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Forgive us our debts: by Jo Marie Griesgraber This past year the government of Uganda spent only $3 per person on health care, but it spent $17 per person on repaying its foreign debt. Meanwhile, one in five Ugandan children will not reach their fifth birthday as a result of diseases that could be prevented through investment in primary health care. Such economic conditions, which threaten people throughout the world’s poorest countries, have drawn many Christians’ attention to the problem of Third World debt. Since the onset of the Third World debt crisis in 1982, many Christians have advocated clemency for severely indebted countries. As we near the end of the second millennium A.D., churches in Europe and the U.S.--including voices from within the Vatican and the World Council of Churches--are calling for a Year of Jubilee to free hopelessly indebted countries from all debt without condition. Whether or not an updated version of Israel’s Year of Jubilee will prove a practical solution, it’s clear that the problem of heavily indebted poor countries is serious. Uganda’s inability to pay for primary public heath measures or Tanzania’s inability to pay for basic education are both tied to their seemingly interminable foreign-debt obligations. This makes the debt crisis one of the principal social justice issues of our time. We should understand its causes and possible solutions. While complete debt forgiveness for poor countries remains for many people a goal, activists have also been seeking incremental changes in the structure of Third World debt. One such measure is the HIPC Initiative involving the World Bank and the International Monetary Fund. In late September the governors of the World Bank and the IMF approved this groundbreaking measure to reduce the overall foreign debt of heavily indebted poor countries (HIPC). The HIPC Initiative is justly termed "groundbreaking" for at least three reasons. For the first time the multilateral creditors will be reducing poor countries’ debt, not just rescheduling it or lending new money to cover old debts. Also, when considering which countries’ debt will be reduced, the international lenders will for the first time use as a criterion the debtor government’s commitment to reducing poverty. The HIPC Initiative is also uniquely comprehensive in that it attempts to coordinate the actions taken by all the debtor country¹s creditors. While the measure is groundbreaking, its impact will not be earthshaking. The World Bank and the IMF still require debtor countries to implement many of the restrictive economic policies, such as draconian budget cutting, that are currently in place--the kind of policies that critics say only further harm the poorest of the poor. Because the initiative is also extremely complex, its many points of "flexibility" will leave implementation subject to political manipulation. The full import of the HIPC Initiative can be appreciated only if it is seen as a decisive stage in the history of a financial disaster. The debt crisis of Third World countries hit the headlines in 1982 when Mexico declared itself incapable of servicing its foreign debt. A number of conditions paved the way for that dramatic event. Before 1982 governments in the Southern Hemisphere were borrowing a lot of money; their growth rates were high, and the real cost of borrowing money was low. At the same time, creditors, especially commercial banks flush with newly invested oil monies resulting from the 1973 hike in oil prices, were eager to lend. This conjunction between borrower and lender collapsed, however, with the second OPEC oil price hike in 1979 and the onset of "stagflation" in the North--inflation without growth. Paul Volcker, head of the U.S. Federal Reserve, took steps to squeeze inflation out of the U.S. economy by raising interest rates well above the rate of inflation. Inflation dropped, but the move pushed the economy into a severe recession. What was an economic cold for the U.S. was full-blown pneumonia for countries of the South. Most loans by U.S. banks to foreign governments had floating interest rates pegged to the rate the Federal Reserve charged banks for short-term loans. Raising the U.S. interest rates automatically raised the cost to foreign borrowers of servicing their loans. The recession in the North also shut down the markets for southern products, so southern producers could no longer earn the hard currency required to pay the higher interest rates. In the fall of 1982, Mexico announced it could not pay its foreign debts. A house of cards had been built on the faulty assumption that countries could not go bankrupt. The unthinkable had happened, and no contingency plans existed to meet the crisis. Eventually, the various creditors developed mechanisms to address their outstanding loans within the southern governments’ debt portfolio. Each segment of the debt--commercial, bilateral and, more recently, multilateral--was addressed separately, depending on the creditor. No one worried about the needs of the debtors. Commercial