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Will cancelling debt contribute to poverty reduction? A practical debate

Date
Time (GMT +01) 00:00 23:59

Chair:

Simon Maxwell, ODI

Speakers:

Paul Williams, Debt and Finance Team, HM Treasury
Paul Spray, DFID
Matthew Lockwood, Christian Aid/Jubilee 2000 Campaign

1. Simon Maxwell introduced the discussion by referring to the agreement at the Cologne Summit of the G7 (18 June) to cancel up to $100 billion of debt owed by the world's poorest countries. This was obviously a very important development which could contribute greatly to poverty reduction. It raised three questions (amongst others): first, what exactly were the details of the agreement; secondly, what did they mean for aid programmes; and thirdly, would there be an opportunity cost paid by poor countries which had paid their debt.

2. Paul Williams from HM Treasury reminded the audience that the Government had long argued that current schemes for debt relief, notably the highly indebted poor countries (HIPC) initiative, had provided too little relief and too late. It therefore welcomed the Cologne agreement that was designed to reduce the debt of 38 countries by a total of $100 billion, or two thirds of outstanding official debt. The end result would be a sustainable debt burden. He listed the main features of the agreement. First, countries would still be required to demonstrate a track record of acceptable policy, but the timeframe would be shortened from six years to three years. Secondly, there would be more accurate calculation of debt outstanding, with the point of calculation being the time at which the decision to enter the HIPC process was begun, rather than completion. Thirdly, lower thresholds would be used for calculating the sustainable level of debt, as follows: net present value (NPV) ratio to exports reduced from 200-250% to 150%; NPV to revenue from 280% to 250%; exports to GDP from 40% to 30%; and revenue to GDP from 20% to 15%. These new thresholds would increase the number of countries deemed to have unsustainable levels of debt from 29 to 36. Fourth, there was agreement to selling IMF gold, to fund its debt relief. Fifth, a new role for the private sector was foreseen, through a new millennium fund. Finally, the whole process would be accelerated, with the aim of having three quarters of eligible countries in the pipeline by the end of 2000.

3. Paul Williams argued that these measures would have a significant impact on the stock. Less was known about the impact on the flow of debt repayment, though it was the intention to provide more choice for countries over the phasing of changes to actual debt repayments. He finished by pointing out that although the G7 had agreed the package, it had not yet been agreed by the Breton Woods institutions, and would have to be submitted to their annual meetings in the autumn. He thought that Congress approval would also be needed.

4. 4. Paul Spray of DFID then spoke about debt relief for poverty reduction. He argued that debt relief could (a) provide resources, (b) improve investor confidence, and (c) back good policy. The precise details of the benefits to each country had yet to be negotiated, but it was clear that additional resources would be available. These would be disbursed with a poverty reduction conditionality, and a link to structural adjustment programming. One possibility would be to put additional funds into a poverty reduction fund, as had been done in Uganda. In any case, it was important to have a poverty programme linked to the international development targets. The World Bank's comprehensive development framework would help in this regard. On the question of improved confidence, Paul Spray emphasised that a reduction in debt would be particularly valuable in improving investors' perceptions of countries.

5. On the question of the impact of debt relief on aid flows, Paul Spray argued that debt relief would not divert funds from any other programme within the current three-year public expenditure framework, though this was largely because new money was unlikely to be disbursed before the end of the current programme. For the future, diversion was unlikely, partly because a good part of debt relief was not funded as a DFID programme (although it counted as official development assistance). In addition, it was highly likely that the success of the Jubilee 2000 Campaign would benefit the climate in which aid allocations were decided.

6. Matthew Lockwood argued that the Cologne settlement was good, but not yet enough. Debt sustainability rather than poverty reduction was still the driving force. A poverty programme would have to be bigger and better targeted. Structural adjustment had largely led to unequalising growth. Calculations Christian Aid had carried out suggested that if target rates of growth of 5% per annum were to be achieved, then the debt service to export ratio needed to be reduced by a further 30% or so. Tanzania provided an example. It had paid something like $200 million in debt service in 1997 and might gain $60 million per annum from debt relief. Calculations of the financing gap for education and health in the first years of the next century had shown a deficit on each of something like $400 million per annum. Thus, more aid remained a priority.

7. On the process to be followed in securing a commitment to poverty, Matthew Lockwood argued that there were many problems with conditionality, which was often not adhered to. He referred in this connection to a recent Christian Aid report The Perestroika of Aid: New Perspectives on Conditionality. Christian Aid was recommending greater involvement of civil society organisations, for example through a civil society debt relief committee. A new Christian Aid report on this had just been published, Curbing Corruption: A People's Approach to Debt Relief.

8. The discussion focused on three main questions:

  1. How much debt exactly had been forgiven, and what the benefits would be to developing countries. All speakers agreed that the numbers were confusing, partly because some of the money committed was not new, partly because some of the debt to be forgiven was actually not being repaid, and partly because countries still had to make choices about the form in which they would take the benefits. There was no authoritative review available, though participants were advised to consult the Jubilee 2000, DFID, Treasury, and NGO websites for information.
  2. Whatever the benefit to indebted countries, it was clear that debt relief was only part of the solution (as the Tanzania example had shown). In many countries, internal debt was an even greater problem than external debt. More aid was needed to help countries deal with internal debt - and it was argued by one participant that money transferred to countries would actually generate internal resource flows, rather than recycling money from donor organisations to debtors outside the country.
  3. There was agreement that countries did need to spend the new resources available on poverty reduction. Some felt that the debate had been biased too much to the social sectors, without sufficient recognition of the importance of productive sectors like agriculture. Others argued that the poverty reduction targets of the international development strategy should provide an overarching context. External conditionality, however, was only part of the answer. Local structures of accountability needed to be encouraged.
  4. There was a short discussion about whether poor countries which had paid their debts would be the losers as the result of HIPC. All agreed that poverty and indebtedness were not well correlated, and that poverty reduction in non-indebted countries also needed to be given priority. Debt relief was only part of the overall solution to poverty reduction.
  5. Finally, there was widespread recognition of the power of the Jubilee 2000 Campaign. It was to be hoped that this could be built on in the future.

Description

This event discussed the G7 summit's decision to cancel up to $100 billion of debt owed by the world's poorest nations, and if it would significantly contribute to poverty reduction.