Debt Cancellation


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Debt Cancellation: The Facts Behind The Deal




Samuel Famakinwa



culled from THISDAY, July 3, 2005



The new President of the World Bank, Mr. Paul Wolfowitz, while praising the historic agreement by Group of Eight finance ministers to cancel the $40 billion in foreign debt owed by some of the world's poorest nations had urged G8 nations to extend the relief package to Nigeria, Africa's biggest debtor. Speaking a day after the G8 announcement while speaking to THISDAY on a visit to Nigeria, Wolfowitz said creditor nations "will hopefully come up with a deal to forgive Nigeria's debt. I'm very positive that something serious will happen."

Nigeria is Africa's most populous nation and the most heavily indebted country on the continent, owing $35 billion. But as the world's seventh-largest oil exporter, Nigeria doesn't meet the World Bank definition of a low-income country, thus disqualifying it from the HIPC package. The G8 ministers had said Nigeria's foreign debt would be considered separately by the Paris Club of international lenders. And Nigeria kept pushing. And it came afterall.

After its recent meeting on Wednesday, June 29th 2005, the Paris Club of creditors agreed to give Nigeria debt relief. The terms of agreement with the Paris Club are that Nigeria would clear arrears of about $6 billion on its $30 billion Paris Club debt, following which there would be a stock reduction on Naples Terms and a buyback of the remainder so as to provide an exit from the Paris Club. Also, the whole package is such that Nigeria can expect debt relief of about 60 per cent on our current Paris Club debt while the balance of about 40 percent would be paid through a buyback operation. This effort would represent a write-off of close to $18 billion for Nigeria which compares favourably with the $40 billion write-off for 18 low-income heavily indebted countries out of which 14 are Africans.

Some important highlights of the Paris Club agreement include the fact it has agreed to recognise Nigeria's implementation of its home-grown reform program under the IMF intensified surveillance as a legitimate instrument that fulfils the requirements for debt relief. This, however, is unprecedented and it is a major achievement for the country. The approach will be encapsulated in a new instrument known as Policy Support Instrument (PSI).

Following the Paris Club agreement, Nigeria has been invited to conduct detailed negotiations and finalise a Memorandum of Understanding (MOU) with the Paris Club in September 2005. It has not been easy as several steps have been involved on this road to debt relief. The country’s reclassification to an International Development Association (IDA) only status allowed it to be eligible for consideration for Naples terms. That is, the more generous debt relief package reserved only for lower income countries that show good performance on reforms. Working together with the World Bank and IMF, Nigeria had argued its case for the use of debt service funds to enable it invest in important areas which are critical to the well being of the Nigerian people.
As a result, starting from budget year 2006, an additional $1 billion is expected to be invested in these areas such as education, health, infrastructure, etc., while a system to track MDG-related expenditure and link it to results on the ground has been developed which would be chaired by the President.


The Campaigners

In his speech last Thursday night, President Obasanjo said: "It is clear evidence that with persistence, perseverance, focus, leadership, the support of the people and belief in God, battles, no matter how daunting they appear, can be won."
Obasanjo has had to travel extensively in the last six years that many Nigerians have not only grown cynical about his trips, but have indeed subjected the President to severe criticism. But he was joined lately by members of the National Assembly led by Senator Udoma Udo Udoma, who took their campaigns top capitals of Western industrialized nations, making a case for 100 percent debt cancellation.

But the efforts to put Nigeria's debt on the international front burner began on May 18 and 19, 2001, the federal government, in collaboration with the Charles Soludo-led African Institute for Applied Economics (AIAE), Enugu and with financial support from the UK Department of International development (DFID) organised an international conference in Abuja at the end of which a major study titled The Debt Trap In Nigeria: Towards A Sustainable Debt Strategy, was published.
The conference was coordinated by three people who edited the work: Dr. (Mrs.) Ngozi Okonjo-Iweala, who as Vice President and Corporate Secretary of the World Bank Group had taken a leave of absence a year earlier (2000) to serve as Economic adviser to Obasanjo on an informal basis; Prof. Charles Soludo, Executive Director of AIAE, who was then consulting for the World Bank, IMF, UN agencies and USAID and Dr. Mansur Muhtar, who was also on leave of absence from the World Bank as Senior Economist.

