Africa: Multilateral Debt Cancellation, 01/18/05

Africa: Multilateral Debt Cancellation

AfricaFocus Bulletin
Jan 18, 2005 (050118)
(Reposted from sources cited below)

Editor's Note

"Given the urgency and need for immediate action, we urge the G8 to begin immediately and in particular for G7 finance ministers to reach agreement on 100 percent multilateral debt relief at their February 4th meeting," African finance ministers said in Cape Town after concluding a meeting with British finance minister Gordon Brown. But despite Brown's high-profile African visit, accompanied by pledges of debt cancellation and increased aid, debt campaigners still have questions about the details of Britain's plan and the will of other rich countries to act.

A new briefing for the Debt and Development Coalition Ireland, excerpted below, noted that "various proposals for multilateral debt cancellation have now been put on the table by G7 countries - the UK and US. ... Whilst this is very encouraging, in some ways these proposals are an extension of the discredited HIPC initiative and suffer from some of the same limitations such as limited country lists and the lack of a fair and transparent procedure to deal with all unpayable debt."

Another AfricaFocus Bulletin sent out today contains statements on debt from the African Social Forum in December and from a submission by the UK Jubilee Debt Campaign to Prime Minister Tony Blair's Commission for Africa. For related news on debt, see http://allafrica.com/debt. For previous AfricaFocus Bulletins on the topic, see http://www.africafocus.org/debtexp.php.

Thanks to those subscribers who have already sent in a voluntary subscription payment this year to support AfricaFocus Bulletin. And a reminder to all that this free resource depends on voluntary support from subscribers. For details, please visit http://www.africafocus.org/support.php

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Multilateral Debt Cancellation: a Briefing by Sony Kapoor

Jubilee Research at the New Economics Foundation For Debt and Development Coalition Ireland

December 2004

[Excerpts. Full text, including graphs, available at http://www.debtireland.org/resources/ papers-briefing-Multilateral-Debt-Cancellation.htm (type URL on one line)]

1. Background

Debt owed to the IMF, World Bank and other multilateral banks[1] has grown rapidly in recent years and these are now significant creditors of low income countries. Because there are serious consequences for countries which default on payments to these bodies, multilateral debt is the most onerous debt.

Campaigns for debt cancellation through the 90s pressed for cancellation of debt owed to multilateral institutions. Partly in response to this, the World Bank and the IMF launched the Heavily Indebted Poor Country (HIPC) Initiative in 1996 and the Enhanced HIPC in 1999. This initiative aimed to enable countries to achieve debt sustainability but was very limited in what it actually achieved and defective in the way it did this. While it did result in some debt being cancelled, it was a far cry from the cancellation of unpayable debt called for by Jubilee 2000 debt campaign which aimed to give a fresh start to the new millennium to debt burdened countries.

Renewed calls for cancellation of unpayable multilateral debt were for many years ignored until public pressure has finally put it on the G-7 agenda. This is a belated recognition of the seriousness of the debt-poverty trap that many of the poorest countries in the world face. Various proposals for multilateral debt cancellation have now been put on the table by G7 countries - the UK and US.

A Fair and Transparent method to deal with unpayable debt

Whilst this is very encouraging, in some ways these proposals are an extension of the discredited HIPC initiative and suffer from some of the same limitations such as limited country lists and the lack of a fair and transparent procedure to deal with all unpayble debt. Debt campaigners have long been advocating a systemic resolution to the problems of unpayable sovereign debt. This is embodied in the proposal for a Fair and Transparent Arbitration Process (FTAP, also known as Jubilee Framework).

The FTAP seeks to

• enshrine the principle that basic human rights take precedence over creditor rights,
  
  
• ascertain the legitimacy of creditor claims, identifying those which may be odious [2]
  
  
• give the affected people a right to be heard.

The arbitration panel which would decide whether and how much debt should be repaid would be independent and not under the control of creditors.

Under such a framework the level of debt which a country can repay would be linked to human development indices/human rights rather than arbitrary debt service/export ratios[3]. The adoption of a FTAP would also help make lending more responsible, as lenders would have to take responsibility for irresponsible or illegitimate lending, reduce the moral hazard[4] and make debt reduction available to countries that need it rather than restricting it to arbitrary lists.

