06.14.07

Background

For decades, poor African countries have been 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 spend more each year to service debt payments than they do on health and education combined.

Current Situation

While the debt crisis is far from over, industrialized countries have taken action to relieve debt burdens in many of the most impoverished countries, and these commitments have proven effective. Debt relief has been extended through two vehicles: the Highly Indebted Poor Country (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). Both initiatives target 40 of the most impoverished countries in the world. The HIPC Initiative, started in 1996 and further enhanced in 1999, cancels most bilateral debt and some multilateral debt once countries adopt economic and governance reform programs supported by the IMF and the World Bank. The HIPC process is designed to ensure that the debt savings are directed to country-owned poverty alleviation priorities.

At the 2005 G8 Summit, G8 leaders, led by the U.S. and the U.K., took further action to broaden debt relief by adopting the MDRI. For those countries that have completed the HIPC process, the MDRI agreement provides 100% debt cancellation of eligible debts that are owed to the World Bank, the IMF and the African Development Bank.

To date, 22 have completed the HIPC process and have thus qualified for 100% debt cancellation, 18 of them are in Africa. Of the remaining countries, eight are receiving interim debt relief and another 10 are potentially eligible for debt relief and full cancellation, but have not yet met the requirements to begin receiving support.

• For the 18 African countries receiving full cancellation, MDRI will result in a nominal cancellation of about $34 billion over the life of the loans. This is in addition to $36 billion in HIPC relief. Combined, the two initiatives are thus currently providing approximately $70 billion in debt relief to African countries, saving them an average of almost $2 billion a year.

• If all 40 potentially eligible countries complete the process, the two initiatives will provide approximately $147 billion in relief in total.

Despite the debt relief provided by HIPC and MDRI, however, substantial debts still remain in many countries striving to meet the Millennium Development Goals.

Moving Forward

More remains to be done to ensure that the benefits of debt cancellation are fully realized. Even after debt relief, the world’s poorest countries continue to pay $100 million each day in debt repayments.

• Donors should continue to fully finance the debt deal brokered at the 2005 G8 Summit by ensuring that adequate resources are available for all HIPC countries so that they can progress through the HIPC process without delay.

• G8 donors should implement an expanded debt cancellation initiative for poor countries such as Kenya and Lesotho who spend a significant portion of domestic resources servicing debt, but who were excluded from debt relief because their debt levels did not meet the HIPC threshold. In this case, the eligibility requirements ended up excluding such countries from the benefits of debt cancellation because they did a relatively good job of managing their debts.

• Finally, donors should take measures to preserve the gains made through debt cancellation by making future development flows available in the form of grants — not new loans — and without imposing harmful economic conditions. Debt cancellation is a critical step in paving the way for economic development and poverty reduction, but it alone is not sufficient to jumpstart development. Impoverished countries need increased assistance in addition to debt cancellation, if they are to stand a chance of breaking the cycle of extreme poverty.