Debt Forgiveness

by Moya K. Mason

Debt forgiveness is also a complicated issue. I could find no numbers on who forgives the most because much of that is handled under the Heavily Indebted Poor Countries (HIPC) Initiative. I have included information on Jubilee 2000 and how much debt was forgiven to commemorate the occasion.

1. Globalization and its Discontents by Joseph E. Stiglitz
W.W. Norton & Company, New York, 2002

Debt Forgiveness

"The developing countries require not only that aid be given in a way that helps their development but also that there be more aid. Relatively small amounts of money could make enormous differences in promoting health and literacy. In real terms, adjusted for inflation, the amounts of development assistance have actually been declining, and even more so either as a percentage of developed country income or on a per capita basis for those in the developing countries. There needs to be a basis for funding this assistance (and other global public goods) on a more sustained level, free from the vagaries of domestic politics in the United States or elsewhere. Several proposals have been put forward. When the IMF was established, it was given the right to create Special Drawing Rights (SDR'S), a kind of international money. With countries today wisely putting aside billions of dollars into reserves every year to protect themselves against the vicissitudes of international markets, some income is not being translated into aggregate demand. The global economic slowdown of 2001-02 brought these concerns to the fore. Issuing SDRs to finance global public goods -- including financing development assistance -- could help maintain the strength of the global economy at the same time that it helped some of the poorest countries in the world. A second proposal entails using the revenues from global economic resources -- the minerals in the seabed and fishing rights in the oceans -- to help finance development assistance.

Recently, attention has focused on debt forgiveness, and for good reason. Without the forgiveness of debt, many of the developing countries simply cannot grow. Huge proportions of their current exports go to repaying loans to the developed countries. The Jubilee 2000 movement mobilized enormous international support for debt forgiveness. The movement gained the backing of churches throughout the developed world. To them, it seemed a moral imperative, a reflection of basic principles of economic justice.

The issue of the moral responsibility of the creditors was particularly apparent in the case of cold war loans. When the IMF and World Bank lent money to the Democratic Republic of Congo's notorious ruler Mobutu, they knew (or should have known) that most of the money would not go to help that country's poor people, but rather would be used to enrich Mobutu. It was money paid to ensure that this corrupt leader would keep his country aligned with the West. To many, it doesn't seem fair for ordinary taxpayers in countries with corrupt governments to have to repay loans that were made to leaders who did not represent them.

The Jubilee movement was successful in getting much larger commitments to debt forgiveness. Whereas before 2000 there had been a debt relief program for the highly indebted countries, few met the criteria that the IMF had erected. By the end of 2000, as a result of international pressure, twenty-four countries had passed the threshold.

But debt relief needs to go further: as it stands now, the agreements touch only the poorest of the countries. Countries like Indonesia, devastated by the East Asian crisis and the failures of the IMF policies there, are still too well off to be brought in under the umbrella."

2. Return to Ethiopia
http://www.guardian.co.uk/debt/Story/0,2763,957932,00.html
The Guardian
Saturday May 17, 2003
Bob Geldof

Some global debt has been cancelled. Most has not, while the rich world has slashed aid and rigged trade.

Debt activists should today salute the achievements of a great campaign. Exactly five years ago this weekend, under the banner of Jubilee 2000, 70,000 people gathered at the Birmingham G8 Summit and with the help of, among others, the Guardian, put on the global agenda an arcane and obscure finance issue - the unpayable, multilateral, bilateral and commercial debts of more than 40 countries. Much has happened since then, and it is no longer possible for world leaders to ignore the plight of these countries: finance ministers from the wealthiest nations in the world will be debating again at the G8 summit in Evian in two weeks time; Gordon Brown will be trying to persuade his counterparts of the desperate need for an extra $50bn a year in aid for the poorest countries; and backroom trading in the US Congress last night resulted in the offer of an extra billion dollars for the global fund for Aids, TB and malaria - if others match it - and a proposal for more debt relief, based on the ability of governments to pay.