The call for cancellation of unpayable multilateral debt and for the establishment of a fair and transparent procedure to deal with debt mutually reinforce each other. Cancellation of unpayable multilateral debt can be seen as a step towards the establishment of a FTAP as the need for further debt cancellation for the poorest countries has already been clearly established based on the recognition that the poorest countries would not otherwise be able to meet Millennium Development Goals[5].

Cancellation of unpayable multilateral debt will set a precedent for the human rights (or need based financing) approach to debt cancellation - a central theme of the FTAP. This in turn would highlight the need to extend debt cancellation to other poor countries that are short of resources to meet the MDGs or where creditor rights are being implemented at the cost of human rights. The UN Millennium Campaign points out that many developing countries are saddled with such high levels of debt that paying off just the annual interest costs more than what is spent on health care and education combined.[6]

Growing burden of multilateral debt

Multilateral debt has grown significantly over the past few years, both in terms of amounts outstanding and as a share of total debt outstanding. This is partly because multilateral institutions are cancelling less debt than other creditors. While most G7 countries are cancelling 100% of debt owed to them, the MFIs are cancelling only a third of debt owed to them. Also, since multilateral development banks and the IMF are treated as preferred creditors most multilateral debt is serviced regularly. This means that compared to other forms of debt relief, multilateral debt cancellation is most efficient as each dollar of debt cancelled results in an equivalent benefit for the debtor country. For other forms of debt, cancellation may not release as much because a significant proportion of this debt is not being repaid regularly in any case.

Irresponsible lending

Multilateral financial institutions (MFIs) are subject to a moral hazard under the current system and this has resulted in some irresponsible lending. As there is agreement internationally that multilateral debts must be serviced, donor countries have provided grants to ensure that debts to these institutions do not fall into arrears. A report by the Netherlands highlights this point: 'Bilateral donor funds were used on a large scale to bail out multilateral creditors. Thanks to this bailout International Financial Institutions avoided a substantial part of the cost of their imprudent lending policies which caused moral hazard'[7] . For example, in the case of the Democratic Republic of Congo, the institutions continued to lend to the Mobutu regime despite knowing that a large chunk of the funds were being diverted by the dictator into his personal accounts. If they had known that they would be held responsible for this and other irresponsible lending decisions and stood the risk of losing money, then they may have acted differently.

2. Why is multilateral debt cancellation so important?

Multilateral debt has grown significantly over the past few years, both in terms of amounts outstanding and as a share of total debt. Multilateral creditors such as the World Bank, IMF, African Development Bank are now the largest creditors for most poor countries - especially those that are included under the HIPC initiative.

For the whole group of low income countries[8] - 61 countries with a Gross National Income (GNI) less than $735 per capita - external debt outstanding has gone up 430% since 1980 and now amounts to $523 billion. Debt owed to multilateral institutions has increased 793% to $154 billion over the same period and now accounts for 30% of the total debt owed by the low income group of countries.

For the Heavily Indebted Poor Countries, external debt has gone up 320% since 1980 to $189 billion. Debt owed to multilateral institutions has increased 800% to $70 billion so it now constitutes a full 37% of the total debt up from 14% in 1980.

For low income countries including non-HIPCs the biggest increase in multilateral debt happened between 1980 and 1994 when it increased by 684% from $19 billion to $130 billion. This was partly as a result of the debt crisis of the 1980s when private debts were en-masse converted to multilateral debts as poor countries used loans from MFIs to repay some of the private creditors that they could not otherwise afford to repay.

The preferred creditor status of the multilateral institutions ensures that almost all debt owed to them is serviced regularly. This is different from the debt owed to bilateral and private sector creditors, significant proportions of which are in arrears

• not serviced regularly by resource poor countries.

So cancellation of bilateral and private sector debt may sometimes be just a paper transaction involving cancellation of debt that was not being repaid in any case. Such a transaction while effective in reducing debt outstanding may not free up any resources. The cancellation of multilateral debt, on the other hand, almost always frees up resources (cash that would have otherwise gone into servicing debt) and reduces debt overhang.

This means that compared with the cancellation of other forms of debt, multilateral debt cancellation frees up more resources and hence is more efficient.

