Harare — A lot is being said and written these days about Zimbabwe's debt and whether the nation should seek debt relief under the Heavily Indebted Poor Countries initiative.

The question of whether or not debt should be written off in the first place is not addressed in this article. It brings in a subjective debate.

The HIPC programme has a number of conditions to be fulfilled, largely similar to those attached to IMF and World Bank loans, requiring structural adjustments and at times including privatisation of public entities like water and electricity.

The country must also maintain macroeconomic stability and has to implement satisfactory poverty reduction strategies for at least one year.

Debt relief is part of a broader agenda aimed at ensuring debt sustainability for poor countries over-time with aid cash-inflows coming in as well.

For debt reduction to impact positively on poor communities, the increased cash flows need to be used on programmes that increase social spending, reduce debt service as a percentage of GDP and improve public debt management.

The process of complete debt relief is long and at times painful to the indebted country.

There are two broad steps to be satisfied before a country can qualify for full debt relief.

The first step is the decision point which enables the IMF and World Bank to decide on the country's eligibility for relief.

Once a country reaches this point it may start receiving interim relief in its debt.

To get to the decision point a poor country must fulfill the following four conditions, it must be eligible to borrow from the World Bank's International Development Agency (which provides interest-free loans and grants to the world's poorest countries) and from the IMF's Poverty Reduction & Growth Facility which offers subsidised loans to poor countries, the country must face unsustainable debt burden that cannot be addressed through traditional debt relief initiatives, the country must have established a record of sound reform and policies through IMF & World Bank supported programmes and finally it must have developed a Poverty Reduction Strategy through a broad-based process in the country.

The second step is the completion point which enables the poor country to receive full and irrevocable debt reduction under HIPC. The country must establish further track record of good performance under programes supported by loans from IMF and World Bank, implement satisfactory key reforms agreed at the first step (decision point) and adopt and implement its poverty reduction scheme developed at the decision point.

Since 1996 through to 1999 a number of modifications have been made to the HIPC process but they have remained largely and not easy for the poor countries.

The above processes apply to debt relief in respect of IMF, World Bank, African Development Bank, Inter-American Development Bank and all the Paris-Club creditors. Smaller multilateral institutions, non-Paris Club bilateral creditors and commercial creditors who together account for about 25 percent of total HIPC initiative amounts have honored a small percentage of their expected relief so far.

Some commercial creditors have gone to the extent of seeking litigation against HIPC initiatives.

Commercial creditors have in some cases resorted to selling debt due to them to vulture funds. The funds are companies which buy the debt of poor nations cheaply when it is about to be written off and then sue the debtor country for the full amount of the debt plus interest which may be several times the amount they paid for the debt.

The normal commercial investment vulture funds can be used for normal business speculation where a distressed asset it is bought cheap during times of economic distress and sold later at a profit when the economic environment improves.

Vulture funds can be used to buy sovereign debt from creditors at very low prices when the debt is about to be written off and then sue the debtor country for huge sums of money. The fund is used to prey upon countries weakened by debt. In 1996 a vulture fund paid US$11 million for some Peruvian debt and then sued the country for US$58 million.

The same fund sued Congo Brazzaville for US$400 million for a debt the fund bought for US$10 million. Zambia bought some agricultural equipment from Romania for US$30 million and failed to repay the loan. Romania was prepared to write off the debt after some negotiations. A vulture fund came in and bought the debt for US$3,5 million and sued Zambia for over US$50 million.

HIPC initiatives do not seem to protect poor debtor countries against commercial creditors, smaller lender institutions and non-Paris Club creditors.

It is important when a country considers to go the HIPC route in getting debt relief to analyze the composition of its creditors.

If it has creditors not bound by the HIPC initiatives, it has to proceed cautiously to avoid the possibility of vulture funds coming in and cause more damage than the original debt.

Vulture funds, used to prey on poor debtor countries are generally viewed as immoral and there are calls to make them illegal wherever they exist.

It is however up to each potentially victim country to be proactive and avoid being preyed upon.

Sonny Mabheju is the chief executive of the Institute of Chartered Accountants in Zimbabwe.