Status check: debt relief delivery

Nov 11th, 2008 6:14 PM EST
By Nora Coghlan

Last month, the World Bank and the International Monetary Fund released their annual report on the status of debt cancellation for the world’s poorest countries.

ONE’s debt expert and Berlin-based Policy Manager Andreas Huebers sent along the following summary after combing through the report:

In September, the IMF and World Bank released their annual report on the progress of debt cancellation. In the last year, two African countries have started to benefit from debt relief- Liberia (which ONE members helped make possible) and the Central African Republic. The Gambia has also completed its debt relief program. These developments bring the overall debt cancellation provided by the HIPC and MDRI initiatives from $105 billion to $111 billion. The next African countries that are expected to progress to the next stage in the coming months are Togo, Cote d’Ivoire Burundi and Guinea.

Debt relief is continuing to free up government resources to fight poverty. The report found that in post-decision point HIPC countries, government expenditures targeting poverty reduction increased on average from under 7% of GDP in 2000 to 9% in 2006. This translated to $17 billion in 2006, which represents a substantial increase of $3 billion since 2005. These expenditures are more than five times the level what countries now paying to service their debts, a major improvement from a decade ago when some countries were spending more repaying old debts than on health and education combined.

Read more about how the financial crisis might impact debt cancellation.

Some of the report’s other findings are especially relevant as experts begin to understand how the current financial crisis might affect the world’s poorest countries.

First, the report warns that that the risk of HIPC countries to fall back into debt distress is increasing- more than half of the HIPC countries are at risk or high risk of re-accumulating high levels of debt. This risk has significantly worsened since the publication of the report, partly as a result of the global financial crisis. For example, one impact of the financial crisis on developing countries has been declining exports. This has aggravated the balance between exports and debt service, which is a main indicator of a country’s ability to manage its debt repayment. This is putting at risk the enormous progress made towards a bearable debt situation in 28 sub-Saharan African countries.

Another impact could result from the outstanding debt owed by poor countries to private banks, called commercial creditors. Under the HIPC-deal, commercial creditors committed to deliver similar debt cancellation that was offered by public creditors (which include governments and international organizations). But this year’s report found that at end of 2007, commercial creditors had only contributed a ”low single-digit” percentage of what they had promised. While some progress has been made in countries like the Democratic Republic of Congo and Mozambique, it is unclear whether this progress can be sustained during the current financial crisis.

While the HIPC and MDRI initiatives have had a tremendous impact on many African countries, these successes need to be both expanded and sustained: expansion by contributions from commercial creditors and sustained by increasing development assistance offered in the form of grants as opposed to loans, so that poor countries do not face a new debt crisis in the next few years. In addition, if the debt situation is getting worse, a fair and transparent arbitration panel might be needed.

-Andreas Huebers

TAGS: Debt Cancellation, IMF, ONE, Policy News, World Bank