Drop the Debt!
When: Tuesday March 1, 7:00 – 8:00.
Where: McGill University, Montreal, QC
I’d like to thank MGAC for inviting me down here to talk to you. It’s a pretty important time in discussions around dropping the debt, and my goal here is to show you that now is the time to get active and help to bring attention to the need to drop the debts of the poorest countries. I hope that you walk away from the discussions tonight with a sense that that there is something that each and every one of you can do to help end the vicious debt treadmill that is saddling the poorest countries.
The extent of the problem of poverty today
I won’t spend too much time detailing the drastic need for concrete action to be taken to start to address the worldwide need to combat poverty, but I will give you a few numbers that are admittedly hard to wrap your head around, but that are important in terms of context.
Nearly half of the world’s population, that’s 3 billion people, live on less than $2 a day. The equivalent of all the deaths from the Tsunami die in Africa every week from preventable causes. Put another way, more than 130,000 Africans die every week from things like malnutrition, HIV/AIDS, malaria, tuberculosis and contaminated water. Yet Sub-Saharan African countries continue to pay about US$12 billion a year servicing debts.
Western countries have repeatedly promised that they will do something about this. But time and again, the promises vanish into thin air as no concrete actions are taken. Groups around the world, including the Halifax Initiative and our colleagues across the country, want to make sure that 2005 is a year were words become action and something is finally and concretely done to make this world better for everyone. This means action on aid, trade, and the subject of my presentation today – debt.
The situation of debt
Four and a half years ago 645,000 Canadians (and 24 million people worldwide) called for cancellation of the debts of the poorest countries. Yet today these countries continue to be stuck on a debt treadmill.
Today the debts of developing countries have grown to reach almost four times as much as was owed in 1980 and these already poor countries have now paid over nine and a half dollars for every dollar owed in 1980.
African countries have now paid back in debt service more than they have borrowed, and yet they continue to have debt stocks equaling more than half of the loans it has received.
Where did the debt come from?
The origins of the debt crisis started back in the 1970s when the OPEC oil embargo drove up the costs of oil, giving banks more money than they knew what to do with. Flush with this new money, banks were happy to loan money to developing countries without worrying about the feasibility of these loans or their potential to alleviate poverty. This was also during the height of the cold war and so Western governments were more than happy to prop up dictators and thieves and help provide loans for military expenditures and vanity projects so long as it contributed to the war against communism. But it wasn’t just lending to bad governments, there was also a real pinch on the governments of the day both developed and developing because of the high oil prices.
The rising oil prices that had brought so much money in to the banks, were also putting a particular strain on developing countries who were saddled with the extra costs due to the high prices. At this time, interest rates were also relatively low and even well meaning governments needed to borrow funds to help support their development programs and thought they would be able to repay them.
But, poor country governments were soon faced with an insurmountable debt load due to various factors outside of their control, including rising interest rates, the spiralling costs due to the high oil prices and drastic decline in commodity prices such as for agricultural goods. These commodities are the almost exclusive source of resources and income for many of the world’s poorest countries.
As the amount of unpaid, and increasingly unpayable debt grew further assistance, debt reprocessing and more loans were given to these desperate countries by the World Bank and International Monetary Fund.
During the 1980s and 1990s, commercial debts – money owed to banks – was largely transformed into money owed to the World Bank and IMF. New loans were given either to repay old debts or simply to keep countries financially afloat and protect Western private banks who had overextended themselves by supporting projects that did nothing to help poor people or contribute in any way to getting countries out of poverty.
It’s important to note here is that if you or I ever got ourselves into this bad a financial situation there would be ways for us to default and declare bankruptcy. But there is no such mechanism for poor countries, their unpayable debts remain and are a constant burden for subsequent generations.
But the World Bank and IMF, didn’t come in and just generously cover the debts. Bank and Fund support came with strings attached that took macro economic and domestic policy options out of the hands of the governments of poor countries and put them into the hands of technocrats in Washington. These Structural Adjustment Programmes forced privatisations, opened up nascent economies to transnational corporations and enforced policy and legal changes in almost all areas of government activity. Looking back on the results of these policies it is clear to an increasing number of analysts that they have done more harm than good. They are now widely assessed to have had a seriously negative impact on the lives and prospects for the poorest people in Africa. They “Kicked away the ladder” to development by forcing countries to relinquish the ability to nuture any kind of domestic industry or to ensure that multinational corporations had to contribute to the development of the country through proceeds gained from the use of domestic resources such as in mining and extractive industries or that knowledge and experience would be left with workers from the countries affected. These are all economic tools that developed countries, countries like Canada, used to developed and prosper.
