Despite debt relief programs, creditors always the winners

Charlotte Denny, Guardian News Service, London

Guess who is claiming US$73 million this year from the famine- stricken Ethiopian government? Nestle? Some big multinational suffering a temporary corporate social responsibility bypass?

Guess again. The vulture creditors in question are the World Bank, the IMF and the governments of some of the world's richest countries.

Hang on a minute, you're probably thinking. Didn't western leaders promise three years ago to forgive the unpayable debts of the world's poorest countries? It took years of fierce campaigning by Jubilee 2000 and its hundreds of thousands of supporters, but eventually Tony Blair and his fellow leaders of the seven most powerful economies said they would write off $100 billion of the third world's debts.

So how is it that the government of one of the world's poorest countries wrote out a cheque for $100 million -- nearly ten percent of government revenues -- last year to its creditors even as its worst famine in 20 years was threatening?

Ethiopia is not alone. Three other sub-Saharan countries facing an epidemic of hunger -- Zambia, Mozambique and Malawi -- will pay back an estimated $250 million to their creditors this year, even as they struggle to feed their people.

Under the debt relief deal reached by G-7 leaders in Cologne in 1999, 26 countries were supposed to have had $68 billion of their debts written off by now. In fact, just over half that amount has been forgiven and the World Bank admits that for half of those countries the amount of relief granted is not enough to make their debts sustainable, even by the Bank and Fund's limited view of what constitutes sustainable debt.

The basic problem with the Cologne deal, as with every previous attempt to reduce Africa's debt burden, is that the West's criteria for sustainability do not have anything to do with human needs, but were based on narrow financial parameters.

The terms they offered debtors in Cologne were an improvement on the previous half-dozen efforts to solve the problem, but it was still an accountant's approach based on how much money can be extracted from a country without it collapsing entirely. In Cologne, the West decided that the amount of debt servicing which a country can afford is about 150 percent of its earnings from exports each year.

Britain, the U.S. and several of the main creditors went further and promised to cancel all outstanding debts. Their generosity has been betrayed. Originally the relief was to be on top the debts forgiven through the HIPC (heavily indebted poorer countries) process. In an unpublicized sleight of hand, the Bank now calculates debt sustainability including the savings from countries offering 100 percent debt relief, meaning the more generous countries are subsidizing the meaner stance of the rest of the creditor community.

Even by the Bank and IMF view of sustainability, HIPC isn't working. IMF estimates of export earnings have proved hopelessly optimistic, as many observers predicted at the time. Collapsing coffee prices have hit Uganda, the West's star pupil and the first country to graduate from HIPC. It has fallen back into unsustainable debt. G-7 promises of an extra U.S. dollars one billion to top up countries sliding back below the sustainability criteria will not be enough to meet the shortfall.

Those countries judged by the Bank and the IMF to have sustainable debts are still facing enormous human development needs, which come second to the requirement to pay back their creditors. When Ethiopia graduates from HIPC later this year, payments to the West will be reduced by about $30 million but will still be half what it spends on its health system. Even before the harvests failed last year, half of the country's children were malnourished and more than one in ten died before their fifth birthday.

The evidence from ten countries which have had payments reduced under HIPC is that the limited debt relief on offer is making a difference. Spending on health and education has risen. The problem with coming to a more generous deal on debt, as the Bank admits in its latest assessment, is that creditors are not prepared to be more generous.

The Bank's and the IMF's debt relief efforts are ultimately paid for by the western governments which are their largest shareholders. Embarrassed by the largest peaceful public protest movement since the Vietnam war, the G-7 made some concessions in Cologne. When Jubilee 2000 wound up at the end of the millennium, western governments breathed a sigh of relief and went back to business as usual -- the biannual issuing at G-7 summits of platitudes about the importance of debt relief and very little action or extra money.

The Bank argues that help for the worst affected countries could be provided through bigger aid budgets, and debt relief is not a well targeted way of providing development assistance; most of the world's poor live in countries which have never stacked up large debts and are thus excluded from the benefits of HIPC.

As Kevin Watkins, senior policy adviser at Oxfam, points out, cutting debt service payments provides a bonus for poor countries over and above extra aid. It gives them back their own money to spend, whereas western aid always seems to come with strings and the burden of explaining to a multitude of donors how it is being spent.

What motivated Jubilee 2000's supporters was the simple hope that western governments would stop taking from poor countries money which they ought to be spending on their own populations. With famine threatening in many parts of Africa, that aspiration is more urgent than ever.