Malawi's precedent setting debt relief is not enough

Responding to international pressure, Japan has agreed to cancel Malawi's debts. And, led by Japan, the Paris Club has agreed to bend its own rules, and include 15 years more of Malawi's debt in the negotiations. This has been done by including all debt incurred before 1997, not just the debt incurred before 1982 - Malawi's original "cut-off date" - which limits the debt eligible for negotiation. These concessions appear to have been made because Malawi's debt would not have become "sustainable" (under World Bank definitions) without broadening the range of debt included in the HIPC debt 'relief' deal. However, despite these substantial concessions, Malawi's debt continues to be unsustainable by World Bank definitions - because the World Bank has rejected what the G7 leaders promised in Cologne.

Jubilee 2000's co-ordinator in Malawi, Francis M'gambi, called for the full participation of Malawians in the debt relief and poverty reduction process. "Poverty in Malawi" he said, "is a national issue and so needs a national answer, which can only be acquired through the involvement of civil society as a whole."

Malawi owes $2,608 million, of which $1603 million is to the World Bank, $322 million to the African Development Bank, and $294 million to Japan. Other large creditors are the European Union ($95 mn), the IMF ($88 mn), IFAD ($50 million), China ($36 mn) and British commercial creditors ($27 mn).

Malawi is unusual in that most of its debt is to the World Bank, and virtually all of its Paris Club debt was taken on after the cut-off date of June 1982. Normally bilateral loans taken after that time are not considered for cancellation. But Japanese aid (ODA) loans account for 86% of all of Malawi's Paris Club bilateral debt, so Japan's views carry substantial weight in negotiations. Japan has agreed to cancel all of its debt, and not to collect any debt service payments between now and the completion point (probably in 2003).

Japan has only now fallen into line with other G7 countries which have already cancelled ODA debt, in line with promises made at various Summits, including the 1998 Birmingham Summit. Japan's decision to write off Malawi's ODA debt is significant because Japan has been resisting cancellation of foreign debt, and has come under intense pressure from the Japanese and international Jubilee 2000 campaigns. (The Japanese government has, however, used taxpayer funds to write off billions of dollars of the domestic debt of its own banks and big businesses.)

The debt "relief" offered, is significant, and will save Malawi nearly $60 million per year. Debt service payments for the past five years have averaged $93 million per year, and this should fall to $36 million in 2003, rising to $45 million in 2007.

But it is not enough. Under the revised rules agreed at the Cologne G7 meeting in 1999, a debt is considered "sustainable" if the net present value (NPV) is less than 150% of export earnings. The World Bank admits that even with Japan's total cancellation, Malawi's debt will only fall below 150% of exports in 2007, four years after completion point - and that is based on very optimistic estimates of growth in export earnings, particularly increases in tobacco prices despite world anti-smoking campaigns. Under the World Bank's more realistic estimates of export earnings, debts will never fall below 150%. This means that the World Bank has proposed that after HIPC debt relief, Malawi will still have unsustainable debts -- by the World Bank's own definition - and in violation of what was agreed in Cologne in 1999.

Meanwhile, even this unsatisfactory HIPC settlement is conditional on Malawi agreeing a PRSP (Poverty Reduction Strategy Paper) without sufficient public consultation. Malawi reached "decision point" on 7 December 2000 only because it agreed an "interim PRSP" with no public consultation at all. Now the government has said there will only be a two-month public consultation on turning the "interim" paper into a full one. At a meeting on 1 and 2 February, 17 civil society organisations said this time was inadequate.

The groups, which include the Malawi Jubilee 2000 campaign, agreed "that although the PRSP is far from a perfect solution and is still driven largely by the IMF and World Bank, it nevertheless represents the best opportunity yet for the genuine participation of Malawians in working out how to tackle poverty. However it was also felt very strongly that this would not be possible in the time frame the government is currently following."

Malawi remains one of the poorest countries in the world. For decades the West supported a brutal dictator, Hastings Banda, who was notorious for claiming he fed his opponents to the crocodiles. With the end of the Cold War, he was deposed and multi-party elections were held in 1994. One of the first actions of the new government was to introduce universal primary education and increase health and education spending by 50%, to $148 million per year. But under pressure from the IMF and World Bank to curb government expenditure, the health and education budget by 1999/2000 had been cut back to under $100 million - the same level as during the Banda era and about the same as annual debt service payments. Under guidelines set out as conditions for Malawi to reach its HIPC floating completion point, health and education spending must remain 15% lower than at their peak in 1997/98.

Thus an effective condition of inadequate debt relief is that health expenditure be kept below the level that the democratically elected government wants. This in a country which has one of the highest levels of HIV prevalence in the world - 31% of women in ante-natal clines are HIV positive, and average life expectancy has fallen from 52 years in the early 1990s to 42 now.