Debt Relief

Q&A: The weight of debt

UK Chancellor Gordon Brown wants the world’s richest nations to freeze foreign debt repayments for countries hit by the Asian tsunami disaster. The move would allow such countries to focus money on reconstruction.

Mr Brown said that “we’re talking initially about $3 billion (£1.58 billion) in debt repayments each year by the most affected countries.”

How much is the debt?

According to the World Bank’s latest figures, total external debt per country is:
Debt as % of national annual income Indonesia 80%

India 21%

Thailand 48%

Sri Lanka 59%

Maldives 45%

Source: World Development Movement

Indonesia $132.2 billion

India $104.4 billion

Thailand $59.2 billion

Malaysia $48.6 billion

Sri Lanka $9.6 billion

Somalia $2.7 billion

Seychelles $560 million

Maldives $270 million

What are the repayment costs?

The figures vary, and are not all immediately available. But, according to the World Development Movement (WDM), which campaigns for debt relief, the annual repayment costs are:

Indonesia $13.7 billion India $13 billion Thailand $17.9 billion Sri Lanka $653 million Maldives $20.8 million

Based on those figures, the WDM said that Mr Brown’s $3 billion in annual debt relief “will cover one-and-a-half months” of debt repayments for the five countries most affected by the tsunami disaster.

Is debt relief something new?

No. Campaigners have long been calling for richer nations to either cancel or cut the money owed them by developing countries.

The issue has forced its way onto the front page in recent years, thanks in part to the support of high profile celebrities such as pop star Bono and Live Aid organiser Bob Geldof.

The war in Iraq, a rise in terrorism and continuing unrest in some of the world’s poorest regions also has brought international attention to the subject.

How did the debts get so big?

Much of the money was borrowed in the 1960s and 1970s through organisations like the International Monetary Fund (IMF) and the World Bank.

Individual nations, banks and corporations also have provided loans.

The cash was earmarked for development and infrastructure projects, but often the money was sidetracked to finance the lavish lifestyles of dictators and unelected governments.

Then in the 1970s and 1980s, interest rates surged, boosting repayment costs. This was compounded by a global recession and a slump in the price of commodities.

Despite making repayments, many countries were left with more debts than they had started with.

On top of that, most of the debt has to be paid back in foreign, or hard, currency. That is usually in stable dollars, pounds sterling or euros.

The debtor nations, meanwhile, have currencies that are far more volatile and often tumble in value, making debt more expensive to service.

What do campaigners want done?

Many are calling for all debts owed by developing nations to be cancelled, saying that repayment costs draw vital cash from social and development projects.

“For the world’s poorest countries to divert vitally needed resources to rich creditors rather than spending on the health or education of their citizens is both immoral and economically irrational,” Oxfam said.

They argue that much of the money lent to regimes such as that of former Indonesian President Suharto is “odious debt” – the cash was provided despite the fact that it was used to keep an oppressive regime in power.

Why, the argument goes, should Indonesians today be paying back money that was used to oppress them?

Other methods used to provide aid are debt swaps and a rescheduling of repayments.

But, campaigners warn that borrowing to repay loans only leads to a spiral of debt and more problems.

What are the arguments against freezing debt?

Freezing debt repayments may not be the answer to solving the humanitarian crisis, some critics say.

Australian Prime Minister John Howard is among the first to question whether freezing debt repayments is the correct approach.

Mr Howard told an international aid summit in Indonesia that there was no guarantee that the money saved would go to help people in need.

He said Australia, which has pledged $46 million in aid, preferred to channel its resources directly so it knows exactly where the money will be put to use.

“The debts are not normally owed by the people who need the assistance. It is usually owed by other organisations,” Mr Howard pointed out.

What has been done already?

The Heavily Indebted Poor Countries (HIPC) Initiative was set up in 1996 by the World Bank and IMF to help alleviate debt problems. Mr Brown has committed himself to fighting poverty.

Critics, such as the Jubilee Debt Campaign (JDC), claim the HIPC does not go far enough and is slow to offer help.

It also attaches “demanding conditions, like cuts in health and education spending.”

According to the JDC, only $36.3 billion, or less than 10%, of debt has been cancelled to date.

Is enough being done?

Campaigners welcomed Mr Brown’s initiative, but said that more efforts are needed.

A freeze on the repayments would only provide a respite, they said, and with reconstruction expected to take many years, cancelling debt completely is the best way forward.

The next months may see some significant changes, however.

Mr Brown has set the elimination of debt owed by the world’s poorest nations as one of the goals for the UK’s presidencies of the G8 and the European Union this year.

BBC News, January 5, 2005

Categories: Debt Relief, Odious Debts

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