Oxfam

International
Position Paper

Debt relief for Rwanda:

an opportunity for peace-building
and reconstruction

March 1999
Debt relief for Rwanda:
an opportunity for peace-building and
reconstruction

Executive summary
Background
Rwanda stands at a critical point in its history. The countrys people are seeking to rebuild a society shattered by
war and a genocide in which one in eight Rwandans - Tutsi and Hutu opponents of the governments extremist
policies - was killed, and which further led to the outflow of over one and a half million refugees. Since the 1994
conflict, poverty levels have increased dramatically, the health-care and education systems have collapsed, and
the economic infrastructure has been shattered. Conflict in Rwanda continues to have enormous destabilising
effects on all the neighbouring countries, including the Democratic Republic of Congo, Burundi, Tanzania, and
Uganda. There is an urgent need for peace, security, and poverty reduction.

Despite notable efforts to reconstruct the country, Rwanda remains in need of massive international assistance if it
is to enjoy a peaceful and prosperous future. But aid alone is not enough. The present peace is partial and fragile,
and there are serious security concerns, largely in the countrys north-west. Rwanda has also acknowledged that it
is involved in the conflict in neighbouring Democratic Republic of Congo, by providing political and military
support to the rebellion against the government of Laurent Kabila. Despite international efforts to secure a cease-
fire, the war continues, threatening lives and livelihoods across the entire region. A renewed respect for human
rights - economic, social, civil, and political rights - is needed, to break the cycle of violence, and to restore the
rule of law. Oxfam believes that international assistance should be provided as part of an integrated strategy
aimed at reducing poverty, averting further conflict, and fostering greater respect for human rights.

Fifty years ago, political leaders in Europe and the US embarked on a concerted post-war reconstruction strategy,
driven partly by the fear that failure to restore hope, and the opportunity for economic recovery, to a continent
devastated by war would create the potential for a return to conflict. Today, Rwanda stands at a similar cross-
roads - and it needs a similar sense of political purpose and integrated effort. Failure in the reconstruction project
will exacerbate social tensions, increase poverty and insecurity, and raise the likelihood of intensified conflict not
only in Rwanda, but across the region. The international community has a moral obligation to use all the means at
its disposal to avert such a crisis. But it also has a self-interest in acting decisively now. As Rwandas recent
tragic history has underlined, crisis prevention is far less costly than responding to another humanitarian crisis.

This paper is prompted by a growing concern that an unsustainable debt burden is one of the factors which
jeopardise reconstruction efforts in Rwanda, and that debt relief could be a crucial element of a wider strategy of
international engagement, aimed at encouraging respect for all human rights and building peace. The paper argues
that existing debt relief mechanisms are not being fully utilised. (The dimensions of Rwandas debt crisis, and the
prospects for its relief under the Heavily Indebted Poor Country Initiative (HIPC) are explained
in detail in the following pages.) As ever, the question of debt relief is a complex one, involving a wide range of
creditors and judgements about Rwandas future debt-servicing capacity. But the bottom line is that the
Government spent approximately US$35m on debt-servicing in 1998. In a country where one in three children is
not in school, and where the majority of those who are lack essential educational materials, Rwanda spends more
on debt than on basic education. At a time when the level of child mortality is rising - in part as a consequence of
the destruction of the water and sanitation infrastructure - debt-servicing dwarfs the amount spent on these basic
services. It has been estimated that providing clean water to rural communities could save up to 6000 lives
annually. The fact that this could be achieved for less than is currently spent servicing debt speaks volumes about
the need for a reordering of priorities, and for a reassessment of current debt relief strategies.

The protection of basic rights

Peace cannot last, and recovery cannot be sustained until the basic human rights of all Rwandans are recognised
and respected. Debt directly limits the provision of basic life necessities: thousands of people do not have access
to clean water; children die of diarrhoea and other preventable diseases; many people do not have access to
affordable health-care. These are violations of human rights. This is not to suggest that debt is the only cause of
human rights violations. The conflict between the Rwandan Patriotic Army (RPA) and insurgent groups in
Rwandas north-west has resulted in the manipulation and abuse of civilian populations. Human-rights groups,
including African Rights and Amnesty International, have reported that both the RPA and insurgent groups are
responsible for the indiscriminate killing of civilians. Some people are subject to extra-judicial arrest. The failure
to address all these human-rights abuses also threatens Rwandas future. Although the Rwandan government has
legitimate security concerns, military expenditure threatens to eclipse social spending. The Government needs to
ensure that their own policies do not jeopardise the reconstruction project.

Poverty reduction is urgently needed

The fulfilment of basic rights in Rwanda will require a radical reduction in poverty. Rwanda is one of the worlds
poorest countries. Seventy per cent of all households live below the meagre poverty line. Not only are more
Rwandans living in poverty now than at the start of the decade; those living in poverty have also become poorer.
Almost one in five children born this year will die before they reach their fifth birthday. Half of the adult
population is unable to read and write. These appalling indicators, and the human suffering that lies behind them,
have steadily worsened in the wake of the catastrophic events of 1994. The violent conflict, principally in the
north-west, and the return of refugees in late 1996, have placed additional pressures on the countrys under-
funded social sector and ravaged infrastructure. Poverty reduction in Rwanda is not only an urgent priority in
itself, it is also a necessary condition of social and political stability.

