Posted on 2/12/2001

Debt Problem #1
From www.debtchannel.org

Less than two years ago, some of the most powerful decision-makers in the
world emerged from a Washington office block to declare very good news for
the poor. The Heavily Indebted Poor Countries (HIPC) initiative to reduce
the debts of the poorest countries, derided as woefully inadequate after
its launch in 1996, had just been enhanced.

Responding to the unprecedented global movement harnessed by Jubilee 2000
(http://www.jubilee2000uk.org/), the initiative now offered faster, deeper
and broader debt relief and set out to secure a lasting exit from debt
problems for the countries involved. The goal of the initiative, somewhat
embarrassingly still trumpeted on the World Bank website, was to bring the
countrys debt burden to sustainable levels in order to ensure that
adjustment and reform efforts are not put at risk by continued high debt
and debt service burdens.

Since that day, the official commitment to sustainability has been growing
ever more flaky. When countries began to receive initial cuts in their debt
payments under the HIPC initiative last year, it was clear that the
reductions were not likely to be enough to allow countries to make a fresh
start. Debt payments in the first 22 countries to qualify were due to fall
by 27 per cent, leaving them spending more on debt than they currently do
on the health of their people. Projections indicated that payments in 2009
would be just 14 per cent below what they are now.

In April, an official paper from the World Bank and International Monetary
Fund admitted that HIPC debt relief alone does not ensure long-term debt
sustainability. The paper highlights the how vulnerable countries are,
noting for example that if exports continue to grow at the same rate as
before, rather than the growth rates projected by the World Bank and IMF,
countries will never reach even the level that those institutions define as
sustainable.

Additionally, the paper confirms for the first time that the impact of the
HIV/AIDS emergency in several indebted countries is likely to push the debt
burden up still further. So what happened to that grand ambition to deliver
the poorest countries from the viscous spiral of ever-increasing debt? Last
week, a letter to me from the Director of External Relations at the IMF,
Tom Dawson, gave the answer.

The HIPC Initiative, Mr Dawson explained, was intended to provide countries
with enough debt relief to become sustainable within the available resource
envelope. This at once both refreshing and appalling. It is refreshing
because a senior figure in one of these major creditor institutions is
prepared to speak in an honest and plain way (or at least as plain as it is
possible to be in IMF-speak) about the true nature of the HIPC initiative.
What Mr Dawson means by making countries sustainable within the resource
envelope is, of course, that the degree of debt cancellation is constrained
by the amount of funds the lenders have available. If creditors do not have
funds to cover their losses, they cannot cancel debt. But the statement is
appalling because after years of talk about sustainability ratios and
thresholds, the creditor community is finally coming clean. Under this
deal, the poorest countries will not get the debt cancellation they need.
They will not get sustainability. They will get what they are given and
what they are given will be what their creditors are willing to give up -
which, in the context of the extraordinary wealth of rich nations, will be
next to nothing.

The envelope of resources addressed to the poorest countries through the
HIPC initiative is a decidedly thin one. While the headlines have suggested
billions of dollars in debt write-off, the reality on the ground has been a
lot less impressive. The 22 countries that had begun to receive some debt
relief by the end of last year are paying $735 million less in total than
they were before. But they are still spending more than twice that in
continued repayments. What is more, the contribution of different creditors
has varied widely. While the G7 nations are now effectively cancelling 100
per cent of the debts owed by these countries, the multilateral creditors -
chief among them the World Bank and IMF - refuse to cancel more than half
of the outstanding debts. The World Bank and IMF are now in danger of being
left as the last great debt collectors from the poorest people. After the
impact of the HIPC initiative and extra steps promised by G7 countries,
these 22 indebted countries would owe more to the World Bank and IMF than
they owe their next 17 biggest creditors put together.

