At a World Bank - International Monetary Fund meeting this week in Washington, DC, an agreement was reached on a plan to provide around $40 billion in debt relief to eighteen of the world’s poorest countries. The agreement, first agreed upon at the Group of Eight’s July summit in Gleneagles, Scotland, follows two years of intense debate among donor countries over debt relief, including the size and scale of debt-forgiveness packages, the criteria for eligibility, and the method by which lending institutions would make up for lost interest and loan repayments. As many as thirty-five additional countries may be eligible for debt relief, provided they meet requirements of “sound” macroeconomic policy and good governance.
Todd Moss, a research fellow at the Center for Global Development and former consultant to the World Bank’s chief economist on Africa, explains the different debt-relief proposals, outlines the various requirements of recipient nations, and gives high marks to World Bank President Paul Wolfowitz.
What is the significance of this recent debt-relief agreement, and why is it coming now?
In 2005, the Group of Eight (G8), and particularly the British government, put Africa at the top of its agenda. One of the issues thought to be holding Africa back is the debt burden. So there was a new push this year to try and have a new initiative to deal with some of the remaining debt that had not been dealt with in past debt relief programs. It was the impetus within the [British Prime Minister Tony] Blair’s Commission [for Africa] report and Britain ’s chairing of the G8 summit at Gleneagles that [led to the decision that it] was time to do something new on debt, and this is the program they chose.
There were three options going forward, because a lot of countries were still facing problems. One was they could expand the number of countries getting debt relief. Second, they could try to come up with a mechanism, like an insurance mechanism, to protect countries against shocks that make their debt unsustainable—something like, say, a coffee price-insurance mechanism. And the last was they could give countries that have already gotten debt relief even more relief. What they’ve settled is this last option, which is to give a fairly small subset of eighteen countries that have already gone through the HIPC [heavily indebted poor countries] program [for debt relief] much deeper relief.
Presumably these are countries that have to meet certain sound economic policies. What do these entail?
To go through the HIPC program, there are several loops you have to go through. You have to have debt of a certain level, have an International Monetary Fund [IMF] program in place, and then you have to go through something called a PRSP [Poverty-Reduction Strategy Paper Process], where you take the budget around and make sure all the civil society groups have a chance to see and comment on the budget and you get input from people about how the money is being spent.
Aren’t there other external factors contributing to these countries’ poverty levels—for example, commodity prices going down, or rising interest rates?
Yes, those are some factors. But the fact remains that all these [debtor] countries have loans that were provided at extremely low interest rates. Most of the World Bank debt is nearly zero-percent interest rates, and they get long grace periods—a World Bank debt is given a ten-year grace period. The debt that’s due now was borrowed a long time ago, and even at zero-percent interest, it did not produce a return that allowed them to service that debt in the future. That suggests it was grossly misused in some way—either invested in something that never produced economic growth or was simply stolen. There’s a lot of moral hazard there—African leaders don’t expect to be in office in ten years [when the grace period expires], so they didn’t care about what debts they leave with other people.
Some of these conditions for debt relief are pretty controversial. Is it your view they’re too harsh, that they set restrictions on funding for social programs?
There’s a myth out there that the IMF has spending caps on social programs. That’s just not true, quite frankly. There’s a consensus that countries need to maintain macroeconomic stability as a precondition for sustained economic growth. To do that, you cannot run huge fiscal deficits or borrow willy-nilly. So the IMF has certain conditions. That does not mean the IMF goes in and says you can’t spend anymore on health and education than you spend on “X”. But what it does mean is the IMF tells countries, “You can’t spend too far beyond your means.” That’s what has gotten countries into inflationary spirals or into debt problems in the past.
Another condition attached to debt relief is you need to have some consultation with your own people before you’re given the relief, so the people who are supposed to be benefiting from the program at least know what’s in the budget and have some say. Most of these countries get a huge amount of their budget paid by donors, which means the governments don’t really have to listen to their people to get money—they’re not really taxing them, so they’re not really getting money from them. The governments are getting money from donors, and this is a way of substituting the normal accountability you’d have in a country raising its own resources.
Some countries, notably the Netherlands and other northern European countries, have objected to the recent plan for debt relief. What are their objections?
