FROM THE OFFICE OF PUBLIC AFFAIRS

Mr. Chairman, Ranking Member Payne, and Members of the Committee, it is a pleasure to testify before you on international debt issues with principal emphasis on the countries of Sub Saharan Africa. The international policy response to the issues of excessive indebtedness is still evolving, and we very much welcome the participation of this Subcommittee.

I have worked on these issues for many years. Here in Congress, I was on the Appropriations Committee staff for over 14 years and was involved in developing much of the current legislation and in suggesting funding levels. Now, in the Treasury, I continue to have an advisory role on these matters as the Office of International Debt Policy reports to me. I appreciate this opportunity to discuss this rather complex issue with you, particularly in a year in which it is receiving so much focus.

Mr. Chairman, today my comments will be structured around three components: first, to provide information on the President's debt initiative presented here in Washington at the Conference on U.S.-Africa Ministerial on March 16th; second, to provide some overview and history; and, third, to review the Administration's FY 2000 budget request.

Debt Policy Initiative

The Administration is pressing for significant improvements in debt-related programs. At the March 16 U.S.-Africa Ministerial, President Clinton outlined our approach saying: "Today, I ask the international community to take actions which could result in forgiving $70 billion. . . . . .Our goal is to ensure that no country committed to fundamental reform is left with a debt burden that keeps it from meeting its people's basic human needs and spurring growth. We should provide extraordinary relief for countries making extraordinary efforts to build working economies."

To this end, the President said that the United States will press for substantial changes in the Heavily Indebted Poor Countries (HIPC) initiative. In consultation with Congress and within the framework of our balanced budget, the Administration will press for:

• First, a new focus on early relief by international financial institutions, which now reduce debt only at the end of the HIPC program;

• Second, the complete forgiveness of all bilateral concessional loans to the poorest countries;

• Third, deeper and broader reduction of bilateral debts, raising the amount to 90%;

• Fourth, to avoid recurring debt problems, donor countries should commit to provide at least 90% of new development assistance on a grant basis to countries eligible for debt reduction;

• Fifth, new approaches to help countries emerging from conflicts that have not had the chance to establish reform records, and need immediate relief and concessional finance; and,

• Sixth, support for IMF gold sales to do its part, and additional contributions by the U.S. and other countries to the World Bank Trust Fund to help meet the cost of this initiative.

The President also stated that "We should be prepared to provide even greater relief in exceptional cases where it could make a real difference."

The President summed up his remarks stating, "What I am proposing is debt reduction that is deeper and faster. It is demanding, but to put it simply, the more debtor nations take responsibility for pursuing sound economic policies, the more creditor nations must be willing to provide debt relief".

U.S. Policy on International Debt

Let me step back for a moment and make a few broad comments. The subject of international debt is particularly complex and raises a broad range of considerations. Nevertheless, I think it is fair to say that U.S. policies on international debt generally have been bipartisan. It should be observed that historically the primary interest of U.S. legislation has been collection of debts to the maximum extent possible; borrowers should pay their debts. General legislation permits the Executive Branch to reschedule debts only in circumstance of "imminent default". Debt collection for all but the poorest remains the rule today. Over the past decade or more, special purpose legislation on occasion has passed Congress permitting international debt rescheduling or reduction in defined circumstances.

These special circumstances have focused on either the poorest economically reforming countries or on countries with unique political circumstances. Since 1989, they include: concessional official development assistance and agriculture assistance for the poorest countries undergoing economic reforms, Egyptian military debt, Polish debt, Jordanian debt, some concessional loans in Latin America under the Enterprise for the Americas Initiative and finally reductions permitted under the Highly Indebted Poor Countries (HIPC) debt initiative and its precursors. Additionally, since the passage of credit reform legislation in 1993, we have included in the budget a specific debt account which provides for the appropriation of an estimated value of reductions that we anticipate will take place during that year.

Attached to my testimony is a table that summarizes U.S. Government Public Sector International Debt Reduction activities from 1989 through 1998. It shows that during this period we have granted debt reduction totaling in face value $14.4 billion.

