Debt Cancellation Growth and Development

What is debt cancellation? DEBT CANCELLATION refers to cancelling the debt of heavily indebted countries as paying it off incurs a very high opportunity cost such as… Building hospitals Improving education and training Developing infrastructure

Who is the debt usually owed to? World Bank Governments Banks International Monetary Fund

Policies to reduce poverty Liberalisation on FDI inflows Privatisation and market reforms Devaluation of the domestic currency Macroeconomic stability Tax reforms/Fiscal discipline

What do the critics think? They argue that the stipulations are actually put in place to benefit western economies e.g devaluing a currency allows cheaper imports It is also said that the emphasis on free- markets is a western-style approach that may not be relevant to all countries and regions

What is HIPC? The HIPC initiative was started in 1996 by the IMF and World Bank with the aim of reducing the external debts of the poorest and heavily indebted countries of the world to sustainable levels Changes were made in 1999 to make the process quicker and deeper, as at this time only 4 countries had partially benefited 41 countries were identified as eligible for HIPC assistance and by the end of March 2009, 35 countries had benefited from debt relief

Arguments for debt cancellation Could help to conserve the environment Could help to reduce savings and foreign exchange gaps Could help to reduce absolute poverty Developing countries would have more foreign currency Money released from debt cancellation can be used to buy capital goods Can buy capital and consumer goods from developed countries which can help increase growth

Arguments against debt cancellation It can be less effective than introducing policies to reduce protectionism in developed countries Some governance is corrupt Compared with aid, it takes more time to agree a debt cancellation programme Sometimes conditions are not attached so there is no guarantee these countries will pursue sound macroeconomic policies Shareholders of banks in the developed world may bear some of the brunt of debt cancellation

Examples of heavily indebted countries GambiaMali Nicaragua BoliviaMalawi

Should we cancel it or not?