Debt Relief- Need for sustaining the campaign over the long-term

Debt Relief

Need for sustaining the campaign over the long-term

Bandula Kothalawala, European Union and International Relations Dept, TUC, and JDC Board Member

Introduction

There is a popular perception gaining currency in many quarters that the debt crisis was largely resolved at the G-8 Summit in Gleneagles in 2005. Although the need for freeing up resources for development through debt relief has long been discussed and acknowledged, the progress on delivery has so far been slow due to a variety of reasons. In fact, much remains to be done, not only to expedite the implementation of the decisions already taken, but also to search for innovative approaches to extend relief to more low-income countries who would otherwise encounter serious difficulties in achieving the Millennium Development Goals (MDGs [1] ) by 2015.

This article, while examining briefly the progress made so far, seeks to sum up current efforts, reflects on possible ways in which the international trade union movement could contribute to the effectiveness of the campaign and points to some additional measures to supplement existing resources for debt cancellation.

Overview

There were numerous initiatives to provide debt relief, notably through the Paris Club in the 1980s and in the early 1990s, involving mostly bilateral creditors and commercial banks, largely designed to retrieve as much money as seemed possible. However, it soon became clear that meaningful debt relief could not be provided through traditional rescheduling or similar palliative measures alone. Moreover, there was increasing recognition of the absurdity of low-income countries receiving aid on one hand and spending far greater sums repaying debt, on the other. In 1996, the World Bank and the IMF launched the Heavily Indebted Poor Countries' (HIPC) Initiative in order to provide debt relief for a number of countries that fulfilled criteria, first to be considered for, and then to actually receive, debt relief. In 1999, under pressure from campaigners and debtor nations, many of whom were spending more repaying debt than on the health and education of their own people, the World Bank and the IMF reformed the Initiative in an effort to make it more relevant to poverty reduction and social policies. Under the enhanced HIPC framework, countries were to have their debts reduced based on actual data at the decision point [2] rather than on projections of debt stock at the completion point [3] . It is worth noting that the HIPC or its enhanced variant was intended, not to provide 100% debt relief, but to reduce external debt burden to financially sustainable levels. In 2005, G-8 nations agreed to supplement the HIPC Initiative through another scheme known as the Multilateral Debt Relief Initiative (MDRI) with a view to providing 100% cancellation of debts owed to three multilateral institutions - IMF, IDA (World Bank) and the African Development Fund - enabling debtor nations to free up the additional resources necessary for achieving the Millennium Development Goals. The implementation of the MDRI is closely related to the HIPC Initiative in that the countries have to meet the conditions required to reach the completion point under HIPC to qualify for MDRI. These criteria include satisfactory performance in macro-economic policy, poverty reduction strategy as well as public expenditure management - as determined by the IMF and the World Bank. Relief under the MDRI is strictly limited to debt stocks owed to the IMF, IDA and AfDF only.

IMF

The cancellation of debt owed to the IMF under the MDRI will cover debt stocks owed to it as at the end of 2004. So far, 19 countries [4] have qualified for 100% debt relief under the MDRI while a further 10 countries [5] have reached the decision point, which entitles them to interim relief and would make them eligible for MDRI debt cancellation at completion point. The 19 countries include the 17 HIPCs and two non-HIPCs [6] whose per capita income was below USD 380 in December 2005. Mauritania and Cameroon also benefited from the scheme in 2006 bringing the number of full beneficiaries to 21. In theory it is possible that 11 more countries [7] will become eligible for debt relief in the coming years.

IDA

There is potentially greater scope for debt relief for low-income countries under the MDRI to be implemented by the IDA - the low interest loans made by the World Bank. Debt stocks as at the end of 2003 are eligible for cancellation. A possible 38 HIPC countries will qualify for 100% debt cancellation when they have reached the completion point while 4 IDA countries are also likely to be eligible under the sunset clause. It is also possible that 4 other countries will eventually qualify under the principle of equitable treatment. The total cost to the IDA for 42 countries (38 HPIC countries and 4 sun-set clause [8] countries) is estimated at USD 37bn.

AfDF

In April 2006, the African Development Fund agreed to grant debt relief totalling USD 8.5bn under the MDRI. All outstanding debts as at the end of December 2004 are eligible for cancellation under the MDRI implementation plan agreed by the AfDF. 33 regional member countries, 32 of which are HIPC countries [9] , of the African Development Bank will become eligible for 100% debt relief when they have reached the completion point under the enhanced HIPC. The full implementation of the MDRI is expected to bring down the average external debt-to-export ratio from 140% to less than 60% for regional member countries of the African Development Bank.