Yet despite this bleak picture of rising poverty and continued conflict in parts of the country, there is also cause
for hope. Rwandans, with the support of the international community, have begun the painstaking reconstruction
of their society and economy. The Rwandan Government has already made budget commitments to poverty
reduction, in particular by increasing its social-sector spending for 1999. But while donors have given substantial
assistance to develop a framework for poverty reduction, their response to Rwandas great and urgent needs has
often been too slow, insufficient, and incoherent. Rwanda continues to spend scarce resources on debt-servicing,
at a time when the pace of the reconstruction programme appears to be slowing. Once the limits of recovery-based
growth are reached, rapid and broad-based growth will depend on further resources being released for priority
social investment.

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The cost of indebtedness
The facts of Rwandas debt tell their own story. Debt stock has doubled over the past five years to US$1bn stock,
over five times the value of Rwandas exports. Repayments are absorbing almost one third of foreign exchange
earnings and one quarter of government revenues. Using the debt-sustainability criteria adopted under the IMF-
World Bank Highly Indebted Poor Countries (HIPC) initiative, Rwandas debt is unsustainable. It will remain so
until well into the next decade - Rwanda will not qualify for comprehensive debt relief under the HIPC
framework until 2003, or later. Although bilateral creditors have reduced their claims, the impact has been
limited, because multilateral debt accounts for over 80% of Rwandas debt stock.

Rwandas parlous position underlines the shortcomings of the HIPC framework, which has provided too little
debt relief, too late. This delay results from the requirement that eligible countries must adhere to two consecutive
IMF programmes over a six year period. The limited benefits which have resulted for those countries which have
been eligible reflect the fact that the debt-sustainability targets have been set at levels which are too high for
heavily indebted poor countries. For a country such as Rwanda, which faces a combination of unsustainable debt
and extreme reconstruction needs, the HIPC framework is grossly inadequate.

In the interests of stability and improved self-reliance, an immediate ceiling must be set on repayment levels, at
no more than 10% of public spending levels; and the debt reduction framework must be accelerated. Early
implementation of HIPC debt relief in 1999 could make available an extra US$31.8m for the Government budget,
enough to finance an immediate phasing-out of user fees in health-care and education, as well as provide funds for
training and better materials for schools and health centres. If a poverty window were created which provided
incentives for the Rwandan Government to invest savings in priority social sectors and basic infrastructure, such
early treatment under the HIPC initiative could act as a catalyst for economic recovery and human development
gains.

The need for engagement

As conflict continues in north-west Rwanda, with reports of serious human rights abuses by all sides, and as many
of Rwandas people slip deeper into poverty, it is essential that the international community uses fast and deep
debt relief as part of a wider strategy of reducing poverty, averting further conflict and fostering greater respect
for human rights and international humanitarian law. This requires action on many fronts - by the Rwandan
government, donors, NGOs - and a form of contractual agreement about these actors respective roles and
responsibilities. At the heart of this approach is a strengthened dialogue between the international community and
the people and Government of Rwanda.

Oxfam believes that such a strategy will only be effective if, as a result of strengthened and sustained dialogue, all
parties make commitments which they are prepared to be held accountable to. All parties should agree to a clear
and costed poverty-reduction plan with explicit benchmarks and targets, as well as mechanisms to monitor
performance. The plan should focus on outcomes, not just outputs. This plan should be accompanied by
agreement on the timing and volume of resources that will be disbursed as part of the plan and on the measures
required to ensure that debt relief is given in such a way as to contribute directly to poverty reduction.
Benchmarks and targets should also be agreed for a further range of issues, such as strategies to strengthen
Rwandan judicial and human rights institutions, and ensuring greater participation by Rwandas people in the
decisions that affect their lives.

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Rwandas involvement in the DRC conflict threatens to scupper the possibilities for such dialogue, or at least to
postpone it, as donors articulate concerns about the diversion of scarce funds to the war effort. Oxfams argument
is that Rwandas people cannot afford such delays or diversion of resources. An end to the war in DRC and the
speedy disbursal of aid are both critical for the country. So long as Rwanda is involved in DRCs conflict, there is
likely to be little political will among donors to provide Rwanda with the exceptional help it needs. The Rwandan
Government will have to convince donors that deeper, swifter debt relief will be effectively used for fighting
poverty, not fomenting conflict. Rwandan signatures on a cease-fire agreement in DRC will contribute to this.
Donors on their part must be able to show Rwanda that assistance is a realistic prospect.

Among the multilaterally agreed commitments which Oxfam calls for, as an outcome of dialogue, Oxfam calls for
the following action.

