International Investment Pushes Past and Present, Part 3: Jubilee-Era Debt Relief

By Tim Hirschel-Burns

This blog is part of a blog series on past large-scale international investment programs and the lessons they provide for the investment push needed for development and climate action today. You can read the introduction to the blog series here, part 1 on the Marshall Plan here and part 2 on South Korea here.

Achieving development and climate investment needs—and thus preventing enormous economic damage and instability—will require a large-scale increase in investment in developing countries. Although discussions of investment pushes typically focus on financial inflows, stemming financial outflows through debt relief provides an alternative route to enable investment.

The interconnected Highly-Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI) stand out as the key case studies of large-scale debt relief, even if they are not the only cases (half of West Germany’s debt was forgiven in 1953 and creditors agreed to reduce about 80 percent of Iraq’s debt in 2004).

Several features make HIPC and MDRI unique. First, no other debt relief initiative has covered so many countries. Agreed in phases between 1996 and 2005, and linked to the Jubilee Year of 2000, HIPC and MDRI encompassed 39 low-income countries. Second, development goals formed a primary motivation for HIPC and MDRI. Third, HIPC and MDRI amount to one of the largest expansions of fiscal space for development in history, forgiving more than $100 billion in debt. HIPC was ultimately linked specifically to anti-poverty spending commitments, and the scale of debt servicing savings relative to the size of many participating countries’ economies rivaled what European countries received in the Marshall Plan.

The experience of HIPC and MDRI is particularly relevant at a time when there are significant calls for a new Jubilee moment, including the recent Vatican-commissioned Jubilee Report. While relatively few developing countries are defaulting on their debts—in part because the weaknesses of debt resolution mechanisms like the G20 Common Framework have deterred countries from using them—many countries are defaulting on development by prioritizing very high levels of debt service over domestic investments. When climate change, youth bulges and continuing underdevelopment mean developing countries should be ramping up investment, debt servicing costs are stifling it.

Close analysis of the HIPC/MDRI experience reveals certain key lessons. First, large-scale and strategic public campaigning played a decisive role in breaking out of the gridlock that has historically led to slow and shallow debt relief. Second, a comprehensive and standardized approach to debt relief enabled speed and scale. Third, while debt relief can enable increased development investments, durable debt sustainability requires broader structural reforms. Indeed, the fact that many HIPC and MDRI countries are again seeing debt crowd out development points to the limitations of the Jubilee moment—and the need for a new and improved debt relief initiative today.

Four phases of HIPC/MDRI

HIPC and MDRI unfolded in four phases: the pre-HIPC phase, the HIPC phase lasting from roughly 1996 to 1999, the enhanced HIPC phase beginning in 1999 and then the MDRI phase starting in 2005.

The combination of a 1970s credit boom and the 1980s “Volcker Shock” of aggressive interest rate hikes led to serious debt challenges in developing countries. While initial debt restructuring efforts focused on Latin American countries, low-income countries entered the 1990s facing severe economic distress, especially African countries. Governments were continuously behind on repayments, with arrears to multilateral development banks (MDBs) preventing the extension of new financing. For its part, the Paris Club tended to turn to short-term market rate rescheduling that extended the problem.

Recognizing these shortcomings, G7 members agreed to inaugurate HIPC at their 1996 meeting in Lyon. The G7 agreed that low-income countries could receive up to 80 percent bilateral debt relief in present value terms through principal haircuts or long-term rescheduling, provided that countries implemented IMF and World Bank International Development Association (IDA) programs for two three-year increments. In one sense, this approach was a breakthrough, providing a comprehensive multi-country framework for debt relief. But its weakness was the extremely high threshold set for defining unsustainable debt, meaning that few countries initially received debt relief.

Table 1: Four phases of HIPC/MDRI

At the 1999 G8 meetings (comprising the G7 plus Russia), the threshold for defining debt unsustainability was lowered from a net present value debt-to-exports ratio of 200-250 percent to 150 percent, and the debt service-to-exports ratio was lowered from 20-25 percent to 15 percent. The 1999 G8 also raised the maximum depth of bilateral debt relief from 80 to 90 percent of present value, with some countries later pledging 100 percent bilateral debt relief. The enhanced HIPC also explicitly tied debt relief to poverty reduction. Debt relief was made conditional on successful implementation of an IMF and World Bank Poverty Reduction Strategy Papers that specified social investments in addition to economic reforms. The enhanced HIPC delivered much wider debt relief than its previous iteration: while just four countries received any HIPC debt relief by 1999, that number was 26 by 2001.

Although the enhanced HIPC meaningfully reduced HIPC countries’ debt, many still struggled to reaching solvency. At the 2005 G8 Summit, members agreed to MDRI, which would forgive all remaining debts HIPC countries owed to the IMF, IDA and the ADF with no additional conditionality. IDA and the ADF funded this debt relief through a mixture of donor contributions and income from the repayments of non-HIPC borrowers. The proceeds of gold sales funded much of the IMF’s debt relief, in addition to donor contributions. In total, 39 countries received debt relief through HIPC and MDRI.

