100% Cancellation
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100% Debt Cancellation

A response to the World Bank and IMF rejection

 (available as a WORD document - why 100% )

Recent campaigning for ‘Drop the Debt’ has focussed on the next step (for the 23 HIPCs that have reached decision point) of cancelling 100% of the World Bank and IMF debts.  These demands were rejected in a paper from the World Bank and IMF (dated July 2001[1]). This paper is a counter argument to that rejection, looking at each point in turn.

The World Bank paper rightly seeks a holistic approach to poverty relief.  In the context of the campaign against terrorism and the challenge of a new world order of justice, the cancellation of the debts of the poorest countries is just one component.  But it is a pre-requisite component for meeting the 2015 poverty reduction targets.  Alongside radically more equitable WTO agreements, conflict resolution and the eradication of corruption, substantial investments will be needed in healthcare, education and economic growth.  At this time, there is no readily available or agreed estimate of the investment needed to meet the 2015 targets, but a World Bank estimate is that between $35-75 billion annually (additionally) will be required.  This figure can be compared with the debt service of the poorest countries which, after enhanced HIPC is $22 billion annually (and rising). 

 

Cancelling the debts would go a substantial part of the way to financing the investment needed to meet the 2015 targets.  Alternative financing would simply substitute for debt relief.

 

The point-by-point response is: -

 

1/ The strategy for reducing poverty

 

Certainly debt relief is only a component of an overall strategy.  The finances released have to be invested in ‘pro-poor growth’.  The International Community must also respond by opening markets and assisting in building good governance.

 

The final paragraph states –

The HIPC initiative should be seen as part of this comprehensive approach.  It is removing debt as a constraint in poor countries’ struggle against poverty.  It sets the stage for determined countries. Supported by the international community to overcome other constraints to exiting from poverty.

 

The graph shows just how much impact HIPC has had on debt service payments for just those countries that have reached decision point (Figures taken form the August HIPC impact report).  This minimal reduction has not ‘removed debt as a constraint’.  It is not sufficient.

 

The debt service for the 52 poorest countries identified by Jubilee has been reduced so far from $23bn to $22bn per annum.

 

Of course HIPC is only a component in a strategic and holistic approach, but it hasn’t achieved the objective of ‘removing debt as a constraint’.  It has reduced debt service for 23 HIPC countries, but they remain comparable to spending on education and a constraint on poverty reduction, whilst for the remaining poor countries the constraint has not been removed.  And without removing that constraint, the broader targets of the 2015 poverty reduction cannot be achieved.

 

II The HIPC Initiative, what has been done?

 

This section of the rejection sets out the significant achievements for the 23 HIPC countries.  It is progress, although it has taken nearly five years and only progressed to a nominal relief of $54bn of the $100 promised (August 2001 HIPC impact report).

Text Box:

However looking again in the context of the broader, strategic debt problem, the current HIPC debt relief comes into a less positive perspective.  This graph shows the relatively significant impact made for the first 23 countries compared with the overall HIPC programs impact on the 41 countries nominally within HIPC and the debt burden of the 52 poorest countries.

 

The argument rightly identifies the risk that there would be no benefit to these 23 countries if the Aid and other grants were reduced, although there are secondary benefits in not merely circulating aid into debt service.

 

The final paragraph asserts that total debt cancellation would seriously jeopardize the overall flow of support for the poorest countries.  It is difficult to see the justification for this assertion.  Those countries and IFIs who currently recognise the need and justification for aid and grants are unlikely to see lower debt service as a reason to reduce aid (and certainly not by more than the debt re-circulation) whilst with lower debts and a more assured future, private investment would be stimulated.

 

The suggestion that further debt cancellation would lead to a reduction in overall net investment seems highly contentious.

 

III Total debt Relief by Multilaterals –would it help the attack on worldwide poverty?

 

The attack on worldwide poverty can be seen in the agreement to meet a number of poverty reduction targets by 2015 (halving the number below the $1/day poverty line, halving malnutrition, infant mortality reduced by two-thirds etc).  These targets will not be met without investment in education, healthcare, infrastructure and governance.  Whilst there may be no agreed figure for the investment required, a World Bank estimate is between £35bn and $75bn of additional resources would be required annually (a perfectly acceptable margin of error).  Currently debt service is extracting $22bn annually from the world’s poorest countries (Jubilee list of 52).  So the answer is yes, total debt relief would make a substantial contribution to releasing the resources to meet the poverty reduction targets.