3. What is happening to multilateral debt?

As the graph illustrates the share of multilateral debt for low income countries and HIPCs has been steadily increasing. In the case of HIPCs this has rapidly climbed from 28% of the total debt in 1997 to 37% by 2002 - a rise of 9% in just five years. The completion of the HIPC initiative would see this ratio rise to 40% ...

For the first 27 countries that reached decision or completion point the share of multilateral debt is expected to be 61% after the completion of the HIPC initiative up from 38% before the HIPC initiative. Multilateral debt will be by far the largest component of residual debt for most countries that will reach HIPC completion point i.e. successfully pass through the HIPC process. The World Bank's concessional lending arm, the International Development Association (IDA) is now the single largest creditor for most completion point countries.

This has come about as a result of the failure of the burden sharing mechanism under HIPC. This central principle of the HIPC process implied that all the creditors would share the burden of the debt cancellation equally. While G7 countries have committed themselves to cancelling 100% of the HIPC debts owed to them the MFIs are cancelling less than a third (See Graph). Of the money mobilized thus far for multilateral debt cancellation, more than half has come from bilateral funding and of the rest an even larger proportion is expected to be funded not by the multilaterals' own resources but through even more bilateral contributions. This has the effect of turning grants into loans[9] - as the money contributed by the donor countries is then recycled as additional loans by the institutions.

The Multilateral Financial Institutions have pleaded poverty saying that any additional debt cancellation through the use of their resources would seriously endanger their financial soundness and sustainability. While trying to highlight their self proclaimed paucity of resources, the MFIs have sought to underplay their considerable financial strength, which is underpinned by their distinctive political and financial structure and their special role within the global economy.

... only a small proportion (less than a third) of the HIPC debt owed to Multilateral Financial Institutions will be cancelled under the HIPC initiative. ... Multilateral debt cancellation through the use of own resources is a way of redressing this imbalance and is perhaps an additional motivating factor in the recent momentum behind the proposal. This would also help reduce moral hazard inherent in a system where the multilateral organizations can expect to be repaid despite having made some irresponsible lending decisions.

4. The problems with existing debt mechanisms

In 1996, an average of $136 million was being transferred every day from the 61 poorest countries (including HIPCs) to wealthy countries in the form of total debt servicing. In 2002, the figure stood at a not much lower flow of $121 million every day. Most of the reduction has come through debt relief provided to some of these countries under the HIPC mechanism.

Despite this, the HIPC group of countries is still paying almost $8 billion (2002) in debt servicing (interest and principal repayments). While this is less than the over $10 billion of debt service paid in 1995 it is hardly the radical reduction that is needed by the countries and does not meet the 'deeper, broader and faster debt relief' theme of the HIPC process[11].

In fact, this figure constitutes about 75% of the total (non-technical) grant flow of $10.3 billion that reached the HIPCs in 2002. This part of the grant flow represents the amount of aid money that is potentially available for use on meeting the MDGs. This implies that about 75% of the usable grant flows is immediately recycled back into debt repayments for the HIPC group.

Of the countries that have already reached HIPC decision point, 4 countries (Mali, Niger, Sierra Leone and Zambia) actually have annual debt service payments due in 2003-2005 that are higher than their annual debt services paid in 1998-2000; 5 countries, Ethiopia, Guinea-Bissau, Honduras, Nicaragua, and Uganda are paying almost as much in debt service payments as before HIPC.

Debt levels post-HIPC remain unsustainable in many countries. Uganda currently has debt to exports ratio of 300%, and Ethiopia will not reach the HIPC target of 150% until 2020 even after top up debt relief it received at completion point.[12] On average HIPC countries in Africa are still spending 15% of their revenue on servicing debt, with some (e.g. the Gambia) spending over 25%.

...

5. Benefits of Multilateral Debt Cancellation

The following graph clearly shows that most HIPC debt stock reduction to date has come in the form of writing off debt in arrears - cancelling debt that was not being repaid in any case. In fact, more than 80% of the debt stock reduction thus far can be accounted for by a reduction in arrears. ...

Cancellation of multilateral debt should be given top priority since it is mostly not in arrears. Thus the cancellation of multilateral debt would actually release additional resources rather than resulting in just a decrease in arrears as has happened under the HIPC process thus far. It is critical to ensure that these additional resources are then not diverted into starting to service debt in arrears but that they are used for development expenditure.

