UN asks G-8 to improve debt relief for poor

by Chakravarthi Raghavan

Geneva, 11 June -- The United Nations made public Friday a new report, "Finding Solutions to Debt Problems of Developing Countries," and asked the G-8 leaders to improve the substantially the terms on which relief is now granted to the heavily indebted poor countries, and eliminate once and for all their debt overhang problem.

The debt relief issue is high on the agenda of the Group of 8 heads of state/government meeting in Cologne 18-20 June. The G-7 finance ministers are now meeting in Cologne and are to report to their heads.

The UN report says that the foreign debt problem of developing countries has "dramatically worsened" since the beginning of the 1990s, because of the outlook for commodity prices and export volumes. Over the medium term the ability of developing countries to service their debts could become worse.

In releasing the report in Geneva, UNCTAD Secretary-General Rubens Ricupero underscored the need to improve the terms of the debt relief, as well as bring in more countries into the eligibility category.

While the criteria for including countries appear to be "objective", in fact they are not really so, but had a "degree of arbitrariness", Ricupero said. He cited what he called "a highly placed source close to the initiative", which he did not want to identify, that informed him that under the original criteria evolved, Cote d'Ivoire did not qualify, but France insisted on bringing it in, and hence the criteria was changed. There was a need to be more flexible and bring in more countries to be given relief, including some who, by virtue of their per capita incomes are excluded but who need relief, he said.

Ricupero praised the action of Russian Federation which, despite its severe crisis, had now agreed to write-off most of the debt to the former Soviet Union. The G-7 rich countries should act now, he said.

The UNCTAD head noted that due to their own public opinion, the G-7 heads had gradually moved to improve their terms as well as the amount of debt relief to be given and, thanks to the initiative of the World Bank President Wolfensohn, multilateral debt too had now been brought into the categories of debt eligible for relief.

The head of UNCTAD's Globalisation and Development Strategies division, Prof John Toy, stressed that the relief, including multilateral relief, should be through resources additional to previously envisaged budgetary ODA allocations, and use of SDRs could be one way. The report refers to the fact that the current proposals and ways in which multilateral debt relief is sought to be given, and fears that the additional costs being charged to loans to middle- income countries (by raising the interest charged to them in World Bank loans), and calls for additionality of funding, including through issuance of IMF Special Drawing Rights which, could be ceded to the multilateral institutions by the creditor countries to provide debt relief. This way, the creditors would be contributing to the relief, by foregoing the earnings of market interest rates on their SDRs.

The issuance of SDRs, and the industrialized nations turning them over for development financing has long been on the international agenda, at least for over two decades, but has been resisted by the rich nations. Whether it will be overcome this time remains to be seen.

The HIPC initiative should be seen as an one-off operation. Once their debt overhang is lifted, the countries must be able to make a fresh start, using new aid flows in an efficient way to remove structural obstacles to their development, the UN report said. But the countries will still have to rely for some time on new concessional external sources of revenue.

The UN proposals call for:

* review of the list of HIPCs to ensure that all poor countries facing debt servicing difficulties will be considered under the initiative;

* shorten the time frame for implementation to three years, so that final debt relief can be provided after the first track record of three years under the IMF's ESAF programme;

* apply less restrictive eligibility criteria, notably by reducing the thresholds of debt-to-exports and debt-service-to- exports ratios, and lowering the thresholds even further for countries facing severe foreign exchange constraints, with the aim of "providing a real exit from debt rescheduling";

* set a ceiling for share of fiscal revenue allocated to external debt service, and provide additional relief if needed to meet this benchmark;

The report says the current 25% of fiscal revenue for external debt service is an excessive burden for HIPCs.

* cancel ODA debts of HIPCs, and extend at least 80% debt reduction on other official bilateral debts, full cancellation of bilateral official debts for post-conflict countries, countries affected by serious natural disasters and those with very low social and human development indicators;

* full funding of the initiative through partial sales of IMF gold, a new general allocation of SDRs and additional bilateral contributions to multilateral Trust Funds for debt relief;

* steps to reverse the current trend of declining ODA and budgeting new aid funds for social and human development projects and poverty reduction, and adopt procedures to release resources for HIPC relief without impinging on regular ODA budgets - so that debt relief is not given at the expense of ODA; and

* linkage between debt relief and poverty reduction, with debtor countries determining their own national priorities.

Collaboration with NGOs and the private sector should be increased so as to raise funds for debt relief and development projects in HIPCs. (SUNS4454)

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

[c] 1999, SUNS - All rights reserved. May not be reproduced, reprinted or posted to any system or service without specific permission from SUNS. This limitation includes incorporation into a database, distribution via Usenet News, bulletin board systems, mailing lists, print media or broadcast. For information about reproduction or multi-user subscriptions please contact < suns@igc.org >