Debt relief: a creditable solution?
Angela Travis, Media Officer for the Jubilee 2000 Coalition
A demonstration in favour of debt relief for poor countries held in
Birmingham (UK) in May 1998.
Only two countries, Uganda and Bolivia, have
had their debt burden lightened, while another five are slated for assistance in
1999. Others like Tanzania and Ethiopia cannot expect anything until 2002.
The aftermath of Hurricane Mitch in a Nicaraguan village.
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A multi-speed road to rescue Even before Hurricane Mitch, Nicaragua and Honduras applied
for debt relief through the HIPC Initiative. A decision for Nicaragua is expected
within months, says Jeff Katz, principal economist for the initiative, while “Honduras’
qualifying track record was a little more ambiguous, so we will have to see.” www.worldbank.org/hipc |
The devastation wrought
by Hurricane Mitch in November was horrific. In three days, the hurricane wiped out
20 years of development in the region, according to UN agencies, leaving thousands
of people dead and reportedly about three million homeless.But as governments and international organizations tried to mobilize funds for relief efforts, another debate reared its head: should Nicaragua and Honduras, both low income, heavily indebted countries badly hit by Hurricane Mitch, continue to pay a total of $2 million a day in debt repayments—money which could provide temporary housing for 800,000 people?
The British Secretary of State for International Development, Clare Short, stated early on that debt relief was “an irrelevance” when the priority lay in avoiding cholera and “pulling people out of the mud”. But a few days later Chancellor of the Exchequer Gordon Brown called on all creditors to support a two-year moratorium on debt service payments.
This shift in thinking reflects a growing realization as to just how bad things have gotten for the world’s poorest nations. Since at least the mid-1990s, a few developing countries have simply stopped servicing a large portion of their debts—that is paying the interest and principal on loans. The reason is simple: their governments are effectively bankrupt. Mozambique and Nicaragua are only able to pay a third of their scheduled debt service (the amount of repayments on all loans). For Nicaragua, this fraction amounts to $221 million a year—three times that which the government spends on health.
Bankrupt states
By 1996, it was clear even to the world’s major creditors that something had to be done. When middle or high income countries like Brazil, Jordan or Russia have run into problems managing their debts, the standard approach has been to reschedule or push back their service payments through agreements generally brokered by multilateral organizations like the International Monetary Fund (IMF) or, in the case of commercial lending, by the Paris Club, an informal group of creditor governments with a permanent secretariat in the French Treasury.
But loan rescheduling cannot solve the problems of the poorest countries. Their financial crises have been so extreme that they generally manage to service just half of their total debts.
The World Bank proposed the HIPC (Heavily Indebted Poor Countries) Initiative in 1996 (see box). The aim was to enable poor countries to get a more secure financial footing. This was “good news for the poor,” according to the bank president, James Wolfensohn. “This initiative is a breakthrough . . . It deals with debt in a comprehensive way to give countries the possibility of exiting from unsustainable debt.”
Under the HIPC Initiative, creditors agree to share the burden of cutting debts including for, the first time, those stemming from World Bank and International Monetary Fund (IMF) loans. The World Bank determines the “sustainable” level at which a country can manage a debt and the creditors cut their portions respectively. A list of 41 countries has been drawn up, identifying when and how much debt relief should be expected. It is estimated that another 25 countries will eventually be added to the list.
However, the plan looks better on paper than in practice. In short, the HIPC initiative delivers too little, too late, according to critics and non-governmental organizations campaigning for Third World debt relief. Only two countries, Uganda and Bolivia, have had their debts lightened, while another five are slated for assistance in 1999. Others like Tanzania and Ethiopia cannot expect anything until 2002.
In understanding the HIPC shortcomings, it is important to remember that many of the poorest countries have long been paying less than half the scheduled debt service. It’s a bit like having two loans, but only being able to pay interest on the second one. If the bank writes off the first loan, your bank balance will look better, but your payments on the second loan continue, so you do not gain any additional benefits.
Consider the case of Uganda, the first country to benefit from HIPC. Under the initiative, its total debt has been reduced by just 11 per cent. The story is the same for Mozambique, due to receive relief in June 1999. Although the country’s total debt (about $5.8 billion in 1996) will drop by $1.4 billion, much of this is “unrecoverable” debt—meaning debt the government wasn’t expected to repay regardless of HIPC.