Oxfam urges the creditor community to ensure that:

HIPC debt relief is provided this year or during 1999-2000.

A fiscal cap of 10 % is placed on debt-service claims.

Increased funds are provided to reduce the burden of multilateral debt during the interim period.

Donors make clear commitments to provide substantial human and financial resources for a poverty-
reduction plan with clear targets on the increase of poor peoples access to economic opportunities and
basic social services. Disbursal should be calibrated with progress towards the benchmarks and targets
agreed with the Rwandan government.

All UN members co-operate more fully with UN Security Council resolution 978, which requires
international action to arrest and extradite those suspected of genocide in Rwanda.

Resources are directed at the continued rebuilding and strengthening of Rwandas judicial system, and
the establishment of an independent and impartial National Human Rights commission.

Oxfam urges the Rwandan Government to fulfil its stated commitments to reduce poverty, avert further
conflict, and respect human rights by:

Allocating resources from debt relief to a clear and costed poverty-reduction plan which has clear
targets on increasing poor peoples access to economic opportunities, education, and health-care.

Ensuring that the overall policy and expenditure framework is coherent with the aims of poverty
reduction and reconstruction. This requires that scarce Government resources are not diverted from
health-care and education into military expenditure, and that all possible measures are taken to reduce
military expenditure.

Establishing full budget transparency, in order to demonstrate the use of debt relief for poverty
reduction. The Government should fulfil its commitment under the 1998 Budget Law to consolidate all
revenues and expenditure in the budget, and to prohibit extra-budgetary expenditure.

Fulfilling commitments to involve non-government actors, such as civil society, in the scrutiny of
expenditure and the assessment of expenditure against priorities.

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 Establishing mechanisms for joint monitoring of the use of finance by the Government, donors, and
Rwandan civil-society groups.

Expediting the process of decentralisation to include civil society in decision-making, and to equip and
entrust local government with the management of local development budgets, rooting out corruption.

Denouncing, investigating, and punishing all war crimes, extra-judicial killings, and violations of
humanitarian law, regardless of the identity of the perpetrator.

Inevitably, there will be financial costs associated with this strategy. But these costs must be set against the
potential for achieving human development gains and increased self-reliance. They must also be considered in the
light of the threats posed to the entire reconstruction process by unsustainable debt.

This paper is organised as follows. The Introduction sets out the broad context in which reconstruction is taking
place, and summarises Oxfams view. Section 1 outlines the financial aspects of Rwandas debt problem. Section
2 looks at the human cost of debt, and Section 3 discusses the prospects for reform under the HIPC initiative.

5
Debt relief for Rwanda:
an opportunity for peace-building
and reconstruction

Introduction
Four years after a genocide which killed 800,000 people - Tutsi and Hutu opponents of the governing regimes
extremist policies - Rwanda continues to struggle to rebuild itself. The challenges are huge: to recover from the
civil war that preceded the genocide; to heal the wounds caused by genocides grim aftermath of loss, trauma, and
fear; and to accommodate 3.8 million people, whether internally displaced people (IDPs), or refugees returning,
either from the vast refugee camps on Rwandas borders or from decades-long exile. Many refugees and displaced
persons who have returned to their homes now compete with others for land they had previously occupied.
Thousands of ex-combatants are swelling the ranks of urban unemployed. Over one hundred thousand children
are described as unaccompanied - orphaned by conflict and HIV-AIDS, or simply abandoned. The war and
massacres have left behind a large number of female-headed households, who are often at a social, legal and
economic disadvantage, and who constitute one of the poorest and most vulnerable groups in Rwandan society.
The integration into society of the vulnerable, traumatised, disenfranchised, and impoverished is critical to long-
term stability and development in Rwanda, and across the Great Lakes region. All these groups, indeed every
Rwandan, must be given a stake in a peaceful future.

There are numerous potential obstacles to peace and development, which require imaginative responses from
government and civil-society groups, in conjunction with donors, regional organisations, and Northern NGOs.
Large-scale financial and technical assistance will be needed. Rapid population growth is placing pressures on an
under-resourced social sector, and is increasing competition over land and water in densely populated rural areas.
The social sector, cruelly targeted during the genocide, urgently needs new investment. Training of teachers,
health workers, and administrators is crucial. The Government also faces serious security concerns, largely in the
north-west. In addition, Rwandas involvement in the conflict in the neighbouring Democratic Republic of Congo
endangers poverty-reduction efforts. Despite international efforts to secure a cease-fire, the war continues,
threatening lives and livelihoods across the entire region. A renewed respect for human rights and the rule of law
are urgently needed to break the cycle of violence and end impunity.

In October 1997, Oxfam International called on the OAU and the UN, the Bretton Woods Institutions, the EU,
and bilateral donors to engage with the Rwandan Government. While recognising the complexities and difficulties
of pursuing an effective reconstruction strategy, Oxfam International argued that the costs of failing to address
both the causes and effects of conflict were too great to contemplate. It emphasised that aid is not enough, and
outlined an integrated programme. This aimed at:

reducing poverty;
averting further conflict; and
fostering respect for human rights and the rule of law.