A huge sum of money has already been written off: $36.3bn to be precise. These are sums that no campaign, aid agency or government department could dream of granting as aid. Annual debt payments by 26 countries have been cut by 40% - and that freed-up money is being spent, in Africa, on health and education. The long-term benefits will be immense. But while debts were being written off, aid has been run down. According to Jubilee Research, total resource flows to the 53 countries identified as highly indebted have fallen sharply, from $6.2bn at the time of the Birmingham summit to $4.3bn in 2000. The G8 last year promised to reverse this decline for the poorest countries, but the developed world still gives with one hand, and ridiculously, unconscionably and cruelly takes with the other.

Debt relief comes with conditions: G7 leaders (through the IMF) require countries to jump impossible economic hurdles they themselves decline. "Open up your markets" is one condition, "but don't expect us to do the same". "Structurally adjust your economies - but don't expect the same of us - even though we are living well beyond our means". "Lower the prices of your commodities, but don't expect us to lower the prices of our exports". "Get out of commodities - but God help you if you try and compete with our value-added industries". "Remove all protection from your producers - but don't ask us to reform the state-backed protection we give to pharmaceutical industries".

How much harder can we make it? It's not just that we won't write off debts that cripple their economies - we won't let them earn their way out of poverty through trade either. It's a dreary tale: the age-old story of the playground bully, picking on the weak and vulnerable.

The world is not a pretty sight. Each day we are assaulted by random terror; opportunistic diseases; the threat of economic instability. AIDS devastates families, communities and economies in Africa and beyond. We hear the rhetoric, and see a bit of money flowing, but it's all so far removed, in countries "of which we know little". And while we don't have to live with the consequences, why should we know?

But it won't stay that way. Back in the 19th century, we learned there was no sense in driving the heavily indebted into the gutter, into debtor's prisons, or into purgatory. So we invented a framework for resolving the problem of debt - bankruptcy - which recognised that both creditor and debtor bear responsibility for unpayable debts. Bankruptcy, unpleasant as it is, puts balance sheets back into order, makes individuals and corporations productive again, and draws a line under human error.

We have no such international framework. So this whole sorry saga drags on, with debtor nations spiraling downwards. Their impoverishment impacts on richer economies, whether through the spread of disease, drugs or crimes of random terror. And in the meantime, millions suffer.

I will return to Ethiopia next week. This country, which Britain so magnificently helped in 1985, has 14 million people at risk of famine. In 2001, Ethiopia lost $81m in foreign exchange through the sudden, calamitous collapse of the price of coffee. But in 2002 the country transferred approximately $149m in debt service to foreign creditors, and will transfer out nearly $90m for each of the next two years.

Getting Ethiopia and other countries back on their feet will not cost the rich countries dear. Short-sighted meanness and refusal to accept the responsibilities of globalisation while enjoying the benefits can only exacerbate polarisation in the world. It is neither a naive nor impossible demand to eliminate all debt, to stabilise and make equitable trade agreements, or to help the dying with the freely available drugs. All this is do-able and all this, regardless of political persuasion, is right. The world cannot be the fiefdom of eight men around a table. It is, and must be, ours to do with how we choose.

In Birmingham in 1998, 70,000 people offered leadership to the world's most powerful individuals. It is not too late for them to throw off their old and tired excuses to take up that baton.

But I will not stand in front of dying families again next week and tell them that this is not their world, too. I will say that it will change. They may die before they see it - indeed, I may die before I see it - but change it will because change it must.

3. Debt Relief under the Heavily Indebted Poor Countries (HIPC) Initiative: A Factsheet
http://www.imf.org/external/np/exr/facts/hipc.htm
April 2004

The HIPC Initiative is a comprehensive approach to debt reduction for heavily indebted poor countries pursuing IMF- and World Bank-supported adjustment and reform programs. To date, debt reduction packages have been approved for 27 countries, 23 of them in Africa, providing $31 billion (net present value terms) in debt service relief over time.

