PALACKÝ UNIVERSITY
FACULTY OF SCIENCE
DEPARTMENT OF GEOGRAPHY
INTERNATIONAL DEVELOPMENT STUDIES
PETRA KRYLOVÁ
DEBT RELIEF
Bachelor Thesis
Supervisor: Doc. RNDr. Pavel NOVÁČEK, CSc.
Olomouc, 2006
Palacký University
Faculty of Science
Department of Geography
Academic year: 2004/2005
PROPOSAL FOR BACHELOR THESIS
Student: Petra Krylová
Study Programme: International Development Studies
Title of thesis project:
Debt Relief
Covering outline:
I. Introduction
II. Body
1. Brief History of Third World Debt
2. Debt relief
• History
• The World Bank and the IMF conditions
• Paris Club, London Club
3. The Impact of Indebtedness on the environment and society in the developing
countries
• World Bank and the IMF practices
4. Debt Swaps
• Debt for Nature swaps
• Debt for Development swaps
• Successful projects
5. Model projects for the Czech Republic in:
• Debt for Nature Swaps
• Debt for Development Swaps
• Difficulties and Obstacles in Realization
III. Conclusion
• Evaluation of the current situation and contemporary debt relief initiatives
Extent of graphics: as needed
Extent of the report: 35 – 45 pages
List of relevant literature: will be compiled during the work
www.eurodad.org
Jubilee 2000
Database of the World Bank and International Monetary Fund
Supervisor: Doc. RNDr. Pavel Nováček, CSc.
Date of submission of thesis proposal: 2. 5. 2005
Completion Date: May 2006
................................................
Head of Department
Olomouc
Date: 2.5. 2005
..........................................................
Supervisor
I declare in lieu of oath that I wrote this thesis myself. All information derived from the work
of others has been acknowledged in the text and a list of references is given.
Olomouc, 15.5. 2006
...............................................
Signature
Acknowledgement
I would like to express special thanks to my supervisor Doc. RNDr. Pavel Nováček, CSc. for
his valuable advice and guidance. I would like to thank Mgr. Irena Skacelová for
constructive advice and Bc. Ondřej Sedláček for language correction and incredible patience
during my work on the thesis.
TABLE OF CONTENTS
Table of contents................................................................................................. 6
Table of figures ................................................................................................... 8
List of Abbreviations .......................................................................................... 9
1. Introduction................................................................................................. 11
2. Methodology ................................................................................................ 12
3. Brief history of the third world debt ......................................................... 13
3.1 The external causes of indebtedness ....................................................... 13
Global recession ........................................................................................ 14
Tariff barriers............................................................................................. 14
Oil crises .................................................................................................... 14
Interest rates skyrocketed .......................................................................... 15
Bipolar division ......................................................................................... 15
3.2 The Internal Causes of indebtedness....................................................... 15
Mismanagement......................................................................................... 15
White elephants ......................................................................................... 16
Corruption.................................................................................................. 16
3.3 Odious debts ............................................................................................ 16
Apartheid-caused debt ............................................................................... 17
3.4 The Debt Crisis........................................................................................ 17
3.5 The Third World debt today.................................................................... 18
4. Key terms ..................................................................................................... 19
4.1 Types of debt ........................................................................................... 19
4.2 Classification of indebtedness................................................................. 21
5. Who is running the show? .......................................................................... 23
5.1 World Bank ............................................................................................. 23
5.2 The World Bank Group........................................................................... 24
5.3 The International Monetary Fund ........................................................... 27
5.4 Regional Development Banks................................................................. 30
Inter-American Development Bank (IDB)................................................ 30
African Development Bank (AfDB) ......................................................... 30
Asian Development Bank (ADB).............................................................. 31
European Bank for Reconstruction and Development (EBRD)................ 31
5.5 Paris Club ................................................................................................ 32
5.6 London Club............................................................................................ 33
6. Debt relief: The never ending story........................................................... 34
6.1 Case-by-case approach............................................................................ 34
6.2 The Baker Plan ........................................................................................ 35
6.3 The Brady Plan........................................................................................ 36
6.4 Toronto Terms......................................................................................... 37
6.5 London Terms ......................................................................................... 38
6.6 Houston Terms ........................................................................................ 39
6.7 Naples Terms........................................................................................... 39
6.8 HIPC Initiative ........................................................................................ 40
6.9 Lyon Terms ............................................................................................. 42
6.10 Cologne Terms ...................................................................................... 42
6.11 MDRI..................................................................................................... 43
10. If there is a will, there is a way ................................................................ 45
11. The impact of indebtedness on the environment and the society of the
debtor countries............................................................................................... 48
11.1 Structural Adjustment Programs ........................................................... 48
11.2 The impact of SAPs on the society ....................................................... 49
11.3 The impact of SAPs on the environment .............................................. 52
11.4 Other factors .......................................................................................... 59
12. A different alternative .............................................................................. 64
12.1 Debt conversions ................................................................................... 64
12.2 Debt for nature swaps............................................................................ 65
Successful Examples of Debt for Nature Swaps ....................................... 66
12.3 Debt for development swaps ................................................................. 67
Successful Example of Debt for Development Swaps .............................. 69
13. Conclusions for the Czech Republic........................................................ 72
13.1 Model Projects....................................................................................... 76
Debt for Nature Swap ................................................................................ 76
Debt for Development Swap ..................................................................... 79
14. Conclusion.................................................................................................. 81
15. Summary.................................................................................................... 82
16. List of references ....................................................................................... 82
17. Annexes ...................................................................................................... 92
7
TABLE OF FIGURES
Fig 1. Number of countries not servicing all their foreign debts,
17
by region, 1970 - 1999
17
Fig 2. Amount of debts by region, 1970 - 2003
18
Fig 3. Short-, medium- and long-term debt as percentage of the total external
debt, as of 2003
20
Fig 4. Medium and long term debt
20
Fig 5. SILICs, MILICs, SIMICs, MIMICs, LILICs, or LIMICs, as of 2005 22
Fig 6. OECD countries voting power in the WBG
26
Fig 7. Members with Ten Largest Quotas
28
Fig 8. Industrial Promotion vs. Pollution Control
55
Fig 9. Gross Domestic Product per Capita in Latin America and Africa,
60
1950-1999
60
Fig 10. Share of Government Spending Covered by Foreign Borrowing and
Devoted to Foreign Debt Service and Basic Social Services, Selected
Countries, 1996-97
62
Fig 11. Debt for nature swap in the Philippines
66
Fig 12. UNICEF debt-for-child development swaps
68
Fig 13. Debt-for-Development: Senegal
69
Fig 14. Countries owing debts to Czech Republic, 2005 (mil. CZK)
73
Fig 15. Debt Outstanding Serbia Montenegro
74
Fig 16. Debt for nature swap, Czech Republic
78
Fig 17. Debt for development swap, Czech Republic
80
8
LIST OF ABBREVIATIONS
ADB
Asian Development Bank
ADMARC
Agricultural Development and Marketing Corporation
AfDB
African Development Bank
EBRD
European Band for Reconstruction and Development
ECA
Export Credit Agencies
ESAF
Enhanced Structural Adjustment facility
HIPC I, II
Heavily Indebted Poor Countries Initiative I, II
IBD
Inter-American development Bank
IBRD
International Bank for Reconstruction and Development
ICSID
International Centre for Settlement of Investment Disputes
IDA
International Development Association
IFC
International Financial Corporation
IFIs
International Financial Institutions
IMF
International Monetary Fund
LILIC
Low Indebted Low-Income Countries
LIMIC
Low Indebted Middle-Income Countries
MDGs
Millennium Development Goals
MIGA
Multilateral Investment Guarantee Agency
MILIC
Moderately Indebted Low-Income Countries
MIMIC
Moderately Indebted Middle-Income Countries
MDRI
Multilateral Debt Relief Initiative
MPLA
Movimento Popular de Libertação de Angola
NGO
Non-governmental organization
OECD
Organization for Economic Co-operation and Development
PRFG
Poverty Reduction Growth Facility
PRSP
Poverty reduction Strategy Paper
SAF
Structural Adjustment Facility
SAL
Structural Adjustment Loans
SAP
Structural Adjustment Program
SECAL
Sectoral Adjustment Loans
SILIC
Severely Indebted Low-Income Countries
SIMIC
Severely Indebted Middle-Income Countries
9
UNCTAD
United Nations Conference on Trade and Development
UNICEF
United Nations Children’s Fund
UNITA
União Nacional para a Independência Total de Angola
WB
World Bank
WBG
World Bank Group
WDM
World Development Movement
WWF
World Wide Fund for Nature
10
1. INTRODUCTION
Everybody would agree that debts should be repaid. The word ‘credit’ comes
from a Greek word ‘believe’. If I lent any of my belongings to anybody I believe I
will receive them back as soon as they fulfil their purpose. However, should all debts
be repaid?
At the beginning of the 21st century the developing countries debt amounted
$2.5 trillion. On the contrary, development assistance provided by the developed
countries was only $60 billion. These debts might have long history reaching to the
colonial times, some of them disappeared along the way and never reached their
destination while others sit and wait in foreign accounts of many dictators. Yet, they
still have to be repaid, by the people who live in the less fortunate part of the world
and a majority of them has to survive on less than $2 a day. Natural resources are
being exhausted in order to provide hard currency for debt repayments. Governments
have to cut their health and education budgets to save as much as possible. The
developed countries are, on one hand providing development assistance, on the other
hand they are receiving debt repayments that could have been invested in sustainable
development.
The aim of the thesis is to demonstrate possible solutions to the debt burden,
which can also help preserve the environment and promote development. Debt for
sustainable development swaps have been realized successfully in many developing
countries. Two model projects have been created in order to show the different
options of how debt swaps can be realized, especially from the Czech point of view.
The work summarizes the current situation, looks deeply at the debt relief attempts
that have been applied so far, and analyses the impact of the debt burden on the
environment and civil society in the developing countries. The work aims to provide
overall information about the debt situation.
I believe this work will support many environmental and development nongovernmental organizations as well as government and academic institutions in their
fight for debt cancellation, environmental protection and development promotion. I
hope debt for sustainable development swaps will become widely used not only by
the creditor governments and large international agencies but also by small-scale
organizations.
