FROM THE OFFICE OF PUBLIC AFFAIRS

Mr. Chairman, Ranking Member LaFalce, and Members of the Committee, it is a pleasure to be here today to discuss international debt policy for the poorest developing countries. We very much welcome the leadership this Committee has demonstrated in this area by focusing on the problem and by proposing constructive solutions with bipartisan support. We are supportive of the broad objectives and approach outlined in the legislation proposed by Members of the Committee, and we look forward to working closely with the Committee to help shape the final legislation.

The Context for a New Initiative

The ongoing debate of how to strengthen the Heavily Indebted Poor Countries (HIPC) Initiative takes place in the context of a series of previous initiatives designed to alleviate debt burdens of poor countries. There is a long history to international debt relief policies. And, over the past ten years about 35 countries have received debt relief through the Paris Club with programs designed to provide up to 67 percent reduction of eligible bilateral debt. Three years ago, the international community launched a new approach to the debt problems of the poorest developing countries. The HIPC Initiative was designed to allow countries that are moving ahead with economic reforms to have their debt reduced to sustainable levels with participation by all external creditors, including for the first time, the international financial institutions.

Late last year, we began an effort to identify ways to strengthen the HIPC initiative. On March 16, at the Conference on U.S.-Africa Partnership in Washington, the President proposed a new approach that would provide deeper, faster and broader relief to reforming countries. He outlined a substantial new initiative to reduce debt to the poorest countries that would help enable them to increase investments in meeting basic human needs and reducing poverty.

Announcing this new initiative, the President said, "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."

Before I describe the specific proposals we support, let me outline the broad objectives and principles that have shaped our approach.

First, freeing resources from debt service to investment in basic human needs is more than just a moral or humanitarian imperative -- it can be good economic and development policy. A dollar of debt reduction can complement development assistance because it can reduce the overhang of debt permanently. By contributing to a more sustainable debt profile, carefully designed debt reduction can help improve the fiscal capacity of a government to meet the needs of its people, help create a more attractive investment environment, and otherwise improve the conditions for sustainable development.

Second, debt relief programs need to be designed carefully to avoid the risk that they create adverse incentives and reduce the capacity of governments in the poorest countries to access adequate levels of finance in the future. The capacity to borrow responsibly is critical to any government's ability to finance the needs of its people, and to any country's capacity to grow. Finance will not flow in a world in which we systematically relieve governments of debt obligations without regard to their capacity to meet those obligations. The systematic forgiveness of all debt would in our view be counterproductive, despite its compelling moral appeal to some. Whatever short term savings it would provide would be overwhelmed by the costs of lost future access to finance.

Third, debt relief needs to be designed to reinforce economic reform and to generate new resources for investment in people. As Secretary Rubin has said, "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 relief will not have long lasting effect."

Fourth, coordinated and concerted action among creditors is needed to ensure that benefits flow to debtors and not simply enhance the repayment prospects of some creditors. Unilateral action by the United States would achieve little, not just because we have already forgiven a substantial portion of our claims on the poorest countries, but also because it would leverage little if any action by other bilateral creditors and have less prospect for inducing meaningful reform.

Earlier this spring, we developed a set of specific initiatives to strengthen the HIPC program, building on the general framework outlined by the President. We have since been working to build consensus on these proposals with the other members of the G-7 in the hope that we could use the Summit process to reach agreement. The broad elements of the approach we proposed to the G-7 are the following:

1. A Greater Emphasis on Poverty Reduction: We believe it is critically important to reform the basic policy framework which is the foundation of any effective debt program. We want to see the IMF and the World Bank develop, with input from the governments and civil society in beneficiary countries and with the NGO community, a new framework that combines realistic, growth-oriented macroeconomic policies, with a greater emphasis on poverty reduction. This framework should be designed to improve transparency and accountability around fiscal policy decisions of the government. It should also help ensure that the resources saved through debt relief result in increased investment in health, education, environmental protection, and poverty reduction.