What is the Heavily Indebted Poor Countries (HIPC) Initiative?

The HIPC Initiative was first launched in 1996 by the IMF and World Bank, with the aim of ensuring that no poor country faces a debt burden it cannot manage. The Initiative entails coordinated action by the international financial community, including multilateral organizations and governments, to reduce to sustainable levels the external debt burdens of the most heavily indebted poor countries. Following a comprehensive review in September 1999, a number of modifications were approved to provide faster, deeper and broader debt relief and to strengthen the links between debt relief, poverty reduction and social policies. Countries' continued efforts toward macroeconomic adjustment and structural and social policy reforms-including higher spending on social sector programs like basic health and education-are now central to the enhanced HIPC Initiative.

Yet the HIPC Initiative is not a panacea. Even if all of the external debts of these countries were forgiven, most would still depend on significant levels of concessional external assistance, since their receipts of such assistance have been much larger than their debt-service payments for many years.

How the HIPC Initiative works

To be considered for HIPC Initiative assistance, a country must:

The first step is to carry out a debt sustainability analysis to determine the debt relief needs of the country. If a country's external debt ratio after traditional debt relief mechanisms is above a threshold for the value of debt to exports (or, in special cases, the value of debt to fiscal revenues), it qualifies for assistance under the Initiative. Once a country has made sufficient progress in meeting the criteria for debt relief, the Executive Boards of the IMF and World Bank formally decide on a country's eligibility, and the international community commits to reducing debt to the sustainability threshold. This is called the decision point.

Once a country reaches its decision point, it may immediately begin receiving interim relief on its debt service falling due. In order to receive the full and irrevocable reduction in debt available under the HIPC Initiative, however, the country must establish a further track record of good performance under IMF- and World Bank-supported programs. The length of this second period depends on (i) the satisfactory implementation of key policy reforms agreed at the decision point, (ii) the maintenance of macroeconomic stability, and (iii) the adoption and implementation for at least one year of the PRSP.

Once a country has met these criteria, it can reach its completion point, at which time lenders are expected to provide the full relief committed at the decision point.

How the HIPC Initiative is financed

The total cost of providing assistance to the 38 countries potentially qualified under the enhanced HIPC Initiative is estimated to be about $50 billion in net present value terms. A little over half of this will be provided by bilateral creditors, and the rest will come from multilateral lenders. The IMF's share of the cost is financed primarily by the investment income on the net proceeds from off-market gold sales in 1999 that were deposited to the IMF's PRGF-HIPC Trust. Additional contributions to this trust have been provided by member countries.

How countries have benefited from the HIPC Initiative

For the 27 countries for whom packages have already been approved, debt service falling due between 1998 and 2004 will drop by more than half in relation to both exports and government revenue. Yet for debt reduction to have a tangible impact on poverty, the additional resources need to be targeted at the poor. Before the HIPC Initiative, eligible countries were, on average, spending slightly more on debt service than on health and education combined. This is no longer the case in the 27 countries receiving HIPC relief. Under their recent IMF- and World Bank-supported programs, these countries have increased markedly their expenditures on health, education and other social services and, on average, such spending is now almost four times the amount of debt service payments.

While country-by-country data demonstrate that these countries are seeing clear gains, it has taken time and effort to ensure that money is redirected to aid the poor in ways that most reduce poverty. And difficult problems remain. For example, in war-ravaged Rwanda and Ethiopia, pressing reconstruction needs may mean large new loans at the same time that old debt is being reduced.

Difficult problems also remain in HIPCs that have not yet been able to reach their decision points. Some of these countries are plagued by uneven policy records or poor governance, which in turn may be caused by the serious problems that their governments confront, including civil conflict. Some HIPCs have debts too large to write off given current funding for the Initiative. This is true, for example, in Liberia and Sudan, which are both afflicted by civil conflict.

None of these are easy problems. But the IMF and World Bank are looking for solutions, with poverty reduction as the central focus.

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