CONTENTS | ANB-BIA HOMEPAGE | WEEKLY NEWS
by ANB-BIA, Brussels, May 1998
THEME = DOSSIER
Should, could the international debt owed by poor countries be
cancelled?
There is worldwide pressure, increasing in recent years,
asking for this debt to be wiped out,
as the 3rd Millennium approaches.
For many years now, the world has gradually come to realise that the problem of debt owed by poor countries is an insurmountable handicap for them in their attempt to overcome their situation, and opinion has been mobilised to find a solution. Many NGOs, of which OXFAM is among the most active, are petitioning for the debt to be cancelled completely. The best known of these movements is undoubtedly the Jubilee 2000 initiative, a coalition led by Ann Pettifor (UK), representing religious institutions and aid agencies, which has been collecting signatures throughout the world.
The Catholic Church has also made statements on the same subject. In his encyclical "Tertio Millennio Adveniente" on 10 November 1994, Pope John Paul II launched an appeal for cancellation of the debt. On 17 April this year, two Catholic organisations, Cidse and Caritas Internationalis, published a document called "Faire Passer la Vie avant la Dette" (Put Life before Debt), in which they study the problem in some detail and ask that the debt, which most poor countries will never be in a position to repay, should be cancelled between now and the year 2000.
Creditors themselves are aware of the problem, and have been searching for solutions. At the start of 1996, international organisations such as the World Bank and the International Monetary Fund initiated ways and means to alleviate debt. The same subject has been considered several times since then, especially during the recent G8 meeting held in Birmingham from 7-10 May 1998 (a summit meeting of the world's richest countries).
The following is a brief outline of the problem and the solutions being considered. Out study is based mainly on the document issued by Cidse/Caritas Internationalis.
Every business borrows money in order to develop. Third World countries have to do the same. This is normal practice, and has positive results if interest rates are relatively low and remain stable, and if the money borrowed is put to good use. However, several factors have destabilised this process.
The starting point for the current debt situation is normally blamed on the oil crisis in the 1970s. In 1973, the Organisation of Petroleum Exporting Countries (OPEC), quadrupled the price of crude oil, and increased it again in 1979. The vast quantities of money thus generated, were mainly invested in commercial banks, which in turn looked for takers for these funds. Since these "petrodollars" were freely available at a time when the developing world was in recession, the banks turned their attention, sometimes in quite forceful ways, to the developing countries. The banks loaned money to these countries often without evaluating current needs, and certainly without controlling the way in which the money was spent. The banks in question paid no attention to individual countries' economic or social conditions. And so the money flowed south!
But this money was, however, often spent very unwisely by political leaders, some of whom were downright corrupt. It was used to procure arms; to finance badly researched and badly managed projects, or projects which only benefited a small elite group, even sometimes disappearing into private accounts. It generated no real wealth for the countries concerned. Banks could lend to these governments, in the knowledge that the debt would continue with succeeding governments, since there is no international procedure for dealing with insolvency.
In 1971, the United States withdrew the gold standard for the dollar. This caused monetary instability throughout the world. Interest rates rose uncontrollably: loans taken out at 7% or 9% had to be repaid at 15% or 19%.
In addition, the increase in oil prices and in interest rates caused a worldwide recession. Developing countries were the hardest hit when the price of raw materials tumbled. They now became "insolvent debtors", and had continually to borrow more and more cash to meet their debt repayments. In 1982, Mexico was the first country to declare that it could no longer repay its overseas debt and the crisis broke. Since then, the situation has deteriorated.
A few figures will illustrate the situation: By 1995, the total debt owed by developing countries had reached 2068 billion dollars. (Figures for previous years were 647 billion in 1980, 991 billion in 1985, 1510 billion in 1990). In 1995, sub-Saharan Africa had debts of $223 billion, or 270% of its export figures.
Faced with such a disastrous situation, some facts must not be forgotten.
Repayments: The first thing to remember is that the indebted countries have already repaid the principal in full, that is, the initial amount borrowed. Their present debts consist mainly, or entirely, of interest payments. This means that, caught in a downward spiral, poor countries have to finance the speculative investments of rich countries.
Moreover, developing countries' unpaid commercial debts are bandied about among specialist purchasing bodies as if they are commodities, and these countries are "priced" according to the level of risk. The purchasing body obviously hopes that the debtor country will recover thanks to the credit advanced, and hopes to have a privileged "right of entry" to that country's future privatisation programme.
Bankruptcy impossible: When a company or individual can no longer honour their financial commitments, they can be declared bankrupt. Conversely, a country cannot declare itself bankrupt. There is no procedure or arbitration system to allow this. At an international level, it is the creditors, not a court, who decide whether or not to demand repayment of the debt from the debtor country, and if applicable, they also set the conditions for repayment.