6
Because of the past failures of the international community in Rwanda, not least in reinforcing the conditions that
gave rise to the 1994 genocide, Oxfam International called on the actors concerned to recognise their
extraordinary responsibility to promote recovery and development.

While Rwanda continues to receive substantial aid flows, these are insufficient to fulfil the basic rights of
Rwandas children, women and men to health-care, education, and security. Not only is external assistance
insufficient, it is also unpredictable, and ultimately unsustainable. While in the medium term, Rwanda will remain
heavily dependent on aid even with debt relief, reducing the countrys debt would lay an important foundation for
greater fiscal autonomy, as well as releasing further finance for reconstruction.

Rwandas debt problems pose a formidable barrier to reconstruction. The diversion of resources to external
creditors, equivalent to one quarter of public expenditure, seriously undermines the Governments ability to fill
the financial resource gap and achieve greater fiscal independence. This debt burden has immediate human, as
well as financial costs. The US$35.8m in debt-service repayments falling due in 1997 was equivalent to:

more than one and a half times the operational budget for education;
more than ten times the operational health-sector budget.

Such skewed resource allocation ought to be regarded as intolerable in a country where over forty thousand
children die each year from easily preventable diseases, and where education typically means classes without
desks and books, and teachers without training. Not only is the prioritisation of creditors claims over childrens
lives a human-rights violation; it is also inconsistent with donor programmes aimed at promoting peace and
development. If donors are to develop a coherent and co-ordinated approach to Rwandan reconstruction, then
substantial and quick debt relief, based on human-development needs rather than narrow financial criteria, must
be a pivotal element.

The protection of human rights

This is not to suggest that debt is the only cause of the problems facing Rwanda. Debt has a direct bearing on
some rights such as access to clean water and affordable health-care. There are other rights violations which
require action by the Rwandan Government. Indefinite numbers of civilians are the victims of indiscriminate
killing, whether by armed groups or the Rwandan Patriotic Army (RPA). Some people are subject to extra-
judicial arrest. Oxfam International urges the Rwandan Government to denounce, investigate, and punish all those
responsible for extra-judicial killings, regardless of their political affiliation.

Military spending has fallen substantially in the last year but remains unacceptably high. Its level must be reduced
further if the human-development needs of Rwandan children, women, and men are to be met. While recognising
that the Rwandan government has legitimate security concerns in its western prefectures and border areas, and
that military spending for defence is not discretionary, current spending levels threaten to eclipse social spending.
At present, there are 55,000 men under arms in the RPA, absorbing 40% of the Governments budget. Meanwhile,
health-care and education continue to receive only 25% of Government spending. This situation must be reversed,
with the government making a commitment to reduce military spending over the next three years. Uganda, which
has almost halved the proportion of public spending going to the military in recent years while confronting violent
conflict in the north and the west of the country, provides an important precedent. Donor governments have a
responsibility, in the context of broader dialogue with the Rwandan Government, to create incentives for this
reduction to be achieved.

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Poverty is central to the debt issue
Seventy per cent of Rwandans live below the poverty line, and are in desperate need of equitable, broad-based
economic growth. Yet economic recovery remains incomplete. Today, GDP is only 85% of its 1990 levels, and
underemployment is threatening social stability in urban areas. Devising strategies for economic growth which
provide viable opportunities for the poor to earn a livelihood is a priority. Export diversification will also be
crucial to a convincing economic recovery. Yet the options are limited. Over 90% of Rwandas population work
in agriculture, typically on small plots of deteriorating quality. Rwanda is overwhelmingly dependent on two
primary commodities, tea and coffee, for its small foreign exchange earnings. International prices for both are
highly volatile.

Section 1
A profile of Rwandas debt
Like other HIPCs, Rwandas heavy indebtedness is the result both of domestic policy failings, and of external
events beyond Government control. In common with other African countries, Rwanda borrowed heavily in the
late 1970s and early 1980s. While some of this borrowing was wasted, much of it was invested prudently in
physical infrastructure and clean water systems. But the total stock of external debt rose rapidly after 1985, as
regional recession and a collapse in world coffee prices hit the Governments earnings.

After 1990, Government revenue-raising capacity was further constrained by escalating conflict in the north of the
country. Between 1990 and 1995, Government revenue as a percentage of GDP fell from 10% to 7%, one of the
lowest ratios in sub-Saharan Africa. i At the same time, society became increasingly militarised as communal
tensions and violence increased. Public spending on arms rose sharply, crowding out social sector budgets.
Poverty levels rose, and investment fell. Against this backdrop, the Government soon found it was unable to meet
the demands of creditors. Arrears rapidly accumulated, and the debt stock became increasingly unsustainable.
Between 1985 and 1997, the stock of external debt more than doubled, from US$400m to over US$1bn. ii Rwanda
also built up a large public domestic debt, reaching the equivalent of US$220m in mid-1997.