The distillations from that conference helped Obasanjo not only to ascertain the nature and details of Nigeria's debt portfolio but also to put the debt issues in perspectives.
But the negotiations of recent weeks, according to reports in the international media, had started uncertainly as both Austria and the Netherlands objected to a G8 Statement issued on 11th June, suggesting that G8 creditors were willing to negotiate a deal with Nigeria. Okonjo-Iweala last night confirmed the problem they had to encounter in the last couple of weeks.
 Okonjo recounted to THISDAY of how the non-G8 members of Paris Club nearly scuttle the whole deal, arguing that the last couple of weeks were fraught with uncertainties because some countries within the Paris Club "felt upset that the G-8 countries were taking decisions on Nigeria's debt without consulting them."
With this situation, Okonjo-iweala said some of these countries, specifically Netherlands and Austria, tried to block the deal when they felt left out. "But we had to reach out to them that it would be unfair to punish Nigeria for what might have been procedural errors that had nothing to do with us."
President Olusegun Obasanjo, she said, had to travel to these countries in the bid to plead Nigeria's cause and with that, they supported the negotiations.

Another low moment according to Okonjo-Iweala occurred earlier when, after making a submission seeking 70 per cent cancellation, the Paris Club secretariat said they were working within the region of 30 percent cancellation for Nigeria. "Of course, that meant we were not on the same wave length and myself and Dr. Mansur Muhtar, the Director General of Debt Management Office, had to sit with them for several hours at the Paris Club Secretariat but all our appeals fell on deaf ears, we were not getting anywhere at all. It was a rather frustrating experience."

Okonjo-Iweala said the more they argued about the need for a substantial debt cancellation of not less than 70 percent, the more the officials argued about the sustainability of Nigeria's debt. "They kept talking about the fact that oil prices were going up but we argued that nobody could rely on oil prices, that it could also go down at any time."
The Minister said that at about the time they were making a case for 70 percent debt cancellation, the National Assembly team was campaigning for 100 percent cancellation. "We knew of course they would not listen to that but the efforts helped because they saw the seriousness of the issue in Nigeria, that we meant business on the issue. There were also petitions by some students groups and nobody can underplay the importance of all these efforts."

Okonjo-Iweala said the efforts of some prominent members of the international community must be emphasised. Aside Prime Minister Tony Blair and Chancellor Gordon Brown, international financial institutions like the IMF and World Bank, she said, were very supportive of Nigeria while the campaign was on.

While praising the Paris Club for showing understanding to Nigeria, she said the detailed negotiations will take place in September when Nigeria is expected to make the first payment of $6 Billion to clear the arrears after which the final timetable for the final payments will be agreed upon.

The Minister said it is however critical that the reformed agenda be continued while the Fiscal Responsibility Bill should be passed so there would not be a recourse to what happened in the past when some of the spurious debts were piled up. "Like the President said in his broadcast, we must not make the same mistake again and this also goes for the states, especially because we know how some of the debts came about."
We should stop going aborrowing while the $1 billion that is being freed from this debt thing should be used for areas like agriculture, health and education. "We must use the resources judiciously and Nigerians must see that the money is working for them."
She said the federal government will meet with the state to work out where to invest the money so the people could feel the impact. 


Africa's Moment of Renewal

Only yesterday, nine countries around the world played hosts to the Live 8 concerts. The concerts were another attempt to draw the attention of G8 countries to Africa’s plight. Unlike in the past, the concerts were not to ask for donations but to call attention to “justice”, as stated by the organisers.  The Live 8 concerts, and the G8 leaders meeting in Scotland next week, is expected to launch the biggest push in history to end poverty in Africa. British Prime Minister Tony Blair, and Chancellor Gordon Brown, who have put the issue at the top of the G8 agenda, talk of a once-in-a-generation chance to heal the "scar of Africa".
Blair's Africa Minister, Lord David Triesman, has even predicted that the G8 package of aid and debt relief will be "as large as the Marshall Plan" that rebuilt Europe after World War II. The rhetoric is soaring while the expectations are enormous. But what the moment might achieve is more modest and more lasting: the start of a frank debate about the West's responsibility to Africa, and about what aid can and cannot do.

Africa’s debt burden has been and may remain in the news for some time to come. Last month, as a part of their Africa aid strategy, the G8 members finally agreed (through the World Bank, International Monetary Fund and African Development Bank) to forgive $40 billion in debt owed by 18 of the world's poorest countries which 14 of them are in Africa. These countries are: Benin, Burkina Faso, Ethiopia, Ghana, Madagascar, Mali, Mauritania, Mozambique, Niger, Rwanda, Senegal, Tanzania, Uganda, and Zambia.

Every year, sub-Saharan Africa is estimated to spend $30 billion on debt servicing alone, leaving little or nothing to spend on other development projects including health, education, agriculture or infrastructure. The gesture was to help alleviate these countries’ debt burden.

