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FINANCE: Despite Debt Relief, Poor Nations Back In the Red

Emad Mekay

WASHINGTON, May 23 2006 (IPS) - A new report by the self-auditing arm of the World Bank has painted a grim picture of the results of a decade-long plan by the Bank and the International Monetary Fund (IMF) to give the world’s poorest nations debt relief.

The report by the Washington-based Independent Evaluation Group (IEG) says that in half the countries that received debt relief under the programme known as the Highly Indebted Poor Countries (HIPC) initiative, debt has in fact climbed back up to where it was before the debt relief plan.

So far, the HIPC initiative has eased 19 billion dollars of debt in 18 countries, halving their debt ratios. However, the IEG found that in 11 of the 13 countries the report studies, and which graduated from the programme that qualifies them to start receiving debt forgiveness, called the completion-point, external debt has actually risen.

The World Bank’s IEG says that in eight of these countries – all of which are in Africa – the debt to export ratio, which measures the level of indebtedness, once again exceeded the HIPC debt-safety threshold of 150 percent.

“What that means is that debt relief by itself doesn’t ensure that the country will get on a sustainable path. You need a lot more other things to happen at the same time other than debt relief,” Victoria Elliott, manager of the IEG Corporate Evaluation team and one of the report’s authors, told IPS.

The study explained that changes in exchange rates have worked to increase debt ratios, and that the positive effect of growing exports and greater revenues on debt ratios has been offset by new borrowing.

Six of the eight countries that graduated from the programme were found to still have a moderate risk of debt distress, while all remain vulnerable to export shocks and require “highly concessional financing and prudent debt management”.

The eight countries are Rwanda, Ethiopia, Uganda, Tanzania, Mauritania, Burkina Faso, Ghana and Mali.

The 98-page report, which concurs that the ultimate goal of debt relief is to curtail rampant poverty, also found that all 18 post-completion point countries have made only “modest progress” on the Millennium Development Goals, which seek to halve poverty by 2015.

The HIPC programme came to life in 1996 after years of intense campaigning by anti-poverty activists.

The architects of the programme, namely multilateral lenders like the World Bank and IMF, and the Paris Club, a cartel of rich lenders from rich nations, approved the HIPC initiative as a comprehensive approach to reduce the external debt of the world’s poorest nations.

But it wasn’t until the July 2005 Group of Eight (G8) most industrialised nations summit in Gleneagles, Scotland, when G8 leaders pledged to cancel the debt of the world’s most indebted countries, most of which are located in Africa, that certification actually began of their adherence to the programmes prescribed by the World Bank and the IMF.

To date, 29 HIPC countries have reached their decision points, where they start qualifying for debt cancellation and agree to a new set of economic policies approved by the lenders. Of the 29 countries, 18 have reached completion point, the mark when debt relief is actually delivered.

In the study, the IEG team explains that among the reasons for poor nations falling back into debt is that they haven’t been able to diversify exports or increase revenues to meet tough new borrowing terms.

“What’s happened to the countries so far is that their debt ratios are affected by the terms and conditions of the new borrowing they have taken and it is affected by their ability to increase and diversify their exports and their ability to increase their fiscal revenues,” said Elliott. “And those things are all driven by factors outside the scope of any debt relief initiative.”

The report says that for the world to create a “permanent” exit from debt that would release resources for social expenditures targeted at poverty reduction, actions by donors and HIPC governments beyond the scope and means of the initiative will be a must.

The Bank’s IEG says these will have to include governments adopting “sound policy” frameworks and balanced development strategies.

The international community would need to assist the countries with enhancing their exports, building needed institutional capacities, and ensuring that HIPC debt relief is truly additional to other aid flows.

Anti-debt campaigners welcomed the report, but outlined a far more comprehensive plan for poor nations to break free from the debt cycle, including increased aid from rich nations and fairer global trade rules.

“One cannot expect countries to be able to break out of the cycle of underdevelopment without many other measures, notably a change in trade relationships, which, for example, allow vast subsidies for American and EU farmers, thus depressing the prices received by poor country producers,” said Stephen Mandel the New Economics Foundation in London.

Mandel told IPS that the forced opening of markets in both goods and services to transnational corporations by rich nations and their affiliated institutions like the IMF, the World Bank and the World Trade Organisation, also prevents the growth of local industry in poor nations.

In its review of the report, the Brussels-based debt think tank Eurodad said the IEG report proved how Bank and IMF officials, including former World Bank President James Wolfensohn, have in the past inflated the benefits of the HIPC programme.

“This is a far cry from the ‘robust exit from the burden of unsustainable debt’ which was proclaimed by former Bank President Wolfensohn as the key objective of the initiative,” the group said.

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