debt, owed mainly by Latin American countries to northern banks, was consolidated and reduced in 1989 through the Brady Plan. Designed by U.S. Treasury Secretary Nicholas Brady, the plan required all commercial banks with loans to a given country to work together with that government. Under the plan, commercial banks all agreed to a cut in the debt, and the World Bank, the IMF and the U.S. and other major economic powers in turn guaranteed that the banks would receive payment on the reduced amount of debt. In 1990 Mexico became the first country to restructure its commercial debt through the Brady Plan. Its package--a 35 percent reduction in its overall commercial debt--set the precedent for all subsequent applicants. Other countries that have qualified for the plan include Brazil, Argentina, Costa Rica, Morocco, the Philippines and Peru. Bilateral debt is money one government owes to another government--as when the U.S. Export-Import Bank lends money to a government so it can buy U.S. products. All the wealthy industrialized donor governments, known as the OECD countries (Organization for Economic Cooperation and Development) meet together in Paris with a single debtor country to adjust the debtor¹s payment schedule for the next few years. To be eligible to petition the Paris Club at all, the debtor must already have an IMF stabilization loan--which amounts to the IMF’s "good housekeeping seal of approval." For the poorest countries, the needed IMF loan is made from the IMF’s Enhanced Structural Adjustment Facility (ESAF), which imposes strict requirements upon the country for cutting inflation, balancing the budget and opening the economy to foreign trade. While these requirements are stringent, ESAF loans involve very low interest and extend for ten years. The timing of the debtors’ first meeting with the Paris Club is crucial, for it establishes the country¹s "cut-off date." Any bilateral loans the country receives after this first meeting are not eligible for future debt restructuring by the Paris Club. The cut-off date has become a serious problem for many countries that first started going to the Paris Club in the mid-1980s and have now accumulated ten years of fresh bilateral debt that is not eligible for relief. In addition to the stipulations attending the cut-off date, the Paris Club also excludes "concessional lending" (long-term, low-interest loans) from being considered for relief. Taken together, these two restrictions leave some of the poorest countries with an enormous stock of bilateral debt that they are unable to service and which is ineligible for relief from the OECD. That debt keeps growing because the unpaid interest is added to the unpaid principal--an arrangement that has all the glories of compound interest in reverse. Creditors who belong to the Paris Club can reduce a debtor’s burden in a variety of ways: they can cut the principal, reduce the interest rate charged or extend the length of the loan. Under terms designed at a summit meeting of leading industrial countries in Naples in 1994, the poorest countries can receive up to a 67 percent reduction on all their eligible debt. However, in the case of a country such as Uganda, for example, the amount of debt eligible for reduction is only 11 percent of its total foreign debt. A third category of debt has become the most problematic for poor countries: that debt owed to multilateral creditors such as the World Bank, the IMF and such regional development banks as the Africa Development Bank. Multilaterals are preferred creditors who are to be repaid in full and on time. Their ability to make low-interest loans is based in part on their status as preferred creditors. But a distinction must be made between loans that a multilateral such as the World Bank makes to impoverished countries and those it makes to middle-income countries. Institutions such as the World Bank and the Inter-American Development Bank raise much of the capital they lend to middle- and lower-middle-income countries in the major money markets of New York, Tokyo and London. Because they carry preferred creditor status, and because major donor governments guarantee their loans, these institutions have earned a AAA credit rating that allows them to borrow money much more cheaply than a middle-income country could hope to borrow. It has long been argued that if the multilateral lending agency¹s preferred creditor status were threatened, so too would its AAA credit rating and its ability to function as a low-interest lender. For this reason multilaterals have worked resolutely to protect their preferred creditor status. Loans the World Bank make to impoverished countries, however, depend largely on money granted to them by donor nations such as the United States. Congress, like other donor governments, annually makes payments to the International Development Association (IDA)--a part of the World Bank that makes long-term, very low interest loans to the poorest countries. The World Bank asserts that for it to maintain its AAA rating it must maintain its preferred creditor status no matter who