UNIVERSITY OF PENNSYLVANIA - AFRICAN STUDIES CENTER
Africa Action: New Start Needed on Debt Cancellation Date distributed (ymd): 020925 Africa Action Document
Africa Policy Electronic Distribution List: an information service provided by AFRICA ACTION (incorporating the Africa Policy Information Center, The Africa Fund, and the American Committee on Africa). Find more information for action for Africa at http://www.africaaction.org
Region: Continent-Wide Issue Areas: +economy/development+
This posting contains a call by Africa Action for a new start on debt cancellation, and links to additional reports on the issue. A related posting also sent out today has excerpts from the latest report by Jubilee Research documenting the failure of debt relief action by the World Bank, IMF and major creditor countries. An Africa Action press release - "World Bank and IMF Fiddle While Africa Burns" - is at: http://www.africaaction.org/desk/debt0209.htm
Towards a New Start on Debt Cancellation
September 25, 2002
Two years ago this week Secretary General Kofi Annan issued a call for "an independent panel of experts not unduly influenced by creditor interests" to reassess the debt burden of developing countries and the international measures taken to date to deal with them. His report noted that the HIPC (Heavily Indebted Poor Countries) initiative had proved inadequate even for the countries included, and that there were many debt-burdened countries not included in the initiative. The report also called for "an immediate suspension" of debt-service payments of all HIPC's and of other countries to be identified by the panel.
The failure to change the basic approach to resolving Africa's debt crisis is a crippling blow to Africa's economic prospects and to its efforts to address urgent needs such as combatting the AIDS pandemic.
As the IMF and the World Bank gather for their annual meeting two years later, the evidence of failure of the creditors' HIPC initiative is even more overwhelming. So is the damage in lost lives and devastated economies caused by the failure to address the issue. The evidence is also clear that when money is saved by debt cancellation, it does go for productive investment in health, education, and other urgent needs.
African countries, non-governmental organizations working on debt cancellation, independent thinktanks, and even some governments in rich countries, such as Ireland, have clearly documented the failure of the HIPC initiative. There is wide recognition that only full cancellation of the debt overhang (combined with additional international public investment) could really meet the needs of the poorest countries. Nevertheless, faced with the stubborn resistence from creditors, many have also come up with more limited proposals, such as capping debt service at agreed percentages of national budgets, topping up the HIPC initiative with additional funds, and other similar suggestions. Current proposals before the U.S. Congress follow this pattern.
There is certainly room for debate on the precise mechanisms for implementing debt cancellation. But delaying comprehensive treatment while adding a few extra bandaids only allows the continued hemorrhage of desperately needed resources out of Africa.
Africa's debt crisis demands both a fundamentally different approach from the HIPC initiative and an immediate moratorium on debt repayments as an interim measure. Options for addressing the debt crisis include the establishment of an independent, international arbitration panel to mediate between debtors and creditors, and the creation of bankruptcy mechanisms for heavily indebted sovereign states. Until such mechanisms are in place, the bleeding must stop. African countries should not be required to continue diverting desperately needed resources to servicing unsustainable external debts.
Economist Jeffrey Sachs has proposed that African countries unilaterally redirect debt payments to urgent investment in fighting AIDS. Nigeria, which is not even included in the creditors' HIPC program, last month declared a unilateral halt on payment of half of the $3.3 billion in debt payments due to foreign creditors for 2002, in hope of future rescheduling. But dependence on creditors still blocks African countries from decisive action along these lines.
Given the paralysis of efforts under the IMF/World Bank framework, and the failure of creditor country governments to support Secretary-General Kofi Annan's call for an independent panel, legislators should take the initiative towards a new start in the debt cancellation debate. The following three immediate steps are measures that could be taken, by the U.S. Congress and other national legislatures in creditor countries, to build momentum for a new approach that goes beyond the failed HIPC initiative.
[Note: While the references below refer to the U.S. Congress, similar considerations apply to European and Asian creditor nations. Again, the text below refers particularly to African countries, but the same principles would apply to other heavily indebted countries, including many not included in the official HIPC initiative.]
A new initiative would require the following:
(1) An inventory of the debts currently being repaid by African countries, in order to determine the legitimacy of creditor claims. This would involve an immediate and thorough information disclosure on outstanding debts owed by African governments to both bilateral and multilateral creditors.
