Multilateral Debt : A Growing Crisis

Multilateral Debt : A Growing Crisis
What is multilateral debt?
Multilateral debt is the debt owed by developing countries to the World Bank and International Monetary Find (IMF) and other multilateral institutions, regional development banks and inter-governmental agencies. Governments, including Canada, allocate tax revenue and provide guarantees to the multilateral institutions which allow them to provide loans to developing countries. Thus Canadians are stakeholders in the multilateral debt crisis.
Why is it a problem?
Multilateral debt levels have increased dramatically in recent years. These debts threaten to undermine economic and social development for some of the poorest countries in the world. Many sub-Saharan African countries spend more to service debt than they spend on health care and education. For example, in 1995 Mozambique spent 3.3% of its budget on health care, 7.9% on education and 33% on debt service. As Southern governments increase exports of natural resources and commodities to pay the rising debt, environmental devastation increases. This situation is becoming increasingly economically unsustainable as well. Debtor countries are trapped on a debt treadmill, forced to take new loans to service old ones or risk default and potential economic collapse.
How much is owed?
The total developing country debt owed to multilateral institutions rose from US$61.6 billion in 1980 to a total of US$313 billion in 1994. For the 36 poorest countries, multilateral debt increased five-fold from $11 billion to $55 billion.
How did multilateral debt grow?
The dramatic increase in multilateral debt began when the multilateral institutions bailed out the commercial banks who had over-lent to developing countries in the 70s. With skyrocketing interest rates and commercial creditors no longer willing to lend to them, debtor countries were forced to take World Bank and IMF-imposed lending packages to pay off commercial bank debt or risk default. A significant amount of new IMF and World Bank funds was used to repay outstanding interest on debts owed to commercial banks. For example, from 1983 to 1989, US$32.7 billion in loans from public sources went to bailout the private banks.
What does this mean for countries today?
The various rescheduling plans of the 1980s have resulted in a situation in which the IMF and the IBRD (a wing of the World Bank) are receiving far more in debt servicing from the poorest countries than they are lending. Countries just can't get out of the debt pit. In 1995, for example, the poorest 36 countries paid out US$ 1.6 billion more to the Bank and the Fund than they received in new loans. This net transfer of resources South to North (known as "net negative transfers") is deeply disturbing - institutions designed to assist in "development" are effectively preventing it by draining poor country coffers. There are rising concerns that aid to poor countries now goes straight back to the World Bank and the IMF to service their outstanding loans. In 1994, the countries of sub-Saharan Africa spent US$11.2 billion servicing their debts and received only US$10.7 billion in foreign aid. Humanitarian efforts to assist countries are being undermined by obligations to pay multilateral banks first. Unlike commercial banks, multilateral institutions have never written off debt and have no intention of doing so.
How can the problem be solved in the short-term?
In spite of international attempts to restructure debt repayment plans, the extent of the debt trap for the most indebted countries means that only significant debt reduction or outright cancellation will offer any hope of economic, social and environmental recovery.
How have the World Bank and the IMF responded to the problem?
The World Bank and the IMF are at the centre of the problem. Both these institutions have compelled developing countries to re-organize their economies around the priority of regularly servicing their multilateral debt. These programmes, known as "structural adjustment programmes" or SAPs are designed to increase foreign investment, boost foreign exchange earnings and reduce government deficits (see factsheet on "Structural Adjustment"). Because the harsh economic measures imposed under SAPs deepen poverty, undermine food security, and lead to unsustainable levels of resource exploitation, environmental destruction and population dislocation, they contribute to the long-term decline of countries already reeling under their debt loads. Under pressure from G7 governments, however, the IMF and World Bank agreed to the "Highly-Indebted Poor Country (HIPC) Debt Initiative", for some of the world's poorest countries in October, 1996.
What is the HIPC?
The HIPC is designed to reduce the debts of selected countries, on a case-by-case basis, to levels that the Bank and the Fund consider "sustainable". The HIPC initiative, however, is deeply flawed. HIPC promises too few countries too little debt reduction, too late. While over 40 countries carry debt loads that threaten to crush them, it is possible that only 8 will receive some relief under HIPC. The eligibility criteria are too narrowly defined and based on primarily economic indicators which do not fully reflect the ability of a country to carry debt. Criteria do not include social indicators like poverty or malnutrition or environmental indicators such as the management of renewable and non-renewable resources. Incomplete "debt sustainability" calculations may result in levels of debt reduction that are too low to ensure an "exit" from future debt. Thus the debt spiral may only be slowed, not stopped. Because debt relief will only arrive after six years of additional structural adjustment programmes, eligible countries will be forced to take new loans. For many countries that have diligently followed Bank/Fund programmes, the delay is unnecessary and unfair. Debt relief is urgently required now. In the year following the launch of the HIPC initiative, only two countries were promised debt relief. Uganda is not scheduled to complete the HIPC programme until 1998, Bolivia in 1999. The HIPC is being used as a stick to ensure compliance with structural adjustment programmes that have even more rigorous conditionalities than in the past. Thus the HIPC will enable the IMF and World Bank to intervene more ruthlessly in the management of poor countries.
What must be done in the long-term?
The debt crisis must be viewed as an integral feature of a development model based on increasing disparities between rich and poor. Incorporating concerns regarding debt into the larger context of more just global economic and social policies and ecological sustainability poses one of the greatest challenges of our time. Therefore, while steps to improve HIPC and cancel multilateral debt are critical, resolution of the Third World debt crisis must be accompanied by the fundamental reform of the international financial system which precipitated the crisis in the first place.