As the scourge of HIV/AIDS began to spread across Africa in the 1990s, countries were often paying more on debt servicing than they could put towards health or education and the poorest countries were often trying to pay back loans for which the countries had received no benefit and that were often contracted and stolen by regimes now removed from office. Saddled with the debts and without the economic tools for development per capita growth in Sub-Saharan Africa averaged minus 0.3 percent between 1990 and 2000.
Civil society groups have long been trying to raise attention to the need for the debts to be cancelled. At the end of the 1990s, the World Bank, the IMF and its representative governments devised a complicated new process called the Highly Indebted Poor Countries Initiative (or HIPC). The HIPC began in 1996 and it now covers 42 countries (34 of which are in Sub-Saharan Africa). The countries covered are not all of the poorest countries in the world, nor actually all of the most severely indebted countries in the world, but nevertheless for those countries included within the initiative the HIPC was supposed to begin to address the debt treadmill many of the poorest countries in the world are trapped on.
But 8 years later, and after a revision of the HIPC in 1999 that was supposed to increase its effectiveness, it is abundantly clear that what was devised by the Bank, Fund and donor governments hasn’t led to the kind of debt relief that was promised.
Of the 27 countries that have qualified for debt relief under HIPC, nine had or will have to make higher debt service payments after receiving HIPC debt “relief” than they paid beforehand. Civil society groups have long highlighted the need for a debt initiative to be taken that truly addresses the debts of the poorest countries within and outside of the the limited HIPC list that once and for all gets these countries off of the debt treadmill.
Governments, faced with mounting evidence, are now beginning to realize that the HIPC initiative, although providing some relief for some countries, has largely been a failure.
The HIPC has not only failed to provide a lasting solution to the debt crisis it has actually blocked the realization of gains in development, human rights, health and education for the world’s poorest people by continuing to force governments to adopt economic policies that are designed in Washington and that have made poverty worse.
Today, as a whole, Africa pays 15 billion US dollars for debt servicing to the World Bank, IMF and rich country governments. This amount is more than the continent receives in development assistance. In 2003, Zambia spent roughly the same for debt servicing as they do for health and education combined. Health (3% GDP) Education (2% GDP) Debt Servicing (5% GDP).
What’s currently on the table?
This past year, with the growing recognition of the failures of past efforts to address the unpayable debts of the poorest countries, there has been movement internationally to do something about the debts owed to the World Bank and International Monetary Fund by the poorest countries.
Two proposals have emerged to address the debts and a number of different ideas are also being floated around financing the debt proposals. The debt proposals that have emerged are from the US and another from the UK.
The US proposal is actually a 100% debt cancellation proposal but it covers only HIPC countries and would cover the cost of multilateral debt write-offs by reducing future lending by one dollar for each dollar of debt relief. This approach will not work because it reduces the amount of assistance available to the poorest countries.
The UK proposal is not a 100% debt cancellation proposal at all. It is only a debt servicing proposal. The difference is that under their proposal countries like Canada will cover the debt servicing costs for countries for up to a ten-year period. The UK proposal also looks to IMF Gold reserves to finance the servicing costs of IMF debts. The IMF is sitting on 103.4 million ounces of gold with market value of about 43 billion dollars. The IMF has kept the gold on their books at the artificially low price of $51.5/ounce. For comparison, the current market price of gold is over $424/ounce.
Instead of actual 100% debt cancellation the UK proposal suggests donors pay the debt service payments owed to the IMF, the World Bank and the African Development Bank by qualifying countries (only 21 at the beginning) After 2015 these countries would then have to resume payments on their multilateral debts unless an assessment at the time was to lead to an extension of the program. Debtor countries face the uncertainty that changes in governments or policies among creditor nations could presumably suspend or change their participation in this program at any time.
The UK proposal falls far short of what is needed.
Presidents Chirac and Lula da Silva have also put on the international agenda a number of innovative proposals for raising revenue including options such as taxes on international financial transactions, arms purchases and carbon emissions.
