Child Rights GovernancePolicy brief:

Overcoming the debt trap and promoting responsible borrowing to improve investment on children

Introduction Borrowing is one way of financing public investments in children. It is thus not necessarily a bad thing to do. How-ever, if not done prudently, it can result in an unsustainable debt burden that negatively affects children. Sub-Saharan Africa for example spends approximately $13.5 billion every year on debt repayments. The funding gap for achiev-ing universal primary education by 2015 is 15 billion a year.1 Heavy debt burdens can leave governments with little fiscal space to increase spending on children. Therefore, whilst governments should exploit borrowing opportunities to improve investment in children, they should do so within sustainable and accountable frameworks.

Unsustainable debt and child rights When national debt becomes too heavy and governments struggle to meet their debt service obligations the consequences may be stalled economic growth and public expenditure cuts especially on social services such as education, health and social protection to children. In such circumstances social, economic, civil and political rights of children are sacrificed. A UNICEF publication graphically describes the impact of a heavy debt burden on children as follows:

‘Debt has a child’s face. Debt’s burden falls most heavily on the minds and bodies of children, killing some, and stunting others so that they will never fully develop. It leaves children without immunization against fatal, but easily preventable diseases. It condemns them to a life without education or – if they go to school – to classrooms without roofs, desks, chairs, blackboards, books, even pencils’2.

1. World Bank, The Costs of Attaining the Millennium Development Goals, http://www.worldbank.org/html/extdr/mdgassessment.pdf

2. Ramphal, S, 1999, Debt has a child’s face, in UNICEF (1999), The Progress of Nations 1999, UNICEF Policy and Practice, New York

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As a result of heavy debt burdens governments may end up raising taxes and user-fees for public services to gener-ate additional resources to fulfill debt obligations and to sustain spending on crucial public services. Some govern-ments go to the extent of charging user fees on basic services such as primary health care, water and electricity and charging valued added tax (VAT) on essential services such as fuel, energy and bread. zUnfortunately, it is usually poor families that suffer most from such policies.

Debt reliefIn order to address the problem of high debt stress in low income countries various forms of debt relief initiatives were introduced by both multi-lateral and bilateral creditors especially by the World Bank and the International Monetary Fund. The two most common debt relief instruments introduced are: Highly Indebted Poor Countries (HIPC) Initiative as well as the Multi-lateral Debt Relief Initiative (MDRI). These initiatives should be seen not only as means for reducing the indebtedness of developing countries, but also as a way to create additional fiscal space for governments to increase spending on children.

The HIPC Initiative was launched in 1996 by the International Monetary Fund (IMF) and World Bank (WB), with the aim of reducing, to sustainable levels, the external debt burdens of the most heavily indebted poor countries. For a country to qualify for HIPC it has to meet a number of conditions including development of sound economic and social development strategies. By 2012, debt reduction packages under the HIPC Initiative have been approved for 36 countries, 30 of them in Africa, providing US$76 billion in debt-service relief.3 For the 36 countries receiv-ing debt relief, debt service paid, on average, declined by about two percentage points of Gross Domestic Product (GDP) between 2001 and 2010.

The Multilateral Debt Relief Initiative (MDRI) provides for 100 percent relief on eligible debt from three multilat-eral institutions namely International Monetary Fund (IMF), The World Bank Group’s International Development Association (IDA) and the African Development Fund (AfDF) to a group of low-income countries in order to free some resources for them to achieve the Millennium Development Goals. Unlike the HIPC Initiative, the MDRI does not propose any parallel debt relief on the part of official bilateral or private creditors, or of multilateral institutions beyond the IMF, IDA, and the AfDF.

Debt relief can also be in the form of debt swaps. A debt swap is a situation where the creditor decides to cancel part of the debt, or all of it, on condition that the freed resources will be used for a specified development purpose within the country. Debt swaps however need careful management. In some cases they fail to create the much re-quired fiscal space on the part of recipient countries because of conditionalities. For example, an individual creditor may push through their own priorities - not shared with other creditors or even the recipient country. The result may be an oversupply of resources in one sector at the expense of the others, duplication and in some cases even corruption.

Results of debt reliefEmpirical evidence exists to show that debt relief including debt swaps has the potential to generate additional fiscal space to improve public investment in children. This happens if governments decide to use freed up resources on children. In Uganda for example, as reported by UNICEF, debt relief resulted in 2 million children having access to free primary education. Mozambique reportedly doubled its expenditure on health as a result of debt relief. In addition, it also rehabilitated a number of schools and clinics4.