MFIs are de facto treated as preferred creditors. Historically, even when countries have defaulted on both private and official repayment obligations they have continued to repay multilateral debt. This is because a default on multilateral debt obligation would result in a country being cut off completely from international credit and leave it unable to access much needed funds. ...

... $1 of bilateral debt cancellation has released less than $1 of resources as a significant part of the debt owed was already not being repaid. In fact for some countries, the HIPC process has increased the debt servicing burden. On the other hand, every $1 of multilateral debt relief would release $1 in resources that are available for meeting the MDGs as most multilateral debt was being repaid regularly by the HIPC countries even before the HIPC initiative. This makes multilateral debt relief the most efficient form of debt relief.

Multilateral debt cancellation is an effective contribution to development financing. Unlike aid flows - a third of which are in the form of 'tied aid' or 'technical assistance' - all resources allocated to multilateral debt cancellation end up in the budget of the recipient country and hence can be used for development purposes.

6. Prospects for Multilateral Debt Cancellation

Both British Treasurer Gordon Brown, and the US Treasury Secretary John Snow, made public statements about the need for 100% debt cancellation of multilateral debt of the poorest countries before the IMF and World Bank AGMs last September. Since then Gordon Brown has produced a draft proposal and is seeking support from other rich countries. The US has not published a written proposal to date.

Among the questions debt campaigners are asking in relation to these proposals are:

• which countries will be eligible for cancellation
  
  
• what conditions will countries have to fulfil in order to become eligible
  
  
• how much debt will be cancelled
  
  
• how will the debt cancellation be financed - will it be funded with new money or will it be funded out of current aid.

Debt and Development Coalition Ireland:

# calls for cancellation of unpayable multilateral debt

# calls for the establishment of a fair and transparent process to deal with debt

# proposes that the sale of IMF gold should be the first port of call for financing multilateral debt cancellation

The sale of IMF gold can mobilize as much as $35 billion. Either the principal raised or the interest earned on invested principal can be used for the cancellation of multilateral debt owed not just to the IMF but also to other multilateral institutions. A major advantage of this proposal is that this source of funds would be additional and hence not come at the cost of other development monies.

The next G8 meeting is in Scotland in July 2005. This will be their opportunity to take the decisive step to cancel unpayable multilateral debt.

1. E.g. African Development Bank, Inter American Development Bank
   
   
2. Odious debt can be defined as debt lent to repressive regimes from which the people did not benefit. Subsequent governments should not be held responsible for debts accrued by such regimes, eg. Iraq
   
   
3. under the Heavily Indebted Poor Country Initiative a country's debt is considered 'payable' or sustainable if the ratio of debt to exports is below 150%
   
   
4. Moral hazard is the irresponsible behaviour that results from the knowledge that one would not be held to account for one's actions
   
   
5. See 'The Unbreakable Link' - Romilly Greenhill Jubilee Research and 'Resource Rich BWIs, 100% Debt cancellation and the MDGs' - Sony Kapoor Jubilee Research
   
   
6. http://www.millenniumcampaign.org
   
   
7. Ministry of Foreign Affairs, Netherlands 'Results of Intenational Debt Relief l990-1999' 2004 page 3 http://www.euforic.org/iob
   
   
8. For a full list see http://www.worldbank.org/data/countryclass/classgroups.htm
   
   
9. Ministry of Foreign Affairs Netherlands 'Results of International Debt Relief 1990-1999' 2004 page 146
   
   
10. NPV - Net Present Value. All debt is not the same and it varies in terms of the interest rates, the period of repayment and other terms. In order to ensure comparability between debts owed at different terms, finance professionals use the concept of the Net Present Value which uses some assumptions to define how much the debt issued under various terms would be worth today.

AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

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From www@africafocus.org Tue Jan 18 12:15:35 2005

Africa: Debt Issue Unresolved

Africa: Debt Issue Unresolved

AfricaFocus Bulletin
Jan 18, 2005 (050118)
(Reposted from sources cited below)

Editor's Note

The first test this year for rich countries' willingness to act on world poverty is coming soon, as finance ministers from rich countries meet in London on Feb. 4. A new report from the United Nations has stressed the need for new investments in strategically targeted new investments through doubling aid (see http://unmp.forumone.com). But halting debt payments to international financial institutions could have even quicker effects, through freeing up resources for health, education, and other urgent needs.

