Debt

The G-8 Proposal

Who is eligible? Countries that reach “completion point” of the Enhanced Heavily Indebted Poor Countries’ Initiative. How many countries? Of 38 HIPC countries, only 18 immediately qualify, with 10 more likely in the coming 2 years. The remaining HIPCs, plus 8 other “sunset clause” countries, are not likely to fulfill all the conditions. What debts will be canceled? All debt stock owed to the International Development Association (IDA) and the African Development Fund (AfDF) and the IMF accrued (most likely) before January 2005. How much are we talking about? $40- $60 billion in nominal terms, depending on the number of countries that qualify.

The G-8 steps forward

The staggering burden of poor country debt has led to significant pressure on creditors. For over two decades civil society actors around the globe have called for substantial debt relief. In the 1980s bilateral creditors recognized that debts held by many poor countries were unpayable and began debt reduction negotiations through the Paris Club. In the 1990s multilateral creditors were forced to acknowledge that many debts were not only unpayable but were severely undermining development efforts. In 1996 the World Bank and IMF launched the Heavily Indebted Poor Countries Initiative. While HIPC has provided some welcome relief, its limitations in ensuring sustainable debt levels among low-income countries have prompted calls for further action.

The leaders of some of the wealthiest countries, the Group of 8 (G-8: Britain, Canada, France, Germany, Italy, Japan, Russia, U.S.), responded with a significant proposal during their July 2005 summit in Gleneagles, Scotland. Unlike previous debt initiatives, the G-8 proposed not just debt relief (moratorium on interest payments, interest rate reductions, etc.), but 100% cancellation of the debt stock owed by at least 18 countries to the World Bank’s International Development Association, IMF, and the African Development Fund, with the prospect that other countries would also be included in the plan. The initial 18 countries are Benin, Bolivia, Burkina Faso, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania, Uganda, and Zambia. These 18 countries are among the poorest in the world, clearly face unsustainable debt loads, and have met various political and economic criteria established by the World Bank and the IMF in their Highly- Indebted Poor Countries (HIPC) Initiative. It is widely recognized that resources freed up by the HIPC Initiative have enabled countries to increase spending on social expenditures. Tanzania, for example, increased spending for poverty reduction by over 130%.

However, participation in HIPC requires countries to demonstrate “a track record of reform” through adherence to IMF and World Bank adjustment programs. As noted earlier, these programs are highly contentious because they require policy changes that many activists and some analysts argue are onerous, politically intrusive, unfair, economically unwise, socially and ecologically damaging, and hindering of debt relief. The G-8 plan could extend to other countries if they too reach “completion point” status within HIPC. Ten countries that could satisfy the program’s criteria in the next two years are Burundi, Cameroon, Chad, the Democratic Republic of Congo, The Gambia, Guinea, Guinea-Bissau, Malawi, Sao Tome, Principe, and Sierra Leone. Uncertainty reigns on how many other countries may qualify for debt cancellation.

What is HIPC?

The Heavily Indebted Poor Countries initiative was launched by the World Bank and IMF in 1996 in recognition of the unsustainable debt levels owed by poor countries, in particular to multilateral institutions. Who’s eligible? HIPC countries must have (1) annual per capita income below $865; (2) debt-to-export levels greater than 150% or debt-to-revenue ratios higher than 250%; and (3) demonstrate good macroeconomic performance as determined by the IMF and World Bank. Will debt then be forgiven? Not that simple. To achieve irrevocable debt relief, a country must:

1. complete a poverty reduction strategy paper (PRSP) that is satisfactory to the Bank and IMF ;  
2. maintain a stable macroeconomic environment (usually means staying on track with an IMF program) ; and
3. implement key structural reforms in governance, education, and health, as recommended by the World Bank. Once the country successfully implements these conditions, “completion point” is reached and creditors agree to a reduction in the country’s debt to a supposedly “sustainable” level (not 100% cancellation of all debts owed). As of August 2005, 38 countries are considered HIPCs and 18 have reached completion point. Uncertainty reigns on how many other countries may qualify for debt cancellation.

Who pays?

