Global Policy Forum

By Adrian Lovett *

How times change. Less than two years ago, some of the most powerful decision-makers in the world emerged from a Washington office block to declare "very good news for the poor of the world." The Heavily Indebted Poor Countries (HIPC) initiative to reduce the debts of the world's poorest countries, derided as woefully inadequate after its launch in 1996, had just been "enhanced". Responding to the unprecedented global movement harnessed by Jubilee 2000, the initiative now offered "faster, deeper and broader" debt relief and set out to secure a "lasting exit" from debt problems for the countries involved.

The goal of the initiative, somewhat embarrassingly still trumpeted on the World Bank website, was "to bring the country's debt burden to sustainable levels...in order to ensure that adjustment and reform efforts are not put at risk by continued high debt and debt service burdens." Since that day, the official commitment to 'sustainability' has been growing ever more flaky. When countries began to receive initial cuts in their debt payments under the HIPC initiative last year, it was clear that the reductions were not likely to be enough to allow countries to make a fresh start. Debt payments in the first 22 countries to qualify were due to fall by 27 per cent, leaving them spending more on debt than they currently do on the health of their people. Projections indicated that payments in 2009 would be just 14 per cent below what they are now.

In April, an official paper from the World Bank and International Monetary Fund admitted "that HIPC debt relief alone does not ensure long-term debt sustainability." The paper highlights how vulnerable countries are, noting for example that if exports continue to grow at the same rate as before, rather than the growth rates projected by the World Bank and IMF, countries will never reach even the level that those institutions define as sustainable. Additionally, the paper confirms for the first time that the impact of the HIV/AIDS emergency in several indebted countries is likely to push the debt burden up still further.So what happened to that grand ambition to deliver the world's poorest countries from the viscous spiral of ever-increasing debt?

Last week, a letter to me from the Director of External Relations at the IMF, Tom Dawson, gave the answer. The HIPC Initiative, Mr Dawson explained, was intended to provide countries "with enough debt relief to become sustainable within the available resource envelope." (I added the italics, needless to say)

The comment is at once both refreshing and appalling. It is refreshing because a senior figure in one of these major creditor institutions is prepared to speak in an honest and plain way (or at least as plain as it is possible to be in IMF-speak) about the true nature of the HIPC initiative. What Mr Dawson means by making countries "sustainable within the resource envelope" is, of course, that the degree of debt cancellation is constrained by the amount of funds the lenders have available. If creditors do not have funds to cover their losses, they cannot cancel debt.

But the statement is appalling because after years of talk about sustainability ratios and thresholds, the creditor community is finally coming clean. Under this deal, the poorest countries will not get the debt cancellation they need. They will not get sustainability. They will get what they are given and what they are given will be what their creditors are willing to give up - which, in the context of the rich world's extraordinary wealth, will be next to nothing.The envelope of resources addressed to the world's poorest countries through the HIPC initiative is a decidedly thin one.

While the headlines have suggested billions of dollars in debt write-off, the reality on the ground has been a lot less impressive. The 22 countries that had begun to receive some debt relief by the end of last year are paying $735 million less in total than they were before. But they are still spending more than twice that in continued repayments. What is more, the contribution of different creditors has varied widely.

While the G7 nations are now effectively cancelling 100 per cent of the debts owed by these countries, the 'multilateral' creditors - chief among them the World Bank and IMF - refuse to cancel more than half of the outstanding debts. The World Bank and IMF are now in danger of being left as the last great debt collectors from the world's poorest people. After the impact of the HIPC initiative and extra steps promised by G7 countries, these 22 indebted countries would owe more to the World Bank and IMF than they owe their next 17 biggest creditors put together.

In many countries, the impact is huge. Fifty-eight cents out of every dollar that Zambia pays out in debt service in the next five years will go into the coffers of these two institutions. Similarly high levels - 40 cents or more to the dollar - will be channelled to the IMF and World Bank from Uganda, Mali, Malawi, Burkina Faso and Benin. In all, because of the refusal by the World Bank and IMF to match the G7 commitment to 100 per cent cancellation, these 22 countries will be denied more than half a billion dollars every year for the next five years - and the payments will continue long after that.

Few would argue that the need in these countries is not desperate. If the challenge of fighting poverty were not already great enough, in recent years the profound impact of HIV/AIDS on the poorest countries has become clear. There is a remarkable correlation between countries most burdened by debt and those most at risk from AIDS. They undoubtedly need every penny they can get. And fears that the money will not be used well cannot be offered as an excuse here either. All these countries have jumped through every hoop and over every hurdle put in their way in order to qualify for debt relief, meeting highly unpopular conditions that, if implemented in western countries, would provoke electoral obliteration for the government of the day.

All this makes uncomfortable reading for the staff of these institutions - particularly those at the World Bank, who say they are dreaming of a World Free of Poverty. They insist they have worked hard to make real the promises made in Cologne and protest that they are merely the instruments of their shareholders - controlled by the G7 governments.

