with other countries, partic-ularly with the other Nordic countries, theUtstein countries and Switzerland, in theongoing negotiations and consultations onHIPC-related issues

" give high priority to the financing of the

HIPC Initiative when allocatingNorwegian budget funds to internationaldebt schemes

" consider unilateral forgiveness of all

Norwegian government claims againstcountries that have completed the HIPCprocess

" work to ensure that the World Bank andthe IMF, when calculating a country’s debtsustainability, avoid using overly optimisticestimates of the country’s economicgrowth, export revenues and foreign cur-rency earnings

" seek to change the current method of cal-culating necessary additional debt reduc-tion when a country reaches its comple-tion point in the HIPC Initiative, to ensurethat extraordinary debt relief provided byNorway and other creditor countries is notincluded in the analyses.

6.2. Efforts coordinated through the ParisClubThe Paris Club is an informal, internationalforum of creditors, whose primary function isto find coordinated, sustainable solutions tothe payment difficulties experienced bydebtor countries. The Club conducts internalnegotiations on debt treatment principles andnegotiations with individual countries ondeferment of payment or debt reduction. Theinstitution serves as both a special-interestorganization for creditor countries and, to anincreasing degree, as a development policyforum.

The Paris Club bases its activities on fivemain principles:

1. The decisions of the Paris Club are basedon a case-by-case assessment of the special

needs of the debtor country.2. Consensus. It only makes decisions on

which there is a consensus among all theparticipating creditor countries.

3. Comparability of treatment of creditor coun-tries. This means that no creditor candemand larger payments or different,more favourable terms that those decidedin the Paris Club. In addition, the debtorcountry commits itself to seek comparableterms from creditor countries that are notmembers of the Paris Club and commer-cial creditors.

4. Creditor solidarity. No creditor can seek toobtain more favourable terms than thosegranted under a Paris Club agreement.Members must also exercise restraint asregards granting more concessional termsthan those allowed under Paris Club agree-ments. The purpose of this is to preventone creditor’s indulgence from undermin-ing other creditors’ chances of recoveringthe debts due to them.

5. Conditionality. The Paris Club will onlynegotiate with debtor countries that arepursuing an IMF programme.

Like other countries, Norway also uses theParis Club to recover as many as possible ofits outstanding claims on relatively prosper-ous, economically developed countries, whichshould be expected to pay their debts. Whencountries like these default on their paymentobligations, being able to fall back on theParis Club’s creditor solidarity may prove tobe crucial.

However, countries with that kind of solvencyare in a clear minority among the countriesthat have government debts to Norway. Forus, therefore, the Paris Club is as much adevelopment policy forum as a forum forcredit recovery. The debt relief that is grantedto poor countries can be regarded as a formof budget support. When Norway providesextraordinary bilateral debt relief and supportfor international debt operations for individualcountries, it is natural to view such assistance

33

34

56 See, however, the description of the Evian approach in Chapter 6.2.1. and Box 9.

More information on the Paris Club

The Paris Club has no legal status and no statutes. In principle, it is a “non-institution” although its mode of operation

makes it a de facto international organization. It has a secretariat, headed by a secretary general with 12-15 part-time

employees, which is fully funded by France. The Club was established in 1956, when Argentina’s debt was rescheduled

for the first time. It has 19 permanent members, 18 of which are OECD countries. Russia became a member in 1996.

Norway, Denmark, Spain, Italy and the USA are primarily represented by their Ministries of Foreign Affairs, while the

others are primarily represented by their Ministries of Finance.

The IMF and the World Bank participate in all meetings. Other international organizations (such as UNCTAD) and

financial institutions take part on an ad hoc basis. Other creditor countries, such as Brazil, Korea and Israel, also partici-

pate on an ad hoc basis in debt negotiations when invited to do so by the Paris Club, and have rights and duties on a

par with the member countries. The Norwegian delegation is headed by the Multilateral Bank and Finance Section of

the Norwegian Foreign Ministry’s Department for Development Cooperation Policy. The delegation includes a repre-

sentative of the Norwegian Guarantee Institute for Export Credits (GIEK).

The Paris Club holds meetings lasting 2-5 days in ten months of the year, usually with no meeting taking place in

February and August. A regular aspect of all meetings is the tour d’horizon, when the debt situation of selected debtor

countries is reviewed. The agenda is determined by demand. It is sufficient that one creditor country requests that a

certain debtor country be discussed during the “tour”. These country reviews allow for exchanges of up-to-date infor-

mation, early notification of payment problems and the preparation of debt negotiations with individual countries.

The basic outline of future debt agreements often emerges during the “tour”. The reviews are also used to draft joint

letters to the competent authorities in debtor countries, which are primarily the Ministers of Finance.

The Paris Club reschedules government-to-government claims that mainly arise from defaults on government-guar-

anteed export credits and development assistance loans (ODA debt) as well as, to a lesser extent, on governmental

loans granted on commercial terms. The claims must be long-term, i.e. they must have a maturity of at least one year.

As far as Norway is concerned, this largely applies to export credits guaranteed by the Guarantee Institute for Export

Credits (GIEK). Debt negotiations are conducted with countries whose payment obligations exceed the financial

capacity of their national economy, with the result that they experience balance-of-payment problems. During the

negotiation sessions, the French Chair negotiates with the debtor country on behalf of the Paris Club members on the

basis of an agreed mandate. The sessions are often as much a “tug of war” between the various member countries as

between the chairmanship and the debtor country.

In practice, the Paris Club helps to fill funding gaps in debtor countries’ IMF loan programmes, whether they are one-

year or multi-year programmes. Debt negotiations must be formally requested by debtor countries. In a normal year,

negotiations are held with 15-20 countries through which debts totalling USD 20-30 billion are either forgiven or

deferred. (By comparison, development assistance provided by OECD countries totals USD 50-60 billion per year.) The

debts of the poorest countries are forgiven. On the whole, middle-income countries are granted deferment of pay-

ments.56 The majority of the countries negotiated with are among the poorest countries, which are treated under the

terms of the Heavily Indebted Poor Countries (HIPC) Initiative.

So as not to impair the debtor country’s creditworthiness during a restructuring phase, a cut-off date is always set the

first time a debtor country’s debt is restructured under a Paris Club agreement. This enables the country to have

access to new credits after that date, but the creditor will then be guaranteed that the new claim will not be included

in subsequent debt relief operations. This is basically also in the debtor country’s interest. However, old – often 20

year-old – cut-off dates are becoming a problem that at worst, in some cases, may undermine the credibility of debt

agreements.

