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.
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