In 2005, Spain offered El Salvador a debt swap amounting to US$50 million which was used to support a Rural

3. IMF, Fact Sheet Factsheet: Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative, September 2012

4. Unicef (2010), Child poverty: a priority challenge, Newsletter on progress towards the Millennium Development Goals from a child rights perspective, Number 10, May 2010

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School Construction Programme. This contributed to improved pass rate and primary school enrolments5. In Nicaragua, as a result of savings arising from debt relief, between 2007 and 2008, an increase in investment in health by $54.3 million was witnessed resulting in improved access to primary health care by 1.2 million people. With debt relief savings in 2002 and 2003, Tanzania built 31,825 classrooms and recruited 17,851 new primary school teach-ers6.

Although debt relief initiatives have resulted in reduced debt-service responsibilities and in some cases increased social spending, several criticisms have been put forward. The results of debt relief are usually short-lived because the additional fiscal space created only last for a short period. This is particularly the case if there is no correspond-ing growth in the economy. Further to this, creditors have been accused of imposing economic conditionalities for ‘macro-economic stabilization and growth’ in the form of Poverty Reduction Strategy Papers widely viewed as a new form of the discredited structural adjustment programmes.

In 2012, the World Bank reported that 17 low income countries are experiencing high debt stress and in danger of facing a new debt crisis7. This figure may actually be an understatement. It is therefore of great concern that HIPC/ MDRI will end in 2014. There is no clear alternative mechanism that will replace them. Yet, according to Jubilee Debt Campaign UK fifteen low and lower middle income countries which have not qualified for HIPC debt relief continue to spend more than 10 per cent of government revenue on foreign debt payments. Millennium Develop-ment Goal 8 on ‘Developing a global partnership for development’ also calls upon governments to work together to comprehensively deal with the debt problems of developing countries. Smaller creditors, particularly non-Paris Club8 creditors, which together account for about 25 percent of total HIPC costs, should also honor their commit-ments to provide debt relief to the heavily indebted poor countries. Most of them have only delivered a third of their expected relief so far.9

5. Ibid

6. Jubilee USA Network, 2009, Debt Relief Works: The impact of debt cancellation in Africa and Latin America, Jubilee USA, New York accessed on http://www.jubileeusa.org/fileadmin/user_upload/Resources/Grassroots/Debt_Relief_Works_2010.pdf

7. http://www.imf.org/external/pubs/ft/dsa/dsalist.pdf

8. The Paris Club Creditors refer to an informal group of financial officials from 19 of some of the world’s biggest economies. In addition to the 19 per-manent members, 13 associate members have recently been admitted. Other creditors such as Algeria, China, Costa Rica, India, Kuwait, Libya, and Saudi Arabia are belong to the non-Paris Club group.

9. IMF, Fact Sheet Factsheet: Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative, September 2012

Photo: Anne-Sofie H

elms/Red Barnet

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Personal indebtednessWhen talking of debt and its impact on children one must not ignore the fast growing personal debt. There are so many reasons for this which are not within the purview of this policy brief. These include high interest rates and rising cost of living. Heavy personal debt significantly reduces the amount of household income available for investment in children. Lunch, pocket money and leisure for children usually get’s reduced from the family budget. In Botswana and South Africa for example, it is estimated that 40-60% of the working class have at least 40% of their monthly income committed to debt repayments10. In Zimbabwe an estimated 45% of users of electricity have at one point or another been cut off for growing household debt to the Zimbabwe Electricity Supply Authority. Around 43% of all children living in extreme poverty in Latin America belong to households whose incomes are potentially insufficient, partly because of a huge debt repayment burden11.

The phenomenon of high personal indebtedness is equally common in the developed world. In Britain for example, personal lending has now reached £1.3 billion. British consumers are on average twice indebted as those in Conti-nental Europe. In addition, between 7 and 9 million people in Britain claim they have had a serious debt problem.12

Debt management and child rightsThe justification for borrowing is implied in Article 4 of the United Nations Convention on the Rights of the Child (UNCRC). The Article implores state parties to undertake all appropriate legislative, administrative, and other measures to the maximum extent of their available resources and where needed, “…within the framework of international co-operation..” to realize child rights. This may mean responsible borrowing to finance public spending on children. Responsible borrowing can generate additional revenue that governments require to deliver services to children.