This AfricaFocus Bulletin contains two recent statements from debt campaigners in Africa and the UK. Another AfricaFocus Bulletin sent out today contains a more detailed analysis of the potential advantages of multilateral debt cancellation. For related news on debt, see http://allafrica.com/debt. For previous AfricaFocus Bulletins on the topic, see http://www.africafocus.org/debtexp.php.

For advocacy actions on debt in the U.S. and UK, targeted at the February 4 meeting, visit http://www.jubileeusa.org and http://www.jubileedebtcampaign.org.uk

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African Social Forum
Lusaka, Zambia

14 December 2004

[http://www.cadtm.org/article.php3?id_article=1011]

The following statement, in response to the news that the U.K. and the U.S. governments are offering different proposals aimed at 100% multilateral debt cancellation, was circulated at the African Social Forum in Lusaka, Zambia. The endorsements below were gathered in a few hours; more will undoubtedly be forthcoming as the statement's circulation broadens.

We Demand Full Multilateral Debt Cancellation for Africa and the Global South

Drop the Debt 100% -- All Impoverished Countries -- No Economic Conditions!

As civil society organizations from across the continent of Africa, we are confronted every day by the devastating reality of the crisis of debt. Debt payments to wealthy institutions like the IMF and World Bank rob our countries of resources we desperately need to provide health care, fight HIV/AIDS, provide education, and make available clean water. Debt is a tool of domination used by rich country governments and creditors like the IMF and World Bank. Conditions attached to debt relief and loans are devastating our economies and undermining our choices as sovereign nations.

For impoverished nations, multilateral creditors -- in particular the IMF and World Bank -- are the largest creditors. They are also the most powerful: because of their "preferred creditor" status, countries must pay their debts back first to these institutions. If countries do not pay, they are penalized and excluded from most forms of aid and assistance.

The Heavily Indebted Poor Countries (HIPC) Initiative was launched by the World Bank in 1996 to provide a "robust exit" to the crisis of debt faced by impoverished nations. Eight years on, the program has failed to achieve this goal. HIPC has provided too little relief, to too few countries, with devastating conditions. It is time to move beyond the failed HIPC Initiative towards another approach: Full (100%) multilateral debt cancellation for all impoverished nations, without harmful conditions.

We are aware of discussions going on now within the G-7 (in particular proposals by the UK and US governments), the IMF and World Bank, and other forums about possibilities for 100% (full) multilateral debt cancellation. We are encouraged that after many years of half-measures, full cancellation is being discussed at these levels. However, we must be clear about the principles for such discussions to meet the goals and aspirations of African civil society.

First, 100% multilateral debt cancellation is critical. Attempts to determine a "sustainable" level of debt for impoverished nations desperately trying to address the crises of HIV/AIDS and economic injustice should be rejected. For impoverished nations struggling to meet the human needs of their peoples, full 100% multilateral debt cancellation is the only option.

Second, this cancellation must come without any economic conditionalities. The HIPC program and PRSPs are riddled with conditions such as privatization, indiscriminate trade liberalization, opening up markets, fiscal and monetary targets. These conditions have devastated our economies long enough. Debt cancellation must come without any economic conditions attached. Moreover, we reject and find that the IMF's Poverty Reduction and Growth Facility (PRGF) must be dismantled and abolished. The PRGF is not a force for development in our countries; the conditions attached to loans from this facility have devastated our economies. It is time to end the role of the IMF in poor countries once and for all; closing the PRGF is a critical first step towards doing this.

Third, multilateral debt cancellation must apply to all impoverished nations, not just the 42 HIPC nations. We reject proposals which only address countries that have reached HIPC "completion point." Many countries would be excluded from this approach. Moreover, non-HIPC countries must be included in efforts towards 100% debt cancellation. Countries including Haiti, Jamaica, and Nigeria are not part of HIPC, despite their extreme indebtedness.

