At an early stage, Denmark recognized that debt reduction was necessary to solve the debt problem of the poorest and most indebted countries. After the adoption of the UNCTAD resolution in 1978, Denmark began cancelling instalments of ODA loans to the Least Developed Countries. In 1995 at the Social Summit in Copenhagen, Denmark cancelled 100% of ODA loans to Least Developed Countries.
Denmark was one of the strongest advocates of the debt initiative for the highly indebted poor countries (HIPC). In 1996 the World Bank and the International Monetary Fund (IMF) launched this initiative, which for the first time also included reduction of multilateral debt. The initial goal was to remove the debt overhang as a constraint to economic growth and poverty reduction. However, it became clear that the initiative was not sufficient to overcome the debt problem, and in 1999 modifications were introduced by the Enhanced HIPC-initiative, which provides deeper, broader and faster debt relief compared to the 1996-initiative. The enhanced HIPC explicitly identifies debt sustainability and poverty reduction as its twin objectives.
42 countries are classified as HIPCs. They become eligible for debt relief when they have committed to economic and social reforms and established a poverty reduction strategy. The initiative was meant to solve these countries’ urgent debt problems within a short period of time and provide them with a sustainable debt defined by a ratio of external debt to exports that should not exceed 150% (or for some less export-dependent countries to a ratio of external debt to government revenue that should not exceed 250%). However, for various reasons the implementation of the initiative has taken longer than envisaged, essentially because of interruptions in the implementation of the economic and social programmes in the debtor countries, delays in the preparation of poverty reduction strategies and difficulties to comply with certain conditions required at the beginning of the HIPC process.
13 countries have completed the HIPC-process while 14 countries are under way in the process. Further, up to 6 countries are expected to initiate the process, while no timetable is available for the remaining countries. The original sunset clause has been extended three times, and the initiative is now set to expire by the end of 2004.
According to the initiative, the creditor countries are obliged to cancel up to 90 per cent of officially guaranteed commercial debt and to reschedule ODA debt over a very long period of time. However a number of countries, including Denmark, provide 100 per cent debt cancellation of commercial as well as ODA debt. Bilateral debt reduction is negotiated in the Paris Club.
Denmark has so far cancelled ODA debt in the order of DKK 4.6 billion and export credits in the order of DKK 1.7 billion. Contributions to the reduction of multilateral debt, incl. contributions to the HIPC Trust Fund, amount to DKK 1.6 billion. While debt reduction is necessary in a number of indebted low income countries and should be used as one of the tools in the development co-operation to combat poverty, the debt problems of other countries should be solved by means of debt rescheduling combined with economic reform programmes.