The Halifax Initiative has been calling on the government of Canada to play a leadership role by pushing for a 100% debt cancellation package that would allow each G7 Minister an opportunity to contribute to a truly innovative and comprehensive solution to debt and resources for development. We have called on the government to ensure that this package secures full cancellation, makes use of the various options for financing debt cancellation and is free of conditions.
The Government of Canada has for its part been very clear with us that they have four principles for any debt package:
They say they want a deal to
1) provide additional resources
2) ensure equity of treatment for other low-income countries (LICs)
3) maintain the financial integrity of the IFIs; and,
4) provide the proper incentives for good governance and economic reform.
On Feb. 2 Finance Minister Goodale came out with a Canadian proposal for “100% debt relief for the world’s poorest countries” to much fanfare. A closer look at the proposal revealed that it was less ambitious version of Brown’s plan, covering just 19 countries.[i] The Government of Canada also said they would not back the sale of IMF gold to pay the costs of IMF debt relief if it were to disrupt world gold markets. Instead, Canada would call on donors to pay the cost of IMF debt relief directly. This is something that Canada, as the only G8 country with a budget surplus, may be able to cover, but that is incredibly unlikely for the other donor countries.
Other shortcomings include the fact that the Canadian plan would cover only loans to the World Bank’s International Development Association (IDA) and the African Development Bank’s African Development Fund (AfDF). It does not cover all multilateral debts for eligible countries like Bolivia and Nicaragua that have loans from other multilateral institutions such as the Inter-American Development Bank.
Canada would expect to spend only C$172 million to replenish the IDA and AfDF over the next five years. This would increase Canada’s contribution to low-income country debt relief by just 28% over the amount of bilateral debt relief already accorded to 14 HIPCs over the years 2001-2004. Canada has granted almost as much debt relief to Iraq alone (C$600 million) as has been granted to 14 HIPCs (C$609.1 million). The C$172 million Canada would set aside for multilateral debt relief pales in comparison to the almost C$1 billion Canada has committed to reconstruction in Afghanistan, Iraq and Haiti.
Another shortcoming of the UK/Canadian proposal is that it is unlikely to ever gain full support. Right now if all of the countries that have expressed support for it, which to this point only includes the UK, Canada, Italy, Norway and Ireland, join in and follow the lead of the UK and Canada, only 25% of the debt servicing costs of the qualifying countries will be covered.
But even in the incredibly unlikely that all donor countries follow suit with the UK/Canadian proposal, when the program ends in 2015 between 60 to 70 percent of the debt stock of the qualifying countries will remain. And they will start to pay this down again. Back on the treadmill.
It’s clear that once again, there is an effort to tinker with the debts rather than finally cancel them and allow the poorest countries an opportunity to develop and get out of their crushing poverty.
The last big event on debt cancellation was the G7 Finance Minister’s meeting this past month. But at this meeting no agreement could be found, though once again they promised to continue to look at options.
It looks increasingly like we will need to put significant pressure on the leaders of our countries and Paul Martin himself to come up with a debt cancellation package at the Gleneagles G8 summit in the UK this July.
What do we want?
We are calling for a “Made in Canada” approach to be advanced through which debt cancellation is paid for with the use of World Bank and IMF resources, including World Bank loan loss provisions (worth US$3.5 billion as of June 30, 2004) and World Bank retained earnings (US$24 billion as of the same date), as well as a revaluation of some of the IMF's 103.4 million ounces of gold. This approach holds the World Bank and IMF responsible for their roles in creating the debt crises many countries face today.
This deal should reflect four key principles:
- SECURE the immediate and unconditional cancellation of 100% of the debts owed to multilateral financial institutions by all impoverished countries that need debt cancellation in order to meet the Millennium Development Goals, including halting the HIV/AIDS pandemic;
- ENSURE that countries are free to implement their own national development strategies by ending IMF and World Bank Structural Adjustment Programs;
- RECOGNISE that neither the people of Iraq, nor citizens of other countries formerly ruled by dictators, should be obliged to repay odious debts; and
- GUARANTEE adequate financing for impoverished countries including through the dedication of 0.7% of Gross National Income to Official Development Assistance.
