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What about debt relief under HIPC? The case of Zambia

Release Date: 12-Nov-2007

The Heavily Indebted Poor Country initiative (HIPC) – the scheme through which rich lending nations extended some debt relief to the most indebted poor countries - resulted in much self-congratulation from wealthy contributors who praised their great generosity. 

Yet for many of the poorest nations, there has been far less cause for celebrating HIPC.  Zambia is a prime example of how impoverished countries have been betrayed by promises of effective debt relief.

The Heavily Indebted Poor Country initiative (HIPC) – the scheme through which rich lending nations extended some debt relief to the most indebted poor countries - resulted in much self-congratulation from wealthy contributors who praised their great generosity. 

Yet for many of the poorest nations, there has been far less cause for celebrating HIPC.  Zambia is a prime example of how impoverished countries have been betrayed by promises of effective debt relief.

Zambia’s involvement with HIPC

1 out of every 10 Zambians lives with AIDS, while 600,000 children have been orphaned by the pandemic, and life expectancy has fallen from 54 years in the mid-80s to 37 years now.

Zambia paid a heavy price to qualify for debt relief under HIPC. The African country endured years of austerity and Structural Adjustment Programs overseen by the World Bank and the IMF. In 2004, for example, the Zambian Ministry of Finance, in order to stay on side with the IMF, forced the Education Minister to cancel the wage increases and ban the hiring of new teachers, despite class sizes of over 100 pupils and a shortage of 9000 teachers.

After so many sacrifices, the Zambian government had reason to expect that graduating from HIPC in 2005 would bring some rewards. Debt relief, the IMF promised, would reduce Zambia’s debt service obligations from 7% of GDP to 1.7%.

Despite these optimistic projections, instead of funds available for Zambia to spend on anti-poverty measures increasing post HIPC, they actually fell by 0.8% of GDP. Why did this happen? One reason is a general trend toward declining Official Development Assistance contributions by donor countries. Another reason is the IMF’s obsession with low inflation and restrictive fiscal policies. The IMF in 2005 obliged Zambia to limit deficit spending to just 0.6% of GDP! What HIPC debt relief supposedly gave the country in terms of new spending power, foreign donors and IMF-imposed conditionality were taking away.

For the average Zambian, these interventions by the IMF meant devastating consequences. For example, the Government was prevented from employing the additional health workers needed to deal with the adult HIV prevalence rate of 17%. Even agencies such as UN International Children’s Fund and World Health Organisation found it difficult to transfer funds to pay health care workers because of IMF restrictions.

Vulture Fund Attacks

As if Zambia didn’t have enough problems to tackle with its foreign accounts, in 2006 it was attacked by an unscrupulous ‘vulture fund’. Vulture funds are private companies that buy up foreign debt at low prices from creditors who don’t expect ever to receive full payment and want to cut their losses. The vultures then take the debtor government to court demanding payments that are many times larger than what the vultures actually spent to acquire the debt.

The vulture fund Donegal, run by US billionaire Michael Sheehan, bought about US$40 million worth of Zambian debt from Romania in 1999 for just US$3.2 million. Then the private company sued Zambia in a British court demanding more than $55 million in payments. This amount was equivalent to all the debt relief that Zambia received in 2006!

Compounding the injustice, according to an advisor to Zambia’s President, the original loan was not even legitimate in the first place because it was tainted by fraud.

In April 2007, the British High Court rejected the fund’s claim for full payment, but still awarded Donegal US$15.5 million – one-third of Zambia’s total debt relief savings for 2007.

In the wake of this evidence, Creditor nations, including Australia, cannot regard HIPC as the be all and end all of debt relief.  The initiative can only be seen as a starting point, the effectiveness of which has been severely compromised by the harmful and tunnel-visioned interventions of the IMF.

In solidarity with social justice advocates from around the world, Jubilee Australia contests that the global debt crisis is far from over. The debt crisis demands much greater attention than restructures and structural adjustments, which have proven to be ineffective and even detrimental.  We remain steadfast in our demands for cancellation of low-income country debts without policy conditions attached.

This article is based on finding in the KAIROS Policy Briefing Paper by John Dillon.