In common with other African HIPCs, the share of the multilateral creditors in Rwandas external debt has
steadily risen, as the debt crisis has progressed. Today, over 80% of Rwandas debt is owed to multilateral
creditors, the highest proportion of multilateral debt owed among the HIPCs. The HIPC initiative was designed to
resolve the multilateral debt problem, by requiring for the first time that multilateral creditors reduce their claims
in conjunction with bilateral and commercial creditors.

Table 1. Rwandas external debt indicator

Net present value of GDP 65%
Net present value/exports 557%
Debt service/exports 32%
Debt service/government revenues 23%
WB 1998

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Debt stock
At the end of 1997, Rwandas external debt stood at US$1164m including arrears. This debt is large even by the
standards of other HIPCs, and equivalent to 65% of Rwandan GDP. US$947m is owed to multilateral creditors;
48% of the total external debt - US$558m - is highly concessional debt owed to the International Development
Association (IDA), the World Banks soft loan arm. A further US$203m (17% of the total external debt) is
owed to the African Development Bank (ADB). Only 16% of the total external debt was owed to bilateral
creditors at the end of 1997, and 6% owed to the Paris Club. In descending order, the principal bilateral creditors
at the end of 1995 were: France (US$54m), Saudi Arabia (US$27m), Kuwait (US$18m), China (US$14m) and
Japan (US$14m). Private debt amounted to only US$18m, less than 2% of the total. Figure 1 illustrates the
distribution of Rwandan debt at the end of 1997.

Debt service
Debt-service repayments due in 1997 totalled US$35.78m, equivalent to 32% of Rwandas export earnings. This
represents more than the operational health-care and education sector expenditures combined. iii On 23 July 1998,
67% of Rwandas Paris Club debts were rescheduled according to the Naples terms. This is a welcome measure,
but it will have limited impact because of the small size of bilateral debt. While the application of Naples terms
will reduce Government debt repayments to bilaterals by US$76m in 1998 - US$63m of it arrears - and by about
US$15m in 1999 and 2000, scheduled debt-servicing is nonetheless set to rise steeply over the next three years.

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In 2001, total scheduled debt service is set to reach US$60.6m, and it is projected to fall only slightly in 2003.
More than a third of this increase is accounted for by IMF debt. This represents only 4% of debt stock, but one
fifth of debt-servicing, because the Funds lending terms are less concessional than those of other multilateral
creditors. Working even with the most optimistic economic growth projections, Rwandas crippling debt will not
fall until well into the next decade, compromising reconstruction efforts. On the basis of the optimistic export
growth projections of the IMF and World Bank, conventional debt rescheduling will leave Rwanda with a debt to
export ratio of 360% in 2003.

Multilateral Trust Fund

Creditors have recognised that Rwanda will continue to carry a heavy debt burden before a sustained debt-relief
strategy is in place, and that conventional treatment would be inadequate. Therefore a proposal has been made for
a World Bank-managed Multilateral Debt Trust Fund (MDTF), which will aim to cover about one third of
servicing on multilateral IDA and ADB debts over the next three years. The fund will support Rwandas balance
of payments and could help avoid a build-up of arrears with bilateral creditors and delay in the Governments
reform programme. It will also make available significant funds in the recurrent budget, which can be directed to
priority sectors. But the US$17m a year on offer under the MDTF remains an inadequate sum compared to the
amount of total external debt-servicing - US$197m payable through to 2001.

Figure 2. Rwandas total debt service (US$m)

70
60
50
40 total
30 IMF

20
10
0
1997 1998 1999 2000 2001 2002 2003

World Bank 1998

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Section 2
The human face of indebtedness
Behind the figures and flow charts used to summarise debt problems, there are human faces. In Rwandas case,
they are the faces of children who are denied the opportunity to learn, because their Government is expected to
prioritise debt repayment over education. They are the faces of the fifty thousand infants born this year who will
die before their first birthday, most of them from diseases which could be easily prevented by the transfer of only
a fraction of debt-service repayments to clean water and primary health-care provision.

Debt-servicing at current levels carries high social costs, especially in a country like Rwanda. As Table 2 shows,
child mortality, literacy, and nutritional indicators are extremely poor, and have deteriorated significantly since
1992. The health of Rwandans has suffered dramatically. Maternal mortality has almost quadrupled since 1990,
and severe wasting of children has increased more than sevenfold. The genocide in 1994 and its devastating
aftermath eroded the Governments revenue base and its capacity to deliver basic services. Last year, the UNDP
ranked Rwanda 174th out of 175 countries, using a composite of welfare indicators in its human-development
index. Prior to the genocide, Rwandas human-development indicators were better than the regional average.