the borrower might be and from which branch it borrows, arguing that the Bank¹s high rating depends on the market’s perception of its stability. Further, the market perceives the World Bank as a single entity; it does not distinguish between various branches of the Bank that make different kinds of loans. Thus despite the logical disparity, poor countries are required to pay their preferred creditors on time and in full, even when the money they repay comes from donor governments’ contributions, not from money raised on the market. The World Bank’s preferred creditor status has thus become a major component of the Third World’s debt problem. When their economic woes deepened, the poorest countries ran up multilateral debts, which had to be serviced on time and in full. Eventually these countries were paying virtually nothing on their bilateral debt, while nearly 50 percent of their debt service payments went to the multilateral creditors, who held only 22 percent of their total foreign debt. These countries’ total foreign debt skyrocketed largely because their bilateral debt surged. The preference given to paying multinational debt has had other negative effects. Instead of promoting development--which multilaterals were designed to do--the multilaterals have been a drain on the poorest countries. While the World Bank has generally had a positive net transfer of funds to poor countries (more money going from the multilaterals than was being repaid to them), the IMF has often had a negative net transfer. The World Bank had a positive net transfer because it continued to make new low-cost loans to poor countries. But the Bank’s ability to make these new loans slowed considerably when the U.S. Congress, spurred by the Republican Party¹s 1994 electoral victories, failed to pay the U.S.’s full pledge to IDA. Congress’s action had a snowball effect. Other donors peg their contributions to what the U.S. contributes, so they reduced their contributions as well. Many governments, experiencing their own domestic pressure to balance budgets and cut foreign aid, were only too happy to hide behind the U.S. example. Poor countries were left to pay their multilateral debt without the necessary assistance of new lending. Under existing conditions poor countries will be saddled with enormous, and socially devastating, debt loads in perpetuity. That is a rough picture of the global financial developments that made the HIPC Initiative necessary. But these developments should also be viewed from another perspective--ground level. The life of the poorest people in these very poor countries is abysmal and getting worse, and their plight is directly tied to the foreign debt. In Zambia, for example, the government spent $37 million on primary school education between 1990 and 1993, a period of deep crisis in its educational system caused by chronic underfunding. Over the same period, it spent $1.3 billion on debt repayments. Repayments to the IMF alone were equivalent to ten times government spending on primary education. In Tanzania, spending on external debt is double the level of spending on water provision. Yet more than 14 million people lack access to safe water, exposing them to the threat of water-borne diseases, the main cause of premature death and disability in the country. (See Kevin Watkins¹s Multilateral Debt: An End to the Crisis?) To be sure, the responsibility for the plight of poor countries is shared. Frequently the governments are incompetent, and many are corrupt. Many are in the midst of or emerging from civil conflict. European countries that were once the masters of these regions generally failed to invest significantly in the human and physical resources of their colonies. And the cold-war antagonists--the U.S., the Soviets, the Chinese--contributed to many countries’ instability by pumping money into regimes that were corrupt but ideologically friendly. Multilaterals themselves bear some responsibility. At the onset of the debt crisis, the World Bank and the IMF had the task of helping debtor countries reform their economic policies. The Bank and the IMF applied a "one-size-fits-all" set of structural adjustment policies to all debtors, and the results were unhappy. Some of these policies have been appropriate in some instances, others less so. Gradually the Bank and Fund have adapted some of their policies to local situations. The Bank and the IMF are not held responsible for the costs of their own failed policies, however. Despite some changes, the economic policies required by the multilateral lenders remain remarkably consistent: reduce the role of government, open the economy to foreign trade and investment, balance the budget, cut inflation, devalue the currency and, above all, produce for export to earn hard currency in order to service the foreign debt. These remain the policies a debtor country must follow to be eligible for relief under the new HIPC Initiative. The HIPC Initiative arranges comprehensive debt relief for heavily indebted countries that are already eligible for International Development Association assistance. "Heavily