11
2. METHODOLOGY
The Bachelor Thesis is a research-compilation work leading to the analysis of
the problem and possible solutions. The work was created using various methods of
gathering information. First, the author’s participation in a number of international
and national seminars and workshops namely Eurodad Annual Conference taking
place from 30th November to 3rd December 2003 in Prague, Controversial
International Debts organised by the Ecumenical Academy Prague from 14th to 15th
October 2005 in Prague and Project Cycle Management seminar organised by
Development World Wide in Prague from 8th to 9th December 2005. Second, the
author’s internship at the Development Centre of the Institute of International
Relations Prague over a one-month period in summer 2005. The Centre’s and
Institute’s library resources have been a valuable source of information. Third,
personal communication with the Ministry of Finance, Department of Development
Co-operation and International Claims in April 2006. Other sources of information
included book resources, articles from the Palacky University Online Resources and
mainly internet resources such as World Bank, International Monetary Fund,
WorldWatch Institute, Organization for Economic Co-operation and Development,
Paris Club, development and environmental NGOs’ webpages.
The thesis compiles and analysis available information. The author’s views on
particular subjects are presented as part of the thesis. The author also attempts to seek
possible solutions to the discussed problem; therefore model projects created by the
author form a part of the work.
Footnotes and annexes are used to provide the reader with additional
information on the discussed subject and to explain in detail more complex
information that was used in the text.
12
3. BRIEF HISTORY OF THE THIRD WORLD DEBT
No one can exactly estimate when the first debts came into existence.
However, once people commenced trading between each other, we can presume that
they also begun to borrow the means of trade, be it cattle, crops or later money.
The history of the third world countries’ debt has its origins even before the
respective countries were born. At the time of colonial suppression, European empires
engaged in debt arrangements mainly with the purpose to help themselves to natural
resources located in the colonized territory (to build infrastructure, mines etc.), and
also to finance wars (usually to fight the pro-independence movements which was for
instance the case of Indonesia). When vast majority of these territories became
independent countries at the turn of the 1960s, it is estimated that the newly-born
sovereign states already owned $59 billion in external public debt. Furthermore, the
debt increased rapidly due to interest rates set at 14% per annum. (Guissé, 2004;
Wikipedia, 2006c)
Trying to eliminate poverty and get their countries on the right track to
development (Ferraro & Rosser, 1994), repaying previous debts (Guissé, 2004) and
being pushed by the 1970’s widely-believed paradigm of limitless growth (Budde-Iser
et al., 2004:9) were, in my opinion, the three main reasons the Third World countries
have taken on other debts.
Unlike many have perceived, the political and economical surroundings of the
1970’s did not prove development-friendly. According to the authors of Spravedlivé
oddlužení (Budde-Iser et al., 2004:9), we can distinguish two types of causes,
internal and external, why debts did not bring the intended results and furthermore
increased the debt burden.
3.1 The external causes of indebtedness
External causes can be classified as international circumstances that and were
not in any way affected by the debtor countries.
13
Global recession
In the 1970’s and 1980’s the world demand for primary commodities (main
export products of developing countries) dropped due to world economic recession.
This resulted in lower prices for such stock. In order to balance the export revenues
the developing countries had to export more which furthermore led to deeper decrease
of prices. (Budde-Iser et al., 2004:9)
Terms of trade index which measures how much countries can import with the
earnings from a given volume of their exports dropped from 100 in 1970 to 76 in
1985 and partially recovered to 85 by late 1990’s. (Roodman, 2001:33)
Tariff barriers
Due to recession, the developed countries were trying to secure their markets
by implementing various subsidies, import taxes and tariffs, thus making exports from
developing countries more expensive, and hence unbeneficial. The World Bank
estimates that if these barriers were erased today it would raise export earnings of the
developing countries by $100 billion a year, which would have been enough to repay
all the debts had it been occurring since 1982. “In effect, rich countries have
demanded that poor countries repay debts but refused the goods offered as payment,”
concludes D. Roodman (2001:34).
Oil crises
An important aspect of a developing-country’s debt before the oil crisis was
that majority of it was owed to bilateral and multilateral agencies, in particular the
IMF and the World Bank. These institutions intended to receive the given loans and
additional interest back, and therefore they made sure the investment was spent on
prospective projects. The oil crises in 1973 and later 1979 have had a number of
effects on the debt situation of the developing countries. Firstly, the oil products
became more expensive, thus raising costs for energy imports and subsequently
increasing prices of all commodities that required energy for their production.
Secondly, after the crisis commercial banks were full of ‘petrodollars’ from the oilproducing countries. Having spare resources banks sought ways to make as much
profit as possible and issuing loans seemed the most profitable at that time. On the
other side, the developing countries welcomed financial injection in order to cope
with the increased oil prices and high inflation while oil-exporting countries wanted to
14
make as much profit as possible from their freshly accumulated wealth. One way or
the other, in the long term these loans did not generate any income to pay off the debt
because they were primarily used to handle the above mentioned situation, and not for
investment. (Ferraro & Rosser, 1994)
Interest rates skyrocketed
Due to several reasons such as the world economic recession as well as the
arms race which the USA funded mostly by loans, at the beginning of the 1980’s the
interest rates increased by 50% in nominal terms and 75% in real terms according to
UNCTAD. Taking into account lower earnings of the developing countries and higher
expenses on oil products, high interest rates resulted in more loans to cover the
previous ones, thus getting into the vicious circle of indebtedness. (Ferraro & Rosser,
1994; Budde-Iser et al., 2004:9)
Bipolar division
The ‘Cold’ War in the northern hemisphere was not so cold for the rest of the
world. Both the USA and the USSR were trying hard to win the hearts of other
leaders by providing them with either arms or finances, not being concerned with how
they were used. As a result developing countries generated more and more debt (in
some cases also odious debt – see Odious debt, p. 12). In the case of Angola each of
the superpowers were supporting different fighting group 1 thus indirectly waging a
very ‘hot’ war between them. (Budde-Iser et al., 2004:9; Wikipedia, 2006b)
3.2 The Internal Causes of indebtedness
Internal causes can be described as mistakes of the debtors but in some cases
also the lenders.
Mismanagement
Many developing countries tried to modernize as soon as possible. They
focused mainly on assets which Catherine Caufield calls the ‘talismans of change’
such as dams, pipelines, railways and roads. To be done properly, these ‘talismans’
require skilled workforce and capable government which is something developing
1
USA supporting UNITA and USSR supporting MPLA
15
countries do not have. When Mozambique became independent its Ministry of
Education had five employees and was managed by a 23-year old minister. Tanzania
spent $2 billion constructing roads which fell apart almost as fast as they were made
due to insufficient maintenance. The World Bank estimates that only 29% of Bankfinanced projects in Africa in the 1990’s were considered as likely to benefit longterm development. (Roodman, 2001)
White elephants
Large sums of money were spent on useless and harmful but at the same time
expensive projects such as the nuclear power plant in the Philippines which cost $2.3
billion. It was built in Bataan which is one of the most geologically active places on
Earth. Thirty years later the government is still paying off the debt for a project that
did not produce a cent. (Columban Missionaries, 2002)
Corruption
Despite of corrupted governments, international institutions and especially
USA and the USSR borrowed money to such leaders. Promising his alliance to the
West, Mobutu Sese Seko generated roughly $5 billion in personal wealth
(Transparency International, 2004) while now-a-days the Democratic Republic of
Kongo owns a $11 billion debt – each resident owns $180 and GDP per capita is
$105 2 . Majority of these loans was used for weapons and armies. (Roodman, 2001)
3.3 Odious debts
Odious debts include some of the causes described above, both internal and
external such as bipolar division, white elephants and corruption. The doctrine of
odious debts was formalised by Alexander Sack in 1927. Odious debts, as described
by Jubilee Iraq (2006), are taken “without the consent of the people and not spent in
their interests and when the creditor is aware of this”. In order to classify debt as
“odious” all three conditions have to be met. (Jubilee Iraq, 2006)
2
Author’s calculations, using Debt and GDP figures – World Bank World Development Report 2006,
population estimate – CIA, The World Factbook.
16
Apartheid-caused debt
The former South African government borrowed large sums of money in order
to maintain apartheid. Already in 1973 the United Nation described apartheid as a
crime against humanity. Therefore, the South African debt can be classified as
‘odious’. It is estimated that when the new democratic government was installed in
1994 it inherited $11.3 billion in foreign debt. This debt was mainly owed to other
governments and private companies. Today, the South African government debt is
almost $28 billion, of which more than one third falls under the definition of ‘odious’
debt. (ACTSA, 1998; WB, 2005b)
3.4 The Debt Crisis
In August 1982 Mexico declared itself unable to pay the debt service. This
moment is considered as the beginning of the developing world debt crisis. A couple
months later Brazil, Argentina and other countries found themselves in the same
situation and were offered the same solutions. International Financial Institutions
(IFIs) as well as governments of other countries tried to find various ways to manage
the crises (see Debt relief: The never ending story). However, their solutions only
postponed the situation but did not solve it.
Fig 1. Number of countries not servicing all their foreign debts,
by region, 1970 - 1999
Source: Roodman D. (2001), Still waiting for the Jubilee
17
3.5 The Third World debt today
According to the 2006 World Development Report, in 2003 the developing
countries owed 2.554 trillion dollars in external debt. Of this 414 billion belong to
low income, 1.053 trillion to lower middle income and 1.085 trillion to upper middle
income countries. The most indebted region is Latin America and the Caribbean
owing 779 billion. (WB, 2005a)
Fig 2. Amount of debts by region, 1970 - 2003
3,000
2,500
2,000
1,500
1,000
500
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
90
19
80
19
19
70
0
All developing countries
East Asia and Pacific
Eastern Europe and Central Asia
Latin America and Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Source: author, using World Bank Global Development Finance (2002, 2005a)
18
4. KEY TERMS
Key terms are aimed to provide basic information about the debt terminology
which is used in the thesis. Types of debt as well as classification of indebtedness are
explained in this section.
4.1 Types of debt
There are several types of debt depending on numerous factors. A debt can be
external or domestic. External debt can be described as “a part of the government
debt of a country which is owed to creditors outside the country”. Depending on the
debtor we can distinguish two types of debt - public and private. The first is owed by
the public and the latter by the private sector. Depending on the creditor we can
classify three types of debts:
ƒ
Multilateral – Multilateral debts are owed to international financial
institutions such as the International Monetary Fund, World Bank and the
regional development banks.
ƒ
Bilateral – Bilateral debt (also called official debt) is owed to governments or
their appropriate institutions. These debts are the result of either credit granted
to the developing countries to finance exports, or direct loans which may be
under concessional or market terms.
ƒ
Private – Private debts are owed to the private sector institution such as
commercial banks, bondholders and suppliers.
(Paris Club, n.d.)