The debt relief terms agreed upon, which are set out in the Agreed Minutes, are to be regarded as non-binding recom-

mendations to member countries. In practice, however, they are followed up as if they were legally binding, through

bilateral debt agreements, so that all creditor countries grant the debtor country the same main terms. However, the

interest terms are determined bilaterally. Most Paris Club agreements, and the underlying debt sustainability analyses,

are based on the assumption that the debtor country will be granted equal or comparable terms by both commercial

creditors and non-member countries (comparability of treatment).

BOX 8

in conjunction with other Norwegian budgetsupport for the same countries – and viceversa.

Norway’s work in the Paris Club is intendedto be an important element of our overallefforts to reduce poverty, cf. the NorwegianGovernment’s Action Plan for Combating

Poverty in the South towards 2015. It is impor-tant that the views expressed by Norway arein conformity with the goals we are seekingto achieve in various fora – in this case partic-ularly the IMF, the World Bank, the UN andthe Paris Club.The Paris Club has a set of standard terms fordebt relief, among which the following aremost commonly used today:

1. Houston terms: no debt reduction, but pay-ment deferments for middle income coun-

tries, normally over 15-20 years with a max-imum of 10 years’ grace.

2. Naples terms (introduced in 1994): 67 %debt cancellation for poor countries thatare eligible for HIPC treatment, while theremainder of the debt is repayable over aperiod of 23 years with six years’ grace.

3. Cologne terms (introduced in 1999): usually90 % debt cancellation57 for HIPC countries,

taking account of earlier debt relief, first(in the interim period) through forgivenessof interest and payments as they fall due,then (at the completion point) through for-giveness of the remaining debt.

Since most of the Paris Club’s member coun-tries now “top up” the Cologne terms withextraordinary contributions (to 100 % debtreduction, subject to reservations), there isobviously very limited potential for improve-ment in this respect.

6.2.1. The Evian approachThere is greater potential for improvementwhere middle-income countries are con-cerned, depending upon the political will ofthe creditor countries. The G8 summit inEvian in June 2003 culminated, among otherthings, in a request that the Paris Club fur-ther develop its policy instruments for middle-income countries in particular. No new stan-dard terms were desired, but there were callsfor more flexible solutions based on long-termdebt sustainability analyses, rather than mere-ly more short-term analyses of paymentcapacity. There is agreement that the Houstonterms, which are based on the latter, have notbeen very successful, particularly because anumber of the debtor countries have fre-quently had recourse to the Paris Club.

The Paris Club carried out internal negotia-tions on the Evian approach in summer andautumn 2003. Norway played an active role inthese negotiations in consistently and vocallysupporting the French G8 Chair, which bothwas the real initiator of the approach anddrove the idea forward within the G8 commu-

Methodological issues are also discussed at the majority of sessions to clarify the Club’s existing policy and the way it

is implemented in practice, resolve any disagreements or reach agreement on new debt relief terms. Such discussions

are usually initiated by individual creditor countries, but may also be held at the request of the Secretariat. In recent

years, Norway has been the country that has most frequently proposed such discussions, primarily with a view to

improving debt relief terms for the poorest countries, and since 2002 for middle-income countries as well.

A regular meeting is held annually with influential representatives of commercial creditors, as well as occasional meet-

ings prior to negotiations with individual countries. The purpose of these meetings is primarily to exchange informa-

tion on debt agreements that have already been entered into, but also to exchange views on upcoming negotiations.

An underlying motive for both parties is to check that official and commercial creditors offer reasonably comparable

terms to individual debtor countries (comparability of treatment). The Paris Club has been one of several arenas for dis-

cussions concerning the establishment of a new Sovereign Debt Restructuring Mechanism (SDRM) and a code of con-

duct for official and commercial creditors.

The Home Page of the Paris Club may be found at www.clubdeparis.org

57 Taking account of previous debt relief, on claims that have arisen prior to the country’s cut-off date.

35

36

nity. The question of adopting a more openattitude towards debt reduction, also for non-HIPC countries, was particularly controver-sial. It took time to reach a final compromise,but in the end the main intentions behind thenew orientation were essentially maintained.58

There may be reason to note that the Evianapproach does not apply only to middle-income countries that might aspire to debtreduction; rather, it constitutes a flexibleframework for all countries that are not eligi-ble for the HIPC mechanism, whether theywish to seek deferred payments or debtreduction.

As stated above, the Evian approach is not aquestion of introducing standardized termsfor the treatment of middle-income countries,like the terms for HIPC countries. On thecontrary, this approach serves to consolidatethe Paris Club’s well-established case-by-case

principle and fundamental ad hoc approach tothe debt problems of middle-income coun-tries.

Nor, basically, is there anything genuinelynew in the possibility of debt reduction formiddle-income countries; Egypt, Poland andthe former Yugoslavia (Serbia-Montenegro)have all previously obtained substantial debt

The main elements of the Evian approach

1. From now on, debt sustainability considerations are also to be a determinant factor for the debt relief that is pro-

vided to non-HIPC countries (chiefly middle-income countries), as is already the case for HIPC countries. Thus a fun-

damental difference in the way poor and middle-income countries are treated has – in principle – been eliminated.

However, it remains to be seen to what extent this policy will be applied in practice.

2. Countries with a debt burden which the IMF and creditor countries agree will not be sustainable in the long term –

i.e. countries that have a solvency problem – will be eligible for debt reduction, not just deferred payments. The

IMF will carry out debt sustainability analyses, but in such a way as to leave the conclusion to the creditor countries

in the Paris Club.

3. Countries that are considered to have only temporary liquidity problems will, on the other hand, only be eligible

for debt rescheduling on “traditional” terms, as is the case today. Provision is even made for less concessional

deferments of payment than the current minimum terms for countries that only have short-term problems.

4. Debt reduction operations in respect of countries that have indisputable liquidity problems are to take place in

stages (usually three), with close linkages to the IMF programme requirements (conditionality) and clear criteria for

responsible debt management. The stages are to culminate in “exit solutions” based on debt reduction that is tai-

lored to the needs of each individual country.

5. This type of comprehensive final debt treatment could comprise flexible instruments such as debt buybacks, debtswaps and debt relief that is activated or terminated by special “triggers” (contingency relief ).

6. This approach calls for closer coordination with commercial creditors, particularly when the latter play a signifi-

cant role, where comparability of treatment poses a challenge and where comprehensive debt treatment is envis-

aged for countries that it is agreed have solvency difficulties. Coordination could be ensured through preliminary

meetings to exchange information, views and positions prior to the respective creditor groups’ negotiations with

the countries concerned.

7. The approach provides for a more active updating of the cut-off dates of debtor countries, which distinguish

in time between older debt that can be rescheduled and more recent debt that is not negotiable. The need to

adjust cut-off dates – like the need for debt reduction, if appropriate – must be assessed in relation to the long-

term sustainability of the (remaining) debt and countries’ creditworthiness.