Social cost: Above all, the social cost of the debt must be considered. Repayment of debts absorbs a large part of the resources which could otherwise be assigned to the fight against poverty, or the creation of infrastructures such as roads, schools or hospitals. The governments of sub-Saharan African countries pay their creditors in the North four times what they spend on healthcare for their own people. Six out of seven of the most highly indebted countries in Africa, pay to service their debts (that is, interest payments) at a rate higher than that needed to make any major progress in the fight against malnutrition, disease, illiteracy and infant mortality.
What is more, remedies such as policy stability and structural adjustment imposed by the international financial institutions (e.g. World Bank, IMF) in an attempt to improve the management of public monies, often lead to a restriction on public spending. The austerity measures which accompany them have disastrous effects on the poor, both in the short and long term: public expenditure is reduced, public sector employees are laid off, local businesses close through foreign competition, and new investment is delayed.
Faced with the catastrophic situation of the indebted countries, creditors themselves began to look for solutions.
The various creditors
There are three categories of creditor: commercial banks, governments or "bilateral creditors", and international financial institutions (the International Monetary Fund), the World Bank and the regional development banks). The bilateral creditors include the Paris Club (essentially the rich nations who form the Organisation for Economic Cooperation and Development - OECD) and the others (Eastern Europe, the former Soviet bloc apart from Russia and the Arab nations).
The announcement by Mexico in 1982 of a unilateral moratorium on repayment of its debt, had considerable repercussions. From then on, the three categories of creditors began to define new approaches to debt repayment.
Commercial banks: the "Brady Plan" was an initiative of the former American Treasury Secretary, Nicholas Brady, used for "countries with intermediate incomes" (e.g. Mexico, Brazil, Morocco, Philippines). Through this, after obtaining the approval of the governments and international financial institutions, the banks reduced the commercial debts of these countries by 20% or even 35%, thus transferring the risk to the bilateral creditors.
Bilateral creditors: The Paris Club (and sometimes other countries) are now proposing reductions or rescheduling of debts, though according to very strict criteria. One of these conditions is that the portion of the debt which can be reduced (so called "eligible debt") is that part which was contracted before the country concerned asked for support for the first time. But since for most countries, this date was at the start of the eighties, the alleviation of debt is very often insignificant.
International financial institutions: These institutions, whose borrowings are guaranteed by all the member countries, normally have very favourable loan conditions. However, by insisting on their status as "privileged creditor", they demand precedence in making repayments. If the debtor country does not make its payments within the appropriate deadline, it will in principle not receive loans from other creditors. They do not authorise cancellation or rescheduling of their loans, but in practice, they almost always allow countries to wipe off their debts by taking out new loans at lower interest rates over longer periods.
In October 1996, the IMF and the World Bank launched a new initiative for relieving the debt burden for the "Highly Indebted Poor Countries" (HIPC). A country is considered to be in this position if its debts represent more than 200% to 250% of its gross domestic product (GDP), or if the debt servicing (repayment) exceeds 25% of exports. In April 1997, another criterion was added: a country is considered "highly indebted" if its debts exceed 280% of its tax revenues.
For such countries, for the first time, it was accepted in principle that all the external debt of a country in difficulties should be considered. This includes commercial, bilateral and multilateral debt. The Paris Club would agree to put 80% of its resources into alleviating "eligible" debts (see above), as opposed to 67% previously. But the biggest innovation is, that part of the multilateral debt may be wiped off if this is seen to be necessary, the cost of which will be met by grants from OECD member countries and by a share of the net profits of the World Bank.
A country wishing to take advantage of this scheme must show, over a significant period of time, a willingness on the part of its government to implement structural adjustment programmes (SAP) approved by the IMF and the World Bank. A period of six years is required in principle: three years to start with so as to establish eligibility for debt relief, and three further years for observation before the proposed alleviation is firmly granted. In total, the World Bank and the IMF estimate that from now till July 2002, thirteen countries of which ten are in Africa, will have benefited.
The Cidse/Caritas Internationalis (CCI) document highlights certain gaps in this initiative and suggests improvements, which are summarised below:
1. Too few eligible countries: Although 41 countries are classified HIPC, only a handful of these can take advantage of the initiative in its present form. According to the CCI document, they should all be eli-gible.
2. Conditions too stringent: The conditions imposed are strict and the effects of this measure are certainly going to be very limited. The restrictions imposed may be devastating for populations, worse than the advantages obtained by a slight alleviation of the debt. The structural adjustment policies may produce positive economic reforms, but may also be a factor in impoverishment.