19
According to the World Bank 2005 Global Development Finance and the Paris Club
the developing countries debt can be broken as follows:
Fig 3. Short-, medium- and long-term debt as percentage of the total external
debt, as of 2003
short-term
debt
16%
mediumand longterm debt
84%
Source: author, using WB (2005), Global Development Finance
Fig 4. Medium and long term debt
Medium and long term debt outstanding
Public and publicly guaranteed
Official creditors
Multilateral creditors
Bilateral creditors
Private creditors
Private non guaranteed
Source: Paris Club (n.d.), Types of debt
20
2003
2 152 100%
1 557 72%
933
488
445
624
595 28%
4.2 Classification of indebtedness
The World Bank recognizes several levels of indebtedness. In general,
indebtedness is measured according to two ratios:
•
The ratio of the present value of total debt service to average GNI;
•
The ratio of the present value of total debt service to average exports
(including worker remittances).
The critical rate for debt service to GNI ratio is defined as 80%, and for debt
service to exports it is 220%. If a country exceeds either of these measures it is
classified as severely indebted. If a country does not go over these thresholds but its
level of indebtedness is as high as three fifths of the critical value, being precise 48%
of debt service to GNI and 132% of debt service to exports, it is classified as
moderately indebted. If the level of indebtedness is lower than three fifths of the
critical value, then the country is classified as less indebted. (WB, 2002)
Countries are also classified by the level of income. According to 2003 GNI
per capita we can distinguish:
•
Low-income countries – those with $765 GNI per capita or less;
•
Middle-income countries – those with per capita GNI between $766 and
$9,385;
o Lower middle-income – $766 - $3,035;
o Upper middle-income – $3,036 - $9,385;
•
High-income countries – countries with more than $9,386 GNI per capita.
(WB, 2005)
Putting together these criteria we can recognize several groups of countries:
•
Severely indebted low-income countries (SILICs);
•
Moderately indebted low-income countries (MILICs);
•
Severely indebted middle-income countries (SIMICs);
•
Moderately indebted middle-income countries (MIMICs);
•
Less indebted low-income countries (LILICs);
•
Less indebted middle-income countries (LIMICs).
21
According to World Bank, Global Development Finance 2005, the following
countries were classified as SILICs, MILICs, SIMICs, MIMICs, LILICs, or LIMICs.
Fig 5. SILICs, MILICs, SIMICs, MIMICs, LILICs, or LIMICs, as of 2005
Severely
indebted
low-income
countries
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
Angola
Bhutan
Burundi
Central
African
republic
Chad
Comoros
Congo, Dem.
Rep. of
Congo, Rep.
of
Cote
d’Ivoire
Eritrea
Gambia, The
Guinea
GuineaBissau
Kyrgyz
Republic
Lao PDR
Liberia
Malawi
Myanmar
Rwanda
Sao Tome
and Principe
Sierra Leone
Somalia
Sudan
Tajikistan
Togo
Zambia
Zimbabwe
Severely
indebted
middleincome
countries
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
Argentina
Belize
Brazil
Bulgaria
Croatia
Dominica
Ecuador
Estonia
Gabon
Grenada
Guyana
Indonesia
Jordan
Kazakhstan
Latvia
Lebanon
Maldives
Panama
Peru
Samoa
Serbia and
Montenegro
Seychelles
St. Kitts and
Nevis
Syrian Arab
Republic
Turkey
Uruguay
Moderately
indebted
low-income
countries
Moderately
indebted
middleincome
countries
Benin
Burkina Faso
Cambodia
Cameroon
Ethiopia
Kenya
Madagascar
Mauritania
Moldova
Mongolia 3
Niger
Nigeria
Pakistan
Papua New
Guinea
o Solomon
Islands
o Uganda
o Uzbekistan
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
Bolivia
Cape Verde
Chile
Colombia
El Salvador
Honduras
Hungary
Jamaica
Lithuania
Malaysia
Mauritius
Paraguay
Philippines
Poland
Russian
Federation
Slovak
Republic
Sri Lanka
St. Lucia
St. Vincent
and the
Grenadines
Tunisia
Turkmenistan
Venezuela, R.
B. de
Less
indebted
low-income
countries
o Bangladesh
o Equatorial
o
o
o
o
o
o
o
o
o
o
o
o
Guinea
Ghana
Haiti
India
Lesotho
Mali
Mozambique
Nepal
Nicaragua
Senegal
Tanzania
Vietnam
Yemen, Rep.
of
Less
indebted
middleincome
countries
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
Albania
Algeria
Armenia
Azerbaijan
Barbados
Belarus
Bosnia and
Herzegovina
Botswana
China
Costa Rica
Czech
Republic
Djibouti
Dominican
Republic
Egypt, Arab
Rep. of
Fiji
Georgia
Guatemala
Iran, Islamic
Rep. of
Macedonia,
FYR
Mexico
Morocco
Oman
Romania
South Africa
Swaziland
Thailand
Tonga
Trinidad and
Tobago
Ukraine
Source: author, using World Bank (2005a), Global Development Finance 2005
Although these criteria define the level of indebtedness they should be used
carefully because for instance they do not indicate the debt servicing capacity of a
country, and a minor change in the criteria or in one of the used indicators changes the
country’s status. (WB, 2002)
3
Classification excludes the effect of Russian Debt Settlement
22
5. WHO IS RUNNING THE SHOW?
After two disastrous world wars and the Great Depression in 1930s world
leaders realized there was a need for international institutions that would set basic
rules and principles for economic cooperation in order to prevent such events
happening in the future.
In July 1944, before the actual creation of the United Nations, 44 government
representatives met at a conference in Bretton Woods, New Hampshire, USA. That is
when the International Monetary Fund (IMF) and the World Bank (WB) were formed.
Due to the location of their inception the IMF and the WB are also called “the Bretton
Woods institutions”.
5.1 World Bank
The World bank mission now-a-days is “to fight poverty with passion and
professionalism for lasting results – to help people help themselves and their
environment by providing resources, sharing knowledge, building capacity and
forging partnerships in the public and private sectors” (WB, 2006c) .
The evolution of the World Bank, as we now it today, has been a long process.
At first the bank consisted of only one institution – The International Bank for
Reconstruction and Development (IBRD) whose initial role was to help rebuilt the
devastated post-war Europe. The first loan for reconstruction was given to France in
1947. (World Bank, 2006b)
Within 10 years of its existence the Bank realized Europe is not the only
continent that is in need for financial help and therefore partially directed its attention
to the poorest countries. Knowing the developing countries would not be able to
borrow money under the existing terms of the IBRD the members of the WB decided
to create a new institution whose focus would be on lending money to the poorest
countries under the most auspicious terms. The International Development
Association (IDA) was agreed to be a part of the Word Bank (in order to keep the
same regulations for both institutions) and became operational in 1960. IDA borrows
23
money to 81 4 poorest countries in the world and also provides them with technical
assistance. IDA credits are issued for 20, 35 or 40 years with a 10-year grace period
before repayments of principal commence. There is a small service charge for the
issued credits. (WB, 2006a, d)
The International Bank for Reconstruction and Development and The
International Development Association function according to the same principles 5 and
together they form the World Bank.
5.2 The World Bank Group
As the issues the original World Bank had to deal with expanded, there was a
need for more specialized agencies that would take on the specific issues.
In 1956 The Interantional Finanacial Corporation (IFC) was born. The
IFC focuses mainly on private sector investment and market creation in the
developing countries, it is the so called “private sector financing arm of the World
Bank Group”. As stated in their definition, “the IFC’s objective is to stimulate
economic growth in developing countries by promoting private sector investment. It
provides equity, long-term loans, structured finance and risk management products,
and advisory services to its clients. It provides finance in markets deemed too risky
for commercial investors in the absence of IFC participation and adds value to the
projects it finances through its corporate governance, environmental and social
expertise. It is the largest multilateral source of debt and equity financing for private
enterprise in developing countries”. (WBG, 2006a)
Considering the World Bank was the only international organization directing
the economic cooperation in the world, more and more often it also had to deal with
disagreements between states and the private sector concerning economic matters.
This was one of the main reasons why in 1966 another institution appeared in the
4
Eligibility criteria for IDA funding:
ƒ Relative poverty, defined as GNP per capita below an established threshold, US$965 (as of July 1,
2005).
ƒ Lack of creditworthiness to borrow on market terms and therefore a need for concessional resources
to finance the country's development program.
ƒ Good policy performance, defined as the implementation of economic and social policies that
promote growth and poverty reduction.
5
IBRD and IDA share the same personnel, have the same president and evaluate projects on the same
basis.
24
World Bank Group family. The International Centre for Settlement of Investment
Disputes (ICSID) was set up to take over the settlement of investment disputes
through conciliation and arbitration and by doing so promoting increased flows of
international investment. (ICSID, 2006)
The 1980’s is characterized by intense changes in the world economy such as
the free markets, and also by a major recession. These changes also affected the
developing countries and foreign investors did not have the ability to deal with the
political risks related to investment in the developing countries. In order to cope with
the situation the last member of the World Bank Group which joined in 1988 was The
Multilateral Investments Guarantee Agency (MIGA). MIGA’s main purpose was
“to provide political risk insurance (guarantees), offering investors protection against
non-commercial risks such as expropriation, currency inconvertibility, breach of
contract, war and civil disturbance”. (WBG, 2006b)
The World Bank Group consists of 5 closely affiliated agencies – IBRD and
IDA (which together form the World Bank), IFC, ICSID and MIGA. Each one of
these institutions has different financial resources and many different ways of lending.
Decision making
As stated in the description of the World Bank Group (WBG, 2006a) “…all[of
the five World Bank Group institutions][are] owned by member countries that carry
ultimate decision making power.”
In my opinion, only part of this statement is fully true. I do agree that the
World Bank Group, to be more precise the 5 concerned institutions, are owned by
member countries but do all member countries carry the decision making power
equally?
The voting power is divided proportionally among all members according to
their contribution to the agency. Above all it means that rich countries have more
votes than poor countries and thus have the ability to pursue their decisions more
25
effectively. As we can see in the table bellow, in all institutions the OECD countries 6
own above 50% of the total votes.
Fig 6. OECD countries voting power in the WBG
(as of 2005) OECD members
Non OECD members
Number of members
IBRD
61.52%
39.48%
184
IDA
62.19%
37.81%
165
MIGA
56.06%
43.94%
167
IFC
70.38%
29.62%
178
ICSID
Not applicable
Not applicable
143
Source: Author’s calculations using data from IFC (2005), WB (2005a, b), MIGA (2004)
6
OECD – Organization for Economic Cooperation and Development – member countries as of
6.4.2006: AUSTRALIA, AUSTRIA, BELGIUM, CANADA, CZECH REPUBLIC, DENMARK,
FINLAND, FRANCE,GERMANY, GREECE, HUNGARY, ICELAND, IRELAND, ITALY, JAPAN,
KOREA, LUXEMBOURG, MEXICO, NETHERLANDS, NEW ZEALAND, NORWAY, POLAND,
PORTUGAL, SLOVAK REPUBLIC, SPAIN, SWEDEN, SWITZERLAND, TURKEY, UNITED
KINGDOM, UNITED STATES
26
5.3 The International Monetary Fund
As already mentioned above, the IMF was together with the World Bank
conceived at the Bretton Woods conference in 1944. It came into existence a year
later when the first countries signed the Articles of Agreement. Although it had
undergone numerous changes due to the transforming world economics and trade, its
purposes remain the same as they were at the time of the Funds conception.