President Clinton's Economic Initiative for Africa assigns high priority to helping reduce the burdens of countries in the region to manageable levels. In terms of broadly held views, it is this Administration's, and prior Administrations', overall debt policy that the poorest most indebted countries committed to basic economic reforms should be provided substantial reductions in debt service payments and where necessary in total debt stock to levels consistent with what they can reasonably be expected to afford to service. The view that excessive indebtedness in many of the poorest countries is one of the significant barriers to economic growth and to rationalization of expenditure toward social and developmental priorities has not changed over the past 10 years.

It is clear that this is a complex policy area which requires that a balance be reached. We require collection, but in certain circumstances, we permit rescheduling to achieve that end. In other circumstances, for the poorest and most burdened, we embrace debt reduction. Still, we recognize that debt relief minus other economic policy actions and conditions will achieve little to improve the lives of a country's citizens.

As Secretary Rubin recently commented to his African colleagues when the Finance Ministers were here in Washington, "Debt reduction has no lasting benefit if not accompanied by meaningful economic reform. The country itself must act to address the underlying causes of poverty and under development or the funds freed up by debt forgiveness will not have long lasting effect."

To achieve long term growth, countries must develop institutions independent central banks, judiciary, and media and must create transparent, participatory and decentralized governance. Simply put, individuals and companies both inside and outside a country must feel secure that their persons and property will be respected and that an economy will be well managed before they will provide the private savings and investment that is necessary to ensure long term growth.

We recognize that public foreign assistance resources are insufficient to provide the kind of investment that is needed to make Sub-Saharan Africa prosper at the level we all desire. If the private sector does not believe there is a culture of credit in which there is a commitment to repaying debt, the necessary private capital to support that growth cannot be mobilized.

In the context of proposals for unilateral U.S. debt action, and calls for U.S. leadership we have to recognize that such action in the poorest Sub-Saharan African countries would achieve little, simply because we do not hold a high portion of the exposure. Further, a coordinated and concerted action among virtually all creditors is needed to ensure that benefits flow to debtors -- rather than enhancing the prospect of repayment of debt owed to other creditors .

I would like to add one important point of information: I remarked that the relative share of Sub-Saharan debt owed to the United States is relatively modest. This is because, since 1985 and in some cases earlier, the U.S. has provided its concessional agricultural and development assistance to the poorest African countries primarily in the from of grants. These grants total well over $14 billion for the most heavily indebted Sub-Saharan countries from 1985 to 1997.

As the committee knows, there is a cost to debt relief programs and therefore budgetary trade offs to consider. As we all know, in the budget process, once budgetary caps and Subcommittee spending allocations are set, increases in one program must be achieved either by reduction or by less growth in other programs. There is a tension between funding debt relief and funding other foreign assistance grant or lending programs. We would argue that, in the case of reforming overburdened poorest countries, debt reduction can be a good investment.

Finally, the international community has yet to fully fund the current HIPC program and the existing shortfall is estimated at approximately $1.7 billion.

Let me comment briefly on indebtedness levels of poorest countries. There are several tables attached to my testimony, so I can be very brief. First, the multilateral, bilateral and private debt owed by Sub-Saharan African Countries totals some $227 billion. Of that $227 billion, the U.S. share is about 3% or $6.8 billion.

Looking at the list of 41 poor countries around the world potentially eligible for the HIPC program we see that the total debt owed to the United States by these 41 countries is just a hair over $6 billion. 25 of these countries are in Sub-Saharan Africa and together these 25 potentially HIPC eligible African countries owe the United States about $5.5 billion.

In order to provide some perspective on the evolution of the international debt policy let me give a little history. The U.S. and other international creditors in the late 1980's, moved from policies which aimed at repetitive rescheduling of debt, in order to buy time for countries to regain the capacity to service their debts, to recognizing that reduction of debt stocks was necessary in order to return some countries to economic growth and sustainable debt servicing. That realization has evolved further over time to recognition that it would require deeper and deeper levels of stock reduction in some countries to achieve that growth.

