The Policy of Cancellation of the foreign debt of the poorest countries - The role of Italy and the International Community - The Vietnamese situation.

 (intervention of H.E. Luigi Solari Ambassador of Italy to Vietnam)

Hanoi, International Trade Center, July 17th 2001  

Dear participants,

Today’s presentation will be focusing on the sensitive issue of debt cancellation. This topic has been always at the top of all G7/G8 summit’s agendas because it is complementary to the many efforts set by the international community aimed at reducing poverty especially in the developing countries.

First of all I would like to apologize for the technical complexity of my speech which will employ an uncommon terminology. Let me list some of the acronyms and expressions which are commonly used by the specialists of international debt policies:

HIPC initiative

IDA countries

pre-cut off date & post-cut off date

****

H.I.P.C. initiative

The “HIPC (Heavily Indebted Poor Countries) Initiative” was adopted in 1996 at the Lyon G7 Summit within the framework of activities undertaken by the international community to ensure the sustainability of the medium-long term foreign debt of the low-income countries. The 1999 G7/G8 Summit in Cologne decided to increase the number of countries eligible under the Initiative (easing the conditionality for access), raise the amount of debt eligible for cancellation (from 80% in Lyon to “90% and above where necessary”) speed up the implementation of the Initiative’s Program and strengthen the linkage between the financial resources released by the debt cancellation and the national Poverty Reduction Strategy Papers - PRSPs. This new more incisive Initiative was renamed “enhanced HIPC Initiative”.

IDA countries

These are the countries eligible for highly concessional loans (soft loans) from the “International Development Association” - IDA of the World Bank (the so-called “IDA-only” countries). The HIPC initiative is opened to  IDA countries which experience an un-sustainable debt, on the basis of specific financial analyses carried out by the IMF-WB experts (the so-called “IDA- HIPC countries). On the contrary, there may be “IDA countries” whose debt is still sustainable and which therefore are considered IDA only but not HIPC.

The cut off date

The 'cut-off-date' is the conventional date agreed on a case-by-case basis, depending upon the moment in which a country obtained its first debt rescheduling by creditors, which draws a distinction between the debt that may be restructured (pre-cut-off date - pre c.o.d.) and the debt which cannot be restructured (post cut-off-date - post c.o.d.), and is used to protect the post c.o.d. loans from any future rescheduling (the cut-off date should therefore help the debtor countries in a financial/indebtedness crisis to once more gain access to loans, and stimulate private investments from abroad.

*****

The “enhanced HIPC Initiative” outlined in 1999 by the G7/G8 countries in Cologne contemplates the following phases:

a)      the debtor country has to adopt “an adjustment program”, supported by the IMF and the World Bank, in order to try to achieve economic stability and promote self-sustainable development;

b)      after about three years of commitment to the adjustment programs and following a final clearance on the basis of negative foreign debt sustainability parameters, the IMF and the World Bank declare the country to be eligible for the Initiative (for having reached the “decision point”). Financial assistance then begins within the HIPC framework;

c)       the country adopts and implements a national Poverty Reduction Strategy Program, with the financial support of the IFI’s and the assistance of creditors gathered under the umbrella of the so called Paris Club, which is an International arena in which regular meetings are hosted among all creditor countries. The HIPC countries sign the first multilateral Agreements for debt cancellation that will be followed by the relevant bilateral implementing Agreements;

d)      within 3 years the country reaches the “completion point” (declared by the IMF and the World Bank when countries have successfully implemented their Poverty Reduction Strategy Program), after which the country is eligible - under a specific multilateral Agreement at the Paris Club and subsequent bilateral implementing Agreements - for the formal cancellation of the totality of its eligible debt.

At the present time there are 37 countries eligible for the “enhanced HIPC Initiative” of which 31 are in sub-Saharian Africa, 4 in Latin America and 2 in Asia.

23 countries have reached the “decision point” and another 3 according to IMF and World Bank forecasts - should reach it by end 2001 – beginning 2002. Of these 23 countries, only Uganda has reached the “completion point”. The World Bank expects another 8 HIPC countries to reach it by 2001.

*****

The Italian Government, which was one of the promoters of the “enhanced HIPC Initiative” in 1999, unilaterally decided last April to go even further than this Initiative and set an example for the whole of the international community of bilateral creditors, both members and non-members of the Paris Club.

Being the world fifth largest creditor Country, Italy wants to effectively complete the process of cancellation of the foreign debt of HIPC countries, without restrictions to “eligible” debt, at the same time increasing the financial resources released from debt cancellation to be used in the fight against poverty in all its aspects (beginning with healthcare and education). Italy has therefore decided to add the cancellation of 100% of “post-cut-off-date” trade credits (not considered eligible for cancellation) to the 100% “post-cut-off-date” aid credits decided by the G7/G8 in Cologne (where an appeal was launched to all bilateral lenders to do the same). This position, which places Italy in the absolute international forefront, is now shared in the G7 by the United States, the United Kingdom and Canada. Italy is therefore ready to cancel about US$ 4.1 billion of HIPC debt, 70% of which is in trade credits and 30% in aid loans.