BOX 9

58 The “Evian approach” is published on the Paris Club’s home page www.clubdeparis.org, both in the form of a summa-ry press release and a more extensive working paper.

reduction through negotiations with the ParisClub. The genuinely new aspect of the Evianapproach lies rather in the introduction of asustainability criterion for debt relief assess-ments, and the fact that this is set out in pub-lished documents.

Naturally, the scope of such a “debt sustain-ability” criterion is debatable, given the factthat no operational criteria have been adoptedto determine when the debt or debt servicingburden of a middle-income country is to beregarded as a solvency problem (as has beenthe case for HIPC countries). Today there isno support for introducing this type ofabsolute criteria. However, the possibility ofintroducing less “mechanistic” indicatorsshould not be ruled out.

Nor is the adjustment of cut-off dates in itselfa dramatic break with the past, given the factthat the Paris Club has, on certain occasions,had to reschedule post cut-off date debt tocreate credible debt solutions. Nonetheless,as in the description of debt reduction, thepossibility of more actively updating cut-offdates is new in the sense that it has been setdown in writing and duly publicised.

Dividing debt relief for insolvent countriesinto stages will give creditor countries anopportunity to link debt relief closely and con-tinuously to demands for economic reforms indebtor countries. The Paris Club’s require-ment that debtor countries must continuouslypursue an economic reform programme incooperation with the IMF in order to be eligi-ble for debt relief has, if anything, beenstrengthened by the Evian approach.

The possibility of using debt swaps repre-sents a fresh approach in the sense that thesecan conceivably be incorporated as part of,and not just be used in addition to, Paris Clubagreements. This means that Norway’s pro-posal of multilaterally coordinated (collective)debt swaps may become more relevant.

The Evian approach is not a quick fix. Theframework will gradually take clearer shapeas it is applied to specific cases. Kenya wasthe first country on which the Evian approachwas used, when its debt was rescheduled in

January 2004. The approach can be regardedas the Paris Club’s preliminary contributionto better, more predictable crisis managementfor middle-income countries whose debt bur-den is incompatible with durable growth anddevelopment. As such, it represents a timelyand important step on the road towards aneven better global debt policy.

Norway will ...

" urge as many creditor countries as possi-ble to cancel 100 % of the debt of the poor-est countries, as Norway currently doesand will continue to do

" work to ensure that all debt relief benefitsthe debtor countries, and not other credi-tors

" work to ensure that countries emerging

from war and conflict (post-conflict coun-tries) are given debt relief on better termsthan the present ones

" work to ensure that middle-income coun-

tries facing payment difficulties also obtaincredible debt agreements, if necessary bymeans of debt reduction, so as to avoid thenecessity of frequently repeated ParisClub negotiations

" promote consideration, under the Evian

approach, of the introduction of a set oftentative “markers” (rather than absoluteindicators) for evaluating the solvency ofdebtor countries and, if appropriate, theirneed for debt reduction

" advocate that several creditor countriesjointly carry out multilaterally coordinated

debt swaps with middle-income countries,whereby debt is forgiven on condition thatthe debtor countries use the freed-upfunds to carry out development or envi-ronmental projects

" work to achieve recognition by the ParisClub of such debt swaps as a real option inits standardized swap clauses, on a parwith bilateral debt swaps

37

38

" work to ensure that the Paris Club liberal-izes the way it practices the volume limita-

tions that apply to debt swaps, preferablyby discontinuing the limitations on swapsmotivated purely by development objec-tives

" work to ensure that creditors with claimsthat are below the minimum amountsrequired for inclusion in the Paris Clubagreements exchange these de minimis

amounts for debt management measuresin the debtor countries, rather than requir-ing that the funds be repaid

" promote a flexible attitude towards moving

the country-specific cut-off dates in caseswhere such dates produce an obviouslyunreasonable outcome and jeopardize thecredibility of debt settlements

" advocate that the Paris Club give the pub-lic even greater access to information on itswork, such as through its home page onthe Internet

" build alliances with other like-mindedcreditor countries

6.3. Unilateral reduction of bilateral debt forHIPC countriesIf a debtor country has an unsustainableexternal debt, it is necessary to have anagreement that ensures equal treatment of allits creditors. In this way, a situation in whichone or more creditors might be tempted tospeculate in the debt relief provided by othercreditors can be avoided. The HIPC mecha-nism coordinates debt reduction by indicatinga sustainable level of debt for debtor coun-tries and by prescribing the amount of debtreduction each creditor must provide in orderto achieve this level. Unilateral debt reductiongiven in addition to the prescribed HIPC debtrelief will, in principle, not affect the sustain-able level of total debt that it has been deter-mined that the debtor country is to end upwith. It will only reduce the debt reductionthat other creditors have to provide in orderto achieve that level. Unilateral debt reductionthat in reality benefits other creditors, ratherthan the debtor countries, is bad debt policy.

Unilateral debt reduction will only have aneffect for the debtor country after the countryhas been through a multilaterally coordinateddebt relief operation, or at least after all thecalculations of the creditors’ coordinated debtrelief have been carried out. Additional debtrelief provided on top of a multilaterally coor-dinated operation will make the operationmore robust. It will reduce the risk of unfore-seen events and changed international para-meters creating a new unsustainable debtsituation. Of course the more countries thatgive extraordinary debt relief, the strongerthis effect will be.

To ensure that extraordinary Norwegian debtrelief cannot be taken into account in the debtsustainability analyses on which the multilat-eral debt relief operation is based, from nowon a unilateral decision by Norway to providesuch relief will not be made until after a bind-ing agreement on the various elements of themultilateral operation has been concluded, orafter it has been ensured in some other waythat extraordinary debt relief provided byNorway will not be included in the debt sus-tainability analyses. For HIPC countries, theoperation will take place at the completionpoint.

Unilateral debt relief provided by Norwaymust not be perceived as an automatic conse-quence of a completed exit operation, butmust be decided on formally after a case-by-case assessment. This will ensure that unilat-eral debt relief given by Norway will be pro-vided on top of the negotiated multilateraldebt relief.

The above-mentioned risk of unilateral debtrelief only benefiting other creditors will beavoided if the debt is forgiven as amounts falldue in a situation where a country is servic-ing its debts. A decision by Norway mustagain be taken after a case-by-case assess-ment, so that unilateral debt relief providedby Norway cannot be “built in” to the basicdebt sustainability analyses.

