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Africa Policy E-Journalgiven the difficulty in maintaining up-to-date links in old files. However, we hope they may still provide leads for your research. Africa: Multilateral Debt, 1 Date distributed (ymd): 960126 Multilateral Debt Reduction: A Proposed Framework A Position Paper of the Canadian Coalition for Global Economic Democracy For more information: Inter-Church Coalition on Africa 129 St. Clair Ave. W Toronto, Ontario M4V 1N5 Canada Phone: 416-927-2124 Fax: 416-927-7554 E-mail: iccaf@web.apc.org January 12, 1996 This paper represents the position of the undersigned groups in Canada on the issue of multilateral debt. It also represents the position of NGOs internationally who are calling on their governments to take similar action. Over the coming months it is critical that Canada urge a comprehensive and just resolution to the debt crisis in which all the creditors, including the multilateral creditors whose relative position has significantly increased, share the costs. This should be done by insisting that the multilateral debt relief proposal to be considered during the April 1996 semi-annual meetings of the World Bank and IMF contain at a minimum the elements proposed in this paper. We seek your views and response to the positions raised in this paper. Summary The following recommendations provide the basic framework for a comprehensive and sustainable resolution of the multilateral debt crisis. 1) The creation of a multilateral debt facility (MDF) to cancel or reduce the debts of highly indebted poor and some highly indebted middle income countries; 2) The facility should be used to finance up-front cancellation or reduction of debt stock of eligible countries; 3) The MDF should be funded primarily from existing resources within the Bank and IMF. A $12 billion MDF through the use of the World Bank's Retained Earnings and Loan Loss Provisions as well as its profits from currency fluctuations. The IMF's contribution should be financed through a sale of 10% of its gold reserves. The sale of IMF gold should not be used to finance the Enhanced Structural Adjustment Facility. 4) The conditions attached to debt cancellations would be an agreement by donor and recipient governments to meet agreed upon targets in social sector spending such as basic health and education. 5) The eligibility criteria for multilateral debt cancellation or reduction should be expanded to include the following criteria: * the relationship between levels of expenditure for debt servicing and social sector needs; * a degree of co-responsibility for loans that were made for projects that have proven to be failures or loans that were misappropriated. Multilateral Debt Reduction: Background to Recommendations 1) The creation of a multilateral debt facility (MDF) to cancel or reduce the debts of highly indebted poor and some highly indebted middle income countries Background: For many years now, NGOs and international debt experts have cited the growing problem of multilateral debt as a key issue in campaigning on debt. Multilateral debt is the debt owed by developing countries to the World Bank and International Monetary Fund (IMF) as well as to regional development banks. The most severely indebted countries of the developing world are trapped on a debt treadmill forced to take on new loans from multilateral institutions to continue to service their debts or risk default and potential economic collapse. Between 1980-1994, the total developing country multilateral debt rose from US$61.6 billion in 1980 to $313 billion in 1994. The multilateral debt problem affects the poorest countries with high debts most severely. The World Bank refers to this category of debtors as "severely indebted low income countries" or SILICs. Twenty-five out of the thirty SILICs are in sub-Saharan Africa. Debt servicing obligations to multilateral institutions rose from less than $8.5 billion in 1982 to almost $40 billion in 1994, an almost five-fold increase. In most cases, debt service to multilateral banks takes precedence over all other debt service requirements. While the proportion of outstanding debt to the multilateral banks of the poorest countries is relatively small (about 20%), 48% of actual debt service flows to these institutions. The problem is especially severe for sub-Saharan African countries. The overall debt of the region stands at $211 billion as of 1994. Over the period 1983-1994 the region paid out a total of $149 billion in debt servicing, $15 billion more than it received in new loans. Over this same period debt servicing to institutions like the World Bank and IMF continued to climb. The IBRD wing of the Bank along with the IMF accounted for $28 billion of the region's debt service between 1983-1994, over $9 billion more than the region received in new loans from these two agencies. The IMF alone has taken almost $5 billion more out of the region than it has provided in new loans over the same period. One way that the region's debt has been serviced is through the increasing use of the World Bank's IDA Facility (the low interest loan and grant wing of the Bank which is meant to assist the poorest countries) to service IBRD and IMF debt. IMF debt is also being refinanced through the use of its Structural Adjustment Facility and Enhanced Structural Adjustment Facility (SAF and ESAF). The region also experienced an increase in aid flows during the 1980s which enabled it to service its debt. However, aid flows have seriously declined in the last two years alone and many African countries have been unable to make use of the IMF's SAF or ESAF because of the very stringent conditionalities attached to them. This has put an even greater burden on IDA funds for the purpose of servicing debts. In 1994 over one half of total IDA lending to the region went straight back to the IBRD in the form of debt servicing. Since multilateral debt must be serviced first, several African countries find themselves in a position where debt service to the multilaterals is virtually pre-empting