Canada has been a leader on debt cancellation in the past. We have already cancelled approximately 610 million Canadian dollars worth of bilateral debt to 14 countries, and have committed to canceling almost 380 million dollars more. This leadership on bilateral debt cancellation should be recognized and built upon to secure a multilateral debt cancellation package. As I mentioned earlier, the Government has also promised to cancel almost 600 million dollars of Iraq’s debt this year.
For every dollar of Canadian bilateral debt relief, Sub-Saharan African countries owe another 94 dollars to multilateral financial institutions, principally the World Bank and the African Development Bank.
Political will by a broad set of countries can give direction and achieve 100% debt cancellation without conditions for all countries that need it to achieve the Millennium Development Goals.
Debt cancellation should also allow developing countries to set their own paths and not attach conditions in return for cancellation. We believe that debt cancellation without conditions will make the greatest contribution to development as countries and their peoples will be able to decide for themselves their own development paths.
Some World Bank and government officials have indicated concern that debt cancellation without stringent conditions will be abused by governments or go towards supporting corruption rather than contribute to development. They argue that the resources will be abused if they are not bound by structural adjustment conditions.
To address concerns surrounding corruption, we believe that donors should channel their development assistance towards initiatives that help to hold governments accountable. That means supporting civil society organizations in developing countries and ensuring that transparency and accountability become the framework for governance. We believe that strengthening civil society in developing countries is a more sustainable approach to assuring that resources are directed to poverty reduction goals, than by attaching conditions to debt cancellation.
In addition, donor countries like Canada can play an important role by making the principles of transparency and accountability the fundamental basis of the operations of the World Bank and the IMF. The World Bank and IMF should no longer be allowed to operate in almost absolute secrecy while they force governments to adopt policies that are against the will of their own people.
It is our hope that when we look back at 2005, that it will be clear that this is truly the year in which true and lasting steps were taken to eliminate poverty. A debt cancellation package would be a critical step in making this step forward. A debt cancellation deal only going to happen if people do their part to make sure that the package actually leads to cancellation and doesn’t just tinker with the debts again.
Full debt cancellation for the broadest list of low-income countries and all multilateral institutions is achievable and it is fully affordable. For a HIPC plus other low-income group of 60 countries it would cost approximately $80 billion, for HIPC alone it would cost $35 billion. When you look at the $43 billion available through IMF gold reserves, $3.5 billion in World Bank loan loss provisions and the $24 billion in World Bank retained earnings as well as the other innovative financing mechanisms being examined it is clear that the real barrier to full debt cancellation continues to be the political will, not the money.
What should people do?
- Check out our website – we have the World Bank/IMF Unhappy Birthday Cards that are calling for debt cancellation copies of the ‘postcard’ are available at the back of the room.
- Get involved with campaigns like “Making Poverty History.” The Halifax Initiative Coalition and several of our members have joined the “Make Poverty History” campaign. The campaign calls for urgent and meaningful policy change in four areas Aid, Trade, Debt and Ending Child Poverty in Canada and has tools and information for people to get active in 2005 to work to make a difference. You can check out the website at www.makepovertyhistory.ca The .ca is important because this is part of a worldwide campaign so to check out the Canadian campaign you need the .ca
- Get involved with groups like McGill Global Aids Coalition or the Social Justice Committee (which is one of our members located here in Montreal)
- Write a letter to your MP and tell them you care about this issue. Write letters to your local media and tell them how important these issues are.
- Live your lives as global citizens. One of the things that means is that you should talk about these issues with friends and coworkers. It means that when a polling company calls, or your newspaper calls to ask what’s important that you should remember that important issues aren’t just the domestic ones. International issues, issues like debt cancellation and development are important too.
With your help, and that of people around the world, it may be possible for us to move the governments to action this year. Words and promises just aren’t enough.
 The 15 HIPCs that have already reached their completion points and by 6 other “IDA-only” countries (Albania, Armenia, Mongolia, Nepal, Sri Lanka and Vietnam.).
 Figures from the Eurodad report “Paying for 100% Multilateral Debt Cancellation.”
[i] In addition to the 15 completion point HIPCs it would cover only 4 other low-income countries (Mongolia, Nepal, Sri Lanka and Vietnam) Canada says that another 37 countries (22 HIPCs that have not reached their completion points and another 15 low-income countries) might eventually become eligible