Debt sustainability debates; new proposals for cancellation

26 July 2004

Preliminary analysis of the new debt Sustainability framework in early June by US-based Citizens Network on Essential Services (CNES), argues the proposal emphasises the rights of creditors over all other development challenges, including the attainment of the Millennium Development Goals (MDGs).

The focus on future borrowing and debt “thresholds” may undermine the argument for the cancellation of old debts and preclude a fundamental questioning of the role of loans.

Special UN adviser Jeffrey Sachs, has suggested that African countries should refuse to repay their foreign debts, urging developed countries to cancel Africa’s $201 billion debt which makes it impossible to achieve the development goal of halving poverty: “if they won’t cancel the debts, I would suggest obstruction”.

"the time has come to end this charade, the debts are unaffordable, if they won't cancel the debts, I would suggest obstruction"

Analysts have pointed out that if the debt suctainability proposal is to advance the MDGs, the level of grants needs to increase to ensure net transfers to low income countries are not reduced. A high policy score might not assure countries increased overall assistance if the proportion of grants to loans is lower.

Debt campaigners have long questioned the ‘grants vs. loans’ approach. They argue that a better approach would be to assess country needs for development finance against benchmarks such as the MDGs, cancel all debt and make up the balance through grants.

CNES analysis casts doubt on the administration of debt sustainability pointing out that it assumes a level of coordination among multilateral lenders that does not exist. They argue that the proposal will result in more stringent terms for grant aid, and a shrinking of countries’ policy autonomy. The proposal would effectively sanction a policy cartel propagating ‘one-size fits all’ policies.

Press reports of a US government plan to back a proposal for 100 per cent cancellation of multilateral debt ahead of the June G8 summit was seen by analysts as an attempt to get backing for Iraq’s reconstruction. It is beleived that the UK may be holding out for their 2005 G8 presidency to make a ‘grand announcement’ on debt relief.

Perhaps the greatest obstacle to debt cancellation is the lack of clarity on who will pay. Birdsall and Deese of the Center for Global Development, suggest mobilisation of more IMF gold, increased bilateral assistance and higher interest rates on loans to upper middle-income countries, and a new ‘insurance policy’. The latter would require creditors to take partial responsibility for both unanticipated shocks and inaccurate predictions which lead to debt accumulation.

The Debt Coalition in Ireland argue that the IMF and World Bank could afford 100 per cent cancellation from their own resources without impacting their ability to lend to other developing nations.

Researchers at the University of Bayreuth, Germany, who define debt distress taking into account the MDGs propose a Board of Trustees on Sustainability (BOTOS). Similar to an arbitration tribunal for private insolvencies, the BOTOS would be a neutral authority with equal representation of debtors and creditors allowing all parties space for constructive dialogue.

The HIPC initiative, due to expire at the end of this year, is likely to be extended. The final G8 communiqué urged its full implementation. UK Chancellor Gordon Brown called for a consideration of “all options to finance further debt releif for the poorest countries, including making better use of IMF gold”