The new drive started from the United Kingdom where Prime Minister Blair, before taking over G8 presidency announced that Africa would be his primary focus. This led to Chancellor Brown putting forward a bold plan to tackle poverty in Africa ahead of the G8 Summit which he presented to the rich countries’ Finance Ministers in London last month. It was at the meeting that the $40 billion relief was approved. Specifically, he called for a doubling of European aid by 2010 and 100 per cent debt relief, as well as an end to many trade subsidies.

Brown's four-point plan for Africa were a 100 per cent debt relief to pay for education and health; the launch International Finance Facility for immunization; large increase in direct development aid, doubling of aid from European countries and; removal of export subsidies and all trade-distorting support to agriculture, which work against producers in the developing world.
The move provides relief for these poor indebted nations and freeing up much-needed revenue. Announcing the deal at a meeting of G8 finance ministers in London, Brown had said now was "not a time for timidity but a time for boldness". The plan, which was devised by the UK, secured the backing of the US administration which paved the way for its adoption at the London meeting.
Under the deal, the World Bank, the International Monetary Fund and the African Development Bank will immediately write off 100 per cent of the money owed to them by these 18 countries totaling about $40bn. The UK Chancellor of the Exchequer said up to 20 other countries could be eligible if they meet targets for good governance and tackling corruption. The total package, which needs to be approved by the lending institutions, could be worth more than $55bn. "We are presenting the most comprehensive statement that finance ministers have ever made on the issues of debt, development, health and poverty," Brown had said, adding that the plan set the stage for this month's G8 summit, where world leaders intend "to forge a new and better relationship, a new deal between the rich and poor countries of the world".

A few countries have shown promising progress because of debt relief. Last year, Uganda became the first nation to qualify under the HIPC program. Ugandan President Yoweri Museveni had followed a strict regimen based on IMF and World Bank criteria since the late 1980s. As a result, the country's annual service payments went from $150 million a year to $50 million, allowing it to increase education spending to $174 million. Since 1997, Uganda has doubled primary school enrollment.

This gesture has been hailed by many, including the World Bank President, Paul Wolfowitz as historic as it would have great impacts on the affected countries. For instance, a billion dollars of collective annual savings will allow Benin to dramatically increase spending on rural health care and HIV programs after all, reduced loan payments enabled Tanzania to abolish primary school fees and boost enrollments by 66 percent. Uganda which is benefiting again under the new arrangement, will have $3.81 billion of its remaining external debt of $4.76 billion cancelled. Zambia would now be able to boost health and education programmes. But Nigeria was excluded from this plan.


How Africa Became Trapped

In the 1960s and 1970s, according to reports, African countries became indebted to international lenders as they accepted loans for political and economic stabilisation in the post-independence era. In the context of the Cold War, and with massive revenue surpluses of oil money in Western banks in the 1970s, loans were made with little thought to their purpose or to their recipients' capacity to repay the debt. Many were made to retain the loyalty of corrupt regimes, and much of the money went into the hands of unrepresentative and repressive governments.
This was also the period when governments and multilateral institutions such as the World Bank, IMF and the African Development Bank pumped billions into poor countries. The idea was to underwrite modernisation projects that commercial banks wouldn't touch. But the money often ended in the Swiss bank accounts of corrupt leaders, or was gobbled up by civil war, natural disasters or waste and mismanagement. At the time, Western lenders weren't terribly concerned; they were at least as interested in buying Cold War loyalty as in helping Africa's poor. Indeed, many of those early post-colonial projects were demonstrably biased against the interests of the poorest Africans.

Many of the dictators who signed those notes have now died or been ousted and replaced by fresh, new leadership. Yet African governments remained shackled by previous dictators' economic misdeeds, in which the international lenders were complicit.
According to the World Bank, 33 of the 41 countries classified as Highly Indebted Poor Countries (HIPCs) are in sub-Saharan Africa. HIPCs nations owe so much in relation to revenues, that loan payments prevent them from investing in development and poverty reduction. Nigeria, for example, owes about $35 billion. This is well above what it spends on health and education.
In the 1980s however, when the shocks of the 1970s oil crisis, rising interest rates and falling global prices for primary commodities began to take a toll, the debt crisis in the developing world began to unfold. Sub-Saharan Africa's debt crisis worsened during this period, as the ratios of foreign debt to the continent's gross national product (GNP) rose from 51 per cent in 1982 to 100 per cent in 1992, and its debt grew to four times its export income in the early 1990s. In 1998, sub-Saharan Africa's debt stock was estimated at $236 billion, and that of the whole continent was over $300 billion. Africa's debt burden is twice that of any other region in the world, it carrying 11 per cent of the developing world's debt, with only 5 per cent of its income. Ironically, GNP in sub-Saharan Africa is $308 per capita, while external debt stands at $365 per capita.