indebted" in this case means that the country’s total debt exceeds 200 percent to 250 percent of its total exports; that the debt service owed (interest and principal due) exceeds 20 percent to 25 percent of the country¹s export earnings; and that the country has other vulnerabilities, such as a high degree of strain placed on the government’s budget by the external debt service; a limited degree of diversity in products available for export; low foreign currency reserves; and a gloomy picture of available resources. A HIPC country must apply within the next two years to qualify for comprehensive debt relief. The first step is to arrange with the IMF for a stabilization package: the country agrees to meet inflation, budget deficit, and trade targets; the IMF then provides a new ten-year, 1/2 percent interest loan through its Enhanced Structural Adjustment Facility. The country must adhere to this macro-economic program for an initial three years. In addition, the country must carry out structural reforms and conduct a responsible social program (as evidenced by the portion of the budget spent on primary health and education). Concerning the countries’ other types of debt, during this three-year period the Paris Club will continue to deal with the country’s bilateral debt, providing up to 80 percent relief on the debt service on eligible debt. (Debt incurred after the cut-off date is not covered.) The World Bank itself will assist those poorest countries that carry debt to commercial banks. After the three initial years, another decision must be made by the World Bank and the IMF. With some input from the debtor country, the two will consider whether the country’s export earnings will bring it within the range of "sustainable debt," assuming the Paris Club continues its debt service relief on bilateral debt, and reduces eligible principal by 80 percent. Here "sustainable" means that the country can continue paying at this rate and still manage to reduce poverty and meet core social problems. If the answer is No, then, after another three-year period--during which time the multilateral institutions have still provided no actual debt reduction--all the multilateral creditors will reduce the country¹s debt service proportional to the amount of debt owed to each of them. If the IMF is owed the most, then the IMF will have to contribute the most to reduce the poor country’s debt stock--the principal, not just the interest. The Paris Club--and the non-OECD creditors in like manner--will reduce the country’s total eligible debt stock up to 80 percent. This is the basic framework of the HIPC Initiative. Despite providing for comprehensive debt relief, including that from the multilateral creditors, the initiative has numerous shortcomings, and promises to start several political fights. Among the problems:
Given the complexity of the chronic debt crisis, the simplicity of a Year of Jubilee becomes more appealing. Advocates of Jubilee say that at the opening of the third millennium all debt incurred by the poorest countries should be forgiven. The most common response to such a proposal has been to brand it as hopelessly utopian. Such a move would pose a moral hazard in international financial relations, some argue. To reduce or eradicate debt would reward those who have been irresponsible, corrupt or at best incompetent, and, just as alarming, it would encourage the same behavior in others. The problem with this argument is a moral one: Those who suffer from the alleged moral imperatives of debt repayment are for the most part innocent citizens who have played little or no role in running up the nation’s foreign debt. Certainly when alternatives exist, as they do in the case of Third World debt, those who live under irresponsible, corrupt or incompetent governments should not have to suffer from the disproportionate hardships created by the debt crisis. By no moral standard should debt repayment place these citizens in a position where their survival is jeopardized. But forgiving the debt will not necessarily benefit the poor, another argument goes. Corrupt governments, it is claimed, will keep any consequent benefits (in income or loans) for themselves. But debt relief can be designed so that in order to qualify, a government must have a good human rights record and a demonstrated commitment to poverty reduction. Any future loans or aid money can be specifically targeted to poverty programs. Even governments that do not receive added money for poverty programs would be able to release their technical staff from the burden of debt negotiations and can get on with the work of development. Having shed a crippling debt burden, some countries may even attract investment capital that could improve the lives of all the nation’s citizens, including its poor. The most prominent objection that creditors raise to such sweeping debt relief is that it would bring ruin to the creditors--specifically, commercial banks. At a minimum, some say, such a move would destroy the preferred-creditor status of the multilateral institutions, along with their