MPH The Debt Issue: A Summary

From its origins in the 1970’s, the burden of debt of the world’s poorest countries has become one of the single largest causes of poverty and exclusion in the world, it has drawn to action a vast array of individuals, movements, organisations, and leaders in a campaign of unprecedented size and diversity and has been forced on to the agendas of a reluctant group of international financial institutions and creditor governments who preside over these debts.

The campaign has pushed the compelling moral case for debt cancellation. Many of the original loans are of dubious legitimacy and point to irresponsible lending on the part of creditors yet are being paid back in terms of lost health, education, and lives of some of the poorest people on the planet, who more often than not, never benefited from the original loan. The debts have also spiralled to unpayable levels due to many factors out of the control of debtor governments.

The Heavily Indebted Poor Countries Initiative (HIPC), was the first plan for debt relief to focus on the poorest countries and to attempt to address all debts in one package.

The HIPC has ended an era of ad hoc and partial responses which simply rescheduled, restructured and recycled debts in a vicious circle, has brought new financial resources to the table, and has achieved real debt relief and improvements in some countries.

But the HIPC is based on an arbitrary, IMF-defined, economic measure of sustainability which does not consider the basic needs of the people of poor countries and which will still leave poor countries with huge and unsustainable debts. After 6 years of implementation, the HIPC initiative has finalised debt relief for just 6 countries out of 42, is failing to achieve even its own measure of debt sustainability and will continue to leave the poorest countries in the world spending more on debt servicing than on basic health and education draining both domestic government revenue and aid contributions from donor countries away from where they are most needed.

The inability of governments to meet debt servicing has been used to impose a set of standard macro-economic policy prescriptions known as Structural Adjustment Programmes (SAPs)which have been discredited as having worsened poverty and inequality in already poor countries and which were a major reason behind the slow progress on debt relief. Despite the damage caused by structural adjustment, conditionality has continued in the form of Poverty Reduction Strategy Papers (PRSPs). These are promoted as nationally owned strategies designed to resolve the problems of SAPs but they continue to have an underlying macro-economic framework which is not open for negotiation.

The failure to achieve an acceptable resolution of the debt burden would be astonishing were it not for the fact that the very institutions which take decisions on debt relief are overwhelmingly dominated by the large creditor governments, have governance structures based on shareholding, wealth, and power, and exhibit a lack of transparency and an historical inability to learn from failure or listen to critique.

New Zealand is not a creditor nation, has cancelled any debts we were owed, and has contributed generously to the HIPC Trust Fund. But beyond that, the New Zealand Government has assigned a low priority to debt cancellation, has not used our vote or voice to advance a more fundamental solution to the issue, and has opposed any extension of the current HIPC initiative or any reduction in the conditionality of debt relief.

Jubilee Aotearoa believes that people must be put first in any economic equation and the rights of the citizens in indebted countries take precedence over debt repayment. The world’s governments have signed up to the UN Millennium Development Goals, designed to halve poverty by 2015 and to have any hope of achieving these goals, Jubilee finds that fully 100% of the debts of HIPC countries must be cancelled and it should be immediate.

New Zealand should support the clear linking of debt with the Millennium Development Goals and the rights of the people of indebted countries and should research and monitor the affects of debt repayments and International Finance Institutions (IFIs) dictated policies on “debt sustainability” in all countries covered by its aid programme on the basis of those country’s ability to achieve these goals.

New Zealand should also pursue reform of the International Monetary Fund and the World Bank, to provide for a voice for poor countries commensurate with their population, not their economic wealth and should actively promote a fair, transparent, and independent process for resolving debt issues, at once protecting the rights of indebted countries and removing from creditors the decision-making power they currently exercise over questions of debt and debt cancellation.

1. So why is Debt a problem?

Debt is a problem because a large number (over 40) of the world's poorest countries now experience debts so large that they are impossible to pay. And in trying to repay them, poor country must choose between the desperate health and education needs of their people and obligations to send money overseas to rich banks and countries.

2. How does this affect people?

Poor countries that have huge debts must repay the interest and the original debt from their government's budget. This means that already very poor governments, must send precious money overseas, instead of funding education, health services, or assistance to small farmers and food producers. At community level, this means your children may not have a school, the teacher may not be paid, or there may be no books to learn from. Or it means poor rural communities lack access to a local clinic, or must pay for treatment and basic medicines, leaving the poorest without access. It is the world's poorest people who are repaying these debts, through lost health and livelihoods.

3. How did it get like this?

A few decades ago poor countries barely had any debts at all. But the sharp rise in oil prices in the 1970's meant that oil-producing nations suddenly had large amounts of cash to invest. Much of this money found its way into international banks, who loaned it to government of poor countries. The World Bank established an active programme of lending, encouraging poor countries to take huge loans for massive infrastructural projects - roads, dams and afforestation - much of it of questionable social and ecological value. Declining terms of trade (due to agricultural subsidies in rich countries), and drops in value of the currencies of poor countries have meant the repayments required of poor countries in overseas currency have spiralled. Many debts are now completely unpayable. But unlike normal commercial investments, governments for the most part, cannot go bankrupt. So regardless of whether countries are able to repay their debts, banks require them to pay.

