Do the Deal: The G7 must act now to cancel poor country debts

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The poorest countries in the world pay $100 million dollars a day to their rich country creditors, more than they spend on health. Along with increasing aid and reforming trade, debt cancellation is an essential step towards ending poverty. As the G7 Finance Ministers convene in London for their first meeting of 2005 they must act to cancel debt as the first step towards making poverty history.
    Do the Deal. The G7 must act now to cancel poor country debts. February 2005 The poorest countries in the world pay $100 million dollars a day to their rich country creditors, more than they spend on health. Along with increasing aid and reforming trade, debt cancellation is an essential step towards ending poverty. As the G7 Finance Ministers convene in London for their first meeting of 2005 they must act to cancel debt as the first step towards making poverty history.   Joint NGO Briefing Paper Do  the Deal. 1      Summary Every month rich country leaders delay a deal on debt cancellation, the poor pay with their lives. Last month, rich countries agreed to suspend the debt repayments of the countries devastated by the Tsunami for 12 months. Under the intense media spotlight, it was clear that rich countries could not continue to give aid with one hand only to take it back with the other hand through debt repayments. Through this step, they recognised that saving lives is more important than repaying debt. Every week, poverty kills more people than the Tsunami. A child dies every three seconds through preventable diseases. Yet at the same time the poorest countries in the world routinely spend more on debt repayments than they do on health. In 2002 low-income countries paid out $39 billion in debt repayments to rich country creditors - the equivalent of $100 million every day. In that same year, despite the billions living in poverty, the millions out of school, and the thousands dying daily, they received only $17bn billion in grant aid. On Friday 4 th  February 2005 the Finance Ministers of the G7 will meet in London. These seven men have the power to make a decision which would end the crippling debt burden of the poorest countries. G7 leaders have made warm speeches about the importance of solving the debt problem. The time for talking is over. The world is watching - and the time to act is now. Following massive campaigning by the Jubilee movement worldwide, rich countries agreed to some debt cancellation in Cologne in 1999. Sadly, more than five years on, it is clear that the debt problem is far from being solved. While the Heavily Indebted Poor Countries (HIPC) initiative 1  has delivered almost $30bn of debt cancellation and pledged to deliver more than $20bn more, only 7 countries have actually seen their debts brought down to levels considered ‘sustainable’, even according to the narrow and inadequate criteria of the HIPC initiative 2 . Even those countries that have qualified for debt relief are still paying $2.8bn a year to their creditors, 15% of their revenues and in many cases more than they spend on education or health. Debt relief works. The debt relief that has been delivered so far has had a massive positive impact on fighting poverty. Debt relief in Tanzania enabled the Government to make primary education free. This meant over 2 million children can now go to school. In Benin debt relief is paying for staff at rural clinics across the country, and in Mali the debt relief dividend has allowed the recruitment of 5000 community teachers. When politicians want to act, they can. Rich countries can and do find the money. In one day in November 2004, rich countries agreed to cancel a total of $31 billion of debt owed by Iraq. This is more than all the HIPC debt relief granted to all the poorest countries in the world in the last five years.  At the same time the IMF is also sitting on a huge pile of gold it neither needs nor uses. These 100 million ounces are worth over $45 billion dollars, but are valued by the IMF at $8 billion. Revaluing or selling this gold would immediately release vital resources to finance debt cancellation. 1  The HIPC initiative was started in 1996 and expanded at the Cologne Summit in 1999. Under the initiative, 42 countries are eligible to receive partial debt cancellation, of which 15countries have so far received a debt write off and 12 mor have qualified to do so. For more on the HIPC initiative, see 2  ‘Jubilee Research and HIPC Initiative: Status of Implementation’ IDA, August 2004 2   Do the Deal.    Debt campaigners worldwide have consistently argued that poor country debt will only truly be ‘sustainable’ if debt service payments do not compromise the ability of such countries to meet the internationally-agreed Millennium Development Goals (MDGs.) 3  Recently this position was fully endorsed by the report of the UN Millennium Project under Jeffrey Sachs. What this will mean for the majority of low income countries is 100% debt cancellation, plus significant increases in aid, if the MDGs are to be met. Set by this standard, the progress made to date through the HIPC initiative remains woefully inadequate. The UK Government announced last September that it will pay its share of the debts owed by 21 poor countries to the World Bank and African Development Bank until 2015, and will push for the revaluation or sale of IMF gold to fund IMF relief. This step is welcome, as it releases vital resources for these countries to spend on fighting poverty. The rest of the G7 should follow suit immediately. However, the proposal should also be expanded further to more than just 21 countries, and involve debt stock cancellation rather than just debt service relief. It should also use resources that are additional to existing bilateral ODA budgets. Lastly it should not be subject to countries having to implement risky and unproven policy conditions in order to access the relief. The Finance Ministers of the G7 showed they could act in response to the Tsunami. They also showed they could act in November when they agreed to cancel 80% of Iraqi debt. Now they must act to end the crippling debt burden of the poorest countries. Recommendations ! 