 

The current HIPC initiative is predicated on the concept of reducing debt service to a sustainable level. Sustainability is assessed in economic terms in relation to exports (yet another contentious issue when commodity markets are so volatile and IFI induced expansion of commodity production has undermined the price basis), GNP and Government resources.  What would be more appropriate is to assess sustainability after allowing for the investment needed to meet the 2015 targets; in other words, poverty reduction investment takes priority over debt repayments.

 

The bulk of the text in this section of the paper extols the virtues of borrowing for investment and the generosity of the IFIs concessional lending.  It looks forward to growth bringing HIPCs to a point when they can sustain access to international finance.  This leads to the argument that ‘Debtor’ countries need to manage debt in a climate of ‘mutual trust’ –so that creditors have the confidence that loans will be repaid.  Whilst not explicit, this argument puts the burden for debt management on the relatively unsophisticated poorer countries.  To balance this assertion, the IFIs should accept a comparable responsibility to banking in the developed world and write off debts that have been made on initiatives that failed!

 

However the essential argument in this section is made in the final paragraphs which, in effect, assume a fixed amount of money available to be spread across all developing countries.  Thus 100% debt cancellation for the HIPCs would be at the expense of other countries.  The fallacy lies in the assumption of a fixed amount of money available.  The demand is to cancel the debt so that the 2015 poverty reduction targets can be met across all countries.  Financing can be either from the IFIs existing resources (which two independent London accountants have assessed as affordable) or else it must come from further funding from the G8 (or a combination of both).

 

Total debt relief would help attack worldwide poverty; indeed the 2015 targets will not be met without it.

 

IV Maintaining the Capacity to Finance Development

 

 The opening statement in this section is – Supporters of 100% debt cancellation must be honest about the costs.   The Total debt for low income countries stands at $640 bn.  ….Total cancellation would imperil the [IFI] funds

 

bulletThe IFIs and G8 should be honest; without 100% debt cancellation poverty reduction (the 2015 targets) will not be achieved.
bulletThe HIPC countries debts after HIPC are $24 bn  (nominal –34 countries).  This step could be financed within the IFIs.
bulletTotal cancellation will require additional donor funding.

 

 

The first point is fundamental and reflects the different perspectives of the campaign to drop the debt and the IFI position noted previously.  HIPC has primarily cancelled debts to avoid pending increases in debt service levels, which could never have been achieved and brought debts to a so called sustainable level, that is debt repayment takes priority.  The call for 100% debt cancellation takes poverty reduction commitments as the objective and demands that pro-poor investments take priority.  The alternative, in which aid/grants merely recycle into debt service, is hypocritical.

 

The second point is that the papers from the London accountants, which concluded that 100% debt cancellation could be funded by the IFIs internally, were addressing the HIPC countries not all low-income countries.  The August HIPC Impact review quantifies the debt stock for the HIPC countries under active consideration at £124bn reducing with HIPC to $24 bn.  If all HIPCs are included, that figure may well be significantly higher (perhaps $100bn), but there are many reasons why the additional countries are not likely to receive relief imminently.  The assertion is that this figure ($24bn) is within the capability of the IFIs without impacting their essential funding of other developing countries.

 

 

Finally, to meet the 2015 poverty reduction targets funding far greater than the debt cancellation will be required.  It is a meaningless exercise to use aid and grants merely to sustain debt service.  The developed world countries, primarily the G8 do have to provide the additional resources to fund the IFIs debt cancellations and further investments to meet their commitments to the 2015 targets.

 

V The Way Forward

 

The debt campaign should join forces with the World Bank in promoting and lobbying for its steps to achieving the poverty reduction targets.

 

bulletOpen markets and equitable trade agreements.
bulletIncreased aid towards the UN 0.7% targets
bulletGood governance and an end to conflict

 

These objectives are consistent with the drop the debt campaign. 

 

But as part of the way forward, and as a pre-requisite for achieving the poverty reduction targets, substantially more debt should be cancelled.  Debt service should not take precedence over poverty reduction investments.  The HIPC initiative should be re-assessed in the context of the poverty reduction goals, and debt sustainability should relate to those government resources that remain after meeting the poverty reduction goals  (for example 20% of the remaining government revenues as proposed by Cafod[2]).

Drafted by Dave Pearce

October 2001


[2] Cafod paper the human development approach to debt sustainability analysis for the world’s poor April 2001 - Northwood