The programs have evolved from Toronto terms of 33% reduction of eligible debt payments in 1988, to Naples terms of 50-67% reduction in 1994, to HIPC terms of up to 80% in 1997. The HIPC program uniquely marks the first point at which proportionate action was required by the International Monetary Fund (IMF), the Multilateral Development Banks (MDBs) and other multilateral organizations.

Here, I want to make a clarifying point. The HIPC program is being criticized in some quarters for being structured as a rigid formula which fails to respond to changing circumstances in a country. In fact, it has been implemented in a very flexible manner. Attached to my testimony is a table which summarizes the actions to date under this program. It shows that six of the seven countries determined eligible at the decision point have been given less than three years to the completion point, indeed five of these countries have had this period shortened to about one year or slightly more. It also should be noted that in these seven cases the targets, which have been treated flexibly, have been set overwhelmingly at the low end of the range, which is what the U.S. has urged.

FY 2000 Budget Request

The FY2000 Administration budget contains important new debt initiatives as well as continuation of funding requests for ongoing programs, these include:

• A first ever request for a U.S. contribution to the World Bank HIPC Trust Fund --$50 million;

• The first year of implementation of the debt for rainforest legislation which passed Congress last year $50 million;

• Two authorization requests which would permit us to support IMF gold sales and the use of resources in the IMF SCA2 trust fund for increases in IMF concessional lending and HIPC debt reduction activities for the poorest countries;

• The second year of implementation of debt reduction under the Africa Initiative, and the regular debt rescheduling and reduction activities of the Paris Club including the Naples and HIPC programs;

In total, these requests amount to $120 million in budget authority.

While debt relief can be an important instrument to help promote economic growth in Sub- Saharan Africa, it is a complement for other more traditional forms of financial and development assistance. The International Development Association (IDA) and the African Development Bank and Fund play a central role. Both IDA and the African Bank and Fund are carrying through on institutional reforms and in the last replenishments agreed to allocate resources increasingly to issues of health with strong attention to AIDS, primary education, nutrition, safe drinking water, infectious disease, proper sanitation and to an extent, disaster recovery. We are working with these institutions to develop an effective program for dealing with the very difficult and unique issues faced by the poorest countries which are emerging from conflict.

To help carry out this essential work of the international financial institutions in Sub-Saharan Africa, the Administration is seeking Authorizing and Appropriation legislation in FY 2000 for both the African Development Bank and Fund and the International Development Association.

Conclusion

Mr Chairman, I would like to take a moment to review the Sub-Saharan Africa economic position. I would say that here we can find cause for both encouragement and concern. The immediate road ahead presents a formidable challenge and we need to see a sharp reversal in many trends if positive growth is to be sustained. Africa remains the most protectionist region in the world. In many cases the process of fundamental reform has just begun. Low investment is a chronic problem with investment rates still only about 18% compared to 25% in low income countries on average. The re-emergence of conflict has been devastating. Some 20% of Africans live in countries formally at war or disrupted by war, according to World Bank estimates. Corruption is a serious economic cost -- an area where the World Bank is making a strong push.

But some underlying trends are the basis for optimism. There has been significant progress in improving social indicators such as education and infant mortality. While there was some weakening in overall economic performance in 1998 it reflected primarily declines in prices of key commodities including oil, cocoa and copper and economic crisis in many of Africa's Asian markets. But overall, given the events and forces which have buffeted African economies in the last two years, economic growth proved surprisingly resilient. We believe this resilience reflects the level of basic and continuing economic reform in many countries -- including gains in fiscal stability, decontrol of prices, and liberalization of exchange rates.

Mr Chairman, despite great challenges, Africa has accomplished a great deal . We have seen some major advances in economics and politics. Public participation is spreading. Countries that have pursued sound economic programs along with good governance are the ones registering the highest sustained growth. It is this backdrop that sustains our determination to work for Africa's economic growth and sustainable development. African growth and stability is essential not only for Africans, but to future U.S. and global prospects.