Finally, we think that the multilateral financial institutions should do their fair share, and should contribute the bulk of the resources to finance debt cancellation. The IMF and World Bank are two of the richest financial institutions in the world. The IMF sits atop more than $30 billion in gold which currently serves no productive purpose. The IMF could sell this gold and use proceeds to cover debt owed to the World Bank and other multilaterals. The IBRD could easily mobilize more than $10 billion in accumulated profits and reserves and could commit a share of its annual multi-billion dollar profit to debt cancellation. The IMF should close down the PRGF facility and use its resources to cancel IMF debt. These are wealthy institutions; it is high time for them to do their fair share and by paying for debt cancellation, begin to acknowledge their role and responsibility in the debt crisis.

We do not believe that concerns about the "additionality" of debt cancellation should be allowed to postpone the full cancellation of the multilateral debt. Cancellation is significantly more valuable to our peoples than additional aid. Aid comes with its own conditions, and often creates more debt. The resources realized from debt cancellation can be used as governments -- with ample interventions from civil society -- see fit. Aid is a promise we have seen broken far too often; cancellation's benefits would be lasting.

Endorsed by the following debt campaigners:

Tafadzwa Muropa - Zimbabwe

Sy Koumbo S. Gale - Chad

Constancia de Pina - Cape Verde

James Kashiki - Zambia

Godfrey Mfiti

Malawi
Rev. Lumu Shabani Democratic Republic of Congo (Kinshasa)

Benoit Essiga - CGT Liberte - Cameroon

Hassan Sayouty - Espace Associatif Maroc - Morocco

Demba Moussa Dembele - Forum for African Alternatives - Senegal

Taoufik BenAbdallah - ENDA - Senegal

Engudat Bekele - PAC - Ethiopia

Bakary Fofana - CECIDE - Guinea

Archinson Mhlata - PCO - South Africa

Pat Dooms - Orange Farm Vision - South Africa

Dao Dounantie - Jubile 2000 / CAD - Mali

Kone Solange - FNDP/ASAPSU - Cote d'Ivoire

Ouattar Diakalia - FNDP - Cote d'Ivoire

Dieng Amady Aly - Forum de Tiers Monde - Senegal

Seydou Ndiaye - ACAPES Senegal

Abubacar Ndiaye, RADI - Senegal

If not now, when?

Urgent recommendations on debt cancellation for a strong and prosperous Africa

A report by the UK All Party Parliamentary Group on Heavily Indebted Poor Countries for the Commission for Africa, based on Parliamentary hearings from African parliamentarians and civil society, from NGOs and academics, and from the Secretary of State for International Development, Rt. Hon. Hilary Benn, MP.

This paper contains the executive summary of the report, and some of the detailed recommendations contained in it.

[Source: Submission to the Commission for Africa. See submissions on the Commission site at http://www.commissionforafrica.org]

Executive Summary

The facts are clear:

• Debt relief has already made a difference to millions of people who are poor.
  
  
• Finance released by debt relief has overwhelmingly been used for poverty reduction.

But

• The HIPC Initiative has failed to provide an exit from unsustainable debt for the world's poorest countries.
  
  
• It will be impossible for the Millennium Development Goals to be met without an immediate 100 per cent debt cancellation for Africa's heavily indebted countries.
  
  
• Impoverished African countries with unsustainable debt are not being considered within the current HIPC initiative.
  
  
• Conflict, corruption and undemocratic processes are barriers to debt cancellation for effective poverty reduction

Therefore, in summary:

• The unpayable debts of Africa's impoverished countries should be cancelled immediately, in full, releasing funds for poverty reduction.
  
  
• The current HIPC Initiative should be urgently and radically reformed so that debt cancellation for all heavily indebted African countries can proceed rapidly under a fair and transparent process that reinforces the positive and active involvement of African national parliaments, other democratic institutions and processes, particularly in Africa, and the broadest definition of African civil society. This process should be established in consultation with democratic African institutions, build on the best practice for the application and monitoring of debt relief for poverty reduction and take into account the processes already initiated by NEPAD to counteract corruption.
  
  
• IMF gold should be sold immediately to maximise its contribution to rapid debt cancellation, using a process that protects the legitimate interests of the gold-producing countries and avoids significant impact on the price of gold.
  
  
• Special attention should be given to urgently dealing with debt owed to non-OECD bilateral and commercial creditors which are not participating in the HIPC Initiative, including establishing a rapid response legal technical assistance facility, independent of the IMF and World Bank, to protect African nations from predatory lawsuits.
  