Early attempts to address the debt crisis began in the 1980s, with debt swaps by creditors and with the IMF's Structural Adjustment Programmes, which were designed to stabilise and re-structure economies to ensure full payment of the debt stock. From 1989 on, a range of measures were enacted to reschedule and restructure debts through the Paris Club, an informal forum where creditor governments review and reschedule debt payment programs for poor countries. In 1996, the Heavily Indebted Poor Countries (HIPC) Initiative was created as the first comprehensive debt relief framework, encompassing private and government creditors as well as the World Bank and IMF, for the first time, and this has now become the dominant approach to resolving the debt crisis.

Crushing debt has been argued to hold back even the most progressive developing nation. That is why the Presidents Obasanjo, Thabo Mbeki and Abdelaziz Bouteflika of Algeria at the Kananski’s G8 summit specifically asked the G8 nations for more of a “hand up than a handout.” Funds saved from forgiven or reduced loans, they promised, would be redirected to social and economic programs. And they asked for help in restructuring their accounts to be eligible for job-creating foreign and industrial investment.


Questionable Debts

It has been argued that most of those loans were to previously corrupt governments in exchange for loyalties to one side or the other during the Cold War and that those funds never trickled down to serve the people; rather they were pocketed by greedy dictators. As the United Nations Conference on Trade and Development's 2004 report also reveals, the continent received some $540 billion in loans and paid back some $550 billion in principal and interest between 1970 and 2002. Yet Africa remained with a debt stock of $295 billion at the end of 2002.

In light of the circumstances under which much of the debt of African countries was incurred, and in recognition of the mistakes of both borrowers and lenders, as well as of the harmful effects of Africa's debt on the continent's development, Africa Action, an advocacy group, considers much of Africa's debt to be illegitimate. It argued that the illegitimacy of the debt is based on some principles which include the fact that debts contracted by dictatorships or repressive regimes, and used to strengthen the hold of these regimes, are illegitimate. It cited the apartheid-caused debt inherited by South Africa. This has also been termed "odious debt" (an established legal principle).

The group also noted that debts contracted and used for improperly designed projects and programs are illegitimate and there is heavy responsibility on creditors here, particularly on the World Bank for its failed development projects. “All debt owed by the South to the North can be considered illegitimate. The argument here is who owes what to whom? Africa Action and Jubilee South maintain that the countries of the South are in fact creditors of an historical, social and ecological debt which Northern countries refuse to recognize. Understanding the illegitimacy of the debt reinforces the arguments for debt cancellation, and opens up some new options for accomplishing this”, the group had argued.



The new deal to forgive the 18 developing countries has elicited a wide range of responses. While some have reacted with unqualified praise, others, especially Southern-based movements and organizations have rejected the agreement as insufficient. Jubilee USA Network, another advocacy group, believes that the agreement represents a first step which will allow countries to retain their own resources for development and which sets a potentially very important precedent. But there are also serious limitations and shortcomings of the initiative.
The deal, it said, suffers from several flaws. It argued that the agreement remains rooted in the failed, condition-laden HIPC Initiative, suggesting no end to the requirement that countries implement harmful economic policy conditions in order to qualify for debt cancellation. Beneficiaries are limited to countries that are currently part of this Initiative (18 countries with the potential to rise to an additional nine-20 HIPCs). The agreement does not cancel debt to other significant creditors such as the Inter-American Development Bank.

In a report, it noted that the deal immediately applies to only 18 countries, less than a third of countries that need full cancellation to meet the Millennium Development Goals, and well short of the countries which require cancellation of odious/illegitimate debts;
“It has taken 18 nations nine years to qualify for debt cancellation; at current rates of progress it could take a decade for the 20 potentially eligible HIPC nations to benefit from 100 per cent cancellation and this must be avoided; The amount of debt stock to be cancelled by the agreement – $56 billion – represents only 10 per cent of the amount of debt stock cancellation required for nations to meet the MDGs, goals which themselves are only a first step towards poverty eradication.
“Because the Inter-American Development Bank (IDB) has been excluded from the deal, four of the 18 nations – Bolivia, Guyana, Honduras, and Nicaragua – are scheduled to pay $1.4 billion in debt service over the next five years to the IDB. The significant burden of odious/illegitimate debt held by nations across the South remains completely unaddressed in this agreement”.
However, it argued that the challenge ahead for civil society in the 18 countries, is the task now will be to monitor the cancellation to ensure it happens, that no new economic conditions are introduced in the process, and then to hold their governments accountable for how they make use of the savings – to ensure that proceeds benefit the people who need it most.