According to the Article I of the Articles of Agreement (IMF, 2004a) the IMF’s
purposes are as follows:
•
promoting international monetary cooperation;
•
facilitating the expansion and balanced growth of international trade;
•
promoting exchange stability;
•
assisting in the establishment of a multilateral system of payments; and
•
making its resources available (under adequate safeguards);
•
shortening the duration and lessening the degree of disequilibrium in the
international balances of payments.
The IMF’s main activities include monitoring economic and financial
development and policies in member countries as well as on global level and also
providing member states with policy advice. Financial assistance belongs to one of
the Fund’s core instruments to help member countries with balance of payments
problems. While the World Bank’s loans could be overall classified as long-term
development-focused, the IMF’s lending is characterized by the contrary – short-term
basis loans with the emphasis on the balance of payments and a country’s
international reserves. Technical assistance and training form integral parts of the
Fund’s activities offering governments and central banks of the member countries a
wide range of expertise. (IMF, 2004a)
27
Funding and Decision making
Currently, there are 184 countries members of the IMF. Vast majority of the
Fund’s finances come from the member states in the form of capital subscriptions
(also called quota). Quotas should reflect relative size of a country in the world
economy - the stronger the economy the higher quota. For instance, the United States
of America quota accounts for almost one fifth of the total subscriptions.
Quotas not only establish how much money members pay in but also how much
money they are entitled to receive from the Fund, and furthermore how much voting
power they have. (IMF, 2004a)
Fig 7. Members with Ten Largest Quotas
Source: IMF (2004), What Is the International Monetary Fund?
From Trust Fund to PRFG
The IMF has been providing financial assistance to developing countries under
favourable terms since mid 1970’s. In 1975 the Oil Facility Subsidy Account was
created to help countries overcome the oil crisis. A year later the so called Trust Fund
came into existence. The Trust Fund as well as the oil Facility were financed through
separate resources other’s than the IMF’s general resources. The capital for the
Facility was attained through contributions of 25 member countries and the necessary
financial resources for the Trust Fund were acquired by selling some of the Fund’s
stock of gold. The Trust Fund’s role ended in 1981 and the Facility stoped operating
two years later. However, the situation in many developing countries was not
changing for the better, rather the contrary, so the Fund applied number of facilities in
28
order to provide financial assistance to the low-income countries. In March 1986 the
Structural Adjustment Facility was created to take over the Trust Fund’s role. A year
later the SAF was reviewed and the Enhanced Structural Adjustment Facility was
conceived and lasted for more than a decade. Countries with IDA-only borrowing
status were eligible for ESAF funding, which indicated 80 countries. Those were able
to borrow a maximum of 140% of their IMF quota 7 and 0.5% annual interest rates
with repayments starting after 5 years and ending after 10 years. In 1999 ESAF was
replaced by Poverty Reduction Growth Facility which provides assistance to member
countries in applying their Poverty Reduction Strategy plans. (Boughton, 2001; IMF,
2004b)
7
The limit of 140% could be increased under exceptional circumstances to 185% of the IMF quota.
29
5.4 Regional Development Banks
Inter-American Development Bank (IDB)
The IDB was established in 1959 as a first regional development bank. Today,
Ida is the largest RDB with 46 members, of which more than half (26) comes from the
Latin American and the Caribbean region. IDA is a member of the Inter-American
Development Bank Group which includes 3 other institutions.
The Bank’s mission is to ”contribute to the acceleration of the process of
economic and social development of the regional developing member countries,
individually and collectively.” With the aim of fulfilling its objective IDA focuses on
4 main areas: encouraging competitiveness, social development programmes
(education, drinking water, micro credits, etc.), modernizing the state with the purpose
of good governance, and fostering regional economic integration. Overall IDA is the
main financial source in the respective region. (IDB, 2006; SADC, n.d.)
African Development Bank (AfDB)
The AfDB was founded five years after its American colleague – IDB, with
the intentions to support social and economic development in the African region.
Currently it has 77 member countries from different continents but the important fact
is that Regional members-borrowers hold 60% of shares.
Over time two other agencies accompanied AfDB in its goal of a poverty-free
continent. It was the African Development Fund and the Nigerian Trust Fund, and
together these three institutions form the African Development Bank Group. The
Group focuses on four key tasks – granting credits, technical assistance, promoting
both public and private investments, and financing infrastructure projects. After a
revision of previous strategies the Bank decided to focus on only fewer priority areas
which in 2003-2007 strategy include agriculture and sustainable rural development –
focusing mainly on water supply, human resources building especially through
primary education and health, also improving infrastructure and economic integration.
The AfDB is the most significant multilateral organization in Africa. (AfDB, 2005;
SADC, n.d.)
30
Asian Development Bank (ADB)
The ADB was founded in 1966 with similar aims as those of IDB and AfDB.
To date, there are 64 members of which 46 come from the Asian – Pacific region.
In recent years the Bank decided to make its primary goal the fight against
poverty as well as following their three pillar strategy which consists of promoting of
sustainable economic growth, fostering social development (especially focusing on
the poorest members of the population), and last point focuses on good governance.
Through various means such as technical assistance, loans and grants provision,
public and private investments for development, policy dialogue and guarantees, as
well as advisory assistance in coordinating development policies and plans of
respective countries.
The Bank also manages the Asian Development Fund which provides
advantageous loans and grants to the most poverty-stricken countries of the region.
(ADB, 2006; SADC, n.d.)
European Bank for Reconstruction and Development (EBRD)
The EBRD is the youngest member of the Regional Bank’s Family. It was
founded in 1991 in response to the political and consequently economical changes in
the Central-Eastern European region with the aim of helping the respective countries
to adapt to the democratic environment and also providing support in the economical
transition.
The Bank currently has 62 members - 60 countries and 2 intergovernmental
institutions - European Community and the European Investment Bank and it works
in 27 countries of the respective region along with some countries from Central Asia.
The Bank encourages structural and sectoral reforms, competitiveness, privatisation
and entrepreneurship, stronger financial institutions and legal systems, development
of infrastructure required to support the private sector and strong governance. The
EBRD is the largest investor in the region and in addition it also activates foreign
direct investment. (EBRD, 2006)
31
5.5 Paris Club
Paris Club describes itself as “an informal group of official creditors whose
role is to find co-ordinated and sustainable solutions to the payment difficulties
experienced by debtor nations”.
The history of Paris Club can be traced back to 1956. At that time, Argentina
was experiencing financial difficulties and it agreed to meet some its creditors in
Paris, in order to concur in new arrangements such as debt payments restructuring.
The new measures that were taken then helped Argentina overcome a financial crisis
that was at its dawn.
Now-a-days the Club meets on a six-week basis - usually 10-11 times a year.
Meetings are held at the French Ministry of the Economy, Finance, and Industry
which also servers as secretariat to the Club. There are 19 permanent members of the
Paris Club – governments which have significant claims on other governments all
over the world, namely: Austria, Autralia, Belgium, Canada, Denmark, Finland,
France, Germany, Ireland, Italy, Japan, Netherlands, Norway, Russian Federation,
Spain, Sweden, Switzerland, United Kingdom, and United States of America.
There are also those creditor countries which are invited on case-by-case basis.
Among those, the following countries have taken part in a specific rescheduling
process: Abu Dhabi, South Africa, Argentina, Brazil, Korea, Israel, Kuwait, Mexico,
Morocco, New Zealand, Portugal, Trinidad and Tobago, and Turkey.
Since its “foundation” the Paris Club itself or random groups of the Club
members have reached almost 400 agreements with more than 80 countries
accounting for more than half a trillion dollars (since 1983 $504 billion).
(Paris Club, n.d.; Koerner, 2003)
32
5.6 London Club
The OECD (2003) definition of the London Club is as follows:
“A group of commercial banks whose representatives meet periodically to negotiate
the restructuring of debts of sovereign borrowers. There is no organizational
framework for the London Club comparable to that of the Paris Club.”
The London Club fist met in 1976 regarding payment difficulties of the
Democratic Republic of Congo (at that time Zaire). Meetings of the London Club take
place ad hoc – meeting sessions are formed upon a debtor proposal and adjourn once
an agreement is reached. The Club’s meetings are not related to one particular place
as those of the Paris Club, the banks representatives meet at various financial centers
such as London, Paris, New York etc. (IIF, 2005; Wikipedia, 2006e)
33
6. DEBT RELIEF: THE NEVER ENDING STORY
For many centuries the Bible has been the fundamental moral code which was
(and still is) respected by many leaders in many countries. In Book Leviticus the
Bible says:
“Consecrate the fiftieth year and proclaim liberty throughout the land to all its
inhabitants. It shall be a jubilee for you; each one of you is to return to his family
property and each to his own clan. … In this Year of Jubilee everyone is to return to
his own property.”
Leviticus 25:10,13
We can regard this advice as one of the first attempts for debt relief. However,
as will be presented in this section, not many creditors have followed this guidance.
6.1 Case-by-case approach
As mentioned in Brief History of the Third World Debt, with the start of the
debt crisis International Financial Institutions as well as other governments, various
banks and other creditors tried to find ways to prevent other countries from defaulting.
Re-establishing economic viability of affected countries was to promote sustainable
growth, and thus avoid a major destabilization of the international financial system
which would also affect the rich part of the world. (Boughton, 2001:359) At the
beginning of the crisis there was no systematic approach and countries were dealt
with on a case-by-case basis. This management involved comprehensive rescheduling
mainly by the Paris Club countries, new lending possibilities from multilateral
organizations, and some additional credit from the Export Credit Agencies (ECAs).