  
• While it is legitimate to insist that money released by debt cancellation is spent for agreed purposes of poverty reduction and national development, and to advise national governments on the economic implications of different policy options, the international financial institutions must stop imposing economic policies on poor countries as a condition for debt cancellation, and be made more accountable to African nations for their behaviour in Africa as a whole and in individual nations.
  
  
• Each impoverished African country should be empowered and enabled to develop, own and monitor its own unique and comprehensive development programme that will meet the 2015 Millennium Development Goals and which includes a comprehensive financing plan
• encompassing all issues of grants, loans, debt (both international and domestic, private and commercial and including export credit debt), taxation and international trade.
  
  
• These national development programmes should receive guaranteed and sustained funding from the world's richest nations, with a strong bias towards grants. Grants should target poverty, without compromising environmental and human rights standards, and be free of undemocratic and economically damaging conditionalities.
  
  
• These guaranteed and sustained funding agreements, including debt relief proposals, must be able to adapt rapidly so that commodity price variations and other external shocks do not destroy their effectiveness and cause more poverty.
  
  
• Each African government has its own opportunities and responsibilities in ensuring debt cancellation results in effective poverty reduction. The Commission for Africa should highlight principles and best practice in this area, indicating how the donor institutions and governments can support rather than hinder this process.
  
  
• African countries own efforts to fight corruption should be backed by a coherent and concerted effort to repatriate 'stolen assets', money siphoned off from national finances into private bank accounts, much of it from loans now being repaid by national governments. This should draw on the legislation and experience gained from the measures taken to combat the laundering of income from the illegal drugs trade and the financing of terrorism.
  
  
• Any further loans made to impoverished African countries should only be made in an open and democratically accountable manner, with clear targets of poverty reduction, without economically damaging conditionalities, and subject to an agreed insolvency process as described below. Calculations of debt sustainability must be based on human development factors, rather than on economic growth and export earnings.
  
  
• A fair, transparent and comprehensive international insolvency process should be created to allow creditor and debtor countries to resolve future debt crises without compromising the ability of poor countries to meet the basic social needs of their peoples, and without forcing poor countries to repay what the insolvency process determines to be odious debts.

These recommendations to the Commission for Africa will also be the basis for continuing political activity within the UK Parliament, the European Union, the countries of the G8 and the International Financial Institutions.

Recommendations from the report:

1. Drop the Debt

100 per cent cancellation

• The unpayable debts of Africa's impoverished countries should be cancelled immediately, in full, releasing funds for poverty reduction.
  
  
• Countries that have already demonstrated their ability to effectively use debt relief for poverty reduction should immediately receive full debt cancellation; in countries where issues of conflict, governance or commitment to poverty reduction call into question the likelihood of debt relief immediately having a positive impact on poverty, debt service payments should be placed in a trust fund so that finance can be released for poverty reduction as soon as appropriate.
  
  
• Debt cancellation should not be limited to those countries currently defined as qualifying for HIPC debt relief. Debt cancellation proposals should be extended to all African nations where debt cancellation is a prerequisite for their ability to meet the Millennium Development Goals.
  
  
• Debt cancellation should be matched by appropriate financing being made available to those African nations that have relatively low levels of debt but lack the resources to meet the Millennium Development Goals.
  
  
• The Commission for Africa, and the UK government, should encourage other creditor nations to follow the UK proposal to cancel its share of multilateral debt in order to achieve 100 per cent cancellation of multilateral debt.
  
  
• While debt cancellation is a highly effective form of transfer of resources to indebted countries for poverty reduction, and should therefore be a priority for financing to help those countries meet their Millennium Development Goals, it should not be financed at the expense of either existing aid commitments or instead of grants that will also be necessary if the MDGs are to be met. Debt cancellation should therefore generate additional funds for poverty

reduction

for example, it should be matched by refunding of the African Development Bank and Fund.

IMF gold

• If this matter has not been resolved and acted upon when the Commission for Africa reports, then it should press for immediate action; the UK government should use all its influence to ensure there is no further procrastination. While it is vital that the detailed mechanisms proposed take into account the interests of gold-producing nations in Africa, there is no justification for any

delay

the creditors should take the responsibility of using their own resources to cancel this debt in pursuit of poverty reduction, especially as it has been shown that this can be achieved without jeopardising the financial stability of the IFIs or disturbing the equilibrium of the gold market.