3. Inadequate alleviation: The creditors collect funds to finance the debt reductions, but some of the larger G8 powers have not assigned adequate resources to this scheme. The World Bank has put aside a package of two billion dollars, but it will not make this available until the bilateral creditors have shown their own financial commitment by contributing to a separate fund. CCI is pleading with the OECD countries to increase their contribution to development aid to 0.7% of GDP, as stated in 1995, and that debt relief should be added to this aid budget, rather than deducted from it.
4. Viability of the debt: The HIPC initiative is only intended to allow the debtor country to recover its ability to repay its borrowing. The Latin-American countries, who are repaying their debts at the expense of their own people, are used as the basis to establish the "viable amount of the debt. According to CCI, these criteria do not take account of the sacrifices made by extremely poor countries. If viability is seen in terms of "human development", rather than "solvency", repayments can only be made from excess public resources over and above basic needs and production activity.
5.Excessive waiting periods: Countries have to wait six years before receiving multilateral relief. CCI comments that indebted countries need immediate relief. Moreover, every year's delay results in less relief, as indicators are recalculated and readjusted. Uganda, for example, which has to wait for another year, sees its relief reduced by 200 million dollars as a result.
6.Cut-off date: As mentioned above, the Paris Club has set a "cut-off date"; debt-granted relief may not be contracted after the date when the country concerned first asked for help. This date applies also to the HIPC initiative. According to CCI, the date should be set individually, taking other factors into account.
Even though the launching of this initiative to relieve the debt burden of HIPCs can be applauded, helping a few countries as it does, the gaps serve to highlights its inadequacies, and its failure to provide a satisfactory solution.
The CCI document stresses that, in order to solve the crisis, an ethical analysis, based on human dignity, is as necessary as an "economic" analysis.
The dignity of the human being is the basis for judging all political, economic and social systems, and therefore also any solutions to be applied to the debt problem. If individuals have mutual rights and responsibilities together to ensure the common good, so too have States.
The common good does not end at frontiers. There is however, no body with a mandate to promote this international common good. Thus, States and international institutions must accept this duty. International debt of poor countries is a huge moral challenge for such bodies. Within the indebted countries, the existence of a crushing debt affects the human dignity, the rights and the well- being of men, women and children. When repayment conditions are set, the effect of these on populations must be considered. Social justice requires that attention must be paid to those who, in the indebted countries, had no say in the matter when the debts were incurred, but who will be profoundly affected by the choice to be made in resolving debt problems.
In 1987, Cardinal Etchegaray wrote that "servicing a debt cannot be pursued at the expense of choking the economy of a country, and that no government may morally require of its people privations which violate human dignity". He added: "Industrialised countries must recognise and accept that the greater their economic power, the more responsibility they have".
The Jubilee of the year 2000 which is for the Church a time to restore justice, and symbolises the beginning of a new era, should be an opportunity for poor countries to make a new start and resolve international debt problems.
Moreover, together with other campaigns, proliferating throughout the world, Cidse and Caritas Internationalis are asking that debts which poor countries can no longer repay, should be cancelled between now and the year 2000. They do recognise that complete cancellation is still a "politically difficult" option, and add some short and long term suggestions.
They recall, however, that there have been precedents in debt cancellation. For example, after the Second World War, there was the Marshall Plan, and Germany's creditors reduced that country's debt at a debt servicing/export ratio of less than 5%. Now, creditors only reduce poor countries' debt from the point at which this ratio lies between 20% and 25%). In 1990, the United States cancelled almost half of Poland's debt.
In the short term, CCI is asking for significant improvements to the HIPC initiative, as mentioned above. Other proposals are added to these:
*Human development: Given that debt is one of the main causes of poverty in the countries concerned, resources released by cancellation must be invested in human development and production capacity, and a subordination link must be created between the two. In order to avoid the risk of deflation, it is suggested that this link is established in the way most appropriate to each country, after agreement between governments and civil society, which plays an essential part.
*Transparency: Care must be taken to ensure that decisions relating to debt relief, are taken in an open and above-board way. Normally, international financial institutions work in secret. Public bodies rarely have access to such dealings, even if it is they who subsequently suffer the effects. The IMF and the World Bank are therefore asked to consult more closely with ministries, local Churches, trades unions and NGOs working in the countries concerned, so that the agreements made are a better reflection of the situation on the ground. Governments are also asked to show that the work is carried out openly, and to conduct dialogue with groups of citizens.
*Structure of relations: In the longer term, according to the CCI, there must be a fundamental review of international financial relations and an equitable process established between creditors and debtors. Creditors are presently both judge and litigant. The responsibility for the present debt is shared between debtors and creditors. An equitable procedure and a framework of trustworthy relations is needed between the two parties. One of the proposed solutions is to introduce an international procedure for bankruptcy, insolvency, based perhaps on the American model, where a law is in place to protect local councils.