The HIPC Initiative

The Heavily Indebted Poor Countries (HIPC) Initiative was launched by the Bretton Woods Institutions in 1996. It was a significant development in that it acknowledged that previous efforts at restructuring or rescheduling debt had been insufficient to resolve the debt crisis in the developing world. This was the first comprehensive international debt relief scheme, integrating all multilateral, bilateral and private creditors into one framework. The aim of the HIPC Initiative was to reduce to "sustainable levels" the debt burden of poor countries that demonstrated sound economic and social policy reforms, and thereby to provide a lasting solution to the debt crisis. Reducing the debt to "sustainable" levels was intended to remove the debt overhang, and make it such that the debt service owed was the same as the amount being paid, thus preventing countries from falling behind on their repayments.
In order for countries to be selected for HIPC status, they had to meet three main criteria: They had to be eligible only for concessional loans from the International Development Association (IDA) of the World Bank and the Enhanced Structural Adjustment Facility (ESAF) which has since been re-named the Poverty Reduction and Growth Facility (PRGF), of the IMF.
Secondly, they had to have a debt burden that was considered "unsustainable". A "sustainable" level of debt was gauged to be a debt-to-export ratio of between 200 and 250 per cent, and a debt-service to exports ratio of between 20 and 25 per cent. This meant that "sustainable" debt should not exceed two and a half times the value of exports, and that debt service should not exceed one-quarter of the value of exports.

Thirdly, they had to establish a track record of economic reforms under World Bank and IMF-sponsored programs. In 1996, the World Bank and IMF selected 41 countries as potentially eligible for HIPC status. 33 of these were in sub-Saharan Africa. The total debt stock of these highly impoverished countries amounted to approximately $200 billion in 1997. 85 per cent of HIPC long-term debt is owed to public lenders (multilateral and bilateral creditors) rather than to the private sector, and about half of this is owed to governments, though only a small amount (3.7 per cent, at the end of 1997) is owed to the US.
The HIPC process was to be divided into two phases. First was a three-year period between the "entry point" and the "decision point", during which a country followed International Finance Institution’s (IFI) adjustment programs, and at the end of which a debt sustainability analysis was conducted to see whether and to what degree the country required debt relief. After a second three-year period, during which the country would consolidate its track record in following World Bank and IMF programs, the "completion point" would be reached, and the country would then receive a reduction in its total debt stock.

Under the original HIPC Initiative, progress was very slow, and criticisms of the pace of the process and the stringency of the qualifying criteria led to a revision of the plan and the unveiling of the Enhanced HIPC Initiative at the G-7 summit in Cologne in 1999. Under the enhanced framework, debt relief was to be made "broader, faster and deeper", and it was to be linked more closely and transparently with the goal of poverty reduction. The Enhanced HIPC Initiative also aimed to link debt relief more firmly with poverty reduction efforts, requiring that all HIPC governments produce a Poverty Reduction Strategy Paper (PRSP) as a condition to their being eligible for HIPC relief. PRSPs were to be developed transparently through a Government-led national process, in consultation with civil society, the private sector and external donors, and with the assistance of the World Bank and IMF. The aim of a PRSP is to ensure consistency between a country's macroeconomic, structural and social policies and the goals of poverty reduction and social development. A country is expected to have a viable and comprehensive poverty reduction strategy in place prior to its decision point, either in the form of a PRSP or an Interim PRSP. Nigeria was not qualified to be under the initiative.


Is Debt Relief the only Answer?

Most people in the West are oblivious to the systemic injustices that are part of our current world order. Many have since argued that what Africa needs is a cure, not a band-aid to mask the reluctance of the world politicians to do what is right. While praising the new gesture towards the continent, they argued that instead of throwing money to Africa, they wanted the rich countries to help the continent to fend for itself by removing tariffs and subsidies to agricultural and primary products in the West and stop subsidising and supplying arms to many of the dictators in Africa. “When that happens all the continent's children scattered around the globe will be flocking back to better Africa. This also alleviates the immigration problem that many Western countries face today”, some have noted. But whichever way, debt relief is good, but at the same time, efforts should be made towards helping the continent to become competitive on trade.



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