Both these are true, and the 'demonisation' of these institutions as sinister and malevolent actors in their own right is off the mark. It is the leaders and finance ministers of the rich industrialised countries who should be held to account for the behaviour of the World Bank and IMF. However, faced with the evidence, the institutions have tried to explain in recent weeks why they are not pulling their weight in the effort to cut the debts of the poorest countries. Their answer is that they cannot afford to do more. They say that because they have made virtually no provision for losses on these debts, if they were to do what the G7 countries have promised to do, they would need a massive injection of new resources - or otherwise they would have to shut down large chunks of their work.

World Bank President James Wolfensohn has gone so far as to claim that the extra cancellation would 'close down the Bank'. For some of the bank's more entrenched opponents on the left and right, this may appear too tempting an offer to refuse. For more measured critics, it will seem like a crude attempt at scare mongering. Either way, it is not true. It is true that the World Bank has failed to make adequate provision for debts on its books, an elementary failure that sound commercial bankers would find wholly irresponsible.

It has also compounded its error by making further loans in order to subsidise repayments and preserve the appearance of solvency. But it is not true to say that what Drop the Debt proposes would close down the World Bank or the IMF. Nor would our proposal impact significantly on their ability to carry out their legitimate functions. The truth is that although these institutions have not made adequate provision for bad debts, they do have more than enough resources to write them off.

Drop the Debt asked City of London accountants Chantrey Vellacott DFK to look at the books of these institutions and give an independent verdict on whether they could afford to join the G7 in writing off the debts of the Heavily Indebted Poor Countries. The conclusion of the accountants was emphatic. First, there are substantial available resources in the World Bank and IMF. Second, used prudently these resources are sufficient to clear the entire outstanding debt of the HIPCs to these institutions; and third, doing so would not impact adversely on the ability of the institutions to carry out their work. In other words, without any extra resources from outside these institutions, the international community could turn the HIPC initiative from its current self-declared failure to meet its own stated objectives into a vehicle for real change and a genuine fresh start in the indebted countries it is designed to help.

It would not wipe out all debt. But it would mean that these countries would finally spend less on debt than they currently do on health, freeing up millions of dollars more every year to be used for schools, health clinics, clean water supplies, roads and the infrastructure that will allow enterprise and growth to thrive. This is not to say that the poorest countries do not need new resources to be mobilised by the richest. The HIV/AIDS emergency completely rewrites the obligations of those who have so much to those who have little. The tired commitment of developed countries to work towards a target of at least 0.7 per cent of their national income in development funds was already a hollow promise before the impact of HIV/AIDS was fully understood.

Now, when an African child born today is more likely than not to die from AIDS, the continued refusal of the world's richest countries to share even one-seventh of one per cent of their wealth is shamefully and recklessly irresponsible. So there is no doubt that debt cancellation alone will not be enough. The 'available resource envelope' will have to be torn up and replaced by an entirely new realism about the challenge of poverty and HIV/AIDS in the years ahead. But it is ironic that the emerging champions of a new campaign to persuade rich countries to give more aid are the heads of the World Bank and IMF, James Wolfensohn and Horst Kí¶hler.

While they call on donors to give more, their own institutions take more than any other creditor from the poorest countries. And while they themselves are only the servants of their shareholders, the fact remains that they can have little to say with any credibility about global poverty until they persuade their shareholders to release them from their role as the poor countries' debt collectors. What is more, they will have little success persuading finance ministers of rich countries' to divert funds to the poorest when there is the real danger that the recipients will have to use some of that money to pay off their debts to the World Bank and IMF. If Wolfensohn and Kí¶hler want to be part of the solution, they must stop being part of the problem.

Millions of people around the world want to see the G7 leaders tell the World Bank and IMF to do what they themselves have agreed to do - and cancel the debts of the very poorest countries - as part of a New Deal on Debt agreed at their annual summit in Genoa, Italy, this July. Thousands of people will be on the streets of the city to tell them so. They will be there, not because they think that debt cancellation is a panacea or a 'magic bullet' to end poverty - many would dearly love to move on to the next stage of the fight against poverty, if only the obstacle of unpayable debt could be set aside. They will be there, not because they think nothing at all has been achieved already - it is because the limited cancellation delivered so far has produced real benefits that we know what a difference deeper cancellation would make. They will be there with a simple desire to finish the unfinished business of the millennium year.

The global movement for debt cancellation, described by some as the greatest popular movement against poverty and injustice in modern times, is sending a clear message to the G7 leaders gathering in Genoa - the job is not finished. More must be done. Those leaders and the heads of the World Bank and IMF currently show little sign of listening. Every day, the combined impact of debt and HIV/AIDS is squeezing the life out of Africa. Exactly how loud do we have to shout?

* Adrian Lovett is Director and Senior Partner of Drop the Debt, the short-term successor to Jubilee 2000 in the UK.

FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C íŸ 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.