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G8 Debt Deal One Year On: What Happened and What Next?

27 June 2006

One year after the Gleneagles G8 Summit and what has been delivered on debt? And what remains on the books? Eurodad looks in-depth at the G8 debt cancellation deal now renamed the Multilateral Debt Relief Initiative (MDRI). The report notes that on 1 July 2006, the World Bank and African Development Bank will start to deliver debt cancellation to 19 impoverished nations, 15 of which are in Sub-Saharan Africa. This is one full year following final announcement of the plan, during which time these countries have continued to make debt service repayments to these institutions. The IMF delivered its share (US$3.3bn) of the debt cancellation six months earlier: on 6 January 2006. Two further countries also benefited from IMF debt cancellation: Cambodia and Tajikistan. The debt deal means that each year, over the next ten years, these 19 countries will save around US$1.1bn in debt service repayments: money that can be used instead to invest in health, education and infrastructure. But did campaigners feel this deal really went far enough? Did the deal cover 100% of countries and 100% of debts?

The paper reports that even though campaigners considered the deal presented by G8 Finance Ministers was far too limited (it covered neither 100% of countries nor 100% of debts), the rest of 2005 still saw rich country governments and the World Bank squabble over the details. These disputes threatened to seriously derail and delay implementation of the deal. They finally resulted in the temporary exclusion of Mauritania from the deal and a limitation of the World Bank debts covered by the plan. In cash terms, this means that US$5bn of World Bank debt will be left on the books of beneficiary countries. NO country will receive the claimed full 100% debt cancellation.

In Africa, the picture is mixed: in percentage terms, Uganda will have the largest proportion of its debt cancelled with 79%. This is followed by Ghana at 76%, and Tanzania and Zambia (both at 74%). The two Sub-Saharan African countries which will see the least reduction in percentage terms are Mali with a 56% reduction and Mozambique with a 48% reduction, principally because these two countries owe money to creditors other than the IMF, World Bank and African Development Bank. In Latin America, the picture is even gloomier. On average, the 4 Latin American HIPCs will see less than one-third of their debts written-off thanks to the exclusion of the Inter-American Development Bank, one of Latin America’s most important creditors. Guyana languishes at the bottom. It will see its debt reduced by only 21%, Nicaragua by only 23%, Honduras by 28% and Bolivia by 31%. In addition, the net financial gain from the MDRI for individual countries will depend on the quality of the country’s policies and institutions as judged by the IFIs.

Where now for campaigners? The paper argues that though Governments may be tempted to argue that “debt is done” thanks to Gleneagles many more countries urgently need immediate debt cancellation. In total, low-income countries are indebted to the tune of US$380bn and middle-income countries to the tune of US$1.66 trillion. Seen in this context, Gordon Brown’s “historic breakthrough” of US$40bn seems a somewhat more modest achievement. However it is significant that thanks to campaigners’ persistent pressure this cancellation will be delivered free of World Bank and IMF conditionalities. At completion point, countries will receive a letter from these institutions advising them that they no longer have to make debt service repayments on eligible loans. This means that governments can decide how and where to spend the cash they save (which in turn promotes downward accountability) and will not be subject to on-going monitoring of their policy performance from Washington DC in order to obtain this relief. The lack of on-going outside monitoring represents a remarkable departure from HIPC since one of the core foundations of the initiative is that countries must remain “on-track” with their IFI-sponsored reform programmes in order to benefit from debt relief. Another important precedent has been set with the inclusion of Cambodia and Tajikistan for IMF-only debt cancellation. If non-HIPCs can be included on the list for multilateral debt cancellation, then why not other countries in the future?

Despite these modest achievements it would be dangerous to underestimate how much still remains to be done on debt. Most importantly for many debt campaign groups in the Global South, remarkably absent from last year’s jubilant announcement was any acknowledgement by creditors of the key role they have played in the accumulation of unsustainable and illegitimate debt burdens in the South. Governments in the North, as well as the international financial institutions they control, have in the past lent large amounts of cash to some of the world’s most notorious and despised depots such as Mobutu in Zaire, Abacha in Nigeria, Marcos in the Philippines, Suharto in Indonesia and Hussein in Iraq. These loans were extended to these dictators out of geopolitical strategic concerns and with full knowledge of the nature of the regimes in place at the time. Yet it is successor governments and their peoples that are saddled with these “odious” debt burdens. So while taxpayers in the North may legitimately ask whether aid money and the cash freed-up via debt cancellation will be spent on the poor, it is equally legitimate for taxpayers in the South to ask why they should pay-out scarce public funds servicing loans from which they never benefited. Debt campaigners around the globe are united in calling for an urgent international focus on the critical issue of illegitimate debt. These debts must be cancelled and principles of creditor co-responsibility must be enshrined within the global financial architecture. Campaigners will continue to maintain that until both debtors and creditors have an equal say in the design of solutions aimed at preventing and solving sovereign debt crises, there can be no long-term resolution of the global debt crisis.

Full report:

G8 Debt Deal One Year On: What Happened and What Next? : Kb