ability to continue to make low-interest loans elsewhere in the world. But few of the poorest countries still carry outstanding debt to commercial banks. Where such debt remains, the banks have set aside reserves to cover the possible loss of those loans. They have also gained tax relief from the losses already incurred. Overall, these commercial banks turned a healthy profit from their loans to the Third World before individual countries stopped payments. Chalking up losses from some bad loans is part of a normal day¹s business in banking; indeed, it is part of the rationale for charging interest in the first place. Regarding the multilaterals’ preferred-credit status, the stock market’s virtual nonresponse to the World Bank-IMF’s HIPC Initiative demonstrates that the multilaterals’ AAA ratings in the money markets depends above all on the guarantees that donor governments provide to back up their borrowing. The multilaterals’ credit rating is as solid as their support from the donor governments of the developed world. As long as these governments stand behind the World Bank and IMF, the institutions will remain in business. From the First World viewpoint, a Jubilee debt cancellation makes sense because creditors need to assume some share of the responsibility for the debt crisis, in light of the faulty "one size fits all" adjustment policies, and especially since some loans were foisted on poor nations. In some instances, commercial banks peddled loans, and promoted young loan officers according to the amount of money they moved, regardless of the merits of the loans made. The World Bank itself initiated projects that required governments to borrow money from the Bank. Is it surprising that some countries are less than enthusiastic about draining themselves of resources in order to pay off debt that in essence originated with the lender? In any case, many poor countries have paid their creditors the principal in full, sometimes many times over. It can also be argued that countries, like individuals, need the option of a bankruptcy court, where debt can be handled comprehensively so the debtor can get on with life. Countries have responsibilities in addition to servicing their debts, including meeting the needs of the poor, which in many Third World countries constitute the bulk of the population. These other responsibilities would be protected in an international bankruptcy court. Local governments in the U.S., such as Orange County, California, can receive protection from their creditors through the courts. Under current international arrangements, creditors require payment, regardless of the effect on the poor. Under today’s conditions, poor countries are unable to get on with the business of development. Debtor governments cannot hope to attract investors; heavy indebtedness indicates to the investor that the country is not a good investment risk. In addition, poor countries’ few skilled civil servants are tied up in endless rounds of debt renegotiations instead of long-term planning for resolving poverty. (Oxfam estimates there have been over 8,000 debt negotiations for Africa since 1980.) Finally, debt rescheduling has not worked. The stringent structural adjustment policies that creditors have required debtor governments to initiate in order to qualify for debt rescheduling have not yielded the promised sustainable economic growth. In many cases, the economy, the people and the environment are no better off--and at times worse off--than before the debt rescheduling. These policies have encouraged poor countries rapidly to deplete their natural resources in order to pay off debt, even though such measures have improved their debt status only minimally. Poor countries are selling their future while gaining nothing in return. The experience of the past 14 years indicates that the poorest countries are unable to pay off their debts under current debt reduction arrangements and policy prescriptions. Something new must be tried to enable countries to get on with the important work of development. While the HIPC Initiative is indeed an important new step in resolving the debt crisis, a Jubilee Year of extensive debt cancellation offers the poorest countries the prospect of a truly fresh start. Pope John Paul II endorsed this practical and prophetic solution to the problem at the Food Summit in Rome in November. He repeated the "concrete initiative of international solidarity" he had earlier announced in the pastoral letter Tertio millennio adveniente (The Coming of the Third Millennium), prepared in advance of the Jubilee Year 2000. In that letter the pope appealed for "reducing substantially, if not canceling outright, the international debt which seriously threatens the future of many nations." It’s time to take such prophetic challenges seriously. January 22, 1997 Copyright 1997 Christian Century Foundation. Reproduced by permission from the January 22, 1997 issue of the Christian Century. Subscriptions: $42/yr. (36 issues), from P. O. Box 378, Mt. Morris, IL 61054. 1-800-208-4097
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