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Note: This document is from the archive of the Africa Policy E-Journal, published
by the Africa Policy Information Center (APIC) from 1995 to 2001 and by Africa Action
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Africa: Multilateral Debt, 1
Any links to other sites in this file from 1996 are not clickable,
given the difficulty in maintaining up-to-date links in old files.
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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: [email protected]
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)
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This material is being reposted for wider distribution by the
Africa Policy Information Center (APIC). APIC's primary
objective is to widen the policy debate in the United States
around African issues and the U.S. role in Africa, by
concentrating on providing accessible policy-relevant
information and analysis usable by a wide range of groups and
individuals. APIC is affiliated with the Washington Office on
Africa (WOA), a not-for-profit church, trade union and civil
rights group supported organization that works with Congress
on Africa-related legislation.
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