In accordance with the adopted method of cal-culating any topping up that may be neces-sary of the debt relief provided under theHIPC mechanism, all decisions to provide uni-

lateral debt relief taken before the time of cal-culation will be included in the calculation andwill thus reduce the topping up of the debtrelief. Consequently, the assessment of unilat-eral debt relief provided by Norway will becarried out after the above-mentioned calcula-tion has been made. The amounts that falldue in the interim period can be added asthey fall due to the Norwegian claim (capital-ized) and then be included in a Norwegianassessment of unilateral debt relief after thecalculation of the necessary multilaterallycoordinated topping up of debt relief hastaken place. This laborious procedure is nec-essary due to the current method of makingtopping up calculations, which has beenadopted by the Executive Boards of the WorldBank and the IMF.59 Efforts should thereforebe made to change this resolution, so as notto include the unilateral debt relief providedby creditor countries and thereby ensure thatall of it benefits the debtor country as anextra buffer against future exogenous shocks.Until this happens, it is important that asmany creditor countries as possible followNorway’s example.

According to the criteria for country selection(and after the unilateral cancellation of allclaims against Tanzania and Benin has beencarried out), six HIPC countries with debtsowing to Norway may be eligible for unilater-al reductions: The Gambia, Ghana, Guinea,D.R. Congo, Senegal and Sierra Leone. Inaddition, there is Côte d’Ivoire, which wasvery close to achieving HIPC status in 2003.HIPC candidates such as Burma, Sudan,Liberia, Angola and Somalia may also be con-sidered provided they emerge from war andconflict, improve their governance and qualifyfor HIPC treatment.

Norway will ...

" on a case-by-case basis consider 100% uni-

lateral reduction of Norwegian officialclaims against countries that have com-pleted their HIPC treatment, based on thecriteria set out in this plan of action

" promote a change in the method of calculat-ing topping up of HIPC debt relief toensure that all unilateral debt relief bene-fits the debtor country and not other credi-tors

" encourage other creditor countries, untilthe method is changed, to follow the pro-cedure used by Norway to ensure thatdebt relief nevertheless benefits debtorcountries

" consider unilateral forgiveness ofNorwegian claims that fall due for post-con-

flict countries that have achieved Naplesterms in the Paris Club and are expectedto be eligible for HIPC treatment at a laterdate.

6.4. Support for clearance of multilateraldebt arrearsIn order for a country to be eligible for debttreatment under the HIPC Initiative andachieve Cologne terms in the Paris Club60,the country must be up-to-date on its debtservicing. However, the poorest countries,particularly countries that have emerged fromconflict, are often far behind with their debtpayments and thus have substantial arrears.In the Paris Club, bilateral arrears are dealtwith by restructuring the country’s debt onNaples terms (67 % debt reduction) and bypostponing the date for paying the remainderof the debt including arrears. The terms are“topped up” to Cologne terms when countriesreach their decision point under the HIPC.

Arrears payable to multilateral institutions willnot only impede the implementation of theHIPC mechanism, they will also preventaccess to new financing from these institu-tions. It is therefore very important to dealwith these arrears at an early stage of a post-conflict situation. This can be done in twoways: either a donor country can grant fundsto cover the arrears or it can provide a bridgeloan. Under the bridge loan procedure, whichis used particularly when the arrears are sub-stantial, one (or more) donor countries provide

59 See Box 7.60 See Chapter 6.2.

39

40

the debtor country with a loan equivalent tothe outstanding amount. The debtor countryuses this loan to pay its debt to the multilateralfinancial institution concerned. The institutionsimultaneously grants a new loan to the debtorcountry which it then uses to pay back thebridging loan. This brings the debtor countryup to date again with its debt servicing pay-ments. After completing this procedure, thecountry can obtain normal support from themultilateral financial institution and debt treat-ment can be initiated under the HIPCInitiative. Norway has participated in suchoperations on several occasions with NorgesBank as the lender. After a bridge operation,the debtor country will still be in debt to themultilateral financial institution, but will nolonger be considered to be in default. Arrearscan also be cleared by means of a combinationof grant financing and bridge loans.

Norway will ...

" participate in coordinated arrears clear-ance operations by providing grants tohelp pave the way for HIPC treatment ofpoor developing countries that are eligiblefor such treatment

" as part of this process, consider participa-tion in future bridge loan operations toenable post-conflict countries to receivenew assistance from multilateral financialinstitutions

6.5. Special unilateral debt forgiveness forpost-conflict countriesCountries that have recently emerged fromwar and conflict are in particular need offinancial assistance. Reconstruction willrequire substantial resources. The countrywill have major import needs. At the sametime, its weakened private sector will only beable to earn limited export revenues, or forthat matter generate other income.

In such cases, the servicing of external debtswill complicate and prolong reconstructionefforts. Rapid, deep debt relief will often beessential. Provided such countries are eligible

for the HIPC Initiative, every effort should bemade to ensure that they qualify for it. Inorder to obtain debt relief under the HIPCInitiative, however, a country must have pur-sued a responsible social and economic policyfor some time. A country that has recentlyemerged from conflict will normally not havebeen able to do this.

In connection with pre-HIPC debt treatmentin the Paris Club, post-conflict countries willnormally be unable to obtain more than amaximum of 67 % debt reduction (Naplesterms), after which the remaining debt will besubject to deferred payments. Normally, cer-tain interest payments and repayments willthen accrue before the countries reach thedecision point in the HIPC scheme. Somecreditor countries will choose to invoice, i.e.collect, these due payments.

For post-conflict countries, even minor pay-ment obligations will be a heavy burden.Norway sees little point in requiring debtservicing from countries that receive interna-tional assistance for sorely neededreconstruction during the period immediatelyafter the conflict has ended. When the situa-tion has stabilized, in the form of a state ofpeace that is recognized and supported by theinternational community and a legitimate gov-ernment is in power, accelerated debt relieffor post-conflict countries can make a vitalcontribution to economic and political stabi-lization, poverty reduction and reconstruc-tion. It is important to give the new regime amore predictable economic situation, with thepossibility of a planning horizon that canensure the reconstruction of the country. Theprospect of early debt relief may in itself spurthe settlement of ongoing conflicts.

Norway can further contribute to debt relieffor post-conflict countries in two ways: by pro-viding support for clearance of the countries’debts to multilateral institutions and by can-celling debt service payments when they falldue prior to HIPC treatment.

In addition, of course, there is the ordinaryHIPC treatment, where post-conflict countries

are dealt with in the same way as every otherHIPC country. Apart from Serbia-Montenegro, all the post-conflict countriesagainst which Norway has outstanding claimsare HIPC candidates. This enables Norway toreduce its bilateral claims by 100 % whenthese countries eventually reach their comple-tion point under the HIPC Initiative.

Norway will ...

