100% DEBT RELIEF FOR HIPC COUNTRIES FROM INTERNATIONAL FINANCIAL INSTITUTIONS

June 8, 2004

The potential G8 proposal:

At the U.S. G8 Summit in Sea Island, Georgia, one of the debt relief proposals G8 member countries will consider is a bold new proposal for debt relief for the poorest nations of the world—100% cancellation of multilateral debt and a shift to 100% grants (rather than loans) until at least 2015 for qualifying HIPC countries. Such a bold proposal could free Heavily Indebted Poor Countries (HIPCs) of hundreds of millions of dollars in debt payments each year which, combined with increased grants, could be used to invest in health, education and clean water. The cost would be on the order of $1 billion a year – up to $700 million to cover the cost of cancellation, and an additional amount not yet well costed, to cover the amount necessary to finance conversion from loans to grants.

DATA’s reaction:

“The 100% cancellation of World Bank and IMF debt would be an historic breakthrough by the wealthiest nations, and a lasting exit for the poorest countries from the debt trap. If agreed and fully funded, the US and UK governments will deserve enormous credit for laying the foundation for the poorest countries to beat extreme poverty over the next decade. There are many questions about the financing of the proposal which Finance Ministers must quickly work out, especially the relative use of reserves including IMF gold and new resources from the G8.”

DATA’s recommendation:

Every poor indebted African country that has a transparent and accountable plan for poverty alleviation should receive deeper debt cancellation, including 100% of the debts owed to the international financial institutions, and 100% grants not loans, in order to help finance poverty reduction and the achievement of the Millennium Development Goals. If agreed, these provisions should be funded with additional, not existing, resources. Further, key countries currently excluded from the proposal, such as Nigeria, should be included.

Background:

Over several decades, poor countries accumulated large international debts, built up through Cold Warmotivated lending, natural disasters, and the acts of corrupt dictators. Many poor countries spent 30-40 percent of their annual budgets paying back decades-old debts, much more than they spent on health and education combined. Worse yet, most borrowed more money in order to cover their payments on old debt, creating a vicious cycle of indebtedness. In 1999, the G7 and then the Boards of the World Bank and IMF adopted the “Enhanced Heavily Indebted Poor Country (HIPC) Initiative.” The Initiative has successfully mobilized donor resources to write off $50 billion worth of debt and free up to $1 billion per year in debt service payments for 27 of the poorest countries in the world—mostly in Africa. This money has been used to build schools, clean water wells and set up AIDS prevention programs. It has not, however, provided a lasting solution to the debt crisis and could be improved.

What would 100% multilateral debt cancellation mean for HIPC countries?

HIPC countries continue to pay billions of dollars each year in debt payments to bilateral creditors and also to multilateral creditors such as the World Bank (International Development Association or IDA), the International Monetary Fund (IMF) and the African Development Fund. Full relief of multilateral debt would enable poor countries to save their money and direct those funds to their people. For example, between 2005-2007, HIPC countries are scheduled to pay an average of $295 million to the World Bank, $318 million to the IMF and $17 million to the African Development Bank for a total of $630 million each year. These resources should be used to improve the health or education of these countries’ citizens. An additional amount would be needed to pay for converting future assistance to eligible countries from loans to grants.

Country Examples

• Tanzania has successfully used the debt relief already received to increase education spending and eliminate school fees, allowing an estimated 1.6 million children to return to school. However, between 2005- 2007, Tanzania is still scheduled to pay an average of $26 million to the World Bank and $46 million to the IMF for a total of $72 million each year. This money could be used to further improve Tanzania’s education system by hiring teachers and buying desks and chairs to fill the new classrooms built with previous debt relief money.
• Ghana reached HIPC decision point in 2002 yet is still scheduled to pay an average of $28 million to the World Bank and $24 million to the IMF for a total of $52 million each year. This amount is almost enough to finance Ghana’s Poverty Reduction plan in 2005 of $53m, allowing Ghana to direct resources towards priorities such as improving the infrastructure, modernizing the agricultural sector, enhancing the provision of basic services such as education and health, and strengthening institutions of good governance.
• Senegal has a strong record of fair governance and of using limited resources to invest in the Senegalese people. But even after the enhanced HIPC initiative, Senegal is scheduled to pay an average of $19 million per year to the World Bank and $25m per year to the IMF for a total of $44 million per year over 2005-2007. According to a joint World Bank and IMF paper, Senegal could effectively utilize an additional $221m per year to fight poverty and improve the lives of the people of Senegal.

Cost of 100% Multilateral Debt Relief for HIPCs

The annual cost of 100% IFI debt cancellation for HIPCs is roughly $600-700 million. For the World Bank (IDA) and the African Development Fund, donors collectively would need to cover the payments that HIPC countries would otherwise have made to these institutions – totaling an average of $312 million per year from 2005-07. The IMF could finance 100% relief of its debt to HIPC countries (averaging $318 million yearly over 2005-07) either by using resources currently available funds that would otherwise be used to offer new lending to these countries or through IMF gold sales.

In addition to proposing 100% debt relief from multilateral debt, the current proposal could offer up to 100% grants instead of loans to HIPC countries until at least 2015, the target year for reaching the Millennium Development Goals. After 2015, HIPC countries would be reassessed and some would begin receiving some percentage of assistance in the form of loans once again.

In order for this proposal to deliver an overall increase in resources to the poorest countries, it is imperative that donors carefully assess the feasibility of using existing World Bank reserves and how much more G8 and other wealthy creditor nations can commit to expand IDA, the concessional lending arm of the World Bank that provides resources for HIPCs and other poor countries. A ballpark $1 billion per annum figure has been floated for the total cost both of 100% debt cancellation and the shift to 100% grants for HIPCs.

On G8 Proposals made today:

“The G8 announced today a series of other important targeted initiatives on finding an AIDS vaccine, fighting famine and structural food deficits in Ethiopia, beating polio and fighting corruption. These are all welcome and much needed. Just as the world must finish the job on eradicating polio, so finding an AIDS vaccine urgently can herald the beginning of the end of the AIDS virus. The development of an HIV vaccine is one of the most important scientific and public health challenges of our time. And with the 20th anniversary of Live Aid and We are the World looming it would be appropriate to have a final and meaningful solution to the Horn of Africa’s structural food deficit. All these efforts will go further with extra efforts to beat corruption,” said Jamie Drummond, executive director of DATA.

All part of one plan – to achieve the Millennium Development Goals and make a better, safer world

“For all these announcements to equal more than the sum of their parts they must be knit into a bigger plan to achieve the internationally agreed Millennium Development Goals. This will require much more financing and fair trade reform from the G8 than is currently on the table, and this expanded historic compact for compassion and justice needs to be delivered between this years G8 Summit, next years G8 in the UK and the UN Millennium Summit in October 2005, to launch a ‘decade for development and security’,” Drummond said.

Contact: Seth Amgott, +1 202 639 8010, or on mobile in Savannah late Wednesday-Thursday +1 202 415 2625.