Government of Canada response Re: Debt relief, financing and other issues - April 8, 2005

April 8, 2005


Mr. John Mihevc and co-signatories
Halifax initiative Coalition
104-153 Chapel Street
Ottawa, ON KIN 1H5

Dear Mr. Mihevc and co-signatories:

Thank you for your correspondence of January 28, 2005 regarding debt relief, additional financing and other development issues. I apologize for the delay of my reply.

I fully agree with you that we need to ensure debt sustainability in poor countries and provide additional resources for critical investments in health and education. During my visit in Africa last August, I had the opportunity to discuss development challenges and opportunities with governments and civil society. Despite lower debt levels provided by the Heavily Indebted Poor Countries (HIPC) Initiative, a common theme in both Mali and Tanzania was that, although social spending had increased dramatically, additional resources are needed. A strong and clear message that I heard was the preference for a greater use of budget support and technical assistance, including from the International Development Association (IDA), as well as the critical importance of additional resources for development.

We are taking several steps to help countries guard against debt distress and to provide them with the necessary resources for poverty reduction. Over the past few months, we have taken several initiatives to free up some fiscal space to increase poverty spending, to provide development finance on appropriate terms, including grant assistance, and to increase resources for development.
Soon after your correspondence, I announced Canada's "Beyond HIPC" Initiative that advocates debt-service forgiveness on all payments owed to IDA, the African Development Fund, and the International Monetary Fund (IMF) until 2015. I believe that our proposal represents an unprecedented step forward in achieving our common goal, allowing eligible countries to immediately increase the level of resources they need to address critical social priorities while at the same time providing additionality by preserving the ability of international financial institutions (IFIs) to continue supporting development efforts, including through greater budget support.

Another important point to note is that the new World Bank-IMF debt sustainability framework for low-income countries represents a major breakthrough in how future volumes and terms of new lending will be determined. This framework allows for a greater provision of grants in IFI financing, including from IDA, consistent with country-specific debt sustainability thresholds. For example, to maintain the appropriate level of debt, Mali would be eligible for 100 per cent of its IDA financing in grants. Similarly, other countries would receive zero, 50, or as much as 100 per cent of their IDA financing in grants, depending on country-specific circumstances. In summary, a forward-looking approach such as this, combined with our own proposal would constitute, in my view, a larger breakthrough.

You also suggest that any new initiative should not end in 2015. To me, it is important that our proposal be time bound to avoid incentives for countries to take on inappropriate levels of new borrowing with the presumption that donors would service these loans on their behalf. I also believe strongly in linking debt relief considerations with good governance. Eligibility criteria of our initiative (i.e., HIPC completion point, for HIPCs, or a Poverty Reduction Support Credit, for non-HIPCs) are clear and simple. Moreover, they presume significant efforts by the country to address accountability and transparency in governance. issues that we know are important for poverty reduction, growth and aid effectiveness.

With respect to the issues you raised regarding structural adjustment programs, I agree with you that, in the past, mistakes have been made in designing some programs. I heard many such concerns from government and civil society during my time in Mali and Tanzania, particularly around the appropriate pace of difficult structural reforms facing a country. But I also heard things are improving and, although far from perfect, both the IMF and the World Bank are trying to integrate greater attention to issues related to poverty and the social impact of adjustment in their work. In particular, the IMF is undertaking a review of its conditionality with the objective of taking better account of country conditions and focusing on a narrow range of issues where the Fund has a clear mandate and expertise. The World Bank Development Committee will be reviewing conditionality in September later this year.

Key is the importance of country ownership in the design and implementation of economic programs, which now appears broadly supported. I have had the pleasure to discuss this issue with Finance Minister Ngozi Okonjo-Iweala of Nigeria several times over the past year, most recently in London earlier in February. You may be aware that Nigeria does not want a formal program relationship with the IMF and has instead devised its own home grown macroeconomic program that forms the basis of IMF surveillance. Canada is very supportive of this approach and has championed broader use of such alternative monitoring and program arrangements in our discussions with G-7 colleagues and through our work at the Executive Board. In fact there are indications that other countries are interested in exploring this option and we will continue to encourage broader use of country-led surveillance.

Finally, I agree that more aid is needed and I took significant steps to act on this conviction in the recent budget. You are likely aware that, in addition to the $641 million in new funds for 2004-05 to respond to the tsunami disaster and global health initiatives, the government increased international assistance by $3.4 billion over the next 5 years, consistent with the goal of doubling assistance by 2010-11 from its 2001-02 level. We are also committed to double aid to Africa by 2008-09 from its 2003-04 level. In the context of IDA, both developed and developing countries agree on the importance of IDA financing for development. Canada has increased its contribution to IDA by over 38 per cent in the context of its fourteenth replenishment.

Thank you again for taking the time to share your views.

Yours sincerely,

[original signed]

Ralph Goodale

c.c.: The Honourable Pierre Pettigrew, P.C., M.P.
The Honourable M. Aileen Carroll, P.C., M.P.