It is painfully clear that Tanzania will be unable to make significant economic progress until it is relieved of its crippling external debts, which currently swallow up a third of the annual budget for debt servicing alone. There is ample evidence of the crippling effect that this diversion of resources is having on health and education services and on economic infrastructure. In the last 13 years efforts have been made by the main industrial countries to provide relief from this damaging situation, supported and at times pioneered by the UK government, by offering facilities for rescheduling. The effect of rescheduling was to spread out repayments over a longer period of time, thus reducing the amount due in anyone year. It did nothing to reduce debt stocks and it soon became clear that the problems of some of the poorer countries would never be resolved until debt stocks were reduced to a level that could be reasonably sustained without serious detriment to education and health services and other government obligations. The result was the offer of debt reduction on what was known as the Naples terms (1994), the Lyons terms (1996) and now the Heavily Indebted Poor Countries (HIPC) Debt Initiative.

The underlying purpose of the HIPC Initiative was to reduce the debt stocks of qualifying countries to a ‘sustainable lever and to provide for the reduction to be distributed among the participating creditors on an equitable basis. The Initiative has, however, come under criticism. The UK government considers the process to be too slow and has pressed for faster implementation. Norway takes a similar view and is working to achieve a reasonable degree of flexibility. In a recent article in the Financial Times, German Chancellor Gerhard Schroeder disclosed details of a new German policy aimed at intensifying (whatever that may mean) and accelerating the implementation of the HIPC Initiative. The German proposal introduces the idea of total cancellation of debts arising from development assistance in certain circumstances. Since armed conflict and political instability gravely imperil all attempts raise living standards in poor countries, the Chancellor plans to raise at the June meeting of the Group of Eight a proposal to associate debt reduction with a comprehensive strategy for conflict prevention. As the Chancellor’s article was marked a ‘personal view’ it must be read with some caution.

Qualification for debt reduction requires the uninterrupted pursuit of a programme of adjustment and reform supported by IDA and the IMF over a period of six years. However the Boards of IDA and the IMF have agreed to a shortened second stage in the cases of six out of seven countries that have successfully completed the first three years of the qualifying period at the decision point. Tanzania reaches the ‘decision point’ towards the end of 1999 and it is theoretically possible that Tanzania might benefit from similar treatment by the Boards of the two institutions. Much will depend on Tanzania’s performance in the coming months.

At ‘completion point’ a final assessment will be made of debt sustainability and debt relief beyond that level will be paid out. In the meantime Tanzania will continue to make crippling annual payments for debt servicing. The damaging effect of such payments has been recognised by the creditor countries and grants amounting to $660 million have been made by bilateral creditors, including the UK to cover three quarters of Tanzania’s expenditure on debt servicing this year. It is hoped that this degree of support will be forthcoming in subsequent years as Tanzania awaits a settlement at ‘completion point’.

Doubt has been expressed in some quarters as to whether the ‘sustainable level’ of debt sought by the HIPC Initiative will be low enough to meet the needs of the poorest countries. Norway has announced its readiness to consider means to achieve a further reduction of debt in the case of poor countries completing the RIPC debt relief requirements. Tanzania is one of 22 countries receiving the benefit of special priority treatment by Norway.
Roger Carter

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