• Our evidence showed that a managed sale of gold offers the most effective and equitable method of releasing this resource for debt cancellation.
  
  
• The UK government has stated that any further debt relief from the internal resources of the International Development Association (IDA) and African Development Bank (AfDB) will 'inevitably result in a dollar-for-dollar reduction in new disbursements to low-income countries' That is why the UK government has announced that it will pay its share of debt service from eligible countries to the World Bank and AfDB from 2005 until 2015. The objective is to put the World Bank and the AfDB in a position to provide 100% cancellation on outstanding loans. But it is not inappropriate for the sale of IMF gold to be used to partially fund the cancellation of debt owed to the World Bank and other development banks, and the Commission for Africa should urge an immediate examination of this option.
  
  

2. Reinforcing democracy, fighting corruption

Conditionality

The Commission for Africa should demand a commitment from all bilateral donors and the international financial institutions that they will end all economic policy conditions for debt cancellation

• and future grants and loans.

Reforming the World Bank and IMF

IFI Governance

The Commission for Africa should recommend reforms to the governance structure of the Bank and Fund towards a more equitable representation of developing countries through reforms to the BWI Leadership selection process, the Board structure and voting weights, and urge the UK Government to take a lead on this process.

We recommend the renegotiation of the Relationship Agreements between the IMF, World Bank and the UN to clarify the responsibilities of the IMF and World Bank to the UN, and enhance the ability of the UN to ensure that international financial institutions fully respect the jurisdiction of other agencies, funds and bodies. The IMF's responsibilities should be defined so as to include working for poverty reduction.

Parliamentary scrutiny of IFIs:

We recommend mechanisms for strengthening the capacity for effective parliamentary oversight of national economic policy-making and interaction with the IFIs.

• Ensure that the democratically elected representatives of recipient nations are the final arbiters of all economic policies in their countries. National parliaments have the right and obligation to be fully involved in the development and scrutiny of all measures associated with BWI activities within their borders, and should hold the final power of ratification. Approval of the PRSP must be shifted from boards of Bank/Fund to the national parliaments of recipient countries.
  
  
• The IFIs should withdraw conditions attached to loans if these are rejected by democratically elected parliaments. Donors must provide financial and technical support to increase the capacity of parliaments to analyse and formulate policy alternatives and scrutinise multilateral agreements.
  
  
• The UK parliament must play a greater role in scrutinising and overseeing the government's involvement in the Bank and Fund. Parliamentarians in the UK have a responsibility to oversee the activities of the Bank and Fund which their contributions support. Therefore they must be informed of the government's actions in the institutions.
  
  
• Welcome best practice examples such as the annual report on the Fund and the forthcoming reports on Bank.

Debt relief and defining Official Development Assistance

• Debt cancellation will not in itself be sufficient to enable the Millennium Development Goals to be met, and our recommendations for debt relief are therefore in addition to recommendations for increases in grants for development assistance.
  
  
• For the sake of transparency, the Commission for Africa should press for a new agreement on the reporting of ODA which categorises expenditure designated for poverty reduction, and separately identifies both debt relief and grants.
  
  
• Cancellation of export credit debt should not be reported as ODA but as additional non-ODA expenses.

Stolen Assets

• Urgent action should be taken to establish judicial and legislative measures to lay down processes and procedures for the repatriation of stolen assets and to prevent further looting of finance for development.
  
  
• Public funds recovered should be used for poverty reduction
  
  
• The Commission for Africa should endorse and encourage the stolen assets campaign within Africa and in Europe and the USA, and call on the European Parliament to pass a resolution calling on all banks in Europe to cooperate in the investigation into stolen assets. This should draw on the legislation and experience gained from the measures taken to combat the laundering of income from the illegal drugs trade and the financing of terrorism.
  
  

3. Future lending

A fair and transparent arbitration process (FTAP)

The Commission for Africa should endorse the need for the establishment of a fair and transparent arbitration process, and request the United Nations as a matter of urgency to begin a formal consultative process that would result in proposals by the end of 2005.

Africa: Multilateral Debt Cancellation

Page Editor: Ali B. Ali-Dinar, Ph.D.