Iraq's Odious Debts

The aid that isn’t: Writing off official commercial debt should not count as aid

Financial Times (UK): Editorial
April 12, 2005

When is “foreign aid” not foreign aid? When it is debt written off by governments that should never have lent it in the first place.

The latest figures on rich nations’ overseas development spending, released yesterday by the Organisation for Economic Co-operation and Development, show aid continuing to creep higher, increasing by 4.6 per cent in real terms in 2004. Although legitimate questions remain about poor countries’ capacity to absorb the vast amounts of aid money for which some advocates are calling, there is little doubt that a sustained increase is justified.

Competitive compassion between richer governments seems to be working. Germany, which cut foreign aid last year, has more recently followed Spain, France and the UK and set a deadline to reach the longstanding United Nations target of 0.7 per cent of national income. Japan, which has also been cutting aid, has backed its campaign for a permanent seat on the UN Security Council by promising to double assistance to Africa.

But those pledges will be flattered in years to come by the write-off of debt to Iraq. According to the OECD’s rules, the full face value of official commercial debt (typically export credits) written off by its member governments counts as foreign aid.

The rich Paris Club of creditor nations hold some $40 billion of Iraq’s crippling $120 billion official debt burden. Next year, the first $15 billion to be written off will boost OECD members’ aid total by more than 15 per cent. But as the OECD notes, this is misleading. A writedown of unpayable commercial bad debt to an oil producer is not comparable to aid to Africa to combat HIV-Aids or build ports. The official export credit agencies whose often questionable loans generate much of the bad commercial debt are mercantilist export promoters, not aid agencies.

The logical solution is for creditor governments to take a leaf out of the private sector’s book, value their official debt holdings at market prices on a regular basis and stop counting writedowns in the value of such assets as aid. This would produce a fairer picture of actual resource flows. For those countries that do not already value their debt at market price, it would also diminish their incentive to block debt-relief deals for insolvent official debtors on grounds of cost. It should also make governments warier of lending to corrupt or incompetent regimes.

Such an approach would not be straightforward. There is no market price on which to base valuations of claims on those countries whose debt markets have long ceased to function, such as Sudan or Zimbabwe. But it is better to have an informed guess at the true value of assets than maintain the accounting fiction that bankrupt countries will one day pay in full.

If governments lend for commercial purposes, they should expect to be treated more like commercial entities. Iraq’s debt relief is not proper aid. Creditors should not pretend it is.

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