The G-8 plan was endorsed in principle by member governments of the World Bank and IMF at their annual meetings in September 2005. However, a key sticking point in turning the plan into action has been the question of ‘who pays?’ The World Bank has estimated its costs of foregone principal and service payments to range from $32 billion to $42 billion in nominal terms, though the present value cost to donors would be significantly less. Preliminary cost estimates for the African Development Fund are $10 billion; $5 billion for the IMF. While some debt relief advocates have argued that the World Bank and IMF possess sufficient internal resources to cover debt cancellation for their poorest borrowers, many donor and borrower governments as well as the World Bank maintain that without additional funding the G-8 plan will eventually weaken the World Bank’s ability to provide low-cost development finance. In the weeks following the Gleneagles summit, the key backers of the plan – the US and UK – offered mixed signals on whether they would provide substantial new funds or reshuffle existing commitments. However, on September 23, 2005, G-8 finance ministers assured World Bank President Paul Wolfowitz that their countries “are committed to cover the full costs for the duration of the canceled loans” and that they “will make contributions additional to [their] regular replenishments of the International Development Association” (IDA) – the World Bank’s concessional lending arm that would write off the debts. The IMF portion of the deal, on the other hand, will be paid for from the Fund’s own resources – namely unused proceeds from a gold sale in 1999 and from the specialized PRGF subsidy account. While donors have pledged to offset the costs of debt cancellation, one should recall that many of these debts have terms of 40 years. Holding future governments to financial commitments made today is of course difficult. In the United States, congressional appropriators would need to approve steady increases in US funding to the World Bank over the next four decades to finance the plan – not a foregone conclusion given competing priorities and large fiscal deficits.

Improving the G-8 deal

The Executive Boards of the World Bank and the IMF are expected to formally approve the deal in the coming months. Debt activists and some analysts point to many challenges and shortcomings of the G-8 deal as announced, and suggest the following recommendations:

1. EXPAND THE LIST OF ELIGIBLE COUNTRIES. Many more countries than those included in the current plan need debt cancellation, although where to draw the boundary is a matter of debate. The current G-8 plan is limited to those countries currently part of the HIPC Initiative. However, HIPC does not provide an adequate basis for determining who needs debt relief. The Initiative uses arbitrary criteria for determining country eligibility (for example, per capita income below $865 and a debt to- export ratio greater than 150%). These criteria exclude numerous countries with high debt loads and large populations surviving on less than $2 per day. Angola, Belize, Ecuador, Lebanon, the Philippines, and Uruguay are just some of the countries that by definition are not part of the plan even though their debt service outpaces spending on health care or education (Table 1). A group of UK NGOs – Jubilee Debt Campaign, ActionAid, and Christian Aid – argue that focusing on what countries need in order to achieve the Millennium Development Goals by 2015 reveals that at least 62 countries need 100% debt cancellation. Finally, some heavily-indebted middle-income nations would benefit from at least partial cancellation of their illegitimate debts, including Chile and the Philippines. In fact, the World Bank notes that 25 middle-income countries are suffering under “severe” debt burdens.
2. ELIMINATE THE CONDITIONS. Many HIPC debt relief requirements can be highly problematic for economic, social and/or political reasons. By keeping the debt cancellation arrangement within the HIPC framework, these conditions are maintained and may be further tightened. In the lead up to the Bank/Fund annual meetings in September, the World Bank lamented that “the G8 proposal offered no mechanism for suspending debt relief if a debtor country deviated from economic and social reforms prescribed by the World Bank and IMF.” Borrowers and debt campaigners reject calls for additional layers of creditor conditionality. Of course, recipient country governments must ensure their citizens that debt service savings will be used for poverty reduction. Transparent public revenue management systems need to be in place.  But creditor assessments of such systems should not become a source of expanded economic policy conditionality for debt cancellation.
3. INCLUDE DEBTS OWED BY OTHER MULTILATERAL INSTITUTIONS. The G-8 plan only covers debts owed to the IMF, the World Bank (IDA), and the African Development Fund. The largest portion of many Latin American nations’ debt is owed to the Inter-American Development Bank (IDB), not the IMF or the World Bank. Bolivia, Guyana, Honduras and Nicaragua – all to be included in the G-8 plan – would still be left owing the IDB over $4.5 billion in debt and service charges. The African countries included in the G-8 plan would continue to owe over $403 million to the African Development Bank. There has been no clear explanation as to why the IDB, the Asian Development Bank, or the African Development Bank have not been brought into the multilateral debt cancellation plan. Furthermore, there is concern that other multilateral creditors that have not yet cooperated in the HIPC initiative now will have less incentive to do so, as their debtors’ financial situations are positioned to improve.