their capacity to service their bilateral and commercial debt obligations. A Moral Scandal * African governments annually pay more than $13 bn to their Northern creditors, more than double what they spend on health and primary education combined; * In 1994 countries like Mozambique and Rwanda who have virtually no debt servicing capacity were still nonetheless obliged to service their multilateral debt; In spite of receiving bilateral debt relief under the Naples Terms which is supposed to provide up to two thirds reduction in bilateral debt stock, Uganda's debt service burden was only reduced by a paltry 2 percent. This is partly because of the restrictive conditions attached to the Naples Terms but largely due to the fact that the bulk of Uganda's debt is owed to multilateral creditors. The Uganda case illustrates most graphically how inadequate current debt relief mechanisms are. Meanwhile, Uganda spends around $2.50 per person on health compared to $30 per person on debt servicing annually. * In 1994 Zambia spent thirty times more in debt repayments than it did on education. The World Bank's own poverty studies admit that "serious drops in attendance rates have been observed, disproportionately affecting girls." Between 1989-1993 Zambia made a net transfer to the IMF of $180 million. * In Nicaragua debt repayments account for more than a third of government spending, double the amount spent for education and clean water provision; * The labour and skills drain associated with constantly renegotiating debts and new aid packages has been considerable for the poorest countries. There have been over 8,000 renegotiations for Africa alone since 1980. The World Bank Proposal: A Breakthrough of Sorts On September 14, 1995 the Financial Times leaked an internal World Bank paper entitled The Multilateral Debt Facility for Heavily Indebted Poor Countries. The document, dated July 25, 1995 outlines a proposal for establishing a debt facility to reduce the multilateral debt obligations of the poorest countries. In terms of recognizing the problem, the Bank document is refreshing and constitutes a major step forward. For the first time, the Bank admits that the status quo is unsustainable in calling for a concerted and comprehensive approach which deals with all components of a country's debt. This very closely echoes what NGOs have been arguing and is the most significant aspect of the document. The report proposes the establishment of a Multilateral Debt Reduction Facility that would coordinate action for reducing the entire debt burden of these countries to sustainable levels. The proposal involves putting in place a fund designed to service on behalf of eligible countries the principal and interest payments to multilateral institutions over the next fifteen years. The World Bank proposes to establish an arms length fund called a Multilateral Debt Reduction Facility funded largely from its own sources but hopefully drawing on IMF and bilateral donor contributions. At the country level, commitments by the Facility to servicing multilateral debt would be made up front for a specific period of time, and subject to eligibility criteria based on performance. The Debt Reduction facility would come into play only after eligible Highly Indebted Poor Countries (HIPCs) received commercial bank and bilateral debt relief at the current maximum terms and are still deemed to have unsustainably high debt obligations. Commercial debt relief provides for up to 85% debt stock reduction while bilateral debt relief is available through the Naples Terms which involve up to a 67% debt stock reduction. Unsustainable debt is defined by the Bank to occur when the present value of a country's debt is more than 220% of its exports. In the short term only four countries would be eligible: Bolivia, Guinea-Bissau, Nicaragua and Uganda. The candidates in the medium term are: Cameroon, Central African Republic, Guyana, Honduras, Madagascar, Mozambique, Sao Tome, Sierra Leone, Tanzania, Zambia. The long term candidates include: Burundi, Cote d'Ivoire, Equatorial Guinea, Niger, Rwanda and Viet Nam. In the paper's estimation there are 16 other HIPCs (14 of them African) that would not need multilateral debt relief if they were granted commercial and bilateral debt relief at their current maximum terms: Angola, Benin, Burkina Faso, Chad, Congo, Ethiopia, Ghana, Guinea, Kenya, Lao, Mali, Mauritania, Myanmar, Senegal, Togo, Yemen. There are four HIPCs in the arrears category which could become eligible: Liberia, Somalia, Sudan and Zaire. The MDF proposal is consistent with what the G-7 leaders agreed to in Halifax: "We will encourage: the Bretton Woods institutions to develop a comprehensive approach to assist countries with multilateral debt burdens, through the flexible implementation of existing instruments and new mechanisms where necessary; better use of all existing World Bank and IMF resources and adoption of appropriate measures in the multilateral development banks to advance this objective ... " (G-7 Communique, Paragraph 29) Since the Financial Times leak, the World Bank President has been quick to point out that the paper was not official Bank policy, nor his own, but only one of several options being put forward. This official distancing points to the highly volatile nature of the internal discussions in the Bank as to how to deal with the multilateral debt issue as well as to the IMF's continued resistance to discussing any serious debt relief proposals. At the annual World Bank/IMF meetings held between October 9-11 the decision was to defer discussion on any proposal until April 1996, when the Bank and IMF hold their semi-annual meetings. (continued in part 2)
Documents previously distributed in the e-journal are
available on the Africa Action website: To be added to or dropped from the e-journal subscription list, write to e-journal@africaaction.org. For more information about reposted material, please contact directly the source mentioned in the posting.
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Africa Policy E-Journal