2. Deeper Debt Reduction: We believe the international community should be prepared to provide substantially deeper relief to countries that commit to this new policy framework. Toward this objective, we have proposed that donor governments and the international financial institutions provide the deeper relief necessary to achieve substantially lower debt sustainability targets for eligible countries. And we have proposed that donor governments fully forgive all bilateral ODA loans on top of the debt reduction provided under the enhanced HIPC initiative.

3. Faster Debt Relief: We believe that the new program should provide earlier relief, without undermining incentives for sustained reform that are critical to successful development efforts. To achieve this, we have proposed that the international financial institutions provide what is called interim relief -- early cash flow relief equivalent to the stock reduction that is provided at the end of the performance period. And we have proposed giving eligible countries the ability to accelerate the time at which they benefit from stock reduction by implementing certain pre-determined policy reforms.

The proposals we have supported in the Summit process are similar to many provisions of the Debt Relief for Poverty Reduction Act of 1999. We have both called for a program built on forgiveness of ODA, deeper reduction in non-ODA claims toward a more attainable level of debt sustainability, faster implementation, and more focus on poverty. There are some differences in approach, but I think we are closer together than we are apart.

We hope to achieve a broad based consensus at the G-7 Summit in Cologne later this week on a set of concrete reforms to the HIPC Initiative that are consistent with the objectives I have outlined here. I am not in a position to tell the Committee at this point just where the Summit will conclude, but we feel reasonably confident that we will achieve agreement on a program that will provide much greater relief, more quickly, to a broader range of the poorest developing countries with unsustainable debt burdens.

This new international initiative will have significant financial implications for the major donor governments and for the international financial institutions.

The President's FY2000 budget request included a combination of new initiatives and funding for ongoing programs. These initiatives, which we have already testified on before this Committee, require a total of $120 million in budget authority.

• 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 account for HIPC debt reduction activities for the poorest countries and increases in IMF concessional lending;
• 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.

These requests were formulated before we began to consider the broader reforms to the HIPC initiative I have described today. These broader reforms will entail additional costs, the precise extent of which will depend on a number of factors. Whatever the full extent of these costs, they will occur over time, and the direct budgetary effects can to some extent be spread over time.

In beginning to identify possible sources of finance for these costs, we have looked first to the existing resources of the international financial institutions.

• For the IMF, carefully mobilizing a modest amount of the IMF's gold is a prudent and necessary step to help ensure the IMF's full participation in the Initiative. The amount under discussion -- up to ten million ounces with sales carefully spaced apart -- represents a small part of the 100 or so million ounces that come to the market in a typical year.
• The World Bank and regional development banks are exploring a number of options to fund their participation in a strengthened HIPC framework. At present, funding for the World Bank's portion in HIPC is financed largely through transfers from IBRD net income to the HIPC Trust Fund. Bilateral contributions to the HIPC Trust Fund will have to finance a large portion of the total costs of African Development Bank participation as well as most of the new additional costs of the Inter-American Development Bank and the smaller regional institutions.

The costs to the United States of a strengthened HIPC come in two forms. First is the cost of reducing our additional bilateral debt outstanding; and second, US financial support for a portion of the costs to the IFIs which cannot be financed out of their own resources. We will not be in a position to estimate either of these costs until we have concluded agreement on the scope of the program; understand the speed at which eligible countries might qualify for relief; determine the scope for mobilizing funds from the IFIs' own resources; and finally, factor in the economic conditions prevailing at the time countries enter the program.

Toward meeting these costs, as the White House said yesterday, the Administration is prepared to work with Congress to provide a significant contribution to our direct bilateral costs and to an expanded HIPC Trust Fund.

Mr. Chairman, Mr. LaFalce, members of the Committee, we look forward to working with you to shape legislation in this area that can command broad support in this Congress. And we look forward to working with the Congress to identify how to pay for this initiative. The initiative you have taken in proposing a comprehensive set of reforms, and authorization of a U.S. contribution have been very helpful to our efforts to build support internationally on a stronger program. The world will not and cannot move forward in this area without the United States.