With a predominantly rural population engaged in smallholder farming, and a tiny export base, the scope for
raising additional revenues remains limited. In 1995, a year after the genocide, government revenues were only
7% of GDP, among the lowest in sub-Saharan Africa. While economic recovery has been rapid, it remains
incomplete. Real GDP in 1997 reached only 85% of its 1990 levels. Per capita GDP amounts to only US$200. iv

Table 2. Rwandas deteriorating human development - 1992 and 1996

Indicator 1992 1996

GNP per capita (US$) 250 209
Infant mortality rate* 85 125
Child mortality rate* 141 185
Illiteracy - aged 10+ (%) 56 60
Severe wasting - under-fives (%) 0.7 5.3
* (per 10,000 live births)

UNICEF 1998, UNDP 1995

Health and education

There is an urgent need for public investment in health-care and education, in water-provision and livelihoods
projects, and in demobilisation programmes. Yet debt-service repayments continue to crowd out social-sector
spending. Last year, for every Rwandan child, woman, and man US$5 were spent on servicing the external debt,
but only 50 cents were spent for each Rwandan on the operational health budget, and US$2 per capita on capital
investments (see Figure 3). While the spending situation in education does not seem quite so dire as in health-
care, Rwanda massively under-invests in its children, even in comparison with other sub-Saharan African
countries. Rwanda allocates approximately US$12 to recurrent spending on primary education for each primary-
age child, whereas the regional average is US$49. In this context, it is important to remember that per capita debt-
servicing is set to almost double over the next three years.

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Figure 3. Rwanda - per capita spending 1997

12

10

4
investment

2 operational

0
Debt Primary Health -
servicing education

UNICEF 1998, World Bank staff estimates 1998

(Education spending is per primary-age child)

Budget constraints
In effect, external debt problems are eroding the Rwandan governments capacity to direct domestic resources to
where they are most needed. Last year, servicing the external debt absorbed US$35m, one quarter of the entire
budget. This is equivalent to more than the health-care and education operational budgets combined.

Although social-sector expenditure is projected to rise by 30% this year, proportionately the burden of debt
service repayments will remain heavy, since total debt service is rising. For ordinary Rwandans the costs of this
resource diversion are high.

30% of children are never enrolled in school.

Children who are in school often learn little, because almost half of all teachers have no training, and basic
materials such as books, pencils, and school furniture are often lacking.

55% of primary health centres are in urgent need of physical rehabilitation.

120,000 unaccompanied children - most of them traumatised by violence - are in need of support services and
appropriate education.

Water supplies need rapid new investments. One third of all installations were damaged in 1994, and a quarter
of people in rural areas are without access to potable water. Clean water for all would prevent over 6,000 child

12
 deaths annually from diarrhoea, as well as improving the health of the wider population.

Aid dependence
The Governments Programme dInvestissements Publics, (PIP), is seeking to address these reconstruction needs.
The programme is running for 1996-1998, and one third of its budget is allocated to human resources and social
development. But, while the US$52m earmarked for reintegration of refugees and displaced people, health-care
and population planning, and for primary and secondary education, is a valuable contribution to Rwandas short-
and medium-term needs, the PIP is almost entirely dependent on outside donors. Unsustainable debt is therefore
creating a dependence on aid.

This dependence on external assistance for the social sectors raises serious doubts about the sustainability of
interventions under the PIP. In education and in health-care, many of the social and economic benefits come
through only in the longer term. The integration and reconciliation process the PIP is intended to contribute to will
require substantial resources for at least a decade, if poverty reduction and political stability are to become
realities. But donor funding is unreliable, and it cannot be assumed that current levels of external assistance will
be maintained beyond the next few years.

Substantial and quick debt relief would provide a far more sustainable financial basis for reconstruction than
ongoing donor support. With commitments from government to use budget savings from debt relief to meet
reconstruction targets, debt relief could provide a sustainable foundation for Rwandas recovery into the next
century. Imaginative incentives, rather than further conditionalities, must be created which provide the Rwandan
government with opportunities to meet their poverty eradication targets.

Section 3
Debt relief prospects under the HIPC initiative
Because of the structure of Rwandas debt, the country urgently needs multilateral debt reduction. Even after the
country has received bilateral debt reduction on the Naples terms, it will continue to spend close to one third of
export earnings on debt-service in 2001. Unfortunately, under existing rules, Rwanda is unlikely to qualify for
multilateral debt reduction for at least six years. Even then, it is far from certain whether it will receive a level of
debt reduction commensurate with its needs.

The failure on the part of the creditor community to establish a closer link between debt relief and poverty
reduction is one of the HIPC initiatives major shortcomings. At present, access to HIPC is determined partly by
the debtor countrys success in meeting conditions set under IMF programmes, and partly by estimates of debt
sustainability. These criteria for access to HIPC will probably result in Rwanda receiving too little debt relief, too
late.