Mozambique’s debt service will only fall from $112 million a year to $100 million, a saving equivalent to about 80 cents per capita.
While reducing total debt is important to keep a country’s books looking healthy, the key to finding new resources to invest in education or health services, for example, lies in cutting those debts that countries actually service and not those considered unrecoverable.
For Jean-Louis Sarbib, World Bank vice p0resident for Africa, HIPC is “not really about wiping off debt . . . It’s just making sure that these countries can remain good credit risks. . . . The idea of HIPC is in fact to allow you to continue to be a good financial citizen of the world community.”
But why not simply write off the debts and service payments to offer a fresh start to poor countries? G. Gondwe, Deputy Director of the IMF’s African Department outlined some key concerns in the Financial Times in August 1998: “Who would lend again to recipients of such cancellation? What guarantee is there that the money saved would be put to effective use?”
Gondwe is referring to the familiar argument of moral hazard: writing off debts and service payments will reduce the incentive to better manage finances in the future and may worsen already poor credit ratings. This argument is valid when loans have been made for sound economic investments. But what about money loaned not primarily for investment reasons, but rather for political reasons to win allies or to increase foreign exports?
There is no scarcity of cases of politically motivated lending. Presidents Marcos of the Philippines, Suharto of Indonesia and Mobutu Sese Seko of the former Zaire were all grateful recipients of loans from the West. Nicaragua and Mozambique were equally well supported by the former Soviet Union. Very little attention was paid to how the money was used or abused.
“One-fifth of all developing country debt consists of loans given to prop up compliant dictators,” insists Joseph Hanlon, policy officer with the Jubilee 2000 Coalition, which regroups NGOs, grassroots movements and trade unions in 40 countries to push for Third World debt relief. “But when the dictators fall, it is expected that their democratically elected successors should repay those debts. Lenders must take a much greater share of the responsibility and accept the losses.”
Popular pressure for debt cancellation
There is another key question: who will benefit from debt relief? There is a genuine concern that blanket debt relief will not be used to reduce poverty and improve education or sanitation systems. Democracy is still young in many developing countries. Many don’t have official watchdogs or independent media strong enough to examine government policy.
For the World Bank, the solution lies in linking debt relief to strict adherence to IMF structural adjustment policies. Tanzania and Ethiopia, for example, have suffered from delays in relief because they did not make the adjustments deemed necessary. But does such macro-economic adjustment ensure that the poor will
benefit?
Oxfam argues that additional “human” measures must be put in place. The British NGO proposes that for every dollar saved through debt relief, the government spends an equivalent amount on health, education and sanitation. Although criticized for encroaching on the decision-making power of governments, this approach has the advantage of reassuring creditors that debt relief will not be wasted.
For the time being, this kind of human development perspective is essentially ignored by creditors. However, the World Bank has agreed to review the HIPC Initiative this year. Instead of waiting for any major changes, the governments of Norway, Finland and Japan have decided to begin canceling debts independently.
Two factors help explain this momentum. First, popular pressure is growing. In May 1998, for example, 70,000 people formed a human chain around the leaders attending the G8 summit in Birmingham (UK). Secondly, the prospect of global economic recession is forcing creditors to change their way of thinking. The financial crashes in East Asia and Russia sent shock waves around the international financial community. The frantic bailouts of South Korea, Thailand, Indonesia and Russia have pressed the IMF to come to the rescue with over $140 billion in finance.
The current climate of recession has highlighted the reasons for raising the calls for poor country debt relief. It is difficult to believe claims made by creditors that they cannot afford further debt relief. The HIPC Initiative for the poorest would cost just $8 billion—a pittance compared to the billions allocated to push back the debt payments of middle income countries. Japan, for example, which is far deeper in recession than European or North American countries, has managed to cancel $500 million worth of debts owed by developing countries.
Canceling effectively unpayable debts owed by the poorest countries may turn out to be a sensible policy for all creditors. As well as the strong moral argument for debt relief, there could be sound financial grounds for doing so to stimulate the global economy and promote growth.
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Outlawing excision Several African countries have banned the ancient ritual
of excision. The latest is Côte d’Ivoire, where a bill is expected to go before
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