These arrangements were attached to the so called structural adjustment programs
aimed to restructure countries’ macroeconomic policies that were supported mainly
by the IMF and the WB. Although this strategy was in some aspects successful,
rescheduling also facilitated further increase in the debt stocks. (US Dep., 1991)
Rescheduling as applied by the Paris Club “involved the creditor accepting to
delay receipt of payments falling due during the period of an economic program
supported by the IMF, and to reschedule such amounts for eventual repayment over
34
the medium and long term” (Daseking & Powell, 1999), also called the ‘flow
rescheduling’. In addition, Paris Club for a long period of time believed that
rescheduling should not occur at concessional rates, thus maintaining the net present
value of the debt. (Menzies, 2001) Over a decade period, from 1976 to 1988, the
members of the Paris Club settled 81 flow reschedulings 8 , accounting for almost $23
billion to be postponed into the future. (Daseking & Powell, 1999)
In a few cases these newly implemented policies met their objective as shows
the example of Chile which was missed by the crisis to great extent. Unlike other
countries from South America that include Argentina, Mexico and Brazil where the
consequences were much graver, and these countries would require much more time
to recover. (Boughton, 2001:359) Neither of the highly indebted countries noted much
success, with debt service payments rising from 17% of exports on average in 1980 to
30% of exports on average in 1986. (Daseking & Powell, 1999)
It soon became obvious that the so-far-applied measures would not be
sufficient to bring the intended results and that new measures would have to be taken.
6.2 The Baker Plan
In 1985 the US Treasury Secretary James A. Baker, III, presented the
Program for Sustained Growth which called for a more comprehensive and
systematic approach to the debt crisis which would, in the long term, lead to
sustainable growth.
Baker identified three problems that were associated with the current strategy:
main indebted countries’ efforts for adjustment were gradually declining, support of
multilateral agencies and other creditors was fragmented, and there was a decline in
net lending by commercial banks. In his plan, Baker suggested the following
measures should be taken in order to deal with the current situation successfully:
•
Debtor countries should adopt comprehensive macroeconomic and structural
policies which must be supported by the international financial community
with the purpose of promoting growth, balance-of-payments adjustments and
to reduce inflation.
8
27 of the debtor countries involved in reschedulings are now identified as HIPCs
35
•
Central role of the IMF is highly desirable, together with increased and more
effective structural adjustment lending by the multilateral development banks,
consequently assisting the debtor countries in adopting market-oriented
policies for growth.
•
Private banks should also increase their lending 9 and thus support the
comprehensive economic adjustment programs.
In his second point, Baker mainly called on the World Bank and the Inter-
American Development Bank to increase their financial support to principal debtors
by 50% from the current yearly level of $6 billion. This additional funding was aimed
at the 15 most heavily indebted countries which became known as the ‘Baker 15’ of
which 10 were from the Latin American region 10 . (US Dep., 1991; Boughton,
2001:360-414)
Similarly to the first approach the Baker Plan did not meet its primary
objectives. New financial provisions were mainly used to repay the previous loans,
and they did not promote any more growth in the indebted countries. (Jubilee Iraq,
2003)
6.3 The Brady Plan
Realizing the Baker Plan mostly failed, the newly-appointed US Secretary of
Treasury Nicholas F. Brady, identified a list of options aimed to reinforce the
international debt strategy and thus prevent further international economic
destabilization. Brady’s strategy comprised 5 new elements:
•
commercial banks – the banks agree to a general waiver of the sharing and
negative pledge clauses for each performing debtor, to enable individual banks
to negotiate debt or debt service reduction operations 11 ;
•
‘set-asides’ – the IMF and the World Bank should dedicate a portion of loans
to qualified countries to finance specific debt reduction plans, primarily to
help countries buy back their bank debts at a discount;
9
Baker suggested new lending amounting $20 billion over the next three years.
Latin America: Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay, and
Venezuela; rest of the world: Côte d’Ivoire, Morocco, Nigeria, the Philippines, and Yugoslavia; In
practice two additional countries we encompassed in the plan: Costa Rica and Jamaica.
11
Without this element, any small creditor bank could continue to block agreement, and negotiating
flexible and innovative exit strategies would remain cumbersome and time-consuming.
10
36
•
augmentation – the World Bank and the IMF should offer new, additional
financial support to collateralize a portion of interest payments for debt or debt
service reduction transactions;
•
U.S. position – a shift toward favouring an increase in the IMF quotas in order
to support the provision of resources for the new debt strategy;
•
rethinking requirements – the IMF should consider requiring firm financing
assurances to be in place. The banks and the country should negotiate the type
of financing needed.
At first, although the overall objectives of the plan were welcomed, a number
of countries opposed some components of the plan, especially the risky use of the
Fund’s resources. In response, the US agreed that any funds set aside for buybacks or
other debt reduction operations would be restricted by the normal access limits. The
G7 ministerial meeting then agreed to support the initiative. The plan was designed to
support 39 heavily indebted middle income countries. Debtors had to qualify by
implementing sustainable macroeconomic policies and structural adjustment reforms.
(Boughton, 2001; Budde-Iser et al., 2004:11)
6.4 Toronto Terms
The 1988 G7 summit took place in Toronto. One of the issues that were on the
summit’s agenda was also the debt crisis and what measures should be taken. Some of
the participating countries already had clear opinions about what should be done. The
UK proposed lower interest rates charged on reschedulings, France recommended to
reduce falling-due payments by a third with the appropriate market interest rate for
the remainder, Japan presented the Miyazawa Plan which endeavoured restricting the
debt relief to reductions in the interest rates. The USA, on the other hand, opposed
any form of present value reduction but agreed to reschedule debts with longer grace
periods. (Boughton, 2001:480) A compromise was reached during the summit giving
the creditors three options for providing debt relief to highly indebted low-income
countries form Sub-Saharan Africa 12 . (US Dep., 1991) As described by the Paris Club
(n.d.) these three options are as follows:
12
In 1990 the Toronto agreement extended to poor countries in other regions.
37
•
debt reduction – 33.33% of the claims treated were cancelled, outstanding
debt being rescheduled at the appropriate market rate with a 14-year
repayment period including an 8-year grace period;
•
debt service reduction – the claims treated were rescheduled at reduced
interest rates with a 14-year repayment period including an 8-year grace
period;
•
commercial and non-concessional settlements – the claims treated were
restructured at the appropriate market rate over an extensive 25-year-long
repayment period including a 14-year grace period.
During the three-year period when the Toronto terms applied, 28
reschedulings have taken place with 20 LICs reaching an agreement, consequently
$6 billion of disbursements falling due were either partially cancelled or rescheduled
under concessional terms. However, these measures soon proved to be insufficient to
avert the prolonged and unsustainable increase in the debt stocks. As a result, at the
Commonwealth Finance Minister’s meeting in Trinidad, the UK Chancellor of the
Excheque John Major, suggested that the full stock of a country’s eligible debt needed
to be addressed, and present value should be reduced by 67%. This proposition
became known as the Trinidad or Enhanced Toronto Terms. (Daseking & Powell,
1999)
6.5 London Terms
However, not all Paris Club members agreed with the proposed 67%. In
December 1991, the creditor countries partially adopted some of the proposed
changes by increasing concessionality to 50%. These new strategies became known as
the London Terms. During their implementation, since December 1991 to December
1994, 26 reschedulings, concerning 23 countries, accounting for almost $9 billion
have occurred. Creditors also agreed that after some time of presenting good
economic and financial performance (three to four years) they would be willing to
consider the full stock reduction. (Daseking & Powell, 1999; US Dep., 1991)
38
6.6 Houston Terms
In 1990 the Paris Club members accepted a new strategy with the purpose to
support lower middle-income countries which do not qualify for the previous terms
but are also highly indebted 13 . The so called Houston Terms do not contain any debt
reduction schemes but provide the respective countries with a more generous
repayment period. (Hillyard, 1998:36) The Houston Terms, as described by the Paris
Club (Paris Club, n.d.), grant three important improvements:
•
Lengthening the repayment period – for non-ODA credits: 15 years or more
with a grace period 2-3 years; ODA credits: 20 years with a grace period of up
to 10 years;
•
Concessional rates reschedulings for ODA credits;
•
Debt swaps can be arranged on a bilateral or voluntary basis.
The Houston Terms are still used now-a-days. Up to date 19 countries have
benefited from them. (Paris Club, n.d.)
6.7 Naples Terms
Following the G8 summit in Naples in 1994, the Paris Club members accepted
a new set of policies affecting highly indebted poor countries. The so called Naples
Terms fulfilled the Trinidad proposal by providing up to 67% debt relief 14 together
with an option one-off reduction of the debt stock. To be eligible countries have to be
successfully fulfilling IMF programs and Paris Club agreements for at least 3 years,
have low GDP per capita, and qualify for IDA-only financing.
Debt relief for non-ODA credits can be implemented either through debt
reduction when 67% of the debt is cancelled and the remaining amount is rescheduled
at appropriate market rate or via debt service reduction when the concerned claims are
rescheduled at a reduced interest rate. ODA credits can be rescheduled for up to 40
years with a 16-year grace period at the most favourable interest rates possible.
Voluntarily, countries can also have an option to engage in bilateral debt swaps.
Naples Terms came into effect in January 1995 and are applied since then.
They have replaced the Toronto and London Terms. From the time when they were
13
Defined as falling under at least two of the following criteria: debt to GDP higher than 50%, debt to
exports higher than 275%, scheduled debt service over exports higher than 30%.
14
In 1999 creditors agreed that all debt relief under the Naples Terms would be conducted at 67%.
39
put into force 26 counties have undertaken 34 reschedulings and 7 debt stocks deals,
accounting for over $17 billion. (Daseking & Powell, 1999; Paris Club, n.d.)
In June 1996 the world leaders met again in Halifax. Prior to the summit,
Mexico experienced another economic crisis, and it was obvious that a profound
action would have to be taken on an international level. In Halifax, the G8 group
agreed on a new strategy which was then accepted by the WB and the IMF.
(Wikipedia, 2006; Bayne, 2001) As described by Bayne (2001:6) the following
strategy was agreed upon: “stronger IMF surveillance for all countries, based on
better data, a new emergency financing mechanisms, backed by extra funds, better
cooperation between regulators of financial institutions, and exploring procedures for
countries comparable to insolvency of firms.”
6.8 HIPC Initiative
As a reaction to the summit and to the debt sustainability problems that were
still experienced by many countries, the World Bank and the IMF proposed a joined
action of bilateral, multilateral and commercial creditors. The Heavily Indebted Poor
Countries Initiative was launched in September 1996 and its main objective was to
help the respective countries bring the debt burden to a manageable level. (IMF, 2000;
Paris Club, n.d.)
Countries are defined as HIPC according to following factors (Eurodad, n.d.):
•
Assessment by the World Bank and IMF showing a 'potential need for HIPC
debt relief’;
•
Per capita income below $785, with entitlement to borrow on IDA-only terms
from the World Bank and from the IMF's PRGF.