Italy’s commitment within - and beyond - the framework of the “enhanced HIPC Initiative” can be summarized as follows:

a)         cancellation at the “decision point” of 100% (and not only 90%) of the debt service charges due in the transitional period leading up to the “completion point”;

b)      cancellation at the “completion point” of 100% of the aid credits (ODA), not only “pre‑cut-off-date ” but also “post-cut-off-date”;

c)       cancellation at the “completion point” of 100% of trade credits not only “pre‑cut-off-date” but also “post-cut-off-date”.

Italy declared that the deadline for the calculation of the trade and aid (ODA) “post-cut-off-date” credits to be cancelled corresponds to the date of Cologne G8 Summit (June 20, 1999).

 ****

Vietnam belongs to the category of the so called IDA countries, taking into account the low level of Vietnamese per capita income. However, recent indicators suggested that Vietnamese debt is sustainable; therefore Vietnam does not belong to the HIPC category and it is not eligible for the cancellation policy internationally promoted by the G7/G8 Countries.

In other words Vietnam is an IDA only / non HIPC country. This does not mean that Vietnam is unable to benefit from concrete measures of debt reduction as I will try to explain later.

In general terms, with regard to poor countries that are not included in the group of most highly indebted countries, Italy has already proposed and continues to insist that within the framework of existing international mechanisms bilateral creditors consider canceling higher levels of debt than at present, where such a need emerges from financial analyses and within the limits suggested by these same analyses.

In particular, during the past time (1993) the Italian Government had restructured its share of Vietnam’s debt - amounting to USD 108 million and corresponding to 13% of the total Vietnamese foreign debt.

More recently Italy praised the efforts put by the Vietnamese Government into the preparation of its Poverty Reduction Strategy Paper. The Italian side outlined its aid orientations and noted that with the mandate of poverty reduction, they perfectly matched the Vietnamese Government policy. These directions set a focus on a global approach to poverty reduction, a strong participatory planning and community empowerment, an intense dialogue with the Partner Governments on their poverty reduction strategies. Therefore, the Italian Development Co-operation assigns a high priority to poverty alleviation and shares with the Vietnamese side the importance of poverty alleviation programs in Vietnam for social justice and stability.

In this context the Italian Government expressed solidarity to Vietnam for the damage suffered by the floods of September-November 2000 that have caused extensive human and economic losses in large part of the country, negatively affecting the development efforts of the Nation.

Therefore, although Vietnam’s debt is not eligible (as I explained before) to benefit from the enhanced HIPC initiative, in consideration of the economic losses incurred as a consequence of the devastating floods, the Italian Government announced its decision to partially cancel the Vietnamese debt, for an amount at least equivalent to nearly USD 18-20 million.  This measure refers to the debt arising from Italian soft loans, disbursed under the previous Development Co-operation Protocols. Thus, the Vietnamese side requested such partial cancellation to apply primarily to the loans related to the water supply sector. Negotiations between the relevant Authorities of both countries will soon start and I expect the final bilateral executive agreement on Vietnam partial debt relief to be inked by the end of this year or during the beginning of the next.

****

In the field of debt cancellation the Italian Government feels committed to playing a constructive role, whenever necessary and within objective and transparent limits. Allow me, however to stress that Italy has spearheaded the campaign to cancel the foreign debt of the poorest countries. We therefore feel that other countries can and should do more and we will press hard to this end.

The entire international community should in fact step up the financial measures adopted within the framework of the enhanced initiative for heavily indebted poor countries in order to take the whole range of crisis situations (war, natural disasters etc.) into due account.

Italy hopes that all bilateral creditors in the international community – starting with the G8 countries, but also including the other members of the Paris Club and other creditors – will do the same in order to help free up additional financial resources to foster self-sustainable development and encourage the countries in question to play a full part in international economic and financial developments. On the other side we urge countries preparing Poverty Reduction Strategy Programs to increase their efforts to improve expenditure management and monitoring.

Dear Participants,

The nucleus of the up coming G8 Genoa summit’s agenda is the analysis of the trend of the world development and the fight against poverty. These issues will be also discussed during other high level meetings taking place in the year 2001 such as the FAO Summit, the UN Conference on development financing, the World Conference on environment. It is clear that any development aid policy shall be based on coherent cultural values. Those values must inspire development aid initiatives and not the contrary.

The choice we are faced with in the 21st century is between working together, north and south, industrialized and developing countries, either to solve our global problems together – and this is where Italian commitment lies – or else to build up new walls and barriers between states. If we chose the second option we would be stepping back in history towards a more divided world, not a more united one; where instead of global problems we would be speaking of national problems; where an awareness of these problems would stop at the borders of each nation and solidarity would not expand, as it is doing today, right to the borders of our world; and where within those national borders we would witness a resurgence of nationalism and racism.