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FINANCE: U.S. Brokers Afghan Debt Cancellation

Emad Mekay

WASHINGTON, Jul 19 2007 (IPS) - The United States, Germany and Russia have agreed to write off one billion dollars in bilateral debts owed by Afghanistan, or 92 percent of the poor nation&#39s debt to the three nations.

The move comes only a week after the World Bank and the International Monetary Fund (IMF) said Kabul has followed their economic advice and now qualifies for more debt forgiveness.

The United States, which considers Afghanistan a central front on the so-called "war on terror", said it played a major role in bringing about both deals.

After the attacks on the Pentagon and New York&#39s World Trade Centre, the administration of Pres. George W. Bush forged a national security strategy that united diplomacy, defence and development, in which aid was officially tied to the self-styled war on terror.

The agreement with the United States, Russia and Germany is under the terms of the enhanced Heavily Indebted Poor Countries (HIPC) initiative, an international plan by rich lenders that benefits the world&#39s poorest nations.

HIPC was devised by such multilateral lenders as the World Bank and IMF to reduce the external debt of the world&#39s poorest nations, which have been ensnared by decades of foreign debts.

After announcing the deal with Afghanistan, Washington urged other members of the Paris Club, a cartel of bilateral creditors from rich nations, to follow suit. Washington was also instrumental in winning a similar debt write-off plan for Iraq in 2005.

Last week, the executive boards of the World Bank and IMF, at the urging of the U.S., said Afghanistan had formally qualified for the HIPC initiative.

To achieve this, the U.S.-backed Afghan government of President Hamid Karzai had to adhere to the terms of its IMF programme as well as meet certain other economic requirements.

Total debt relief for Afghanistan is expected to equal more than 11 billion dollars, which represents more than 99 percent of its total debt.

"It is a major achievement of the Afghan government to qualify for HIPC debt relief," the U.S. Treasury Department said in a statement.

"This debt relief is a crucial step towards normalising Afghanistan&#39s relations with the international financial community and in helping Afghanistan move towards economic sustainability," it said.

The IMF vouched for Kabul&#39s adherence to prescriptions set by Washington and the international financial institutions.

"Despite a difficult security environment and persistent expenditure pressures, Afghanistan continued to make progress by maintaining macroeconomic stability and advancing its structural reform agenda," said Murilo Portugal, deputy managing director of the IMF.

He added that Kabul will still need a continuous flow of foreign aid and tighter economic policies to achieve any level of sustainability.

The World Bank says that money freed by debt cancellation will be used to provide basic healthcare, education and other essential services. The United States had argued before that the money should also be used to fight the country&#39s booming drug trade and to improve security.

The Asian Development Bank says the large and illicit opium economy is among the most intractable challenges facing the poor nation. It notes that since the U.S. invasion of Afghanistan, the drug industry has boomed.

It says that opium poppy cultivation has spread to every corner of Afghanistan. In 2004, poppy cultivation increased by as much as 64 percent, pouring 2.8 billion dollars in illicit revenues into the pockets of warlords and traffickers – with only a small fraction of that going to the poor farmers who grow the poppies.

The IMF and the World Bank say that the Islamic Republic of Afghanistan has become the 31st country to reach its decision point, the mark where debtors pledge to cancel debts. The completion point is when debt forgiveness is actually delivered.

Only 22 countries have so far reached the completion point.

Afghanistan, a country of 26 million people, has suffered more than two decades of conflict and political instability, leaving it one of the poorest countries in the world. Many of its people are refugees, mostly in neighbouring countries, and its infrastructure is in ruins.

Despite stronger backing from the United States and other Western powers in the aftermath of the collapse of the Taliban government in 2001, the country&#39s Gross Domestic Product was only seven billion dollars in 2005 – just a little more than what the United States spends on its military operations in Afghanistan and Iraq in two weeks.

The World Bank says that the country&#39s annual per capita income was estimated at 271 dollars in 2005.

Afghanistan also ranks well behind its neighbours on most human development indicators.