Once a country qualifies it has to undergo a two-stage process. The first step usually
takes three years and includes:
•
Applying macroeconomic reforms and structural adjustment programs
supported by WB and IMF;
•
Rescheduling debts with the Paris Club members under Naples Terms;
40
•
Preparing an Interim Poverty Reduction Strategy Paper 15 .
When a country fulfils these requirements it reaches the so called decision
point when the World Bank and the IMF prepare a debt sustainability analysis which
determines whether the country requires further assistance from the Initiative or
whether a sustainable level of indebtedness can be reached by applying traditional
debt-relief methods. If a country meets one of the following criteria it is eligible for
debt relief under the HIPC Initiative:
•
Net Present Value debt-to-export ratio still above 150%;
•
For countries particularly open to international trade 16 the debt-to-revenue
ratio must be above 250%.
If additional assistance from the Initiative is agreed on, then countries further have to
show a record of good performance under IMF and WB programs, prepare a full
PRSP (those who did not prepare one prior to the decision point), and implement their
poverty reduction plan for at least one year. After these conditionalities are met a
country reaches the completion point when their debts, as decided at the decision
point, are cancelled (for more information about the HIPC process see Annex 2). In
between the individual points creditors may (and most of them do) provide interim
debt service relief. (Jubilee Research, n.d.; Andrews D. et al., 1999)
In 1996, 42 countries 17 qualified for the HIPC Initiative; however for: Angola,
Kenya, Vietnam and Yemen the World Bank decided their debts were already
sustainable. (Jubilee Research, n.d.)
The process of debt relief under HIPC I was long and in three-years time only
a small number of countries was making any progress: only7 countries reached the
decision point. In 1999 a review of the Initiative occurred resulting in a number of
15
PRSP is a country-led, country-written document that provides the basis for assistance from the
World Bank and the International Monetary Fund, as well as debt relief under the Heavily Indebted
Poor Country initiative. A Poverty Reduction Strategy Paper describes a country's macroeconomic,
structural, and social policies and programs to promote growth. It summarizes the country's objectives,
policies, and measures for poverty reduction. A Poverty Reduction Strategy Paper should be countrydriven, comprehensive in scope, partnership-oriented, and participatory.(WB,…)
16
export-to-GDP ratio above 30% and a revenue-to-GDP ratio of 15% or more
17
Angola, Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad,
Comoros, Congo, Congo, Dem Rep., Côte d'Ivoire, Ethiopia, The Gambia, Ghana, Guinea, GuineaBissau, Guyana, Honduras, Kenya, Lao PDR, Liberia, Madagascar, Malawi, Mali, Mauritania,
Mozambique, Myanmar, Nicaragua, Niger, Rwanda, Sierra Leone, São Tomé Principe, Senegal,
Somalia, Sudan, Tanzania, Togo, Uganda, Vietnam, Yemen, Rep. of, Zambia (Jubilee Research)
41
changes affecting the eligibility criteria. An Enhanced HIPC 18 (HIPC II) was agreed
on with stronger practices with the purpose to deliver deeper debt relief more quickly
and to a wider range of countries. (Andrews D. et al., 1999)
Up to date 18 countries have reached the completion point, 11 countries have
reached the decision point and 11 countries are in pre-decision stage and Haiti and
Eritrea have joined the HIPC list (see Annex 1).
However questions about the principles of HIPC still remain. As stated by
Jubilee Research (n.d.): “In April 2002, the World Bank admitted that of the six
countries that had by then passed their Completion Points, at least two still did not
have a sustainable level of debt. Furthermore, the external debt sustainability of half
of the 20 countries which were between Decision Point and Completion Point at that
time had significantly worsened.”
6.9 Lyon Terms
After the HIPC initiative was established the Paris Club member countries
decided to further increase the level of cancellation up to 80% for the group of HIPC.
Creditors had the options of debt reduction, debt service reduction and capitalisation
of moratorium interest 19 for non-ODA credits. ODA credit reduction options remain
the same as under Naples Terms, and countries were also offered the debt swaps
option. Under these terms 5 countries have undergone rescheduling and debt
cancellation accounting for roughly $5 billion.
The Lyon Terms are no longer in use within the Paris Club framework. The
current use is limited to those 5 countries that previously benefited from them and still
have not reached the decision point under the HIPC Initiative. (Paris Club, n.d.)
6.10 Cologne Terms
In reaction to the unsuccess of the first stage of the HIPC Initiative the leaders
of G8 countries decided at the Cologne summit to push for a further increase in debt
18
The eligibility criteria described in the text apply to the Enhanced HIPC. The original eligibility
criteria were much more strict: debt-to-export target from 200–250%; debt-to-revenue target 280%;
the eligibility thresholds for the openness of an economy (export-to-GDP ratio) 40% and revenue effort
(revenue-to-GDP ratio) 20% (Andrews D. et al., 1999)
19
As explained by the Paris Club: the claims treated were rescheduled at a reduced interest rate (40year repayment period including 8-year grace and progressive payments).(Paris Club, Lyon Terms)
42
reduction 20 . As a result the Paris Club creditors accepted the Cologne Terms under
which countries with a history of good performance and those within the HIPC
Initiative framework were entitled to receive non-ODA credit cancellation of up to
90% while the untreated debt is rescheduled at appropriate market rates for a
maximum of 23 years with a 6-year grace period. Out of 41 countries eligible, 27
have benefited from these terms. The Cologne Terms replaced the Lyon Terms and
are currently used within the Paris Club. (Paris Club, n.d.)
Over the past few years debt relief has in fact remained on the agenda of G8
annual meetings as well as other international seminars and conferences. Mainly
because too many countries are, even after a long process of debt reduction as
described above, experiencing debt sustainability problems. The year 2005 was
symbolised by a number of important meetings of the international decision making
community – G8, United Nations Summit, etc. These events were accompanied by an
enormous world campaign Global Call against Poverty which was organized by a
number of organizations and supported by different celebrities from all around the
world. Debt relief was one of the main points campaigners demanded from the world
leaders.
6.11 MDRI
At their summit in Gleneagles, the G8 leaders decided a further action
concerning debt relief will have to be taken in order to fulfil the Millennium
Development Goals (see Annex 3). A new framework, later called the Multilateral
Debt Relief Initiative, was conceived. Under MDRI 100% of debt owed to IMF, IDA
and AfDB will be cancelled for those countries that have successfully reached, or at
some point in the future will reach, the completion point under the enhanced HIPC
Initiative.
Although MDRI is a joint initiative, the decision to grant debt relief belongs
solely to each of the participating institutions and therefore the approach and
implementation may vary. For instance, with the aim to uniform the process the IMF
agreed to include all countries (HIPC and non-HIPC) with an annual income of $380
20
At the Cologne summit the G7 countries agreed on 90% debt reduction of bilateral debt, however by
the next summit in 2000 all of the G7 countries were offering 100% debt relief on their own debts.
(Bayne:4)
43
per capita or less; thus more countries became eligible for IMF debt relief under
MDRI. (IMF, 2006)
Although this agreement could be considered a historic milestone in debt relief
history, it also encompasses a number of drawbacks. Among these stands out that
only a limited number of countries is eligible and debt relief is granted from only a
few of the multilateral creditors. (OXFAM, 2005:7) Besides this fact, Jurgen Kaiser
(2005) also points out that the cancelled debt will be deducted from future resources
the respective countries were pledged by the respective creditors.
The planned relief should account for $8.54 billion from the AfDB, $37 from
IDA and more than $7 billion from IMF, all together amounting for more than $50
billion. While the IMF has already provided some debt relief under MDRI in January
2006, IDA is expecting to commence 1st of July and AfDB approved debt cancellation
for 33 countries of which 13 will benefit from it immediately on the 19th of April.
(AfDB, 2006; IMF, 2006; WB, 2006f)
44
10. IF THERE IS A WILL, THERE IS A WAY
Despite of numerous rules, conditionalities, regulations and restrictions the
history shows that in certain cases creditors were more than willing to forgive and
cancel a country’s debt.
In 1898 after the United States annexed Cuba, which was still a Spanish
colony at that time, they refused to accept the colonial debts. The USA explained that
the loans taken by the colonial government were used against the independence
movement in such ways as putting people into concentration camps, and therefore the
loans that were used against the people should not be the responsibility of the people.
The same way Costa Rica refused to pay its foreign debts contracted by the dictator
Frederico Tinoco Granados. The US arbitrator in the dispute stated that the creditor
knew the dictator would use the money for his personal use and therefore Costa Rica
should not be repaying such debts. (Roodman, 2001:16)
However, such examples are very rare in history and only powerful nations
can dare to refuse to repay their debts. During the First World War United Kingdom,
France and other European countries took large loans from the USA. In 1923 the
repayment period was extended and interest was reduced, however in 1934 five
European countries including United Kingdom defaulted, and no other repayments
have been made since. Nevertheless the debts are still on the books. According to the
US treasury, the First World War debts owed to the US as of June 1997 amounted
$33.5 billion of which UK owes $14.6 billion, France owes $11 billion and Italy $3.2
billion. (Hanlon, 1998)
After the Second World War, Germany was not able to repay its debts. In
1952 official as well as private creditors and commercial banks met in London in
order to solve the German debt situation. Germany was represented by Hermann-Josef
Abs a German banker. From the beginning creditors were concerned about the
economic and political situation in Germany and therefore all debt repayments were
inferior to economic and political stability of the country. It is estimated that the value
of the debt was almost 30 billion German marks. However, this amount represents
45
only the face value of the debt without any interest which was not even calculated into
the debt. Approximate calculations assume that the interest accounted for more than
15 billion German marks thus this debt was cancelled at the very beginning. It was
calculated that if Germany were to repay the entire debt (without interests) its debtservice-to-exports ratio would be 10% which Abs considered intolerable 21 . Under the
London agreement which was signed in 1953, the creditors agreed to forgive more
than two thirds of the German debt. The remaining debt was to be repaid until 1978 at
annual payments of 570 million German marks for the first five years and 765 million
marks afterwards. Repayments at the time of the agreement accounted for 3.5% of
1952 exports and were never expected to be more than 5% of exports. In addition
Germany was to make the debt repayments only from export surplus not from new
loans or other reserves, which meant that creditors had to buy German exports in
order to ensure debt repayments. In the case of no export surplus Germany was
allowed to stop repayments. Due to rapid economic growth Germany repaid the rest
of the debt in 1960. (Hanlon, 1998, Budde-Iser et al., 2004:33)
In 1968 Indonesia found itself trapped by debts amounting $2.1 billion and the
Paris Club calculated that in the next few years it would inevitably default. HermannJosef Abs again took on the role of a negotiator-analyst whose aim was to prepare a
debt analysis and prepare a suitable plan for debt repayments. Abs suggested 30
annual repayments without any grace periods, and all interests were to be cancelled.
