A World In Chains – developing countries and debt

A World In Chains – developing countries and debt – Brief Article

Carol Welch

The IMF’s role in increasing the poor’s crushing burden of debt is exposed.

The overwhelming debt burdens of poor countries is a major contributor to the crisis that grips the economies of most developing countries today. For the 41 most heavily indebted poor countries, total external debt rose from $55 billion in 1980 to $215 billion by 1995. Debt has continued to climb in most countries. African governments alone now have $350 billion of foreign debt and they have to spend two-fifths of their revenues to service it. As a result, governments have been forced to divert scarce resources away from spending on health, education, environmental protection and other vital social services and instead dedicate them to pay what are essentially unpayable debts. Because of this process, Jubilee 2000 says 13 children die every minute in the 40 poorest nations.

Recognising that debt threatened the viability of the international economic system, the world’s rich governments, the World Bank and the IMF finally agreed in late 1996 to launch the Heavily Indebted Poor Countries Initiative (HIPC). However, it has been a failure for the following reasons:

Inadequate funding: The IMF’s (and other creditors’) contribution to HIPC is insufficient. Furthermore, instead of using its own resources to provide immediate debt relief the IMF has sought bilateral sources of funding for HIPC. By refusing to use its own funds, the IMF is abdicating its role in the debt crisis.

HIPC’s terms and conditions are too stringent: The debt-to-export ratios that determine eligibility for HIPC are too high and are based on export levels and national income rather than human development needs. These levels exclude many debt-ridden poor countries, and mean that any debt relief granted will be insufficient to deliver a country to economic health. Consequently, only a few countries have reached the stage where they have qualified for debt relief.

Tied to SAPs: The IMF’s Poverty Reduction and Growth Facility (PRGF) — formerly known as the Enhanced Structural Adjustment Facility — has been directly linked to the HIPC Initiative. To qualify for HIPC relief, a country must go through at least three years of PRGF structural adjustment, which is notoriously difficult to complete because of its unacceptable levels of austerity. The IMF has linked any additional contributions it might make to HIPC to the financing of a permanent PRGF structural adjustment programme, despite its controversial record and the fact that its prescriptions are likely to wipe out any gains made through debt relief, given that they usually lead to cuts in spending on health care, food subsidies and education.

Some academics and NGOs charge that the IMF and its policies are themselves creating debt. A recent study by the Development GAP found that, on average, the longer a country was undergoing structural adjustment, the higher its debt is likely to be. Attempts to address the debt crisis in the context of IMF adjustment programmes, therefore, may be counter productive. By liberalising their economies, adjustment makes countries open themselves up to more foreign investment, which can increase their debt. Trade liberalisation meanwhile means increased imports, as well as exports. If imports increase more than exports, this can also lead to increased debts.

The fact is that structural adjustment loans — designed to relieve poor countries’ debt — have failed to do so and have probably made the debt burden worse. They were so badly designed that borrowing countries have not reaped enough income to pay them back. We thus now have a situation in which many poor countries pay more money to the World Bank and IMF each year than they receive in loans: the IMF extracted a net US $1 billion from Africa in 1997 and 1998 — more than they loaned to the entire continent. To make matters worse, just as total debt in developing countries rises again, (by $150 billion in 1998 to a total of almost $2.5 trillion), a plunge in commodity prices — to which many developing countries have been made highly vulnerable by the IMF’s policy of export-led-growth — has further crippled the poorest countries’ ability to repay foreign debts.

Responding to the pressure of the international NGO movement to cancel the debts of poor countries, the IMF, World Bank, and creditor governments are beginning to revise the HIPC programme by lowering eligibility thresholds and increasing financing for debt relief. But, as Robert Weissman of Multinational Monitor points out, the additional $45 billion committed for poor country debt-relief at the G8 meeting in Cologne will result in only 16 countries making significantly smaller debt payments, as “a large portion of the debt forgiveness would only apply to loans that have already been written off by lenders but that were still on the books as obligations of the poor country borrowers”. Furthermore, total debt relief funds may be far less than promised if the US Congress pursues its threat to vote for only a fraction of the US’s HIPC contribution.

The system, if it works at all, will do so to protect creditors’ interests and ensure a steady flow of repayments, rather than freeing up vast amounts of resources that could be dedicated for health, education, rural support, and environmental protection. As the IMF’s own website inadvertently admits, the main objective is not poverty reduction but rather the reduction of debt burdens to levels that will “comfortably enable [countries] to service their debt… and… broaden domestic support for policy reforms”.

If the IMF is counting on debt relief to make them and their policies more palatable, they will have a very long wait. Meanwhile, it will be the poor, once again, who will pay.

Carol Welch is an International Policy Analyst at Friends of the Earth US.

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