In many countries, the impact is huge. Fifty-eight cents out of every
dollar that Zambia pays out in debt service in the next five years will go
into the coffers of these two institutions. Similarly high levels - 40
cents or more to the dollar - will be channelled to the IMF and World Bank
from Uganda, Mali, Malawi, Burkina Faso and Benin. In all, because of the
refusal by the World Bank and IMF to match the G7 commitment to 100 per
cent cancellation, these 22 countries will be denied more than half a
billion dollars every year for the next five years - and the payments will
continue long after that.

Few would argue that the need in these countries is not desperate. If the
challenge of fighting poverty were not already great enough, in recent
years the profound impact of HIV/AIDS on the poorest countries has become
clear. There is a remarkable correlation between countries most burdened by
debt and those most at risk from AIDS. They undoubtedly need every penny
they can get. And fears that the money will not be used well cannot be
offered as an excuse here either. All these countries have jumped through
every hoop and over every hurdle put in their way in order to qualify for
debt relief, meeting highly unpopular conditions that, if implemented in
western countries, would provoke electoral obliteration for the government
of the day.

All this makes uncomfortable reading for the staff of these institutions -
particularly those at the World Bank, who say they are dreaming of a World
Free of Poverty. They insist they have worked hard to make real the
promises made in Cologne and protest that they are merely the instruments
of their shareholders - controlled by the G7 governments. Both these are
true, and the demonisation of these institutions as sinister and malevolent
actors in their own right is off the mark. It is the leaders and finance
ministers of the rich industrialised countries who should be held to
account for the behaviour of the World Bank and IMF. However, faced with
the evidence, the institutions have tried to explain in recent weeks why
they are not pulling their weight in the effort to cut the debts of the
poorest countries. Their answer is that they cannot afford to do more. They
say that because they have made virtually no provision for losses on these
debts, if they were to do what the G7 countries have promised to do, they
would need a massive injection of new resources - or otherwise they would
have to shut down large chunks of their work. World Bank President James
Wolfensohn has gone so far as to claim that the extra cancellation would
close down the Bank.

For some of the more entrenched opponents of the bank Bank on the left and
right, this may appear too tempting an offer to refuse. It will seem like a
crude attempt at scare mongering to the more measured critics. Either way,
it is not true. It is true that the World Bank has failed to make adequate
provision for debts on its books, an elementary failure that sound
commercial bankers would find wholly irresponsible. It has also compounded
its error by making further loans in order to subsidise repayments and
preserve the appearance of solvency. But it is not true to say that what
Drop the Debt proposes would close down the World Bank or the IMF. Nor
would our proposal impact significantly on their ability to carry out their
legitimate functions.

The truth is that although these institutions have not made adequate
provision for bad debts, they do have more than enough resources to write
them off. Drop the Debt asked City of London accountants Chantrey Vellacott
DFK to look at the books of these institutions and give an independent
verdict on whether they could afford to join the G7 in writing off the
debts of the Heavily Indebted Poor Countries. The conclusion of the
accountants was emphatic. First, there are substantial available resources
in the World Bank and IMF. Second, used prudently these resources are
sufficient to clear the entire outstanding debt of the HIPCs to these
institutions; and third, doing so would not impact adversely on the ability
of the institutions to carry out their work.

In other words, without any extra resources from outside these
institutions, the international community could turn the HIPC initiative
from its current self-declared failure to meet its own stated objectives
into a vehicle for real change and a genuine fresh start in the indebted
countries it is designed to help. It would not wipe out all debt. But it
would mean that these countries would finally spend less on debt than they
currently do on health, freeing up millions of dollars more every year to
be used for schools, health clinics, clean water supplies, roads and the
infrastructure that will allow enterprise and growth to thrive. So there is
no doubt that debt cancellation alone will not be enough. The available
resource envelope will have to be torn up and replaced by an entirely new
realism about the challenge of poverty and HIV/AIDS in the years ahead.

The global movement for debt cancellation is described by some as the
greatest popular movement against poverty and injustice in modern times.