100% multilateral debt cancellation must be provided now  to all low-income countries which need such relief in order to meet the MDGs, under a fair and transparent process. ! Debt relief should not be financed out of existing aid budgets, but from new donor contributions, and the sale or revaluation of IMF gold. ! Debt relief should not be confined to HIPCs, but should also be extended to other poor countries that need debt relief in order to meet the MDGs. ! There should be an end to harmful economic policy conditionality associated with debt relief. Debt relief should be provided to any country able to use such relief to meet the MDGs. ! In countries where human development needs are greatest, and where the feasible tax base is narrow, future aid flows should be in the form of grants rather than loans for the foreseeable future. ! In future, a fair, transparent and comprehensive international insolvency process should be created to allow creditor and debtor countries to resolve debt crises without compromising the ability of poor countries to meet the basic social needs of their people, and without forcing poor countries to repay what the insolvency process determines to be odious debts. 3  See, for example ‘Debt and the Millennium Development Goals’ Working Paper by Cafod, Christian Aid and Eurodad, September 2003 Do  the Deal. 3      Do the Deal Debt and the low income countries  At the end of 2002, low-income countries owed the rich world a total of $523bn, or roughly half their combined Gross National Income (GNI). Of this total, $154bn, or a little under a third, was owed to multilateral creditors, including the World Bank and IMF. Low-income countries as a whole paid out $39bn in debt service in 2002, or roughly $100m per day. Of this, $13.1bn was paid to multilateral creditors 4 . In contrast, low-income countries received $17bn in grant aid in the same year. HIPC relief and other forms of debt relief have so far relieved low-income countries of around $48bn of their debts, of which HIPC debt relief accounts for about $30bn 5 . However, this remains less than 10% of the total debts owed by all low-income countries to rich countries and institutions. The case for further multilateral debt relief 1 : The failure of HIPC In 1999, when the HIPC was expanded 6 , the initiative pledged to provide HIPC countries with a ‘permanent exit’ from the burden of unsustainable debts . While HIPC has undoubtedly delivered some benefits for some countries, however, the most recent reports show that the initiative is falling far short of its promises. Under the HIPC initiative, most countries are supposed to have their debts brought down to within 150% of their annual exports 7 . However, the latest Status of Implementation Report for the HIPC initiative, prepared by the IMF and World Bank, has shown that only 7 of the 14 countries that had fully passed through the initiative 8  had seen their debts brought down to within these levels. In some cases, debt burdens remain way over the HIPC thresholds. Uganda, for example, has a debt amounting to more than 250% of exports, while Ethiopia’s debt burden will remain at over 200% of its exports until at least 2010, despite HIPC’s so-called Completion Point ‘topping up 9 .’ Debt service payments remain high, because HIPC has not brought down debt stocks sufficiently. In 2003, even the 27 countries that have either received a debt stock reduction, or have at least passed the first stage of the initiative (so-called ‘Decision Point) still paid $2.8bn to their rich country creditors. This amounted to 15% of their revenues and 2.5% of their annual GDP 10 . For some countries, the figures are even higher. Senegal, for example, spent almost 36% of its revenues in debt service last year, while Malawi paid more than 30% 11 . By contrast, legislative proposals put before the US Congress suggest that in countries with critical poverty needs, this figure should not exceed 5%. 4  Source: Global Development Finance 2004 5  Source: Jubilee Research 6  The srcinal HIPC initiative, started in 1996, had committed less generous terms to HIPC countries. In 1999, the initiative was expanded into its current form. 7  Some countries have qualified under the so-called ‘fiscal window’ under HIPC, which measures debt sustainability according to the ratio of debt to revenues. 8  It was 14 countries at the time the report was published. It is now 15, including Madagascar. 9  HIPC Status of Implementation Report, August 2004, IDA/IMF 10  ibid 11  HIPC Status of Implementation Report, August 2004, IDA/IMF 4   Do the Deal.  
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