Global Policy Forum

By Caroline Lambert

Both the World Bank and the IMF have renewed their commitment to broader, deeper and faster debt relief. But the G7 countries ultimately hold the key to the issue. And poor countries will need a lot more than debt reduction from the wealthy nations if they are to find a way out of poverty.

If you worried about debt relief - or rather the lack of it - whirledbank.org is the website for you. Thanks to its "unsecured online banking facility," you can attempt to repay your country's debt on the spot. The trouble is you are likely to incur more loans in the process. A parody of the World Bank's website, whirledbank.org provides a simplified snapshot of debt relief campaigners' analysis of the Heavily Indebted Poor Countries' (HIPC) desperate situation.

The World Bank and IMF Annual Meetings in Prague were supposed to be very much about poverty reduction and debt relief. But interventions designed to bring down oil prices and to boost the euro have taken center stage, and the world's eyes have once again largely turned away from poor countries. The meeting of G7 finance ministers on September 23 barely touched on the issue of debt relief. This is unlikely to please demonstrators who are getting ready for a debt funeral march on September 24 under the banner of Jubilee 2000, an international movement calling for the cancellation of unpayable debts for the world's poorest countries.

Since the beginning of the week, both Horst Koehler and James Wolfensohn, top men at the IMF and the World Bank, have repeated again and again that they were committed to broader, deeper and faster debt relief. They both expect that, by the end of the year, 20 countries will have qualified for debt relief under the Heavily Indebted Poor Country (HIPC) initiative. According to Wolfensohn, 67% of these countries' debt will have been wiped off by the time the scheme is completed. Most bilateral creditors have accepted to grant relief over 100% of their debt, and about a third of World Bank and IMF debt will also be forgiven - if the US Congress finally decides to foot its share of the bill that is.

So what is all the fuss about debt relief about? Everybody seems to agree that a large part of the debt will never be repaid anyway and cripples poor countries by sucking scarce resources that are badly needed in social sectors. No one questions the fact that, if debt reduction is to succeed, recipients have to be closely monitored to make sure the extra cash is spent on poverty reduction programs. And everyone appreciate that debt cancellation is no magic bullet, which by itself will magically eradicate poverty. Sound policies, more private investment and more international aid are also key pieces of the poverty reduction puzzle. Which is why according to Wolfensohn, "the fact that overseas development assistance has dropped in the last decade is a crime."

So far so good. But things get a lot more complicated when it comes to specifics. NGOs such as Jubilee 2000 say that the current HIPC initiative, although already an enhanced version of the original scheme, is not enough. Not broad enough, not fast enough, not deep enough. They maintain that a lot more countries - 52 instead of the current 30 or so currently being considered - should be eligible for debt relief, including Nigeria, Haiti and Bangladesh.

Speed is also a sore point. Only 10 countries have actually started receiving debt relief - in HIPC language, they have reached the decision point. Others are still in the process of building a three-year track record of good macroeconomic behavior and drafting poverty reduction strategy papers (PRSP), both preconditions to reaching the much-awaited decision point. PRSP are supposed to involve consultations with civil society and be reviewed by the board of the World Bank and the IMF.

Most recipient countries, such as Burkina Faso, welcome the PRSP initiative. Linking debt reduction to poverty alleviation, says Tertius Zongo, Minister for Burkina Faso, is a clear acknowledgement that macroeconomic stability is not sufficient to improve living conditions. "Nobody eats macroeconomic indicators," he added. So even if they take quite some time to put together, this is a useful planning phase and, as Jamie Drummond of Jubilee 2000 UK argues, "debt cancellation is worth waiting for."

Drummond maintains, however, that additional delays are due to structural reform conditionalities which, according to him, should not block access to debt relief. Zambia's finance minister, Katele Kalumba, couldn't agree more. Conditionalities have to be cut back, he says, and building a three-year track record is too long. Countries should be judged on their results and the quality of their efforts rather than have a mandatory waiting period before reaching the decision point. According to Abdoulaye Bio Tchane, Benin's finance minister, that does not mean that all conditionalities should be thrown out. Conditionalities monitoring results and ensuring that money is spent on the right things are necessary.

But depth - in other words how much debt actually gets canceled - is even more of a concern. The HIPC program only aims at reducing debt levels at what is considered sustainable. And according to the World Bank and the IMF, the magic number is a debt-to-export ratio of 150%. For Jubilee 2000, this is still too much. They claim that the cancellation of debt stock does not have such a significant impact on debt service levels. Before they reached the decision point, the 10 current recipients paid $1.5bn a year in debt service. But according to Jubilee 2000, they are still supposed to foot a hefty $1bn a year now. Donors may like to claim they are forgiving 100% of their debt, but they are in effect only talking about concessional debt and export credit. And in some cases, they are only talking about debt incurred before countries first asked for debt rescheduling.

For countries that have been suffering from a persistent debt overhang, the difference could be quite significant, as they have usually incurred fresh loans to be able to repay some of their old debt. Forgiving multilateral debt, which makes up about a third of the HIPC's tab, raises more issues. Under the HIPC initiative, only about a third of World Bank and IMF debt will be written off. According to Jubilee 2000, here lies the reason for continuing high debt service payments. And even that third is difficult to come by. So far, donors have committed to $2.4bn to the HIPC Trust Fund, established to help multilaterals meet their share of debt relief. But when the IMF offered to sell some of its gold to finance debt relief, some of its shareholders started having nightmares about falling gold prices and the idea was buried. And most of the World Bank's loans to HIPCs, because they are granted on concessional terms, are financed through donor contributions and repayment flows. Which means that, as Wolfensohn pointed out earlier this week, forgiving debt while protecting future lending requires extra donor contributions to make up for the foregone repayments.

According to Wolfensohn, it would be difficult to obtain such a commitment. So even when it comes to multilateral debt, industrialized countries seem to hold the keys to debt relief. Which explains why according to Ann Pettifor, Jubilee 2000 UK's director, "the real power in Prague this week is not in the hands of the World Bank and the IMF, nor the protestors on the streets. The real power is with the finance ministers of the G7." So the September 24 debt funeral march is in their honor.

A satisfactory resolution of the HIPC debt problem would be a step in the right direction. But as both Koehler and Wolfensohn remarked this week in Prague, the benefits of debt relief, although significant, pale in comparison to the estimated $120bn economic impact that more open markets in the industrialized world would have on developing countries every year. So until rich countries push for trade liberalization at home, funeral marches and anti-globalization protests are likely to remain.

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