Debt end

Efforts to relieve poor countries of their debt remains inadequate

Published: Sunday 15 January 2006

Debt end

-- Large amounts of foreign debt are an enormous burden for many low and middle-income countries in the global South. Funds that nations could be allocating to social expenditures such as education, healthcare, water, and sanitation are being diverted to repay foreign debt. In 2003, Senegal, Malawi and eight other African countries -- many experiencing severe hiv / aids crises -- spent more on debt service than on healthcare. In the Philippines, debt service eats up over 85 per cent of the country's fiscal revenues.

Large amounts of poor countries' debt is historical, incurred by corrupt elites. In fact, currently over us $500 billion -- nearly 20 per cent -- of all developing country debt is the result of loans to dictators, such as Mobuto in Zaire and Ferdinand Marcos in the Philippines. So, victims of oppression and corruption are actually expected to pay for their sufferings.

All this has led to calls for debt relief. In the 1990s, multilateral creditors were forced to acknowledge that many debts were not only unpayable but were severely undermining development efforts. In 1996, the World Bank and imf launched the Heavily Indebted Poor Countries (hipc) Initiative. To qualify for this, a country should have an annual per capita income below us $865; its debt-to-annual export ratio should be more than 150 per cent, while its debt-to-revenue should exceed 250 per cent. And that's not all. To achieve irrevocable debt relief, a country must have a poverty reduction strategy paper that satisfies the World Bank and the imf, 'maintain a stable macroeconomic environment' and implement key 'structural reforms in governance, education, and health,' as recommended by the World Bank. As of August 2005, 38 countries are considered hipcs.

In July this year, the Group of 8 (G-8: Britain, Canada, France, Germany, Italy, Japan, Russia, usa) proposed 100 per cent cancellation of the debt stock owed by at least 18 countries to the World Bank's International Development Association, imf, and the African Development Fund. The initial 18 countries are Benin, Bolivia, Burkina Faso, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania, Uganda, and Zambia.

The G-8 plan was endorsed in principle by member governments of the World Bank and imf at their annual meetings in September 2005. However, a key question remains: who pays for the funds forfeited? The World Bank has estimated its costs of foregone principal and service payments to range from us $32 billion to us $42 billion. While some debt relief advocates have argued that the World Bank and the imf possess sufficient internal resources to cover debt cancellation for their poorest borrowers, many donor and borrower governments as well as the World Bank maintain that without additional funding, the g-8 plan will eventually weaken the World Bank's ability to provide low-cost development finance.

Moreover, while donors have pledged to offset the costs of debt cancellation, one should recall that many of these debts have terms of 40 years. But holding future governments to financial commitments made today might be difficult. In the us, for example, the Congress would need to approve steady increases in the country's funding to the World Bank over the next four decades to finance the plan -- and this not a foregone conclusion, given the competing priorities and large fiscal deficits of usa.

More importantly, the current G-8 plan is limited to countries currently part of the hipc Initiative. However, the initiative, by no means provides an adequate basis for determining who needs debt relief. It leaves out countries with huge debt loads and large populations surviving on less than $2 per day. Angola, Belize, Ecuador, Lebanon, the Philippines and Uruguay are just some of the countries that by definition are not part of the plan even though their debt service outpaces spending on healthcare or education.

Finally, some heavily-indebted middle-income nations would benefit from at least partial cancellation of their illegitimate debts, including Chile and the Philippines. In fact, the World Bank notes that 25 middle-income countries are suffering under "severe" debt burdens. It seems there is little respite for them.

Pamela Sparr is a consultant and has worked on debt, trade and development issues. Bruce Jenkins is with the Bank Information Centre, Washington

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