Debt Crisis and the international trade union movement

The international trade union movement has long campaigned for the cancellation of unsustainable debt of the world's poorest nations. In 2000, the ICFTU Congress expressed support for Jubilee 2000 and called for an end to the debt burden. The ICFTU [10] also welcomed the HIPC initiative when it was proposed, but called for a more radical solution to the crisis commensurate with its magnitude. In its submission [11] to the World Bank / IMF Meetings in September this year, the International Confederation of Free Trade Unions (ICFTU) and Global Unions, while welcoming the new initiative, called upon the two institutions to ' forgive the debts of all 42 countries potentially eligible for debt relief that respect human rights and extend eligibility to other heavily indebted countries currently excluded from the initiative'. Moreover, the Statement called upon 'the World Bank and IMF to honour their endorsement of the MDGs as well as their commitments to promote country ownership of development strategies by ceasing to attach economic policy conditionality to debt relief'. It also points out that while the average number of conditions per IDA loan decreased from 22 in 2001 to 13 in 2006, the number of benchmarks per loan increased from 8 to 32 during the same period. These conditions sometimes infringe on the sovereign status of nations, affect important public expenditure decisions on health, education and infrastructure development and conflict with policies designed to achieve the Millennium Development Goals.

As in the past, the International Trade Union Confederation (ITUC [12] )/Global Unions should take the opportunity of their contact with international financial institutions to impress upon them the need for further debt relief. In their submissions to the IMF/WB Meetings, the ITUC and Global Union Federations will need to continue to argue the case for more substantial relief for low-income debtor nations as part of their efforts to augment the resources for development, especially for the attainment of Millennium Development Goals. Moreover, it is evident that the success of the Multilateral Debt Relief Initiative - especially, implementation plans adopted by the IDA and AfDF - will hinge critically on the commitments made by G-8 nations to compensate for the loss of income flows in order to ensure the financial integrity of the two institutions. In this context, trade unions, especially those in the G-8 need to keep the pressure on their governments to redeem the pledges made at Gleneagles and maintain their contributions to IDA replenishments in real terms. Of course, this cannot be achieved without the support from trade union members at grass-root level, local debt campaigners and the general public, all of whom could be mobilised through local trade union networks.

Trade unions [13] can also make an important contribution to the success of debt relief by actively taking part in the design and implementation of poverty reduction programmes. In many countries, trade unions [14] have not yet had the opportunity to participate in the consultation process leading up to the development of poverty reduction strategies. It is important that they assert their right to participate in the process and are able to make a meaningful contribution, notably by highlighting the impact of the programmes on the vulnerable sections in society.

Furthermore, there is a manifest need for monitoring the public expenditure on health, education and infrastructure funded out of the increased resources made available to governments consequent upon debt relief. Trade unions, in close collaboration with other civil society organisations, need to keep a close watch on the use the governments make of the additional resources. The international trade union movement has contributed significantly to campaigns on a number of themes of global relevance - Child Labour, HIV/AIDS, Make Poverty History etc - and is in a position to make a significant difference to the campaign on debt relief.

Freeing up resources for development

Debt cancellation has enabled a number of countries to free up resources for development purposes, paving the way for achieving the Millennium Development Goals. President Benjamin Mkapa of Tanzania, addressing the 2005 Jubilee Debt Campaign Annual Conference, gave a graphic account of how his country had been able to substantially increase resources for health, education, water and infrastructure as a result of debt relief. He pointed out that the net enrolment ratio in schools in Tanzania rose from 58.8% in 2000 to 90.5 in 2004 and that 2,035 new schools had been built. Debt relief has enabled Uganda, inter alia, to provide access to clean water for 2.2m people. In Mozambique, immunization programmes have been expanded to cover all children following debt cancellation. There is growing evidence that debt relief provided under the HIPC and enhanced HIPC has been put to good use by recipient governments and that it has accelerated the progress towards the attainment of the MDGs.

Need for more relief

As the international trade union movement and many campaigners, notably, Jubilee Debt Campaign, have repeatedly pointed out, the relief provided under MDRI including the enhanced HIPC is grossly inadequate for it to have any significant impact on the magnitude of the unsustainable debt burden confronting low-income countries. According to some estimates [15] , the total stock of debts owed by low-income countries as at December 2005 stood at some USD 523bn. The total amount of debt relief agreed so far under the HIPC amounts to some USD 50bn, which leaves a large number of low-income countries still saddled with vast amounts of unsustainable debt. The total debt stock of African countries alone is estimated at around USD 300bn.

Moreover, debt relief has been a slow and painful process. It has taken 10 years for 21 countries to be granted meaningful debt relief while uncertainty still surrounds the position of another 10 countries currently receiving interim relief. The debt relief being granted by the African Development Fund is to be spread over a period of 50 years from 2004 to 2054 [16] . In addition, some of the conditions imposed by the international financial institutions on debtor nations in order to qualify for relief have proved to be harmful to the prospects of long-term development. Reductions in public expenditure on education, health and nutrition and infrastructure have had serious effects on human resources essential for development. While there is increasing emphasis on public participation and country ownership in initiatives supported through Poverty Reduction and Growth Facility of the IMF, criteria laid down by the international financial institutions have often conflicted with the objectives of pro-poor spending by governments.