The creditors almost fully agreed with the proposed plan with the exception of the
interests’ cancellation. The interest was set at a lower rate of 0.5% but was to be paid
only from 1985, which in the long term made only a slight difference. Repayments
started in 1970 and the debt-service-to-export ratio at that time was 6.6% and was
planning to decrease afterwards. As in the case of Germany, Indonesia was able to
repay its debts. (Hanlon, 1998; Budde-Iser et al., 2004:35)
It might be argued that these debt settlements were agreed on before the
concessional debt cancellation of the Paris Club or the HIPC Initiative were launched,
however, we can find cases of similar favourable settlements in late 1990’s as well.
21
Debt-service-to-exports ratio under the HIPC Initiative is considered sustainable at 15%
46
After the end of the war in Yugoslavia and change of regime the country owed
approximately $13 billion. It was classified as a Less Indebted Middle-Income
Country and there for it would be entitled for Paris Club relief under usual market
terms, which means that the debt would be rescheduled for later with additional
interest. However, especially the United States were pushing for greater relief in order
to promote the reconstruction of the country. The aim was to reach the Naples Terms
which are granted only for highly indebted countries with IDA-only status.
Yugoslavia does not meet any of these criteria and therefore under regular
circumstances would not be able to receive such relief. Nonetheless, despite of
Russia’s opposition in November 2001 the United States enforced and agreement
where 66% of the debt (which amounted $4,5 billion) was cancelled immediately,
unlike under the Naples terms where relief is provided over a two or three-year long
period. (Budde-Iser et al., 2004:14, Wikipedia, 2006f) Similar agreement was also
reached with commercial creditors in the London Club in July 2004 where 62% of the
debt was cancelled. In 2002 the country concluded a three-year Extended Fund
Facility arrangement with the IMF which started the first phase of a 51% write-off.
Additionally, after finishing another IMF program in 2006 a further debt relief from
the Paris Club will be provided reducing 15% of the net present value of the original
debt. (EC, 2005; Kaiser, Kowsky & Schuleller 2006:67)
In my opinion, further interest and favourable debt relief for Serbia and
Montenegro might be expected from the creditors. As with the case of Germany after
the Second World War geopolitical and economical interests are put ahead of debt
repayments, which is without any doubt good news for this Severely Indebted Low
Income Country 22 .
As for the rest of the developing countries, most of them with much higher
debt burden, they will have to manage with regularly provided debt relief. After all,
they account for only 3% of the world’s GDP and most of them are not geopolitically
important.
22
As of 2005 Serbia and Montenegro was classified as SILIC.
47
11. THE IMPACT OF INDEBTEDNESS ON THE ENVIRONMENT
AND THE SOCIETY OF THE DEBTOR COUNTRIES
In reaction to the third world debt crisis in the late 1970’s and early 1980’s the
international financial institutions as well as official and commercial creditors realized
there was a need for a major structural change in many of the defaulting countries in
order to help them repay their debts and thus prevent a further crisis.
11.1 Structural Adjustment Programs
In order to promote the changes the IMF together with the World Bank created
a neo-liberal set of economic policy reforms to be implemented by the developing
countries in order to foster economic growth, eliminate balance of payments deficits,
implement institutional and structural reforms and overall increase the flexibility and
adaptability of the economy in order to make the economy less vulnerable to future
shocks. These reforms became known as the Structural Adjustment Programs
(SAPs). (Wikipedia, 2006g)
SAPs consisted of two main elements:
•
Macroeconomic stabilization with a short-term objective;
•
Structural reforms of the economy with a long-term objective.
The first of the two objectives was carried out by the IMF’s SAF, later ESAF, while
the latter was promoted by the World Bank’s Structural Adjustment Loans (SALs)
and Sectoral Adjustment Loans (SECALs). Borrowing financial resources from the
Adjustment facilities was thus conditioned by a number of structural, economic and
policy changes which the country had to implement in order to qualify for a loan.
(Rahman, n.d.)
These conditionalities were meant to promote economic growth and help
countries to ease the debt burden; however, most of the countries where SAPs were
implemented experienced the very contrary. SAPs usually included the following
conditionalities:
•
Eliminating government intervention in the economy;
•
Focusing on direct export and resource extraction – emphasizing the
production of cash crops and other commodities such as coffee, cocoa, tea,
rubber, cotton, copper etc.;
48
•
Government cuts in social expenditures such as health and education, and
implementing fees for these services;
•
Reduction of subsidies and price controls;
•
Devaluation of local currency;
•
Trade liberalization – eliminating all trade-related restrictions;
•
Privatization of government-owned enterprises;
•
Attracting foreign direct investment by applying high interest rates.
(Chebucto, 2006; Ohkubo, 1997; Wikipedia, 2006g)
Criticism
SAPs have been criticised for various reasons, mainly because they threaten a
country’s sovereignty, put short-term interests before long-term development
objectives, prioritize economic structural reforms and debt repayments over social
welfare, environmental protection and well being of the peoples. For some countries
such as the East Asian tigers, SAPs brought some success, however for majority of
developing countries they did not. (Roodman, 2001) I would like to focus the next
few pages on the impacts of structural adjustment policies on the environment and
society in the debtor countries.
11.2 The impact of SAPs on the society
Structural adjustment programs affected people living in the respective
countries in a number of ways, while the poorest have usually been hit the hardest and
women and girls suffered more than men.
"I believe that banking institutions are more dangerous to our liberties than standing
armies."
Thomas Jefferson
Education budgets were cut down and school fees were introduced. As a
result, “Zaire fired a fifth of its school teachers in 1984” (Roodman, 2001:34) and
Tanzania where elementary education was almost universal had to introduce school
fees in 1986 which disabled the poorest children to go to school. A similar story
happened in Nicaragua where one quarter of the elementary students did not enroll
49
into school after fees were introduced. D. Roodman (2001) also notes that poor rural
areas suffered much harder than ‘urban elites’ when primary education cuts were
larger than those of universities. On the other hand, when school fees were abolished
in 1994 in Malawi, school enrollment increased by 50% and most of the new students
were girls. (Roodman, 2001:34,35; Hong, 2000:17)
Health care budgets were exposed to the same restrains. In the 1980’s the
health budget of Mexico dropped from 4.7% to 2.7%. Within the same time period
“infant deaths from nutritional deficiencies tripled to rates higher than those in the
1970s as a result of cutbacks in social and health spending” describes Evelyne Hong
from the Third World Network. (Hong, 2000:16) United Nations Childrens Fund
estimates that half a million children died each year in developing countries in the late
1980’s as a subsequence to the adjustment policies. (Roodman, 2001:35) In
Zimbabwe’s spending on healthcare per person has decreased by third since
adjustment policies were introduced in 1990. (Jubilee, n.d.) Health care cuts also
resulted in the decrease of disease-prevention. Diseases previously eliminated came
back in a number of regions. In Subsaharan Africa malaria, yellow fever, and cholera
reappeared, South America experienced increase in malaria and dengue cases, and in
India the outbreak of plague in 1994 is believed to be “the direct consequence of a
worsening urban sanitation and public health infrastructure which accompanied the
compression of national and municipal budgets under the 1991 IMF-WB, sponsored
structural adjustment programme” (Hong, 2000:18).
“According to UNICEF, over 500,000 children under the age of five died each year in
Africa and Latin America in the late 1980s as a direct result of the debt crisis and its
management under the International Monetary Fund’s structural adjustment
programs.”
Ross P. Buckley
In South America SAPs helped the increase of poverty from 130 million
people in 1980 to 180 million in the 1990’s. However, not all people suffered from
the applied policies. Especially in Latin America, the gap between the minority of the
rich and the majority of the poor widened even more. In Mexico, for instance, 20% of
the richest people owned more than half of the national income while the poorest 20%
50
owned only 5%, and the number of billionaires increased from 2 to 24. (Hong,
2000:15)
SAPs also resulted in salary decline. In Mexico, within a six-year period
wages fell to 50% of their value in 1982. In Peru the situation was even worse with
wages being reduced to 90% while the price of bread increased 12 times over night. In
most countries women have been affected the most. (Hong, 2000:15) In Costa Rica
after reductions in state expenditures 85% of the public-sector employees who were
fired were women. (Thompson & Toro; 1999)
Due to an IMF/WB-imposed emphasis on exports many countries experienced
a painful shift from a diverse domestic food production to growing mainly cash crops.
The IMF/WB logic was simple, the more countries export, the more they will earn.
However, the real situation was a bit different. Due to world recession, the prices of
primary commodities were low and large exports even more enhanced the decline of
prices on the world markets, thus more production resulted in lower prices. In 1985
Thailand exported 31% more than the previous year and it earned 8% less. (Roodman
2000:33) In Brazil per capita production of crops for daily-consummation dropped by
13% from 1977 to 1984 whereas production of export-oriented crops went up by 15%.
The shift from domestic production to export production lowered the nutrition levels
resulting in 50% of Brazilians being malnourished. (Hong, 2000:15)
The Food crisis in Malawi
In 2002 the Sub Saharan country of Malawi was hit by a serious food crisis.
While many believe the main cause was floods and corrupted government, in fact
other far more serious factors were the main culprits.
Malawi has always suffered from hunger and food shortages, consequently
32% of the population have low nutrition levels. However, due to food aid and
government subsidies for basic food which were distributed by the Agricultural
Development and Marketing Corporation, the Malawi people were able to live
through the unfavourable seasons, despite the long-lasting government corruption
The IMF/WB-proposed reforms did not take into consideration differences
and specifics of individual countries, and thus the agriculture sector in Malawi has
been restructured in the one-size-fits-all approach. Subsidies were reduced, price
51
controls and regulations abolished and agencies such as the ADMARC were
restructured or privatized. Within half-a-year, from October 2001 to March 2002, the
price of maize increased by 400%. Prior to the adjustment reforms, the government
was able to ensure food availability even in distant, isolated areas. Today, Malawi
faces serious chronic food insecurity.
No one disputes Malawi needs agricultural reforms in order to improve food
productivity and security, as well as institutional and governance reforms. However,
the main issues troubling food production in Malawi such as rural poverty, the impact
of HIV/AIDS and discrimination against women, have not been addressed. On the
contrary, SAPs brought deregulation, privatization and austerity.
Even after debt relief under the HIPC Initiative Malawi’s external debt
accounts for 29% of government expenditures and even at the time of hunger and
food crisis donors insist on debt repayments. (Owusu & Ng’ambi, 2002)
Altogether the number of people that were adversely affected by the
adjustment programs exceeds the number of men and women killed in the Second
World War.