The role of public campaigning

Public campaigning played a central role in transforming a more typical case of drawn out, shallow debt relief into multi-country debt relief on an unprecedented scale. The major expansion of HIPC from 1996 to 1999 coincided with the height of the Jubilee 2000 campaign.

The connection between the upcoming Jubilee Year of 2000 and the biblical jubilee tradition of debt forgiveness sparked increased attention from the Catholic Church. In major addresses, Pope John Paul II repeatedly called for the provision of debt relief before the turn of the century. This religious leadership was coupled with organized civil society action through Jubilee 2000 and high-profile celebrity engagement, with Bono, Bob Geldof, Muhammad Ali and others participating in the Drop the Debt campaign. The efforts’ largest mobilization came when an estimated 70,000 people formed a human chain around the 1998 Birmingham G8 meetings. Another 30,000 surrounded the 1999 Cologne G8. The importance of public campaigning is further underlined by the fact that the United Kingdom—the site of the most dedicated organizing—was both the first country to pledge 100 percent bilateral debt relief and hosted the Gleneagles G8 where MDRI was agreed.

While non-governmental organizations (NGOs) played a central role in coordinating the campaigning, its success benefited from its unusual diversity and scale. The involvement of celebrities and the Catholic Church brought in new constituencies, and the connection between debt relief and biblical tradition attracted supporters across the political spectrum. Still, while the scale of mobilization was unusually large for a majority-Global North movement focused on the Global South—a debt relief petition even broke the record for most-ever signatures at the time—its success did not require attaining salience usually reserved for more traditional political priorities. For example, even the day after the movement’s biggest mobilization (the Birmingham G8 summit), debt was the second story on The Guardian’s front page and only on page 11 of The New York Times.

Successes and limitations

HIPC and MDRI succeeded in their most immediate goal of bringing down low-income countries’ debt levels. HIPC and MDRI sharply reduced debt-to-GDP ratios and debt service costs fell by 1.5 percent of GDP between 2001 and 2015. While debt relief should have been agreed and delivered more quickly, HIPC’s shift to a novel comprehensive approach accelerated relief. Setting established modalities for eligibility and the terms of debt relief preempted drawn out negotiations. The multi-country approach also seems to have reduced the stigma of debt relief. All in all, the 39 participating countries far surpasses any past moment of debt relief.

At least in the short-term, there is evidence supporting the underlying theory that debt relief would spur social investments. Increased fiscal space led to increased public spending, and debt relief was associated with decreased infant mortality and increased school attendance. The timing of increased education spending suggests that it was increased fiscal space—not program conditionalities—that enabled educational expenditures. There is mixed evidence on HIPC and MDRI’s effects on growth.

HIPC and MDRI’s greatest shortcomings concern the longer-term durability of their impacts. While they delivered debt relief, HIPC and MDRI did not come with new finance, nor did they address broader flaws in the international financial architecture. Net transfers from Paris Club lenders to IDA-eligible countries turned negative in the 2000s, and with other sources of finance limited, many HIPC countries turned to expensive bond markets. While impressive growth and a commodity boom masked the effects during the late 2000s and early 2010s, debt vulnerabilities had already re-emerged prior to the COVID-19 pandemic. The confluence of the pandemic, interest rate hikes and additional economic shocks then pushed many countries to the edge.

Lessons for today’s investment push

Several aspects of HIPC and MDRI should be kept in a new debt relief initiative. Deep debt relief tied to development investments was effective, and strategic public campaigning remains necessary for achieving such relief. HIPC and MDRI’s comprehensive approach proved far more effective than the case-by-case approach that has led to extended negotiations and little uptake of the Common Framework. And the involvement of multilateral creditors was crucial for achieving debt sustainability in HIPC countries, but this breakthrough was only achieved by ensuring funding was available to cover a large majority of multilateral creditors’ losses. The proceeds of gold sales facilitated relief at the IMF, and the extremely high price of gold increases the feasibility of this option in the present.

However, achieving debt relief will require new mechanisms to ensure participation from all creditor categories. The participation of private creditors and non-Paris Club bilateral creditors in HIPC was very limited. While these shortcomings were less meaningful at the time because a large majority of HIPC debt was owed to Paris Club and multilateral creditors, the growth in developing country debt owed to these creditors today heightens the need for mandatory and comparable participation.

Further, a new round of debt relief will need to be accompanied by expanded access to long-term, affordable finance for productive investments, as well as broader financial architecture reforms. Without addressing the structural conditions that leave developing countries vulnerable to recurring debt crises, the benefits of debt relief will be short-lived.

The upcoming 2027 G20 in the UK—the country that did more than any other to advance HIPC and MDRI—provides an opportunity for a new round of debt relief. Whether or not geopolitical conditions allow a similar breakthrough next year, a new round of debt relief will be needed eventually—but this time, debt relief can’t come on its own.