" work to ensure that post-conflict countries

that are eligible for HIPC treatment do nothave to use scanty resources, which arecritically important at the stabilization andreconstruction stage, for debt servicing

" advocate that the Paris Club establish ageneral principle whereby interest and

repayments are either forgiven as and when

they fall due or are capitalized, until thecountries reach their decision point underthe HIPC Initiative

" refrain from collecting interest and repay-

ments from such post-conflict countries,either by forgiving them when they falldue or by capitalizing the amounts

" (after a country-by-country assessment)forgive any interest or principal that have

been capitalized at a time when such unilat-eral debt relief will benefit the debtorcountry and not other creditors

6.6. Multilaterally coordinated debt swapswith non-HIPC countriesA debt swap is a transaction whereby a credi-tor country’s claim against a debtor country,quoted in “hard” currency, is converted to anobligation to the creditor country other thanservicing of the original debt owed. There aremany types of debt swap operations. Themost common are commercial operations, inwhich a claim is converted into equity capitalin local companies, or to specifically definedadvantages for the creditor country’s private-sector investments in the debtor country. TheDebt Relief Strategy does not include thistype of commercial debt swap operation.Instead the strategy deals with development-

motivated operations whereby a debtor coun-try’s debt is converted into an obligation forthe debtor country to use a specific amount inlocal currency for specifically agreed meas-ures, for instance in the health, education orenvironmental sector. The advantages of thistype of debt swap operation are obvious. Theyintensify cooperation between creditor anddebtor countries on development and environ-mental programmes, they help channel much-needed local funds to development assistanceprojects, and they reduce the debt burden. Insome ways, debt swaps are a kind of budgetsupport. Like ordinary budget support, debtswaps also entail setting conditions for theway funds are to be spent.

Cancellation or capitalization of the pre-HIPC maturities of post-conflict countries

If Norway unilaterally cancels a post-conflict country’s pre-HIPC maturities, Norway will, when a post-conflict country

achieves HIPC status, report a somewhat lower claim that would have been the case without such pre-HIPC debt

relief. This will reduce the debt relief need of the country in question under the HIPC Initiative, if only marginally. Other

creditor countries will then be able to give the country marginally less HIPC debt relief, while the total amount of debt

relief will ultimately be the same. Rather than providing additional debt relief for the country, the only thing that has

been achieved is to redistribute the burden among the creditor countries. The logic is completely analogous to the sit-

uation that arises when unilateral measures are taken during the actual HIPC treatment.

Unless the unilateral cancellation by Norway of pre-HIPC interest and repayments owed by post-conflict countries can

be excluded from the HIPC debt sustainability analyses, an analogous response to this problem would be to capital-ize the maturities rather than cancelling them. The decision about whether these capitalized amounts should also be

forgiven can then be taken after the country has completed its HIPC treatment, analogously to Norway’s adaptation

to the prevailing HIPC methodology. If appropriate, the capitalized amounts could be forgiven at the decision point. In

that way, the main purpose of the extra contribution is achieved: to provide the country with more debt relief than it

would otherwise have received, as an extra helping hand during a critical stage of development.

BOX 10

41

42

Schemes of this nature can also have a num-ber of disadvantages. The operations areoften complicated and demanding in terms ofadministrative resources, for the debtor andthe creditor countries. It will put particularstrain on the debtor country if many of itscreditors wish to establish this type of fund.At worst, debt swap operations might alsoundermine the debtor country’s own decision-making bodies, since the creditor country willnormally focus on its own priorities whendetermining how the freed-up funds shouldbe used. If a third party such as a non-govern-mental organization is introduced as theimplementing body, this might be perceivedas a disregard of the country’s own publicadministration. If debt swaps are used to agreat extent, moreover, they might have aninflationary effect and/or supersede othermeans of financing development measures bythe debtor country.

In the light of the above purely bilateral debtswaps are difficult to combine with theemphasis that is placed on the importance ofdeveloping countries pursuing a coherent pol-icy and their own ownership of this policy.

However, the disadvantages of debt swapoperations can be counteracted through acoordinated approach by several creditorcountries. If several creditor countries make aconcerted effort to implement collective debtswaps instead of “going solo”, the administra-tive burden on the debtor country could bereduced to a minimum. If, in addition, aneffort is made to coordinate debt swaps withnationally adopted development strategiesand adapt the volume of the swaps to thecountries’ macro-economic framework, debtswaps could be an effective development poli-cy instrument. The development effect of thistype of coordinated effort could be far greaterthan what can be achieved through dispersedtargeted interventions. Multilaterally coordi-nated debt swaps entail the transfer of theprinciple of donor coordination to the arena ofswaps, which has hitherto been extremely “bilateralized”.

Such multilateral debt swap operations couldbring increased debt relief for developingcountries, since creditors who would not oth-erwise be willing to provide bilateral debtrelief outside the Paris Club agreementswould be motivated to participate. Among thedifficult problems that will be encountered isthe problem of agreeing on the modalitiesand objectives of such multilateral debt swapoperations, and of finding a suitable institu-tional framework.

Debt swaps are not an option for HIPC coun-tries, whose bilateral debt will be cancelledover time in any event, whereupon there is nopoint in taking any additional measures.Consequently, debt swaps are only relevantfor non-HIPC countries. These are chiefly mid-dle-income countries, which at present nor-mally do not qualify for debt reduction, butonly for debt rescheduling, in the ParisClub.61 Nor is it possible at present, due tothe Paris Club’s principle of comparability oftreatment of creditors, to unilaterally cancelbilateral claims against such countries. On theother hand debt swaps, which can be regard-ed as an alternative route to debt reduction,are fully accepted, albeit within a limited vol-ume specific to each country (usually 15 or 20% of outstanding debt or a maximum amountof SDR 15 or 20 million).

In a way, HIPC debt relief can be regarded asa multilateral debt swap, whereby a coordinat-ed group of both bilateral and multilateralcreditors forgive debt on condition that thedebtor countries commit themselves to imple-menting poverty-reducing measures in accor-dance with their own development strategies(PRSPs). One of the main challenges relatedto debt swaps with middle-income countries isto achieve a similar process.

If mechanisms can also be identified in mid-dle-income countries to ensure that theresources freed up through debt relief areutilised by the debtor country to promotedevelopment and reduce poverty, this willpave the way for implementation of multilater-ally coordinated debt swap operations forthese countries.

61 See, however, the description of the Evian approach in Chapter 6.2.1.

After Pakistan renegotiated its debt in theParis Club in December 2001, Norwaylaunched the idea of supplementing the post-ponement of debt repayments granted toPakistan with a multilaterally coordinateddebt swap operation, in which interested cred-itor countries would participate. We launchedthis initiative, not solely in the interests ofPakistan, but also with other highly indebtedmiddle-income countries in mind. ANorwegian “think piece” on the format of thistype of debt swap has been circulated interna-tionally in various versions, most recently inthe Paris Club and to the French G8 chair-manship in May 2003 and at UNCTAD inGeneva in November 2003. It outlines threedifferent options for multilaterally coordinateddebt swaps:

1. Debt swaps in cooperation with othercreditor countries: Several creditor coun-tries swap debts for an agreed commonobjective in a debtor country, possibly alsoby entering into a joint framework agree-ment with the country concerned.Functions such as allocation of funds, over-sight, control, auditing, reporting and eval-uation are assigned to a separate institu-tional body (commission, foundation, facili-ty or the like) which is tailored to therequirements of each individual case. Theefficiency gain lies in the fact that the mazeof bilateral agreements and follow-upmechanisms is eliminated and resourcesare pooled to achieve common objectives.