The creation of an "inventory" of these debts would comprise an investigation of the circumstances and purpose of the original loans, as well as their actual use. Such an investigation would enable a fair determination of the legitimacy of these debts and the appropriate policy for their recovery.
Examples of illegitimate debts would include: debts contracted by repressive regimes, where the money was used to strengthen the hold of these regimes; or debts contracted by formally democratic but corrupt governments, where the money was then stolen by senior officials for their own enrichment.
Lending of this nature was prevalent during the Cold War, when geo- strategic interests often trumped development concerns. Indeed, debts incurred by dictatorships for the purposes of enforcing their rule may be considered "odious" in international law. Under this established legal principle, such debts are not considered to be the responsibility of the oppressed population or of subsequent governments. Odious debts may, according to legal precedent, be cancelled on the basis of international agreement. An inventory of African governments' outstanding debts should also include an investigation of those cases where a country's debt burden increased or was perpetuated as a result of conditions unilaterally imposed by creditors.
The creation of an inventory of Africa's debts is an essential step towards achieving a just resolution to Africa's debt crisis. Making public the purpose and use of loans and investigating their legitimacy is a reasonable approach to assessing the extent to which the debts of African countries should rightly be canceled.
Such a fair-minded proposal should be embraced by Congress, to send a message to the White House and U.S. Treasury that their existing "solutions" have failed, and to change the nature of the public debate.
Moreover, an endorsement of this undertaking would send an important message, that greater accountability and responsibility shall be required from both lenders and borrowers in future lending. This would address concerns about "moral hazard" on the parts of creditors and debtors alike.
(2) A study to ascertain what would be the cost to creditors of the full cancellation of Africa's debts.
This study would investigate to what extent bilateral and multilateral creditors would be able to absorb the costs of 100% cancellation from their own resources, and what balance would have to be recouped from other sources. It would provide a "bottom-line" assessment of how much it would actually cost creditors to write the debts of African governments off their books.
Studies of this nature, requested by Congress, would draw from the body of recent research on aspects of this question, and build a rigorous and comprehensive analysis of the finances involved. While the bilateral debts owed by African governments to the U.S. form a relatively small part of Africa's debt burden, and the U.S. has already committed to cancelling this bilateral debt, what is far more significant is the large amount of debt owed by African governments to the World Bank and International Monetary Fund (IMF), where the U.S. is the principal shareholder.
Recent studies indicate that these institutions hold sufficient wealth on their own balance sheets to absorb the full costs of multilateral debt cancellation from their internal resources. An audit of these institutions by two independent accounting firms in Britain revealed that the World Bank and IMF could write off all of the debts of the world's poorest countries from their own assets, without negatively impacting their credit rating or their ability to function. Despite these studies, the World Bank and IMF continue to maintain that outright debt cancellation is a financial impossibility because it would critically undermine their future operations.
Congress should commission an independent study to investigate the veracity of these claims and to accurately assess how 100% cancellation of Africa's debts would affect the World Bank and IMF, and other creditors. This study should include an analysis of the full costs of debt cancellation, how these costs might be borne, and by whom, and what the impact would be on creditors and debtors, both immediately and in the future.
Such a review is a matter of self-interest to the U.S., as the leading power at the World Bank and IMF. It must also form a crucial element of any U.S. policy determination on the issue of debt cancellation. It is important that Congress have a thorough cost analysis at its disposal before an accurate assessment can be made of the possibility of 100% debt cancellation.
(3) A resolution by Congress supporting a moratorium on debt repayments by African countries until such time as an inventory of these debts has been compiled and the costs of 100% cancellation have been determined, these two studies providing a foundation for moving towards a just resolution to the continent's debt crisis. In light of the question of illegitimacy hovering over much of Africa's debt, it is appropriate that debt repayments be suspended while the nature of the original debts and the validity of creditor claims are investigated.
Debt since the Jubilee: Two Years of Creditor Stalling
By the year 2000, public pressure from Africa and from debt cancellation campaigners around the world (the Jubilee 2000 coalitions and many others) had produced widespread international consensus on the need to act to cancel unsustainable debts of poor countries, to free resources for addressing urgent human crises and long-term economic development. As a result, bilateral and multilateral creditors promised "solutions."