Is cancellation of poor countries' debts a Utopian dream? Are organisations asking for this action just cranks? This view ignores the impact which public opinion can have on government.
Let's consider the example of the Jubilee 2000 campaign. This movement was born in the Protestant English-speaking Churches and is now a broad coalition, campaigning throughout the world. Its aim is simple: to pressurise hard enough to ensure that clear, thoroughly researched procedures are implemented in the year 2000 to cancel a debt which is crushing the poor. The campaign strives to recognise that we are all responsible, both creditors and debtors, and calls on the leaders of the creditor countries to take the necessary steps to avoid a return to such high levels of debt.
"Coalition 2000" intends to bring together as many people as possible in a project for simply cancelling 100 billion dollars of debt for the 52 most heavily-burdened countries. Copies of the petition are circulating throughout the world. They will be presented to the G8 Summit in 1999. The millions of signatures collected, will support a worldwide action which will be a very powerful sign of the will of the majority of people, to see the human race make a new start in the year 2000.
In May this year, almost 50,000 people formed a "chain of solidarity" around the conference centre where the G8 Summit was taking place in Great Britain. During the summit, the leaders of the richest countries in the world discussed the debt problem and agreed on certain steps to be taken for debt alleviation.
Other action has been taken. For example, the British newspaper, The Guardian, published a whole series of articles on debt during May, analyzing the problem and noting what action must be taken. One example taken from the Guardian, 13 May 1998: "OXFAM wants to bring a case before the United Nations, accusing three countries, Germany, Japan and Italy, of following a tough debt repayment policy which disadvantages children in the poorest nations. These countries are contravening the United Nations declaration on the rights of the child. OXFAM asks these countries to justify their policies publicly. It accuses the IMF of adopting the same attitude, incompatible with its status as a specialist agency of the United Nations.
Where will the money come from to relieve or cancel the debt of the poor countries? Enormous sums are needed - or at least they seem to be enormous. But just take a look at the amount of money handled in the business world. Some 1200 billion dollars are handled each day as financial transactions! And the Microsoft Corporation makes a daily profit of $34 million dollars, which is the same amount as sub-Saharan Africa pays to service its debts (over what timescale? - annually? monthly?).
There will be ways to finance a cancellation of the debt. All that is needed is the will to do it.
The Tobin Tax: In the document "Third World Debt and the Jubilee" (published by Fidélité), the authors describe an often-quoted solution, namely the so-called "Tobin Tax", named after an American economist. This Nobel prize winner suggested as long ago as 1972, a tax of 0.01% on international financial speculations, the aim of which would be to reduce the movement of speculative capital. France and Australia have declared themselves to be in favour of a tax on currency trading. Canada and the Asia-Pacific Cooperation states will soon consider this proposal. A single tax of 0.2% could generate an annual sum of 150 billion dollars. A real breath of fresh air for the Third World and for everyone else. Other possible ways have been considered by well-known economists. A joint decision must first be made, which cannot happen without a global desire for change.
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There are 28 African countries listed among the Highly Indebted Poor Countries: Angola, Burundi, Cameroon, Central African Republic, Congo-Brazzaville, Congo-RDC, Côte d'Ivoire, Equatorial Guinea, Ethiopia, Ghana, Guinea, Guinea-Bissau, Kenya, Liberia, Madagascar, Mali, Mauritania, Mozambique, Niger, Nigeria, Rwanda, Sao Tome e Principe, Sierra Leone, Somalia, Sudan, Tanzania, Uganda, Zambia. A further nine are considered to be approaching this stage.
By the end of April 1998, the IMF approved a debt-relief package for Uganda, Burkina Faso, Côte d'Ivoire and Madagascar. This package will very shortly be approved for Guinea-Bissau and Mali.
Mauritania, Togo and Ethiopia's situation will be put under the microscope before the end of 1998.
Senegal and Benin will not be able to profit from the IMF package. Their debt situation is considered to be "viable".
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Today, every African -- (men, women and children), is in debt (external debt) to the tune of more than 440 US dollars.
In Uganda, the government spends annually 3 US dollars per person on health needs. At the same time, the government must repay between 20 US dollars and 30 US dollars per person in debt repayment.
In Mozambique, 33% of public expenditure is taken up by debt repayment, 7.9% to education and 3.3% to health.
Between 1990 and 1993, Zambia spent 35 times more money on debt repayment than on meeting the country's education needs.
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CONTENTS | ANB-BIA HOMEPAGE | WEEKLY NEWS
PeaceLink 1998 - Reproduction authorised, with usual acknowledgement