Canada breaks the debt dam - Full analysis of Canadian Proposal

Canada's Prime Minister, Jean Chrétien, yesterday (March 25^th) said Canada would act alone if G7 countries failed to respond adequately to the needs of the severely indebted countries. Announcing a series of measures to reduce debt, Mr Chrétien broke ranks with other G8 leaders, who have insisted only on acting together. An official briefing from the Canadian finance ministry backing up his announcement confirms: “Should there not be a multilateral ... agreement to write down 100 per cent of bilateral debts for LLDCs [the least developed countries], Canada would proceed unilaterally with bilateral debt agreements.”

Jubilee 2000 Coalition Director, Ann Pettifor, has welcomed the announcement: “The cracks that have been emerging within the G8 over recent months have opened up into a chasm. The dam has broken. Canada has shown the others the way. There is still further to go – but if every other creditor signed up to Canada's proposal, we would take another step towards a debt-free start for the poorest countries in the new millennium.”

Mr Chrétien said that Canada had “forgiven” over $1.3 billion in foreign debt owed by developing countries and had consistently called for more generous terms. He said this gave Canada an authority and credibility to adopt a leading role in the negotiations at the forthcoming G8 summit in June. He set out four proposals that Canada would adopt unilaterally in dealing with the remaining debts owed to it by developing countries, and which it would seek to persuade other G7 countries to agree and adopt.

100 per cent write down of bilateral debt

First, he proposed that other industrialised countries forgive 100 per cent of the debt owed to them by those least developed of the Heavily Indebted Poor Countries (HIPCs). Although he did not give full details, this suggests that he intends full cancellation of all bilateral debts of the least developed of the HIPCs. This would potentially include all of the following 30 countries, which are both Least Developed Countries and HIPCs: Angola, Benin, Burkina Faso, Burundi, Central African Republic, Chad, Congo (Kinshasa), Equatorial Guinea, Ethiopia, Guinea, Guinea Bissau, Laos, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Myanmar, Niger, Rwanda, Sao Tome and Principe, Sierra Leone, Somalia, Sudan, Tanzania, Togo, Uganda, Yemen, Zambia. However, on current assessment the IMF and World Bank expect 8 of these (Angola, Central African Republic, Chad, Equatorial Guinea, Guinea, Sierra Leone, Togo, and Yemen) to be sustainable at completion point in HIPC. Mr Bruce Rayfuse, Senior Chief in the International Financial and Economic Analysis Division of the Ministry of Finance, said that the government was calling for write-down of 100 per cent of all bilateral debts, not just the pre-cut-off-date debt. The Paris Club normally deals with only pre-cut-off-date debt, which is often considerably less than the total bilateral debt.

Special case consideration for countries such as Honduras

Second, he has said that cases of these extremely poor countries that were initially deemed to be ineligible for consideration but have since been hit by unexpected shocks such as natural disasters or world economic turmoil be re-examined. He specifically referred to Honduras, which is beginning the process of rebuilding after the devastation of Hurricane Mitch. Honduras has been granted a debt moratorium until February 2001, but how much of its debt will be written off is dependent on the country pursuing an IMF structural adjustment programme, and is only likely to reach 67 per cent of its eligible debt. The implication is that countries such as Benin and Senegal, which were judged not to need full HIPC debt relief, should be re-considered in the light of the global economic downturn, which has impacted so severely on developing countries.

IMF gold sales to fund extra relief

Third, he has proposed that the IMF sell 10 million ounces of gold from IMF stocks to allow the IMF to participate in a broader initiative to assist heavily indebted poor countries. This call joins those of the German, French, British and US governments for sale of gold to finance the IMF's share of debt relief. The US and the UK have both called for the sale of $1 billion of IMF gold. Canada is saying that more should be sold. On the current price, 10 million ounces would raise about $2.8 billion. The receipts would be invested and the interest used to cover the IMF's share of debt relief.

Extra help for governments committed to social sector spending

Finally, Mr Chrétien said that those countries that showed clear intentions of increasing spending on health and education would benefit from increased debt relief and future assistance. Those that oppressed their own people and destabilised their neighbours would not receive debt relief.

Finance minister gives further details

A lower threshold for debt sustainability

Finance Minister Paul Martin further developed the headline proposals of the Prime Minister. Also included in the Canadian proposal is a lowering of the debt sustainability target to 150 per cent of exports. This forms part of the German and British proposals, but neither of these proposals explicitly calls for 150 per cent as a sustainable level for all eligible countries. This is likely to provide an extra $8 billion of debt relief (in net present value terms).

Haiti and Malawi to be included

Haiti and Malawi should also be included as HIPC-eligible countries. Afghanistan should as well, if the political situation permits.

Debt write-off for countries with good governance

Countries with good governance should receive 100 per cent debt write-off of bilateral debt, and Canada would act unilaterally if G7 countries failed to comply. Countries to benefit would include Madagascar, Tanzania, Honduras, Bangladesh and possibly Zambia. For those countries where productive use was not guaranteed, Canada is proposing a debt conversion scheme, which would convert debt service payments into local currency for investment in local priority development projects. Ethiopia, Liberia, Rwanda and Congo (Kinshasa) and possibly Sudan are in this category.