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G8 Debt Relief Proposals

A first step in the right direction – and a long way to go

The announcement that a deal to cancel the debts of some of the world’s poorest countries had been reached at Saturday’s G7 Finance Ministers’ meeting must be welcomed as the first step on the road towards writing off the debt burdens that are preventing developing countries from attaining their Millennium Development Goals.[i]  Nonetheless it remains a wholly inadequate response to the demands made by NGOs and civil society debt campaigners for a total cancellation of unsustainable debt at the G8 Summit in July.

There is a danger that the flurry of publicity surrounding the deal, which hails it as a ‘historic breakthrough’ in debt cancellation representing a ‘victory for millions’, may obscure the fact that there is a very long way to go before the developing world can be lifted out of poverty. It has been clear for 20 years that many indebted countries were effectively insolvent and required their debts to be written off, and that the debt problem itself was part of a systemic failure of the present economic system. Until a fundamental reform of international finance and trade is undertaken, debt cancellation – though necessary in the short term – can only address the symptoms and not the cause of chronic poverty in the developing world. In the absence of such comprehensive changes, the high hopes of debt campaigners will ultimately be disappointed.

Under the present deal, the 18 countries which have reached Completion Point within the World Bank’s Heavily Indebted Poor Countries initiative (HIPC) will receive 100% debt cancellation, and a further 9 may qualify to do so over the next eighteen months.[ii]  This debt will be written off in full (that is, it will include debt stock rather than simply the debt service relief previously suggested in the UK/Dutch/Canadian proposal). The write off for the initial 18 countries will cover $40bn (£22bn) of debts owed to the World Bank, the African Development Bank and the IMF, and the funds will be provided by the G8 nations topping up their repayments to the World Bank and the AfDB, and by the IMF funding its share from its own resources. This will cost rich countries $1.2bn a year for the next three years, a sum that equates to an expenditure of only 1.5 pence per person per week in developed countries, and represents around 5 pence per head to the populations of the 18 developing countries concerned.  Since the per capital GDP for the G7 countries for 2002 stood at $29,872 and that for low income countries at $430, this does not seem a very significant contribution; indeed, it represents less than 1% of the annual shortfall from the 0.7% of GNI for development aid promised by rich countries to the developing world.[iii]

Nonetheless, many of the countries benefiting from the deal have been paying more in debt service to rich creditors than they have been able to devote to their health and education budgets, and this writeoff will make a considerable difference to their economies. However, even in the short term, the process of debt relief, let alone the task of relieving world poverty and enabling the developing countries to reach their MDGs has only just begun. In particular, it should be noted that

·        Very few countries are covered by the agreement
The 18 countries immediately affected by the deal contain only 1/8^th of the population of low-income countries, and represent a very small proportion of those needing debt relief. It is estimated in a joint NGO briefing report recently released by the Jubilee Debt Campaign, Action Aid and Christian Aid that at least 62 poor countries will need 100% debt cancellation immediately if they are to meet their MDGs. [iv]  The paper underlines the responsibility rich creditors carry for creating and perpetuating the debt crises in developing countries, and demands that G8 governments should write off these debts in full as a matter of justice.

·        Additionality
It is very important that debt relief should be additional to existing aid. Most HIPC countries will require additional grants as well as full debt relief if they are to achieve their MDGs. However, although the G8 has promised to reimburse the WB and the AfDB, and it appears that these reimbursements are additional to their normal payments to these institutions, they will come out of existing general aid budgets. Moreover, since regular replenishments to the IFIs are not fixed (for example, the US contributions to IDA[v]  fell from 20% to around 13% over the last three years) it will be impossible to estimate whether payments will be additional to the amounts they would have received after 2008 had the deal not been negotiated.

·        Incomplete participation
Although many Latin American HIPCs owe more to the IADB (the Inter American Development Bank) than to other international institutions, there has been no mention of arrangements for the cancellation of these debts. Nor is there any mention of private sector debt.

·        IMF Contributions
There has been considerable debate about how the IMF can fund debt cancellation, and NGOs have have published a number of papers explaining how this can be achieved by selling of some of its gold reserves.[vi]  This was the preferred option for debt campaigners, since it insured the additionality of  IMF debt relief, and the Fund itself agreed that this would be feasible within the context of the Central Bank Gold Agreement.

The suggestion was agreed by the UK but always opposed by the US, and the latter’s proposal – to replenish IMF funds from a previous sale of gold has now been adopted. In fact this will not be sufficient to expand the list of beneficiaries, and more funds will have to be raised, possibly from new donor contributions. This again may have adverse implications on the quantity of available development aid

·        Economic Policy Conditions
All the countries currently under consideration are already within the HIPC initiative, and the acceptance of IMF economic policy programmes, typically carrying harmful and undemocratic policy conditions, is a requirement for entry into this scheme. Campaigners have called for the removal of these conditions, and the UK government has recently indicated that it will no longer demand that they be accepted before aid is disbursed. However, the new deal will do nothing to restore economic autonomy to these developing country governments. To the contrary, the G8 has announced it will ask the World Bank and the IMF for a report on ways to ensure that the new funds are used for poverty reduction and do not lead to corruption.

In short, although debt campaigners must be congratulated for forcing this agreement on the governments of the industrial nations, this breakthough must not be allowed to blind the world to the severe limitations of the current deal on offer. With over a billion people living on less than $1 a day, 800 million without enough food to meet their energy needs, and 30,000 people dying per day from poverty related causes, we need more than debt cancellation for 18 very poor countries: we need a 100% writeoff of debts and an increase of aid for all 62 countries that cannot otherwise meet their MDGs, and to make these measures effective in the longer term, a radical reform of trade rules and the financial system in general. So while welcoming the progress made in this agreement, it is now vital to maintain pressure on world governments to move forward from the position they adopted at the weekend.

[i] The Millennium Development Goals are a set of eight goals with quantifiable targets designed to reduce poverty, hunger, illiteracy and preventable disease by 2015. (The first of these is to halve the number of people living on less than $1-a-day, and to halve those living in hunger.) Most of the world’s countries have pledged to support these goals, as have the IMF and the World Bank, but more assistance from the rich economies is desperately needed. At the moment few countries are on track to meet the MDGs, and the findings of the 2003 Human Development Report suggest that Sub-Saharan Africa may not do so for another century.

[ii] The 18 HIPC Completion Point countries are Benin, Bolivia, Burkina Faso, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania, Uganda and Zambia. The nine countries currently through Decision Point and awaiting Completion Point are Cameroon, Chad, The Gambia, Guinea, Guinea Bissau, Malawi, Sao Tome Principe, Democratic Republic of Congo and Sierra Leone.

[iii] In 1970 the UN General Assembly endorsed the proposal that rich countries should give 0.7% of their gross national income (GNI) to assist global development. Now, 35 years later, only 5 relatively small economies (the Netherlands, Luxembourg, Norway, Denmark and Sweden) have put up their 0.7%., while overall official development assistance (ODA) remained at a disgraceful 0.25% of GNI for 2004.  Among the reluctant donors the richest country – the US – is the worst offender, with a foreign aid budget standing at a shameful 0.16% of GNI.

[iv] See the full paper at www.jubileedebtcampaign.org.uk/inthebalance

[v] IDA is the International Development Agency, which is the arm of the World Bank responsible for concessional lending to poor countries

[vi] See for example  S. Kapoor et al Paying for 100% Multilateral Debt Cancellation at http://www.eurodad.org/articles/default.aspx?id=576