13
Time frame
Part of the problem facing Rwanda derives from the eligibility criteria for entry to the HIPC initiative. Broadly,
all candidates are required to complete two consecutive IMF programmes over a six-year period. This
arrangement is intended to avert problems of moral hazard, although an element of flexibility has been

introduced, whereby a countrys past track record of compliance with IMF programmes can be taken into account.
Oxfam International believes that, in requiring Rwanda to wait for six years, insufficient weight is being attached
to the countrys track record.

The new Rwandan Government began a reform programme in 1995, one year after the genocide, which was
closely monitored by the IMF. The early stages concentrated on trade and fiscal areas, and, even though the new
Government was faced with many pressures, the IMF and World Bank have judged their performance to be
satisfactory. In June 1998 the government signed up to a three-year Enhanced Structural Adjustment Facility
(ESAF), which was soon followed by a flow rescheduling on Naples terms. The ESAF is a detailed reform
programme, enforced by loan conditionality, which is designed to improve both resource mobilisation and human
development, while also accelerating public-sector restructuring. Privatisation, improved social-sector
performance, and further investment in the reconciliation process are being supported.

According to the IMF and the wider donor community, Rwandas track record begins in 1998, with the new
ESAF programme. Oxfam International takes the view that three years of track record have been established since
1995, and that the advent of the new Government, rather than 1998, should mark the start of this period of track-
record accumulation. If this view is adopted, and if the creditor community recognises the countrys special needs,
a decision on debt relief can be made this year.

Debt sustainability
Debt sustainability under the HIPC initiative is decided on a case-by-case basis, within a band of 200-250% for
the debt to exports ratio (NPV/XGS), and a band of 20-25% for the debt service to exports ratio (TDS/XGS).

There is little doubt that, even with the maximum amount of bilateral debt relief, Rwanda will qualify for HIPC
on these two export criteria. Between 1997 and 2004, the ratio of net present value debt (NPV) to exports is
projected by the World Bank to fall only slightly from 393% to 358%. Moreover, this is a best-case scenario,
arrived at by using the IMFs optimistic export projections (see Table 3), which understate the extent of debt relief
required. According to the Funds projections, Rwandas exports will grow by 65% in only seven years, from
US$101m in 1997 to US$168m in 2004. As a small, landlocked, overwhelmingly rural and low-skill economy,
dependent on tea and coffee for an average of 80% of foreign exchange earnings, Rwanda will have to achieve
rapid diversification into higher value-added manufacturing and services industries if these targets are going to be
met. The IMFs projections also ignore the potential for continued low-level conflict and instability in the
country, which will make growth precarious for some time to come. The IMF has projected that manufacturings
share of export earnings will increase from 14% in 1997 to 34% in 2004. So far, there are few signs of this
happening, and foreign direct investment has been disappointing since the reform programme began.

14
Past export-growth rates suggest more modest rates of export growth, with volatile prices and volumes for coffee
and tea leading to marked fluctuations year on year. While the IMF has a downward projection to account for
the possibility of external shocks, their estimate remains extremely high, projecting a 57% increase in export
earnings over 1997-2004. In contrast, using a sample seven-year period from 1986-1993 gives a dramatically
different picture of where Rwanda might be in 2004, especially with the debt-service ratio almost doubling (see
Table 3). From the IMFs point of view, there are good reasons for systematically underestimating a countrys
debt burden, and minimising the costs to itself of HIPC debt relief. Yet without unprecedented export growth,
Rwandas debt-service ratio will rapidly become unsustainable, and further arrears will accumulate. Far deeper
and faster relief than is currently provided for under the HIPC initiative is needed to avoid this outcome.

Table 3. The debt-service ratio under IMF export projections, and less optimistic projections
(US$m)

total exports debt service TDS/XGS

__________________________________________________________________________
1997 101.0 35.8 35.4%
2003/4
IMF upward projections 168.0 58.6 34.0%
IMF downward projections 159.0 58.6 36.8%
past record projected* 106.5 58.6 63.4%
__________________________________________________________________________
IMF 1998, WB 1995 * export growth from 1986 - 1993

The case for early action

Although Rwanda is highly likely to become eligible for special relief under HIPC on the export criteria, the track
record conditions threaten to jeopardise the reconstruction process. The track record of two uninterrupted ESAF
programmes is designed to guard against moral hazard, reasoning that unless the preconditions of debt relief are
onerous, there is little incentive for countries to borrow responsibly in the future. Oxfam International agrees that
there is a need for some form of track record. However, the process is unduly protracted, and linking eligibility to
compliance with IMF programmes has in practice slowed down the process further.

Put simply, Rwandans cannot afford to wait for debt relief from HIPC while creditors concern themselves with
insuring against what they perceive as a moral hazard. Even with additional transitional measures such as the
Multilateral Debt Trust Fund, Rwandans cannot afford to wait. Without debt relief that goes beyond HIPC
mechanisms, the reconstruction process will be slowed, and the risk of a descent into further poverty and violence
will inevitably increase. Delay will incur a heavy cost in terms of human lives, as well as in terms of recurrent
emergency interventions. Rwandas experience points to the inadequacies of the existing HIPC framework for
countries emerging from conflict in three respects. First, any country which has experienced a widespread
conflict, violent change of government, and the economic and social upheaval associated with sudden political
change, is unlikely to have an uninterrupted track record of reform under IMF programmes. Second, conflict
leaves challenges of reconstruction which go beyond the normal challenges associated with debt in poor
countries. Finally, excessive debt makes it more likely that post-conflict countries will fail to implement
successful adjustment programmes, and jeopardise their access to aid and debt relief in the process.

