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Summary Analysis of the June 11, 2005 G8 Debt Proposal
On June 11, Finance Ministers from the G8 countries announced a debt remission proposal that would cancel multilateral debts owed to the World Bank, the International Monetary Fund (IMF) and the African Development Bank's African Development Fund (AfDF) by 18 low-income countries.
The G8 proposal offers 100% debt stock cancellation for debts owed to three multilateral financial institutions for the 18 countries that have reached their 'completion points' through the Heavily Indebted Poor Country (HIPC) Initiative. A further 9 HIPC 'decision point' countries, who have not completed or have stalled in their World Bank/IMF programs, might qualify in the near term. The deal could also potentially be extended to the 11 remaining HIPCs that have not yet reached their decision points.
The G8 proposal to actually write off debts owed by HIPC completion point countries marks a breakthrough over the proposals by Canada and the United Kingdom to pay their debt service over a period of 10 years. However, the 18 countries initially covered in the current plan are fewer than the 22 countries (including 4 non-HIPCs) proposed by Canada or the 24 countries (including 6 non-HIPCs) proposed by the UK.
There are at least 62 countries that civil society assessments conclude need immediate 100% debt cancellation in order to meet the goals of halting the spread of HIV/AIDS and halving the proportion of their population living in extreme poverty, hunger and without safe drinking water.
How much money?
The debts to multilateral institutions owed by the 18 HIPC 'completion point' countries are estimated to be nominally worth US$40 billion. However, the actual cost to creditors in Net Present Value terms, that is the amount that would have to be invested today to pay off these debts over their full terms, is only about US$15 to US$17 billion.
The plan would see industrial countries reimburse the World Bank's International Development Association (IDA) and the AfDF. Their relative shares would be based on their historic contributions to these bodies. Therefore, for IDA Canada would pay about 4% of the cost and Britain about 10%.
The Finance Ministers' proposal promises to replenish dollar per dollar the money that was to flow back into IDA and AfDF through debt service payments. Donors would contribute matching funds to the IDA and AfDF to cover the costs of loan and grant repayments. Therefore, the commitment for additional resources is for all of IDA, rather than for each country.
The question of how to finance the write-off of debts owed to the IMF is more complicated. The G8 proposal states that the IMF fund its share of debt cancellation through the use of 'existing IMF resources.' This refers to the principal, worth about US$3-4 billion, left from the 1999 revaluation when a portion of IMF gold was revalued to cover the cost of debt relief under the HIPC initiative.
The G8 proposal also insists that debt relief not 'undermine the Fund's financing capacity.' Hence the communiqu' calls for donors, including oil-producing countries, to make extra voluntary contributions to cover debts owed by countries with relatively large IMF debts, such as Liberia, Somalia and Sudan should they ever qualify under the proposal.
Analysis of the Debt Deal
The Finance Ministers debt deal represents a major step forward toward the 100% cancellation of multilateral debt for the poorest countries in three key areas:
- The deal marks acceptance by the G8 countries of the principle of 100% multilateral debt cancellation to deal with the debts of the world's poorest countries. More importantly it signals a recognition that previous debt relief initiatives like HIPC have failed;
- The deal accepts the principle that the IMF's share of debt cancellation can be funded through the use of its own resources. While the current deal relies on the use of resources from a previous sale of gold, the additional sale of IMF gold to fund debt cancellation is clearly back on the table;
- The G8 leaders have agreed to provide additional resources towards development assistance by increasing their support for the multilateral lending and some have committed to reaching the ODA target of 0.7% of GNI by 2015.
There are, however three serious limitations in the deal:
- The deal only applies to 18 Heavily Indebted Poor Countries with a possible extension to 20 other HIPCs when 62 countries need full debt remission to meet the Millennium Development Goals. The 18 countries involved will receive dollar for dollar reduced aid from the International Development Association (IDA). To receive new IDA flows, they will have to comply with controversial World Bank and IMF conditions and policy performance criteria.
- Countries that have not reached their completion points must still apply harsh IMF and World Bank adjustment measures before they qualify for debt cancellation. These measures have been shown to exacerbate rather than reduce poverty and have led to long delays for countries needing immediate debt cancellation;
- The World Bank's and IMF's dominant role in these countries will continue even after cancellation through assessments of 'good governance' based on a weak and subjective analyses of their macro-economic policies.
The Road Ahead
The G8 Finance Ministers proposal will be tabled at the G8 leaders Summit at Gleneagles, Scotland from July 6-8. The leaders can improve on its recommendations before referring the proposals to the annual meetings of the World Bank and IMF on September 25, 2005 for approval by all shareholders.
Canada has provided leadership on the debt issue and played an important brokering role during the negotiations. In particular, it has championed the principle of 'equity of treatment' for other low-income countries that do not qualify as HIPCs. Finance Minister Ralph Goodale confirmed that Canada will still cover its share of the debt servicing requirements of the four countries that are not eligible for HIPC but were on its original list of countries based on the 'equity of treatment' principle. Canada should use this principle to call for a complete delinking of debt cancellation from the HIPC framework and its inappropriate conditions to extend the plan well beyond the 18 countries currently eligible.
In the short term Prime Minister Martin must take leadership at the Gleneagles Summit to:
- EXTEND the agreement for 100% cancellation of the debts owed to multilateral financial institutions to all impoverished countries that need debt cancellation in order to meet the Millennium Development Goals. It should champion the 'equity of treatment' principle and call for the additional use of the World Bank's and IMF's internal resources as well as other innovative mechanisms such as coordinated taxes of international financial transactions, arms sales, aviation fuel or airline tickets.
- ENSURE that countries are free to implement their own national development strategies by ending IMF and World Bank Structural Adjustment Programs;
- GUARANTEE adequate financing for impoverished countries including through the dedication of 0.7% of Gross National Income to Official Development Assistance.