2. Debt swaps in cooperation with amultilateral institution: A creditor coun-try enters into an agreement with adebtor country and a multilateral develop-ment bank (one of the regional develop-ment banks or the World Bank), wherebyfunds freed up by a debt swap are to bechannelled to an agreed developmentproject or programme which the bank inquestion is funding in the debtor country.The funds are thus to be considered “top-ping up” of these projects or programmes,thereby making it possible to carry outadditional activities that would not other-wise have been implemented. Based on anunderstanding with the creditor country,most of the responsibility for qualityassurance and reporting is assigned to thedevelopment bank, which already haswell-established routines for this type offunction. The rationalisation gain lies inthe elimination of the need for a specialbilateral monitoring mechanism, whilelimiting the extra administrative burdenplaced on a third party. Furthermore, bycarrying out what amounts to a “piggy-back swap” on a multilateral institution inthis way, it is possible to avoid bilateralspecial interests dominating the use of thefunds.

3. Debt swaps in cooperation with othercreditor countries, based on a devel-opment bank program: This “hybridmodel” is the result of several creditor

Multilaterally coordinated debt swaps. Example: Poland

In 1992, for the first and so far only time, a multilaterally coordinated debt swap was initiated for Poland. Under the

swap, 10 % of Poland’s maturities to six creditor countries were forgiven in return for which the equivalent amount (in

Polish zloty) is to be spent on environmental investments in Poland. During the period 1992-2010, the mechanism will

mobilize USD 600 million, NOK 180 million of which will be provided by Norway.

The funds freed up through this debt-for-environment swap are administered by the ECOFUND, which was estab-

lished by the Polish authorities as an independent foundation. The creditor countries are represented on the

ECOFUND’s Supervisory Council. Besides Norway, the USA, France, Switzerland, Sweden and Italy are participating in

the debt swap.

The ECOFUND is the only example to date of a genuine multilaterally coordinated (“multi-creditor”) debt swap. The

lessons learned from this joint undertaking should, however, have significant value when transferred to other indebt-

ed middle-income countries.

BOX 11

43

44

countries jointly carrying out a debt swapwith a debtor country, but instead of cre-ating a customized follow-up mechanismfrom scratch, parts of the programmeportfolio of a multilateral developmentbank in the debtor country concerned arechosen as channels for the freed-up funds.This amalgamation of options 1 and 2above – where several creditors joinforces in a “piggyback swap” on a devel-opment bank – can also occur when sever-al creditor countries join in an “option 2”debt swap where there was originally onlyone participating creditor country. Inthese cases, the efficiency gain can bedoubled, partly through the synergyinherent in multi-creditor cooperation andpartly by avoiding having to establish newmechanisms for basic follow-up functions.

In principle, Norway is ready to carry outmultilaterally coordinated debt swaps along

the lines of all three of the above-mentionedoptions, depending on the possible constella-tions of cooperation for the debtor countriesconcerned. It must be noted, however, thatonly a few countries are eligible for suchswaps with Norway, simply because Norwayhas claims against very few middle-incomecountries whose debt burden constitutes aserious development problem.

As in the case of other Norwegian bilateraldebt relief, GIEK will also receive compensa-tion for debts forgiven through debt swaps,taking into account GIEK’s own loss provi-sions. Since Pakistan is not covered by theDebt Relief Strategy financing facility, com-pensation for the debt swap with Pakistan willbe provided from the Fund for InternationalDebt Relief Operations. Compensation for thedebt swaps with Vietnam and Ecuador will becharged against the Debt Relief Strategyfinancing facility.

Priority countries for multilaterally coordinated debt swaps

Pakistan, after conducting a dialogue with Norway, has initiated the establishment of a Social Sector Development

Fund (SSDF), through which funds generated by debt swaps will be channelled to poverty-reducing measures. So far,

Norway and Canada have stated that they are willing to participate. Germany and Italy have also shown interest in

implementing debt swaps with Pakistan but if so, and unfortunately, bilateral swaps. The Paris Club’s maximum limit

on debt swaps with Pakistan is 20 % of outstanding claims or SDR 30 million (equivalent to about NOK 300 million),

whichever amount is highest. Since Norway’s claim amounts to about NOK 255 million (as of 31 December 2003), this

ceiling is not a limitation as far as we are concerned. Norway’s debt swap with Pakistan is scheduled to run for a peri-

od of ten years (2003-12). As of February 2004 the debt swap had not yet been implemented, as the Canadian-

Pakistani negotiations have yet to be finalized. During the debt swap period, all interest and repayments will be forgiv-

en as they fall due, in return for which Pakistan will implement specific development measures in the social sector,

financed by the countervalue of the amounts forgiven in Pakistani rupees. Special priority will be given to measures to

promote girls’ education. The volume of the debt swap, which largely depends on interest rate levels during the life-

time of the swap, is expected to lie somewhere between NOK 105 and 170 million. By comparison, Canada’s debt swap

has a limit of CAD 447 million. It involves so-called ODA debt arising from development assistance loans at a heavily

subsidized rate of interest. In other words, the real difference in volume between Norway’s and Canada’s contributions

is considerably smaller than indicated by the figures alone. Pakistan is not covered by the Debt Relief Strategy financ-

ing facility, and the debt relief will therefore be charged against the “Debt Fund” (chapter 172, item 70) in the central

government budget.

Vietnam has requested Norway to implement a debt swap. The original intention was to provide the country with

debt relief under the HIPC Initiative. Any additional Norwegian bilateral debt relief would in such case have been a

supplement to the HIPC Initiative. Vietnam’s economic situation has improved, so that the country now appears to

have a sustainable debt burden and is no longer dependent on debt relief under the HIPC. However, the country is

still indebted, and reducing its burden of debt would be an extremely important contribution to its development.

Norway therefore plans to provide unilateral debt relief to Vietnam through a debt swap operation. The Paris Club’s

maximum limit for debt swaps with Vietnam is 20 % of claims or SDR 20 million, whichever amount is highest. Since

Norway’s claim amounts to about NOK 36 million, this ceiling places no limitation on Norway’s freedom of action. The

plan is to implement the debt swap in cooperation with the Asian Development Bank (ADB), by using the freed-up

funds, converted into Vietnamese dong, to “top up” a major water resource management project under the auspices of

BOX 12

Norway will ...

