Cologne Debt Initiative: Ministers call for "faster, deeper, broader" debt relief for the world's poorest countries

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Launched in 1996, the initiative to reduce the debt overhang of heavily indebted poor countries (HIPC Initiative) has already yielded positive results, bringing together for the first time multilateral, Paris Club, and other official bilateral creditors in a comprehensive framework for debt relief. Nonetheless, recent developments and experience have highlighted the vulnerability of many HIPCs to exogenous shocks. At the threshold of a new millennium, it is now time to reinforce the initiative so as to enhance the prospects for a robust and lasting exit for qualifying countries from recurrent debt problems.

We therefore support faster, deeper, and broader debt relief for the poorest countries that demonstrate a commitment to reform and poverty alleviation. If this is implemented, the debt stock of countries possibly qualifying under the HIPC Initiative would be reduced, from some $71 billion in net present value terms remaining after traditional debt relief, by an additional $27 billion. These measures, together with forgiveness of debts arising from official development assistance (ODA), of which some $20 billion in nominal terms is owed to Group of Seven countries, would lower countries' debt-service burdens significantly and free resources for priority social spending.

Framework for poverty reduction

While enhanced debt relief will reinforce debtor countries' scope for policy action, sound economic policies must continue to be pursued, and renewed unproductive expenditure must be avoided. At the same time, it is important that the benefits of debt relief be targeted to assist the most vulnerable segments of the population. Hence, there will have to be a strong link between debt relief, continued adjustment, improved governance, and poverty alleviation. Both better governance in budgetary matters and financial savings derived from debt relief should allow for targeted expenditure on basic social services.

The pursuit of sound social policies should be integrated with structural adjustment programs that debtor countries are expected to implement. The new HIPC Initiative should be built on an enhanced framework for poverty reduction, developed by the international financial institutions. This is critical to ensure that more resources are invested in health, education, and other social needs, which are essential for development.

To that effect, the...