The objections are twofold: One is that this latest G8 debt-relief deal was negotiated at the G8 summit, and as the smaller creditors and the smaller shareholders of the IMF and the World Bank, they felt they were not really part of that decision-making process and that the decision was hoisted on them without consultation.
The other objection is that, while the United States and the United Kingdom were pushing for this, they had very different views about how to pay for it. In the end, the agreement was that the major shareholder governments would give the World Bank additional money to make sure [the debt-relief plan] didn’t undermine the Bank’s own finances. For each additional country [to be considered for debt relief], they wouldn’t necessarily get additional aid; it went back into the general pool of the International Development Association [IDA] , the lending and grant-making arm of the World Bank]. What happened recently was the Dutch and some of the Scandinavians didn’t think the promises made by the G8 were strong enough. They concocted this letter, written by the G8 to [World Bank President] Paul Wolfowitz, which explicitly pledges the [G8 members] to provide additional assistance to cover the lost future income from writing off these debts.
What will be the impact of this debt relief on recipient countries?
The impact is actually going to be very small. The truth is these eighteen countries—while they have fairly large debt in face value—their actual debt service per year was quite small. What we’re talking about is a tiny fiscal effect: If countries save $30 million or $40 million [in debt service payments] a year, that’s only a few percentage points of total aid. And aid goes up and down by several percentage points every year. So it’s not like they’re going to have a huge windfall, where all of the sudden they’re going to have all this cash on hand that they didn’t have before. They’re already receiving large amounts of aid, which is much, much greater than their debt-service [payments]. The question is: Why isn’t that aid translating into social services and making it back to the economic management of the country?
The U.S. government has always pushed for grants versus loans. Explain that a bit, and why other countries oppose that.
The World Bank has been giving loans with very low interest rates—less than 1 percent—so a lot of that has been made up with grant components. Recently, they’ve added grants for special categories, such as HIV/AIDS or post-conflict reconstruction. The United States has been pushing for all low-income countries, at least all heavily indebted low-income countries, to get new World Bank credit as grants rather than loans. The United States argued that we’re in this ridiculous cycle, where we loan and then we forgive, and we loan and then we forgive. Let’s just forget the charade, and let’s give these poor countries grants.
The Europeans resisted this in two ways. One is, there’s a sense that loans help to create a credit culture, that there’s some accountability—it’s not just a handout, but you’re actually borrowing it. The other opposition to the grants is that, if you are giving grants rather than loans, there’s no future flow [of money back] from the country and the Bank relies on reflows as part of its income. So if we move from loans to grants, the World Bank would be more reliant than it is now on donor replenishments.
What’s the timeline for considering other candidate countries for debt relief?
Each country’s terms will be individually negotiated. Some of the countries in the middle [of the HIPC process] will reach completion point and then have access to [debt relief], but a lot of those countries face major problems. These are countries like Chad, the Democratic Republic of Congo, Sierra Leone, Guinea Bissau, Guinea—all countries with major governance problems. [Then there are] countries like Laos, Liberia, Burma, Somalia, Sudan—countries that nobody is ready to give debt relief to now, although it’s possible some of them may receive relief within a few years. The idea that there’s about to be an explosion of [debt relief] is not true; they’re talking about twenty to thirty years from now.
What is the report card on the World Bank’s new president, Paul Wolfowitz? Has he given more attention to this issue of debt relief, and is that part of the reason the United States seems to be getting on board?
Actually, no. The United States has been driving the debt-relief plan from the beginning, long before Wolfowitz came to the World Bank. The United States and the United Kingdom have had competing debt-relief proposals for at least two years, now, and Wolfowitz has only been in office at the Bank since June. The early report is that Wolfowitz is doing remarkably well in winning over some of his early skeptics.
The agenda is basically a continuation of that of [former World Bank President] James Wolfensohn, which emphasizes Africa and a shift back to [improving] infrastructure. That’s normal. What happened is that, when this [debt-relief] dispute came up over the financing detail, Wolfowitz sided with the Bank management and said he wanted to ensure that shareholder [countries] came up with extra money. In his first test between the U.S. administration and the Bank, he sided with the Bank. So I think that will help him win over further supporters within the Bank. The early signs are fairly good. It’s a job with a steep learning curve, I think, but the big tests are still yet to come.