" refrain from implementing purely bilateraldebt swap operations

" implement multilaterally coordinated debt

swaps with Pakistan and Vietnam, with astanding invitation to other creditor coun-tries to join them, and negotiate a multilat-

erally coordinated debt swap with Ecuador

" urge other countries to implement multi-laterally coordinated debt swaps, also withcountries against which Norway has no

claims

" initiate efforts to make multilaterally coor-dinated debt swap operations explicitlyrecognized options in the Paris Club

" urge creditors with de minimis claims toexchange them for a commitment by thedebtor country to invest in debt manage-ment tools, rather than requiring that thedebts be paid back

" advocate that the Paris Club either remove

or grant exemptions from its limitations on

the volume of debt swaps, provided the

swaps concerned are purely development-

motivated and cannot be inherently disad-vantageous for other creditor countries.

6.7. Support for the World Bank’s FifthDimension FacilityIn 1988, on the initiative of the Nordic coun-tries, a debt relief mechanism called the FifthDimension Facility was established to providerelief for poor (current IDA) countries’ servic-ing of old marked-based loans from the WorldBank.62 The need for this mechanism isdiminishing as the volume of old IBRD debt isreduced.

Under this mechanism, a small portion of therepayments to the IDA are used to pay inter-est on old IBRD debts for countries that nowonly receive IDA credits. Furthermore, somedonor countries, including Norway, con-tribute by also covering repayments ofremaining IBRD debts.

In total, the Fifth Dimension Facility has con-tributed around USD 1.5 billion to some twen-ty-odd countries, particularly African coun-tries. In addition, Norway has contributedover NOK 1.5 billion to cover repayments fora number of countries, cf. Table 4.

the ADB. Under this plan, the entire body of claims would be forgiven, either in a one-time operation or in stages over

a period of two to three years. If this plan is accepted by Vietnam, the debt forgiveness will be charged against the

Debt Relief Strategy financing facility.

Ecuador has also requested that a debt swap be implemented with Norway, as a supplement to the country’s agree-

ments with the Paris Club, most recently in April 2003, to defer debt repayments. So far, no other creditor countries

have been interested in a multi-creditor swap. Norway has therefore proposed a debt swap in cooperation with the

Inter-American Development Bank (IDB), or possibly the World Bank. The Paris Club’s maximum limit for debt swaps

with Ecuador is 20 % of total claims or SDR 20 million, whichever amount is highest. As far as Norway is concerned,

this imposes a ceiling of around NOK 200 million. Since our bilateral claim (which is dependent on the rate of

exchange of the USD) amounts to approximately NOK 304 million (as of 31 December 2003), the maximum we can

swap (based on current rates of exchange) is about 2/3 of the bilateral debt. Any debt swap implemented with

Ecuador would be charged against the Debt Relief Strategy financing facility.

Among the other non-HIPC countries against which Norway has claims, Peru, Jamaica and Algeria are in principle

also candidates for debt swaps with Norway which, if implemented, would also be financed from the Debt Relief

Strategy financing facility, provided that there are sufficient funds to do so. Given the current outlook as regards the

need to draw on the facility, there will only be sufficient funds if some of the potential HIPC countries do not qualify

for HIPC debt relief, and will thus no longer aspire to unilateral debt relief from Norway. For the time being, these

poorer countries will have first priority as regards the unutilised portion of the facility.

62 IBRD loans. The candidate countries are Bangladesh, Cameroon, Chad, Congo-Brazzaville, Côte d’Ivoire, Ghana,Guyana, Honduras, Kenya, Lesotho, Liberia, Malawi, Sri Lanka, Tanzania and Zambia.

45

46

Table 4.Norway’s contributions to the WorldBank’s Fifth Dimension Facility (NOKmillion as of 31 December 2003)

Country NOK millionZambia 331Nicaragua 250Tanzania 241Malawi 182Uganda 160Bangladesh 125Honduras 65Ethiopia 50Ghana 36Kenya 32Sri Lanka 20Guyana 20Senegal 12Total 1,524

In special cases, the funds provided byNorway under the Fifth Dimension Facility torepay IBRD debts could conceivably bematched by a commitment by the debtorcountry to initiate specifically agreed prioritydevelopment measures, preferably in connec-tion with existing programmes that are multi-laterally financed and monitored.

One example of such an operation is Norway’sfinancing of Kenya’s IBRD repayments for2004 (approx. USD 4.5 million). In the light ofKenya’s substantial financial difficulties and thenew government’s prioritization of anti-corrup-tion measures, Norway has decided to coverthese repayments in return for a commitmentby Kenya to allocate a specific amount tofinance additional anti-corruption measures.These measures will strengthen a current pub-lic sector reform project that is mainly financedby the World Bank and monitored by Bankstaff. This will thus be a kind of multilaterallycoordinated debt swap.63

In the African Development Bank (AfDB), thebank’s management has proposed the estab-lishment of a mechanism similar to the WorldBank’s Fifth Dimension Facility. However, inthe AfDB the repayments to the bank’s fundfor the poorest countries (the AfDF, equivalentto the IDA in the World Bank) are not bigenough for the interest payments to be subsi-

dized from that source. The mechanism in theAfDB will therefore be more dependent onfinancing from donor countries. The establish-ment of the mechanism has been accepted inprinciple, but the details and financing havenot yet been clarified.

Norway will ...

" support continued transfers from therepayments made to the IDA to subsidizeinterest rate payments on IBRD loans forIDA borrowers (Fifth Dimension)

" contribute towards financing IDA coun-tries’ repayment of IBRD loans

" encourage other countries to contribute toIDA countries’ repayment of IBRD loans

" explore the possibility of linking contribu-tions to the Fifth Dimension Facility to acommitment by debtor countries to initiatespecific development measures

" work to establish a corresponding facilityat the African Development Bank (AfDB)and contribute financing for this facility

6.8. Support for the World Bank’s SixthDimension FacilityIn 1989, as part of the efforts to help the poor-est developing countries deal with their com-mercial debt (debts to commercial banks andfinancial institutions), the World Bank estab-lished the IDA Debt Reduction Facility, alsocalled the Sixth Dimension Facility. So far, theWorld Bank has allocated USD 300 million ofits net surplus to the facility, which is supple-mented by funds from donor countries.

The World Bank assists the countries con-cerned to negotiate an agreement with thecommercial banks whereby the World Bankwill buy back their outstanding claims, atgreatly reduced prices, on the secondaryhand market for this type of debt claim. Thefacility finances the costs incurred by thecountry in connection with such buybacks. Inthe end, the commercial debt that is theobject of the operation is completely can-celled.