The victory, however, was limited, and jubilation premature. Rich country promises were vague. Implementation of "solutions," moreover, has been piecemeal. The scale has been on the order of pilot projects rather than measures even approaching comprehensive action. Reductions of some debts of some countries, such as Uganda and Mozambique, have in fact allowed redirection of some resources to urgent needs. Throughout, however, the process, managed by the creditors' themselves, with their multilateral agents the IMF and the World Bank, has been intrusive, inefficient, and unjust, as well as too little and too late. Critiques by NGOs, UN agencies, and even in internal documents of the financial institutions themselves, have gone unheeded.
The official IMF and World Bank web pages, presenting creditor views and documentation on HIPC, are
http://www.imf.org/external/np/hipc/doc.htm and http://www.worldbank.org/hipc
The links below cite a few of the many documents on this issue from these two years. The overwhelming consensus is that HIPC has not worked. Proposed changes are abundant. But the key missing element is still a lack of political will on the part of creditor countries and institutions.
Christian Aid, Oxfam, Eurodad, August 2002 A Joint Submission to the World Bank and IMF Review of HIPC and Debt Sustainability http://www.oxfam.org.uk/policy/papers/wbimfdebt/wbimfdebt.pdf
Ireland, Ireland Aid and the Department of Finance Developing Country Debt Relief Strategy, July 2002 http://www.eurodad.org/articles/default.aspx?id=146
Africa Action, June 2002 Critique of the HIPC Initiative http://www.africaaction.org/action/hipc0206.htm
Jeffrey Sachs, Resolving the Debt Crisis of Low-Income Countries Brookings Papers on Economic Activity, 1: 2002 http://www.africaaction.org/docs02/dbt0209a.htm
Center for Global Development and Institute for International Economics, "Delivering on Debt Relief: From IMF Gold to a New Aid Architecture," April 2002 http://www.iie.com/publications/publication.cfm?pub_id=337
African Forum and Network on Debt and Development (AFRODAD) Fair and Transparent Arbitration on Debt, March 2002 http://www.africaaction.org/docs02/debt0203.htm
Jubilee Research, April 2002 Debt and Double Standards http://www.africaaction.org/docs02/debt0205.htm
UNCTAD, September 2001 UN study estimates that for each
dollar of net capital flow into sub-Saharan Africa
from the rest of the world, $1.06 flows out, 51 cents
through terms of trade losses, 25 cents through debt
servicing and profit remittances, and 30 cents through
into capital outflows - a net transfer of resources from Africa to the rest of the world. http://www.africaaction.org/docs01/unct0109.htm
Africa Action, Africa's Debt Position Paper, July 2001 http://www.africaaction.org/action/debtpos.htm
Jubilee South, Global Day of Protest against Debt, July 2001 http://www.africaaction.org/docs01/dbt0107a.htm
Drop the Debt, April 2001 UK studies show the IMF and World Bank can afford to cancel 100 per cent of the debts they are owed by the poorest countries, and that the HIPC program is failing. http://www.africaaction.org/docs01/debt0104.htm http://www.africaaction.org/docs01/debt0105.htm
Dakar Manifesto for Total and Unconditional Cancellation of African Debt http://www.africaaction.org/docs01/dak0012.htm
Zambia Government Calls for Debt Cancellation, October 2000 http://www.africaaction.org/docs00/zam0011.htm
Oxfam International, September 2000 HIPC Leaves Poor Countries in Debt http://www.africaaction.org/docs00/ox0009.htm
Africa Fund, Religious Action Network (Africa Action), September 2000 Cancel the Debt http://www.africaaction.org/docs00/debt0009.htm
Secretary-General Kofi Annan, September 2000 Call for Debt Inquiry http://www.africaaction.org/docs00/sg0011.htm
Message-Id: <200209251510.g8PFAVT00858@marduk.africapolicy.org> Comments: Authenticated Date: Wed, 25 Sep 2002 11:14:41 -0500 Subject: Africa Action: New Start Needed on Debt Cancellation
Editor: Ali B. Ali-Dinar
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