It is also important to point out that debt cancellation schemes adopted so far by international financial institutions have not been comprehensive enough to cover all creditors -countries, banks, export credit agencies and other lending institutions. Bankers are unlikely to go out of their way to substantially reduce commercial debt without encouragement from governments. Governments, on the other hand, have been slow to act for their ostensible reluctance to intervene on commercial debt. Nevertheless, it is rather disingenuous to believe that they are indifferent to fiscal implications of debt write-offs.

Special Drawing Rights

It is evident that debt relief at the current rate will fail to have an impact on the need for development finance of a large number of low-income countries, which underscores the need for innovative schemes to increase resources for further debt cancellations. In this regard, an allocation of Special Drawing Rights (SDRs) for debt relief needs to be seriously considered by the IMF with the support of the World Bank and industrialized nations. The Fund is authorized to allocate SDRs to members in order to meet a global need for additional reserves. The debt crisis has caused immeasurable hardships and hampered development efforts of debtor nations. Although a special allocation cannot resolve the debt crisis as a whole, it could alleviate it to a significant degree without any additional cost to any nation. Critics have, in the past, argued against a new allocation on the grounds that it could be inflationary. According to the IMF, the inflation in the world economy has been very low in recent years. Moreover, even after the proposed one-off allocation of SDRs, the cumulative allocation of SDRs would constitute only a minute fraction of total international reserves [17] . Furthermore, the use of SDRs in international transactions is strictly limited to members and institutions designated by the IMF, which further limits its possible inflationary impact. The SDRs are normally allocated in proportion to the quota of the members of the IMF, which entitles developed countries to claim the lion's share of a possible allocation. Nevertheless, developed countries, if they wish, could forgo their use and re-allocate them to debtor nations for the purpose of debt relief. All proceeds could be credited to the HIPC Trust Fund or be handled through some other appropriate mechanism. A more imaginative use could also be envisaged; a special allocation of SDR 50bn could form the basis for a Trust Fund, out of which matching contributions could be made when debt relief is agreed, thereby doubling the value of debt relief.

Trade unions have an abiding interest in development, as they seek to bring about sustainable improvements in working and living conditions of workers and their communities through protection and promotion of their economic and social rights. Millions of workers, their families and communities are being denied their legitimate right to a better life, as governments of debtor nations, confronted with the consequences of unsustainable debt, reduce expenditure on essential public services. Trade unions, especially those in developed countries, need to support the campaign for debt relief in earnest, for they can make a real difference to its success.

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[1] Set of goals agreed by world leaders in 2000 to combat poverty, hunger, disease, illiteracy, environmental degradation and discrimination against women.

[2] When a country has made sufficient progress in meeting criteria set by the IMF/WB for debt relief, it has reached the 'decision point'; IMF/WB decide on its eligibility and recommend interim relief.

[3] The completion point is reached when the county has made further progress under IMF/WB-supported programmes. The country then becomes eligible to receive the totality of debt relief agreed at the decision point.

[4] Benin, Bolivia, Burkina Faso, Cameroon, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania, Uganda and Zambia

[5] Burundi, Chad, Democratic Republic of Congo, Republic of Congo, Gambia, Guinea, Guinea Bissau, Malawi, Sao Tome Principe and Sierra Leone.

[6] Cambodia and Tajikistan

[7] Central African Republic, Eritrea, Liberia, Nepal, Togo, Comoros, Côte d'Ivoire, Haiti, Kyrgyz Republic, Somalia, Sudan

[8] The countries wishing to avail themselves of the HIPC need to have started a reform programme supported by IMF/IDA between 1^st October 1996 and 31 December 2006. In other words, no new countries will be allowed into the process after 31 December 2006.

[9] Eritrea is the exception.

[10] The ICFTU also called for immediate debt relief for countries that respect core labour standard and for less emphasis on the performance of macroeconomic policies under the Enhanced Structural Adjustment Facility as condition for debt relief.

[11] Trade Union Statement to the 2006 Annual Meetings of the IMF and World Bank (Singapore, 19-20 September 2006)

[12] The new world body of the international trade union movement formed on 01 November 2006.

[13] There is emphasis on broad public participation and greater country ownership in programmes under the Poverty Reduction and Growth Facility.

[14] ICFTU has consistently called for opportunities for trade unionists to participate in consultations conducted by international financial institutions. See ICFTU/GUF Statement to the Spring 2004 Meetings of the IMF/World Bank.

[15] Estimates of debt stock based on their net present value (NPV) are subject to variations in interest rates .

[16] This is due to the fact that IDA loans are repayable over long periods - often 40 years .

[17] Total international reserves at the end of December 2004, according to the IMF, stood at SDR2.7 trillion. The proposed one-time allocation of SDR in accordance with the fourth Amendment to the Articles of Agreement to the IMF would raise the cumulative allocation of SDRs to 42.8bn or some 1.5% of the total.