(Editor’s Note: I had a long conversation with David Francis, a columnist at the Christian Science Monitor, about the May 2005 report on debt cancellation I wrote for Foreign Policy In Focus. In the following column from the Monitor, Mr. Francis has done a good write-up of the issue. I am pleased he was able to make use of the report, and I’m very happy to see this important issue get the attention it deserves. [The version below contains a small factual correction, noted in brackets.] –M. E.)
Sweet victory ahead on debt relief?
By David R. Francis
The 10-year battle to wipe out the debt burden of the world’s most impoverished nations is reaching a climax.
Hopes are running high that when leaders of the richest countries gather next month in Scotland, they will insist that two key players – The World Bank and the International Monetary Fund (IMF) – forgive billions of dollars of debt.
The logic behind debt relief is twofold: 1) Countries no longer indebted would have more money for education, health programs, sanitation, and services for the poor. 2) Many of these loans are so-called “odious” debts, made by onetime dictators instead of elected representatives. Since the United States has already persuaded other countries to forgive loans made to Iraq under Saddam Hussein, the logic goes, then debts made under other former dictatorships, from Nigeria to the Philippines, deserve similar treatment.
The US stance on Iraqi loans, plus repeated high-profile protests at international meetings of wealthy nations, have moved debt relief from the bottom of the international agenda to near the top.
In addition, thousands of people are expected to protest in Scotland July 2 to help keep President Bush, British Prime Minister Tony Blair, and the other leaders of the G-8 (the G-7 industrial nations plus Russia) on track to forgive billions of dollars of debt, primarily for poor sub-Saharan nations, when they meet four days later in Gleneagles, Scotland.
“Expectations have been raised very high,” says Mark Engler, an analyst with Foreign Policy in Focus, a [Washington, D.C. and New Mexico-based] think tank.
The momentum has been building slowly. In 1999, President Clinton cancelled 100 percent of the bilateral debts owed the US by 22 nations classified as “Highly Indebted Poor Countries” (HIPC). Britain, Germany, France, and Japan soon followed suit. US bilateral relief was estimated at $330 million.
After the recent tsunami disaster in Asia, the wealthy countries in early February issued a statement agreeing in principle to “as much as 100 percent multilateral debt relief” for 38 HIPC nations.
That was a milestone, though not all will likely get debt relief at the G-8 meeting. These nations owe the World Bank and other regional development banks about two-thirds of their debts – estimated in the hundreds of billions, not the millions forgiven by the US and other individual countries. The large amounts make full forgiveness more difficult.
Back in April, the G-7 finance ministers meeting in Washington appeared to back off from relief of debts owed the IMF. US Treasury Secretary John Snow said, “We are not persuaded by arguments for IMF debt relief.”
By forgiving all loans to poor nations, development banks would have less revenue to issue future loans, points out Raghuram Rajan, the IMF’s chief economist. In an article last week, he argued that it would be better to deal with the problem of the debt burden on a country-by-country basis.
But according to the Jubilee USA Network, a coalition group working toward total debt cancellation for all impoverished nations, the IMF could afford debt cancellation by selling a portion of its huge gold holdings. That gold is valued on its books at about $40 an ounce, while the market value is about $418 an ounce. American gold producers objected, however. They feared IMF gold sales would clobber gold’s price.
Chunks of the IMF’s gold could be sold without hurting the supply-demand balance in the market if major central banks reduced their already anticipated annual gold sales by a little each year, says Neil Watkins, national coordinator of Jubilee USA, in Washington, D.C.
By American law, the Bush administration would have to receive approval from Congress for any IMF gold sales, but it apparently doesn’t want to raise that issue with legislators. The mining industry has been lobbying Congress against allowing gold sales.
What the administration has done – perhaps unwittingly – to further Jubilee’s cause is to bolster the case against odious debts. The US convinced 19 nations last year to cancel 80 percent of the $42 billion Iraq owed them on the grounds that Saddam Hussein used the money primarily to build castles and buy arms.
“That changed public understanding of odious debts profoundly,” says Patricia Adams, executive director of Probe International, a nongovernmental group.
In Iraq, the National Assembly within a few days rejected even that unusually generous, US-negotiated debt deal as inadequate, basically on grounds of an odious-debt legal theory dating back to 1927.
Nigerian senators have been raising the same thesis in talking about debts from their former military governments. Citizens’ groups and legislators in the Philippines challenge the validity of debts incurred by former dictator Ferdinand Marcos. Debts racked up by an earlier military junta are now under scrutiny in Argentina. In South Africa, apartheid-era debts are being questioned.
The odious-debt thesis makes the IMF nervous because so many of its loans were made to nondemocratic regimes, says Ms. Adams. The IMF has to make such loans when approved by its executive directors. Ironically, the democratic rich nations – soon to meet in Scotland – hold most of the power in the IMF.
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