15
Converting debt into development
In the case of Rwanda, early implementation of HIPC - especially if debt sustainability were defined at the lower
end of the export criteria - could generate significant budget savings (see Table 4). In 1999 alone, projected debt-
servicing would be reduced by 60%. The US$31.8m of funds thus released could finance an immediate phasing-
out of user fees in health-care and education, as well as contribute to complementary qualitative interventions.
This would help raise private demand for basic social provision, and extend access to the poorest households, for
whom user fees are a major deterrent to medical care and school enrolment. If a poverty window were created
which provided incentives for the Rwandan Government to invest savings in priority social sectors and basic
infrastructure, such early treatment under the HIPC initiative could act as a catalyst for economic recovery and
human development gains.

Table 4. Implementing HIPC in 1999 (US$m unless otherwise stated)

NPV TDS XGS NPV/XGS TDS/XGS

_______________________________________________________________________
1999 projections 724.1 53.6 109.0 664.3%49.2%
after HIPC* 218.0 21.8 109.0 200.0%20.0%
reduction 506.1 31.8 -- 464.3%29.2%
_______________________________________________________________________
IMF 1998 * at NPV/XGS of 200%, and TDS/XGS of 20%

Inevitably, each country emerging from conflict must be considered on its merits. But as a broad principle, Oxfam
International believes that post-conflict countries should be provided with debt-relief arrangements which limit
repayments to 10% of public revenue for the duration of the reform and reconstruction programme. As Table 5
shows, a fiscal cap set at this level would free substantial funds. These could be allocated to government sectoral
plans of action. Placing a ceiling on debt-servicing would result in substantial accumulation of arrears, which
would need to be sterilised with the agreement of creditors through a debt work out, on the condition that the
government remained on track with its commitments on poverty and human rights.

Table 5. Projected savings from a fiscal cap of 10% of total revenues (US$m)
_____________________________________________________________________
1998 1999 2000 2001

revenue projections 227 270 320 382

debt service projections 42 54 58 61
debt service at 10% 23 27 32 38
of revenue
Budget savings 19 27 26 23
____________________________________________________________________

IMF 1998

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Conclusion
Oxfam International urges both multilateral and bilateral creditors to take bold steps to alleviate Rwandas debt
burden, and to build on the existing hope for peace and the possibility of development. People are striving to
rebuild their lives in the wake of the genocide. Economic recovery is underway, and there is a commitment on the
part of Rwandans to succeed in the transition from recovery to development. If the opportunity for peace is not to
be wasted, this willingness must be matched by coherent co-operation from the international community.

Debt is not the only problem facing Rwanda, whose peace is partial and fragile. Resolving conflict in the north-
west, reducing the diversion of scarce resources into military expenditure, and developing coherent policies for
poverty reduction are among the necessary measures. This requires action on many fronts - by the Rwandan
government, donors, NGOs, and civil society. But the debt problem, left unresolved, will contribute to wider
pressures endangering Rwandas development prospects. Rwandas debt burden is a fundamental obstacle to the
reconstruction and rehabilitation efforts of the Rwandan Government and members of the international
community. It is diverting scarce resources away from priority social sectors and the infrastructure, and
hampering economic recovery. The HIPC framework has proven inadequate in tackling the problems of
unsustainable debt in a country emerging from conflict. The creditor community must develop more flexible
mechanisms for substantial, and fast, debt relief as a matter of priority. Without a new debt agenda which focuses
on basic rights, an opportunity for reconstruction and development will be squandered.

The cost of the HIPC initiative would rise if the proposals outlined in this briefing were implemented. Yet Oxfam
International believes that failure to achieve a swift resolution to the crisis of unsustainable debt in Rwanda will
incur far higher costs, by diverting resources from the reconstruction programme and jeopardising peace efforts.
The costs of a failure by the creditor community to act immediately, and decisively, will be counted in lives, as
well as dollars.

END

i
David Woodward The IMF, the World Bank and Economic Policy in Rwanda: Economic, Social and Political Implications
September 1996
ii
World Bank Rwanda: Debt Sustainability in the Transition to Growth with Equity Rwandas Donors Meeting June 2-3
1998
iii
UNICEF Children and Women of Rwanda: a situation analysis of social sectors 1998
iv
WB The Transition to Long-Term Economic Development: an overview of external financing needs June 1998

Published by Oxfam International March 1999

Published by Oxfam GB for Oxfam International under ISBN 978-1-84814-304-3
17