For decades, African countries were spending billions of dollars each year repaying debts to donor countries and international financial institutions. Many of these loans were given for political reasons during the Cold War to prop up particular governments, and in many cases, were wasted by corrupt and unaccountable regimes. These large debts became a serious impediment to poverty reduction and economic development. Countries began taking on new loans to repay old ones. Some countries spent more each year to service debt payments than on health and education combined.
While the debt crisis is far from over, industrialized countries have taken action to relieve debt burdens in many African countries. Debt relief has been extended through two vehicles targeting 40 of the most impoverished countries in the world, 34 of them in Africa. In exchange for debt relief, poor countries adopt economic policy reforms and agree to channel the debt savings to poverty reduction activities.
Today, 18 African countries have qualified for 100% debt cancellation, resulting in close to $2 billion per year in savings that can be directed to health and education rather than paying old debts. Despite the debt relief provided, however, substantial debts still remain in many countries striving to meet the Millennium Development Goals. Debt cancellation is a critical step in paving the way for economic development and poverty reduction, but it alone is not sufficient to jump start development. Impoverished countries need increased development assistance in addition to debt cancellation if they are to stand a chance at breaking the cycle of extreme poverty.
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