4. But wasn't most debt cancelled in 2000?

After a huge, unprecedented global campaign for debt cancellation, the Year 2000 brought many announcements of debt relief. But by May 2003, three years after 2000, only 8 countries out of 41 had received substantial debt write off. International Monetary Fund (IMF) structural adjustment policies continued to hold up debt cancellation. Jubilee estimate that 19 out of 26 countries currently receiving debt relief will emerge without sustainable debt levels after all the relief they are eligible for. Despite some debt relief, poor countries have experienced an increase in the net flow of resources to rich countries due to new lending and reduced aid. Explore this further in “Did the G8 Drop the Debt?” (Adobe Reader PDF, 232kb)

5. Why is it taking so long?

There are many reasons for this. There is reluctance among rich country governments and the IMF/World Bank to relieve debt if the private sector lenders (banks and commercial lenders) do not also do their part. This is a big issue, because many of these debts are not currently being paid, and if only one group of lenders cancel debts, the money may just end up flowing to another group. For this reason, Jubilee calls for an independent Fair and Transparent Arbitration System which can include all lenders, as well as taking into account the rights of people in indebted countries.

Another reason for the delay is that many indebted countries also experience extreme poverty and associated conflict. Many of these countries find it very difficult to prepare a Poverty Reduction Strategy Paper which is required for debt relief. Many also are not prepared to implement the conditions attached to debt relief, and for this reason, do not receive assistance.

6. Who decides whether debt is cancelled?

Two organisations play a central role in debt relief. These are the World Bank and the International Monetary Fund, which were set up after World War II. These organisations lend money to poor countries, and hold some of the debts. (Other debts are held by rich country governments or by commercial lenders and banks). The problem here is that these two organisations are also lenders. It is not in their interests to cancel debt.

They are also not democratic. They are controlled by their shareholders, and the majority of shares are held by the rich G8 countries. That means that it is the lenders who take all the decisions on how borrowers should be treated.

7. What is a Structural Adjustment Policy?

Structural Adjustment was a term developed to describe a set of economic and social policy changes which poor countries were encouraged, or required, to follow in order to borrow money from the World Bank/IMF, or to receive any debt relief. They included deregulation of the labour market, liberalisation of trade and investment, sale and privatisation of state assets, introduction of user charges on basic services, and removal of subsidies or other forms of protection for domestic industries. Although the language of structural adjustment has been replaced with a new term: Poverty Reduction Strategy Papers (PRSPs), many of the original policy changes remain in place, and are cemented, or deepened through the PRSPs.

What do the experts say about Structural Adjustment Policies? Try reading the SAPRI report, an independent study initially commissioned by the World Bank/IMF but disowned after it began to come up with very negative findings.

8. But how can we be sure debt cancellation will benefit the poor?

Jubilee also wants to ensure that debt cancellation improves the lot of the poorest people in poor countries. Members of the international Jubilee Network undertake research on these issues, and work with local organisations in indebted countries to engage with governments on how debt relief should be used. While this process has had mixed benefits, the actual results of debt relief have been positive.

Debt relief has enabled Uganda to implement a universal primary education programme which has more than doubled enrolments from 2.9 million in 1997, to 6.5 million in 2002. Spending on poverty focused areas has risen from 18% in 1997 to around 35%. Mozambique introduced a free immunization programme for children. There is in fact, no evidence to show that debt cancellation is being used to fuel military expenditures which is a common claim for those opposing debt cancellation. Military expenditures in poor indebted countries show no increase over the period of debt relief.

9. So what should New Zealand do?

New Zealand is not a creditor nation, has cancelled any debts we were owed, and has contributed generously to the HIPC Trust Fund. But beyond that, the New Zealand Government has assigned a low priority to debt cancellation, has not used our vote or voice to advance a more fundamental solution to the issue, and has opposed any extension of the current HIPC initiative or any reduction in the conditionality of debt relief.

Jubilee Aotearoa believes that people must be put first in any economic equation and the rights of the citizens in indebted countries take precedence over debt repayment. The world's governments have signed up to the UN Millennium Development Goals, designed to halve poverty by 2015 and to have any hope of achieving these goals, Jubilee finds that fully 100% of the debts of HIPC countries must be cancelled and it should be immediate.

New Zealand should support the clear linking of debt with the Millennium Development Goals and the rights of the people of indebted countries and should research and monitor the affects of debt repayments and International Finance Institution (IFIs)dictated policies on"debt sustainability" in all countries covered by its aid programme on the basis of those country's ability to achieve these goals.

New Zealand should also pursue reform of the International Monetary Fund and the World Bank, to provide for a voice for poor countries commensurate with their population, not their economic wealth and should actively promote a fair, transparent, and independent process for resolving debt issues, at once protecting the rights of indebted countries and removing from creditors the decision-making power they currently exercise over questions of debt and debt cancellation.

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