Debt relief

Debt Many of the world’s poorest countries are saddled with high levels of external debt owed to other governments, institutions such as the IMF and foreign companies, banks and individuals The near $5tn of external debts owed by developing countries costs them more than $1.5bn a day in repayments – and much of that comes from the poorest countries Most of the world’s poorest countries have limited access to international capital markets – their sovereign debt does not have an official credit rating Without conditional loans from the IMF, World Bank and others, they would have to pay interest rates many times higher on private sector loans Some developing countries have chosen to borrow from other emerging economies such as China or Brazil as a way of avoiding conditional loans from international institutions Countries with persistent trade deficits end up accumulating large external debts, so too a government where spending greatly exceeds annual tax revenue leading to high fiscal deficits A country defaulting on loans will find it harder and more expensive to attract future loans.

Savings gap and foreign exchange gap reminder Debt relief Many countries built up substantial external debts Servicing the debt (interest payments) means insufficient government revenue available to promote development (reduce poverty, improve education/healthcare etc) Link to savings gap and foreign exchange gap Current state Savings gap and foreign exchange gap reminder i) Many poorer countries do not have sufficient domestic savings to be able to finance the required rate of capital investment to promote economic growth ii) Many developing countries suffer from a shortage of foreign exchange that can be used to finance imports of consumer goods and services, raw materials and components and new capital inputs

Debt relief Benefits to cancelling or reducing debt: Funds spent on servicing and repaying debt can then be used to: Foster development, e.g. with investment (infrastructure, education, healthcare etc – each of these can be a full point in an essay) Alleviate poverty (absolute poverty now defined as $1.90) It may be in the long term interests of the developed world, since growth in the developing world means more and bigger markets for developed world firms (eg growth in Apple sales) Debt cancellation generally tied to conditions, eg evidence of low levels of corruption, increased spending on development and on measures to alleviate poverty Can also be tied to privatisation and other market opening/free market measures (so Dependency Theory advocates have an opportunity to criticise)

Debt relief Costs or risks of cancelling or reducing debt (evaluation!): Moral hazard - a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost. This means debt cancellation could encourage irresponsible borrowing by developing countries Comes at a cost to governments, and so to consumers and firms, in developed countries (which means an opportunity cost) Linked to the above, and like the debate on aid in the UK some argue we should reduce (relative) poverty in the UK before spending money to alleviate poverty elsewhere

Questions Why was the HIPC launched? What are the four conditions a country needs to be considered for HIPC Initiative Assistance? How many countries are currently receiving full debt relief? What are the benefits of the HIPC initiative? Where does the funding come from?

Debt cancellation programmes See print-outs Heavily Indebted Poor Countries Initiative (HIPC) launched in 1996 Aimed at ensuring no poor country has an unsustainable debt burden, and allowed for reducing debt from IMF and World Bank Country eligible if the debt burden could not be managed with traditional means Assistance provided subject to governments meeting a range of economic management and performance targets Supplemented by the Multilateral Debt Relief Initiative (MDRI) in 2005 (drawn up to help achieve Millennium Development Goals) Allows up to 100% relief on debt to IMF, World Bank and African Development Bank Just under 40 countries included in the programmes Total debt relief of about $130 billion by early 2013 Substantial reduction in debt service costs and increase in spending on development and poverty reducing measures (see sheet)