If countries are to avoid debt burdens that negatively affect investment in children, both lenders and borrowers should work together to ensure responsible borrowing and lending. To begin with lending and debt management strategies should serve the interests not only of creditors but also of debtors and the communities they represent, particularly children. This implies mutual obligations and responsibilities guided by national and international laws. Creditors should play their part to minimize the risks of recipient countries getting trapped in a heavy debt burden. Both parties should respect principles and guidelines on prudent debt management. These include development of transparent regulatory and policy frameworks on borrowing and debt management; setting out clear roles, respon-sibilities and accountability frameworks for those authorized to borrow; prompt repayments; keeping borrowing to acceptable and sustainable levels and strengthening oversight institutions on debt13.

Both debtors and creditors should also ensure that matters of debt are discussed together with related economic instruments such as aid, taxation, trade etc, all of which fall within the continuum of financing options for public investments in children. Borrowing and lending policies and strategies should be harmonized with the Paris Declara-tion on Aid Effectiveness (2005), Accra Agenda for Action (2008) and the Busan Partnership (2011). All these com-mitments emphasize policy and systems alignment, transparency and accountability, ownership as well as harmoniza-tion of aid and development policies and strategies.

Recommendations•Both creditor and debtor governments should adhere to prudent public borrowing and debt management prac-

tices. These include mutual respect, obligations and responsibilities; respect of national and international laws; fair interest rates; coordinated and coherent institutional frameworks; independent debt monitoring and oversight;

10. Southern Africa Public Policy Institute, 2011, Personal Debt Crisis in SADC, unpublished paper

11. Unicef (2010), Child poverty: a priority challenge, Newsletter on progress towards the Millennium Development Goals from a child rights perspec-tive, Number 10, May 2010

12. Griffiths (2010), Briefing Paper 5, Breakthrough Britain SERIOUS PERSONAL DEBT, Serious Personal Debt Working Group, Centre for Social Justice, London

13. United Nations (2006), Manual on Effective Debt Management, Economic and Social Commission for Asia and the Pacific, Bangkok

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public participation; limits to borrowing; inclusivity and information disclosure and respect for human rights.

•Debt relief recipient governments should ensure that any additional fiscal space arising from debt relief should be used to increase public spending on children.

•Lending institutions should also take responsibility for past mistakes. It is unfair for lenders to demand debt repayment for loans given to corrupt governments or to prop up dictatorial regimes. Debt originating from such irresponsible lending must be cancelled. Resources saved should be prioritized for spending in crucial sectors such as health, education and social protection.

•Governments especially from developing countries should gradually shift macro-economic policy thrust from reliance on aid and borrowing beyond their repayment capacity to ensure greater focus on sustainable domestic revenue mobilization especially through taxation.

•Governments should periodically conduct external and domestic debt audits and also keep up to date records showing country debt profile, contracted loans, debt service obligations and balance of payments.

•Governments should also conduct child rights impact assessments of debt management policies in order to en-sure the best interest of children.

Photo: Red Barnet

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BibliographyAFRODAD (2011), BORROWING CHARTER: Principles and Guidelines on sovereign financial borrowing for Sub-Saharan Countries, AFRODAD, HARARE

EURODAD (2011), Responsible Finance Charter, EURODAD, Brussels

Griffiths (2010), Briefing Paper 5, Breakthrough Britain SERIOUS PERSONAL DEBT, Serious Personal Debt Work-ing Group, Centre for Social Justice, London

Marcus (2012), Critical drivers of change for child sensitive development: Report commissioned by Save the Chil-dren UK and UNICEF, ODI, London

Oxford Policy Management (2010), Improving Debt Management Practices Worldwide, OPM, OXFORD

Ramphal, S, (1999), Debt has a child’s face, in UNICEF, The Progress of Nations, UNICEF Policy and Practice, New York

UNESCO (2011), Debt Swaps and Debt Conversion Development Bonds for Education: Final Report for UN-ESCO Advisory Panel of Experts on Debt Swaps and Innovative Approaches to Education Financing, UNESCO

United Nations (1999), Finding solutions to the debt problems of developing Countries, Report of the Executive Committee on Economic and Social Affairs of the United Nations, (New York, 20 May 1999)

United Nations (2006), Manual on Ef-fective Debt Management, ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC, Bangkok

World Bank and International Monetary Fund (2011), Revisiting the Debt Sustainability Framework for Low-Income Countries, IMF, Washington DC

For more information contact: Lene SteffenDirector, Child Rights Governance Global InitiativeSave the ChildrenLS@redbarnet.dkMobile: +45 29290620Skype: lenesteffen