G8 cancellation of World Bank, IMF debt: “step forward”

13 June 2005

G7 finance ministers (the G8 minus Russia) agreed to write off $40 to $55 billion of debts owed to the World Bank, IMF and African Development Bank (AfDB) in a meeting in London . Statements on aid effectiveness and trade in the final communiqué may signal an important change in donor attitudes.

As with previous debt deals, the devil was in the details. For the World Bank’s concessional lending arm, the International Development Association (IDA), the AfDB and the IMF, 100 per cent debt stock cancellation will be delivered immediately to the 18 countries which have completed the Heavily Indebted Poor Countries (HIPC) initiative, 14 of which are in Africa – Benin, Burkina Faso, Ethiopia, Ghana, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania, Uganda and Zambia – plus Bolivia, Guyana and Honduras. The HIPC initiative has been heavily criticised by NGOs for delivering too little debt relief too slowly and for imposing damaging conditions requiring liberalisation and privatisation.

It is less clear how quickly other countries will be able to benefit from the new offer. Nine more countries are “likely” to reach the HIPC completion point in the next 12 to 18 months, qualifying them for the same relief. This includes Burundi, Central African Republic, Comoros, Republic of Congo, Cote d’Ivoire, Liberia, Somalia, Sudan and Togo. UK chancellor Gordon Brown said that additional countries which were not part of the HIPC process “will come through the process quite soon” and would be “covered by the communiqué”. He also committed to continue pushing other wealthy countries to follow the UK’s lead in cancelling its share of multilateral debt for all low-income countries.

need the flexibility to decide, plan and sequence reforms

However, beyond question marks around the content of the conditions which poor countries must comply with to receive debt relief under the HIPC initiative, there is a serious concern about its timeliness. Previous rounds of HIPC debt relief have been delayed for years. According to Debt Relief International’s analysis, this was due to “over-rigid fiscal and macroeconomic frameworks”, “insistence on executing ‘left-over’ structural conditions from past programmes”, and the “proliferation of new poverty reduction performance criteria”.

As part of the final compromise, the Germans and Japanese have demanded additional ‘performance criteria’ to prevent corruption. While most observers would welcome basic fiduciary conditions requiring transparency in the way debt relief proceeds are spent, there is fear that this could become an opportunity to impose onerous governance conditionality.

One of the key sticking points in the deal had been the US insistence that the World Bank fund debt relief out of its own resources. While the Americans asserted that this would help increase the institution’s accountability for past bad loans, the UK position was that it would in practice make other poor countries pay for the debt relief exercise by making less concessional resources available to them from the Bank. In the end, the Americans agreed to pay an additional $1.75 billion to the World Bank and AfDB before 2015. The UK earmarked $1 billion for the new initiative – however this is to come out of previously announced commitments, rather than new funds.

Found money: IMF debt cancellation

Most observers had given up on prospects for the cancellation of debts owed to the IMF due to the American’s refusal to allow for either the revaluation or sale of the Fund’s gold reserves. On this count, it appears that the British compromised with the US, agreeing that the costs of “fully covering IMF debt stock relief” would be met out of the Fund’s own resources. This is to come from unused proceeds from the previous gold sale – which Jubilee Debt co-chair Stephen Rand described as “a little like finding grandma’s forgotten post office savings account”. It is not clear how much money is in this forgotten account, or if it will be enough to cover the commitments made. The communiqué says ambiguously that “where obligations cannot be met from the use of existing IMF resources, donors commit to provide the extra resources necessary”.

Reaction to the deal

African governments welcomed the deal. “We can expand health and education services with this relief,” said Daudi Balali, the governor of Tanzania’s central bank. “We will also be able to expand our infrastructure.” Uganda’s information minister, James Nsaba Buturo, agreed: “We greatly appreciate the initiative. It is a challenge for us to use the money we have been paying debts to be now used to better the lives of our people.”

Most NGOs welcomed the deal but called for the rich countries to go further before the G8 summit in Scotland in July. Stephen Rand, co-chair of the Jubilee Debt Campaign, said: “The deal is a step forward, there is no doubt about that. But the amount of money involved is very small and there is still a long, long way to go.”

Jubilee South said that the deal had “more to do with the needs of the IFIs to salvage their credibility and initiate a new cycle of indebtedness”. The global network of southern-based organisations working on the debt issue said that the amount of debt cancelled was a “miniscule” part of total debt, saying that the debt of African countries alone stood at over $300 billion. They reiterated their demand that “any debt cancellation must be unconditional” and take into account the “illegitimacy of the debt claim held against southern countries”.

Empowerment of a continent

UK chancellor Gordon Brown insisted that the deal was not just about aid, trade and development, but about the “empowerment of a continent”. Language on aid effectiveness and trade, included for the first time in a G8 finance ministers’ communiqué, marked a significant shift from previous positions.

On aid effectiveness, the ministers committed to “enhance efforts to untie aid”, “deliver aid in a more predictable way” and called on the OECD’s Development Assistance Committee to set by September “ambitious and credible targets” to measure the progress of donor commitments to improve the way that they deliver aid.

On trade, the communiqué recognised that not all countries will benefit from reductions in trade barriers. In a marked departure from previous insistence on the universal benefit of unilateral trade liberalisation, the communiqué recognised that “poor countries face particular problems and need the flexibility to decide, plan and sequence reforms to their trade policies to fit with country-owned development programmes.” In response, the IFIs are to “submit proposals at the annual meetings for additional assistance to countries to develop their capacity to trade and ease adjustment in their economies”.

In a meeting with NGOs and faith groups following the announcement, the Bretton Woods Project pressed the chancellor on the gap between the language on trade in the communiqué and the reality of BWI pressure for trade liberalisation at the country level. The chancellor encouraged NGOs to “enter into a dialogue on how the World Bank and IMF should interpret the language”. He said that for its part, the UK “would be talking to the Department of Trade and Industry”.