Jubilee Research:UK Chancellor pledges £100 million for Multilateral Debt Cancellation: But can we really cheer twice?



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UK Chancellor pledges £100 million for Multilateral Debt Cancellation: But can we really cheer twice?

Gordon Brown's announcement that the UK will finance the cancellation of its share of the debts owed by 32 countries to the World Bank and the African Development Bank is in principle a very welcome one. And we wholeheartedly join him in calling for other donors to follow the UK's example, and to support the use of the IMF's gold reserves to finance the cancellation of the debts it is owed. However, we welcome this initiative with some reservations, which we hope other creditor countries will address.

Firstly, while we agree that additional resources are required for multilateral debt reduction, we note that the resources for this initiative will in fact be taken from the existing aid budget. In another very welcome move, Mr Brown announced a substantial increase in this budget in the Comprehensive Spending Review in July - although it was less clear to the general public at the time than it now appears to be to Treasury officials that part of the increase was ear-marked for multilateral debt reduction. Neither the relevant chapter (15) of the CSR nor the Chancellor's statement made any reference to this; and neither did the DFID press release.

On the contrary, the statements at the time claimed credit for the increase as contributing to UK's progress towards its (34-year-old but never-fulfilled) commitment to provide 0.7% of its national income in aid to developing countries. To take credit for it again as providing "additional" resources for multilateral debt reduction looks like double-counting. Would aid have been £100m lower without this initiative? And is the 0.7% target now to be 0.7% plus £100m of debt reduction? Unless the answer to both these questions is "yes", these resources cannot be considered to be genuinely additional.

Secondly, it is disappointing that the debt reduction is to be phased over time, rather than unpayable debts being cancelled outright. This risks reducing the effectiveness of debt reduction, because as long as the debt overhang effect on private investment persists, it will stifle employment creation and economic opportunities, even if resources are not diverted from public spending to debt servicing. Rather than prolonging the debtor countries' agony over yet another decade, we call on the Treasury to cancel these debts with immediate effect. The cost would be £1bn - but this is less than a quarter of this year's shortfall from the 0.7% target for aid.

Delaying debt cancellation will be a still greater problem if it is used to make debt reduction conditional on the economic policy prescriptions of the IMF and the World Bank. The terminology may have changed from "structural adjustment" to "poverty reduction", but these remain essentially the same policies that have failed the developing world for the last quarter century. The deliberate withholding of debt reduction for six years or more as a means of imposing economic policy conditions has been as important as the inadequacy of the debt reduction available in explaining the failure of the HIPC Initiative to resolve the debt crisis of poor countries since its inception in 1996.

We therefore call on the Treasury to confirm that neither the prior requirement of "robust public expenditure management systems" nor the statement that "debt reduction would continue as long as the savings are being used for poverty reduction..." will be used as a means of imposing economic policy conditionality.

Thirdly, the debt cancellation offered covers only debts owed to the World Bank and the African Development Bank. Apart from the IMF debt issue, this leaves open the question of the other regional development banks. While Sub-Saharan Africa's needs are clearly particularly acute, it seems questionable to assume that all low-income countries in other regions will be able to meet the Millennium Development Goals without debt cancellation beyond what is currently available.

In short, while the UK Chancellor can only be congratulated for leading the way in making a much needed commitment to multilateral debt cancellation, there is still a long way to go. Above all, new money for debt relief should be represented by additional resources, and not simply by a redistribution of our still dismally inadequate budget for international aid.