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Debt is a Red Herring: It's Really About Aid and Trade!

Written by Simon Maxwell

The debt deal announced by the G7 finance ministers is definitely a success, and reflects well on the political leadership provided by Tony Blair and Gordon Brown, as well as a skilful and powerful campaign by NGOs. That being said, I found myself at the weekend pondering six points.

First, it's worth remembering that taking on debt is in itself a good thing, if the money is well used and if the borrower can afford the repayments. The IDA, the soft loan window of the World Bank, has just benefited from a 30% replenishment to enable it to lend to poor countries, and Gordon Brown is busy campaigning for the International Finance Facility, which involves the UK government borrowing money to finance aid. It's important not to demonise debt. By the way, about 40% of IDA's resources come from countries repaying past loans, some of them countries like China and Korea that have used earlier loans to graduate to middle income status.

Second, debt relief is a good thing when it becomes clear that debts are not repayable - but it's also important not to create incentives to countries not to pay their debts. Economists call this moral hazard. We have to avoid a situation in which countries like India or Bangladesh, which do pay their debts, are penalised. Debt relief should not transfer money from poor countries that do pay their debts to other poor countries that don't.

Third, a great deal of fuss is made about debt relief, but the cost is charged to aid budgets, and debt relief is really only another form of aid. As was made clear at the weekend, the headline figure for debt relief ($US 40bn plus) translates only into $US 1-2 bn per annum on the ground - quite a small amount compared to total aid of around $70bn. Why do we always talk about a three legged strategy for development (aid, trade and debt) when it is really only two (aid and trade)?

Fourth, it's important to make sure that the aid made available for debt relief is genuinely additional to other aid already promised. The G7 communique does include the key word 'additional', and it will be necessary to monitor that such is actually the case.

Fifth, there's a debate to be had about conditions. The G7 communique is very tough on transparency and corruption, but debt relief seems to have been granted automatically to all countries that have passed the HIPC completion point. This includes some that may have slipped backwards since then, for example Uganda, where the UK has delayed budget support as a warning signal, Bolivia, currently in political turmoil, and perhaps Ethiopia, until enquiries have been completed on electoral fraud. Question: should debt relief be automatic to post-completion countries, or should there be a review?

Sixth, in the discussion about the debt package, it was important to remind people that debt relief is only one form of aid, suitable for countries that have made political progress and are genuinely committed to poverty reduction. That emphatically does not mean that donors should or do walk away from other countries. There are many other kinds of aid available, ranging from emergency aid to project or sector support. Sudan is a good example. It does not qualify under HIPC, and is very unlikely to receive debt relief until the situation in Darfur has stabilised and accusations of genocide have been resolved. At the same time, a pledging conference in April raised $4.5bn for Sudan, to support peace in the South.