63 Cf. chapter 6.6.

Commercial debts are basically expensivedebts that generate high interest costs.Admittedly, the countries concerned now dolittle to service debts of this type, which werelargely contracted many years ago. However, itis crucial to the country’s future creditworthi-ness that an arrangement also be reached withits commercial creditors.64 The buyback mustbe made while the debtor country is still con-sidered to be poor and heavily indebted, sothat the price of the claim is sufficiently low.

At the end of 2002, the World Bank had car-ried out 17 operations of this type, therebyeliminating USD 6.4 billion of the commercialdebts of the poorest countries. The facilityhas proved to be very cost-effective, since theaverage price of buybacks has been 15 % ofthe nominal value. The Sixth DimensionFacility plays an important role in the effortsto facilitate the access of developing countriesto commercial capital by improving their cred-itworthiness. Norway has participated in suchdebt relief operations for Guinea, Yemen,Honduras and Cameroon, contributing a totalof NOK 61 million.

Norway will ...

" support the use of internal World Bankresources for the buyback and cancellationof IDA countries’ commercial debts

" participate with financing for countrieswhere this is considered effective andappropriate

6.9. Support for liquidating South-South debtSeveral of the poorest, most heavily indebtedcountries have debts to other developingcountries in the same category. Although thisdoes not pose any major problem, there is lit-tle point in maintaining such claims while thesame countries are being granted deep debtreduction by other creditors.

It is self-evident that reciprocal claims shouldbe balanced against each other so that one ofthe countries ends up with a net outstandingclaim, which could then be cancelled bymeans of a grant from a third party.

In the same way as for unilateral Norwegiandebt forgiveness, this should be done on condi-tion that the final decision on implementationfor the individual country is not made until amultilaterally coordinated operation has beencarried out. In other words, South-South debtshould be cancelled in connection with andconcurrently with the HIPC Initiative.

Norway will ...

" consider contributing to the cancellation ofthe debt of poor developing countries toother poor developing countries, on a netbasis, provided that a special multilateralmechanism is established for this purpose

6.10. Support for national debt fundsSeveral of the poorest, most heavily indebtedcountries, such as Uganda and Mozambique,used to have their own national debt fund. Thepurpose of these funds was to service thecountries’ debt to the multilateral financialinstitutions (the World Bank, the InternationalMonetary Fund (IMF) and regional and sub-regional development banks). To the extentthat Norway’s priority countries choose toestablish new funds of this type, support forthe funds can free up financial resourceswhich the countries can then reallocate fromdebt servicing to development programmes.

Norway will ...

" consider supporting national debt funds,both as a targeted debt policy instrumentand as a special element of more generalNorwegian budget support

6.11. Support for national debt managementTo ensure that a country’s debt burden iswithin the limits of its national economic sus-tainability, active debt management is vitallyimportant. To be able to prepare meaningfulbudgets and economic analyses, most coun-tries today need to have a complete overviewof their debt situation. Debt management poli-cy must be seen in close conjunction with allother macroeconomic policy. This is far fromthe case in many developing countries.

64 We are now seeing positive indications that commercial banks are behaving far more responsibly than they sometimesdid before. Recently, around 70 banks agreed to follow the same standard for environmental and social assessmentslinked to loans. The standard was established by the World Bank’s private sector window, the International FinanceCorporation (IFC).

47

48

In order to help these countries, during thedebt crisis in the 1980s UNCTAD, the UNforum that deals with issues related to tradeand development, developed a computer-based debt management tool, the DebtManagement and Financial Analysis System(DMFAS). The programme has since beenupgraded and is now used by 60 countries.Under the DMFAS programme, countries areprovided with important technical assistanceaimed at improving debt management.

In addition to the DMFAS programme, theWorld Bank has developed a computer pro-gramme called the Debt Sustainability Model– Plus (DSM+). The World Bank works close-ly with UNCTAD to integrate elements of thetwo systems. In addition, there are a numberof regional centres, all of which are engagedin work on related issues.

In 2000, Norway initiated efforts to rationalisethis work. As a result of this initiative, a multi-year, multi-donor fund was established tosecure the financing of the DMFAS pro-gramme, and it was resolved that annual con-sultation meetings should be held betweenuser countries, other interested countries andvarious institutions that address debt manage-ment issues. Norway’s initiative led to theestablishment of a better foundation for theDMFAS’ work, including stronger, more pre-dictable financing of this system.

As countries complete the HIPC process,measures that ensure that their debt burdensremain sustainable will become increasinglyimportant. The immediate gain realized byimplementing a debt management system canbe considerable for debtor countries, forinstance in the form of reduced charges foroverdue payment and interest on arrears, aswell as better terms for new loans.

Norway has advocated significantly strength-ening cooperation between current contribu-tors to debt management, such as the WorldBank, the IMF, the DMFAS, Debt ReliefInternational and the CommonwealthSecretariat. The DMFAS could play a pivotalrole in this work. The object must be to sub-stantially enhance the exchange of informa-tion and experience, which can then be used

to refine policy instruments and improve theoverall effect of measures. An annual interna-tional meeting (consultative group), sched-uled in connection with already existing debtconferences held by UNCTAD and the WorldBank and thus alternating between Genevaand Washington, would be able to fulfil thisincreasingly important function.

Norway will ...

" promote more systematic cooperation withinthe multilateral system to improve debtmanagement in heavily indebted countries

" continue to work closely with the DMFAS,also by contributing to funding for the pro-gramme

" initiate efforts to establish a joint consulta-tive group (Consultative Group on Debt

Management, CGDM) for all institutionsworking on these issues, with participantsfrom both user countries and interestedcreditor and donor countries

" consider co-financing with the World Bank

and possibly other multilateral financialinstitutions programmes to improve thepoorest, most heavily indebted countries’management of their debt obligations

" follow up and contribute to the IMF’s

Technical Subaccount and Afritac

" consider making bilateral contributions,preferably in cooperation with otherdonors, towards strengthening debtorcountries’ debt administration and negoti-ating capacity and competence

" advocate that member countries of theParis Club implement debt swaps wherede minimis claims are used to finance bet-ter debt management tools in poor coun-tries, rather than requiring that the moneybe repaid.

A Plan of Action

Debt Relief for DevelopmentPublished by:The Norwegian Ministry of Foreign Affairs7. juni plassen/Victoria Terrasse,P. O. Box 8114 Dep, 0032 Oslo, NorwayE-mail: infosek@mfa.no

This publication can also be downloaded from the Internet: http://odin.dep.no/ud

Public institutions may order additional copies of this publication from:Statens forvaltningstjenesteKopi- og distribusjonsserviceP.O.Box 8169 Dep. 0034 Oslo, NorwayE-mail: publikasjonsbestilling@ft.dep.noTelefax: +47 22 24 27 86

Publication number: E-775 EISBN: 82-7177-760-2

Cover/illustrations: Corbis/Scanpix

Designed and printed by: www.kursiv 06/2004 – circulation 2500