Iraq and Ethiopia treatment shows debt relief double standards

5 April 2004

The differing treatment given to Ethiopia and Iraq in debt relief suggests that geopolitical considerations are again outweighing internationally agreed criteria for fair debt cancellation. Massive popular campaigning in the mid to late 1990s resulted in the World Bank and IMF launching a Heavily Indebted Poor Country (HIPC) initiative. This has, however, failed to deliver sufficiently timely or generous debt relief. The contrast with the treatment of Iraq could not be more stark.

Creditor countries pledged debt cancellation for 42 countries if they met a set of conditions. The judgement on when countries qualify is made entirely by the World Bank and IMF, with no participation of the debtor government or civil society. The technical criteria include the ratio of debt to export levels, a track record of policy reform and the preparation of PRSPs. But it is government’s political willingness to be ‘good performers’ under IMF/World Bank programmes which is really necessary to ensure they get debt relief.

Ethiopia satisfied creditor conditions over the five-year qualifying process and its debt sustainability analysis was completed last November. This indicated that falling coffee prices and drought have reduced Ethiopian government income. However World Bank and IMF board approval for debt cancellation was delayed by opposition from the US, Germany and Japan. These creditors were attempting to withhold around $700 million in debt relief by ignoring the agreed principle that debt relief should be “topped-up” if countries face external shocks. According to Jubilee Research: “if Ethiopia is denied this relief, debt service payments will be an additional $35 million per year for the next 10 years”.

debt relief is subject to arbitrary geo-political considerations

While blocking Ethiopia’s additional debt relief, the US and German governments are pushing to cancel Iraq’s debt. Speaking at the World Economic Forum in January, Bank president James Wolfensohn affirmed that most of Iraq’s creditors are prepared to write off two-thirds of its foreign debt by the end of 2004. Jubilee Research responded: “the double standards applied by Western creditors to these two debtor nations reveal that debt relief is subject to arbitrary geo-political considerations”.

Estimates of Iraq’s debt vary widely, but it is estimated to be over $300 billion making it one of the world’s most heavily indebted nations. In the aftermath of the invasion, the US urged international financial institution involvement in Iraq. US Treasury spokesman Tony Fratto made American motives clear: “the economic reconstruction of Iraq is an important aim of our national security goals for the region”. A White House spokesperson went further: “the future of the Iraqi people should not be mortgaged to the enormous burden of debt”. As Iraq is such a vital political issue in the US the government has abandoned its normal line that debt write-offs set a dangerous precedent. As Washington already has plenty of leverage in Iraq it does not need to keep the country indebted in order to push through investor-friendly reforms. However the cancellation is likely to come with strict conditions. In April the IMF will publish a debt plan for Iraq which is expected to demand wide-scale privatisation of the energy sector and public services.

The eagerness to cancel Iraq’s debt while trying to reduce the package for Ethiopia shows creditors’ double standards. The Millennium Development Goals are likely to remain a mirage for HIPC countries under current circumstances. But with political will and a fair and transparent governance mechanism for debtor/creditor negotiations this could be reversed. A new report by the Jubilee Debt Campaign and World Development Movement suggests, for example, that it would only cost the UK government £1.3 billion to write off its share of outstanding debt owed to the international institutions.