JAPAN: Aid ‘Business’ Makes Debt Write-off a Bitter Pill

By Suvendrini Kakuchi Reprint | | Print |

Suvendrini Kakuchi

TOKYO, Apr 23 1999 (IPS) - The Japanese government is studying how to relieve the debt burden of 41 heavily indebted poor nations in Africa and other regions, an issue that ranks high on the agenda of an upcoming summit of major powers in Germany.

But critics say this initiative is unlikely to result in a massive reduction, given the economic costs Japan would have to swallow in outright cancellation.

While Tokyo is unable to undertake a wholesale cancellation of its debt, it says its outstanding loans to these nations will be effectively canceled by expanding programmes of relief grants, according the Foreign Ministry.

“We are looking into the proposal” by industrialised countries to cancel the debt of the poorest nations, said an official of the Foreign Ministry who declined to be named.

“But it is not possible to follow the G-7 proposal that calls for canceling debt outright,” he said.

In trademark fashion, the official was reticent about what Japan intends to do instead, saying only that Tokyo is looking at plans for “meeting the cancellation plan as best as possible”.

Earlier, German Chancellor Gerhard Schroeder, who will host the G-7 summit in June, proposed that the creditor nations cancel all official development loans to the 41 nations, termed HIPCs ( heavily indebted poor countries) as identified by the International Monetary fund, by the end of 2000.

Among these countries, 32 countries are concentrated in the sub- Saharan region of Africa. Burma, Vietnam and Laos are among the HIPCs of Asia.

Japan, the world’s largest aid donor, accounts for around 40 percent of the 20 billion dollars in bilateral aid loans to HIPCs provided by the G-7 countries.

France follows with 25 percent, Germany, 15 percent and the U.S., 10 percent. Japan’s loans for 41 HICs totalled 980 billion yen in 1998. The United Kingdom has also unveiled a 4-point plan for helping poorer countries, including a 50 billion dollar reduction of debt by 2000.

Japan, mindful that among the G-7 it would bear the heaviest burden of the proposal, has been a reluctant partner in the debt- relief plan.

In fact, observers say Tokyo was forced to say it goes along with the G-7 proposal to avoid the image of an ungenerous donor.

And because it feels compelled to pay the highest price for the debt initiative of industrialised countries, Japan wants to ensure that other G-7 members bear their share of the pain too.

This is why in return for the possibility of writing off some loans, Tokyo plans to ask the United States and European countries to contribute more money to programmes under the International Monetary Fund and the World Bank designed to help poor nations and ease their debt burden.

Since loans make up close to half of Japan’s aid budget, debt relief remains a troublesome policy in the country’s huge budget for official development assistance.

Tamaki Tsuda of the loan-aid division of the Foreign Ministry’s Economic cooperation Bureau, quoted in the Japanese media, in fact says Japan wants to nurture sustainable development in developing countries and this means encouraging recipient countries to be responsible in repaying loans.

In response to external pressure, Japan has already embarked on providing debt relief to 19 HIPCs under a system where grants are extended to a country for the repayment of a prior debt.

Japan also provides 10 million dollars to a World Bank trust fund set up to give credit relief to developing countries.

Officials here say that Tokyo cannot cancel its loans wholesale — for the simply reason that it cannot afford to.

Doing so would hurt the average Japanese citizen, because Japan’s aid loans come from the government’s fiscal loan and investment programme that in turn relies on the country’s postal savings and postal life insurance.

“The money (from loans) has to be repaid to Japanese people who put in their savings into the postal saving system because of higher returns when compared to banks,” explained Ikuko Matsumoto of the Friends of the Earth.

The Nikkei Weekly, Japan’s leading financial newspaper, said this week that it will be difficult to give outright debt relief given this system which could harm the assets of Japanese nationals.

This may well explain why, as the foreign ministry says, any debt cancellation will be conducted under different conditions.

“Every country has a different situation. Japan will try hard to meet Germany’s proposal in its own way,” said the foreign ministry official.

Thus, Matsumoto says that while Japan’s announced policy of debt relief is commendable, it remains to be seen how far it will be extended to affect the overseas aid budget as a whole.

“Japan’s ODA is too reliant on loans which is not really aid but actually a business because recipient countries must repay the loans with interest,” she pointed out.

NGOs have long been urging Japan to increase grant-aid to developing countries, as what other donors are doing.

Japan’s Asian Development Fund, designed to help Asian countries weather the current recession, is also under fire from aid watchers who question the real benefits that these huge loans bring to countries like Thailand and Indonesia that are already battling debt problems.

“The loans are to help Japanese companies which are involved in the expensive infrastructure projects in South-east Asian countries — not really for poverty reduction,” said Matsumoto.

In short, as the debate over the G-7 proposal for debt cancellation shows, Tokyo may have to pay more and more of a political price for for keeping aid as a business.