11.3 The impact of SAPs on the environment
Similar way adjustment practices affect society they also affect the
environment in the respective countries. SAPs in fact degrade the environment
through different means. The Friends of the Earth’s report The IMF: Selling the
environment short recognizes three ways how SAPs encouraged environmental
degradation:
•
Increase in natural resources exploitation;
•
Reductions in environmental spending;
•
Weakening of environmental laws.
By focusing on increasing their export earnings countries over-exploit their
natural resources in an unsustainable manner. Debtor countries most important
exports comprise of timber, oil and gas, minerals, cash crops and fish. The
accelerating pace of the exploitation is not sustainable and in the long-term
52
perspective leads to excessive deforestation, soil degradation, erosion and salinization,
desertification, loss of biodiversity, water and air pollution and so on.
(Chebucto, 2006)
Natural resources exploitation
In Thailand, the government encouraged farmers to focus on rice and rubber
production by lowering tariffs on these particular products. Consequently farmers
abandoned cassava farming and went ahead to seek a suitable land for rubber
plantations which they have found by clearing the rainforests. (Roodman, 2001:36)
Due to agricultural expansion deforestation has increased also in Nicaragua
(Gueorguieva, 2000:12) and many other countries. In Cote d’Ivoire in 1960 the forests
covered 12 million hectares of the country. Increase in cocoa production has been the
primary source for deforestation in Cote d’Ivoire where forests represent only on 3.9
million hectares today. Although the government as well as the IMF realized the
critical situation and accepted various measures to prevent further deforestation, the
remaining forests are threatened by illegal farming which in 1997 comprised of 30%
of the protected forests. As extensive farming is degrading the soils, more farmers are
still moving into the protected forests. (Montanye & Welch, 1999:5)
Cameroon is one of the ecologically most unique countries in Africa. Its
forests reserves account for 22 million hectares, of which 14 million are tropical
rainforests. Due to the economic crisis of the 1980’s Cameroon found itself in a
difficult debt situation, and agreed to implement IMF/WB led adjustment programs
which commenced in 1988 and on and off are continuing to the present. The
adjustment programs included, as always, various measures such as diversifying the
economy and stimulating export production in the non-oil sectors, note Montanye and
Welch (1999:6). The dense and ecologically rich forests seemed to be a perfect option
for the economical diversity. The IMF promoted lower export taxes on forests
products and the devaluation of currency. Due to these implemented policies the
production of forest products skyrocketed, the number of logging companies rose
form 194 in 1994 to 351 in 1995 and lumber exports increased by 50% between 19951996 and 1996-1997. The report concludes that these changes inevitably led to
deforestation which further threatens endangered species such as the black rhinoceros
living in the forests. (Montanye & Welch, 1999:6)
53
Guyana belongs to one of the most forested tropical countries in the tropics
with forests covering three quarters of the country. In 1988 Guyana accepted a
structural adjustment program guided by the IMF/WB. Guyana’s vast gold reserves
became an important part of the imposed adjustment. The implementation of SAPs
resulted in the increase of foreign multinational corporations, which inevitably led to
an increase in foreign ownership. Today there are 32 foreign mining corporations
operating in Guyana and large-scale mining permits cover 10% of the country.
(Montanye & Welch, 1999) Most of the reserves are located in the forest. Mining has
adversely affected the environmental sustainability mainly by deforestation,
destroying wildlife habitats, destroying river banks, increasing toxic threats and
widespread contamination, and by spread of domestic and industrial waste in the
rivers. In addition, local authorities are not able to properly monitor and control
companies which results in breakdown of environmental standards and ignorance of
environmental regulations. Furthermore, illegal small-scale mining is taking place
which leads to increased use of mercury, contamination of rivers, decline in fish
species, threatening human lives via contaminated fish, incursion and destruction of
wildlife habitat and protected areas, and also the increase in malaria cases caused by
water holes in the mined out areas. (Williams, n.d.)
Omai Gold
In 1995 mining activities of a foreign company Omai Gold Mines Ltd. resulted in
release of 3 million cubic meters of cyanide-laced waste into Guyana’s main river
Essequibo. The accident was caused by a burst of a tailing dam and it was the largest
spill of four that happened previously in the year. Subsequently the river was
contaminated, aquatic life was killed and 3 people were hospitalized for cyanide
poisoning. (Montanye & Welch, 1999)
Reductions in environmental spending
In order to meet their budget requirements countries were very often forced to
lower the number of government employees. Usually the first ones to go are those
from the education, health as well as forestry, fishery and agriculture departments,
environmental protection agencies and other government institutions. (F Montanye &
Welch, 1999)
Where governments tried to care for their employees they had to cut the
funding for the agencies which disallowed them to do their jobs properly. This was
54
the case of Zambia, Tanzania and Cameroon. A study undertaken by the World Wild
Fund for Nature shows that in El Salvador environmental organizations were steadily
being destroyed. “Such cuts may hurt more in the long term than the short term, since
young environmental agencies in developing countries often wield little effective
power, but will gain strength over time if properly supported,” remarks D. Roodman
(2001:36).
Weakening of environmental laws
Reductions in environmental institutions’ budgets already imply eliminated
ability of the government to enforce environmental laws and protection. Budget
priorities are given to increase of investment which further complicates environmental
protection.
In Thailand the government was forced by the IMF to abandon majority of the
resources focused on environmental protection. Before the financial crisis in South
East Asia in 1997 Thailand was implementing Economic and Social Development
Plan which stressed the importance of sustainable development. However, after the
economic crisis Thailand agreed to financial assistance from the IMF which
prioritized investment promotion over environmental protection efforts. (Montanye &
Welch, 1999)
Fig 8. Industrial Promotion vs. Pollution Control
The graph shows the
increase of government spending on
industrial activities,
mainly promotion and
development,
whereas funding for
pollution control has
declined sharply after
the financial crisis in
1997 and subsequent
intervention of the
IMF.
Source: Montanye & Welch (1999), The IMF: Selling the Environment short
In the Philippines, the IMF perceived restrictions to direct investment as
barriers to exploitation of the country’s vast natural resources. The new law which
was accepted in reaction to the IMF’s suggestions encourages and facilitates large55
scale mining as well as increase in investment, especially by foreign-owned
companies. In addition, the law also gives the foreign companies full possession and
rights to exploitation, utilization and development of the natural resources, which
violates the Philippines Constitution from 1987 which states that in mining
development and exploitation there needs to be 60% ownership by the citizens of the
Philippines. (Montanye & Welch, 1999)
People and the environment were also affected by the projects managed by the
WB and the IMF such as dams and power plants. It is estimated that more than 3
million people were displaced as a result of ‘development’ projects. “In India, some
300,000 poor people have been displaced by the construction of the Singrauli coalfired power plant, a highly polluting energy project that contaminated air and water
with toxic ash,” says a report by the Center for International Environmental Law
(2003). Many of these displacements were accompanied by opposition from the
affected people which were, the report continues, dealt with brutally and resulted in
killings of the opposing people. (CIEL, 2003)
SAPs and their impact on the environment and society have not gone
unnoticed by the people in the respective countries who became the victims of
adjustment. Few of them accepted the new reality of no education, health care,
unemployment, food insecurity and damaged environment silently, however, most of
them tried to fight for their lives and liberties. In the following countries people
expressed their hopelessness and frustration by demonstrations or mass movements,
and many of them lost their lives:
•
Algeria - 1988
•
Morocco - 1990
•
Tunis - 1984
•
Benin - 1989
•
Niger - 1990
•
Uganda - 1990
•
Bolivia - 1985
•
Nigeria - 1986, 88,
•
Venezuela - 1989
•
Ecuador - 1987
89, 90, 92
•
Kongo, D.R. -
•
Jamaica - 1985
•
Russia - 1993
•
Jordan - 1989
•
Sudan - 1987
•
Mexico - 1994
•
Trinidad - 1990
(Whirled Bank Group, 2003; Hong, 2000)
56
1985
•
Zambia - 1987
After more then 20 years of adjustment which have not brought much success
in alleviating poverty and assisting the developing countries to achieve bigger growth
and economic stability, many non-governmental, not-for-profit, development
organizations as well as academic institutions from across the world began to criticize
the Fund’s and Bank’s ‘development’ practices. These organizations joined in a
coalition called Jubilee 2000 whose goal was to promote cancellation of the debt of
the developing countries and also to set basic rules for debt relief in the form of a Fair
and Transparent Arbitration Process. Although the Third World debt has not been
cancelled, Jubilee 2000 succeeded in gathering more than 24 million signatures for
debt cancellation petition. (JDC, n.d.) It should be noted that without the pressure
from civil society organizations calling for debt relief, raising public awareness and
speaking out about the impacts of debt, debt relief would not be on the international
agenda as often (for more information about organizations focusing on debt relief see
Annex 4).
The Bank and the Fund themselves started to realize that structural adjustment
implemented in one-size-fits-all approach did not bring the prognosed growth nor
poverty reduction. A World Bank report by William Easterly (2000) found “no
evidence for a direct effect of structural adjustment on growth. The poor benefit less
from output expansion in countries with many adjustment loans than in countries with
few adjustment loans.” D. Roodman (2001:45) also states that in relation to Africa
“Bank researchers now recognize that structural adjustment has mostly failed.”
Due to the international pressure on the IFIs to change their practices in the
developing countries, both institutions made a shift towards poverty eradication. In
1999 the IFIs introduced Poverty reduction Strategy Papers which became the new
conditionality for debt relief and also for new lending. PRSP is a three-year national
development strategy. Official definition by the World Bank describes PRSP as:
”…a country-led, country-written document that provides the basis for assistance
from the World Bank and the International Monetary Fund, as well as debt relief
under the Heavily Indebted Poor Country initiative. A Poverty Reduction Strategy
Paper describes a country's macroeconomic, structural, and social policies and
programs to promote growth. It summarizes the country's objectives, policies, and
57
measures for poverty reduction. A Poverty Reduction Strategy Paper should be
country-driven, comprehensive in scope, partnership-oriented, and participatory.”
(WB, 2006e)
At the same time PRSPs came into existence, ESAF was replaced by Poverty
Reduction Growth Facility (PRFG) which was established with the purpose to “make
the objectives of poverty reduction and growth more central to lending operations in
its poorest member countries” (IMF, 2004b).
Although I find this change a rather rhetoric one, I believe that it shows some
progress in the IFIs’ attitudes towards development. After 20 years of adjustment
failures the World Bank and the IMF at last admitted that the proposed policies did
not achieve their goals. They also realized that countries themselves should be
involved in shaping the countries’ policies because each country has its own unique
characteristics coming form different cultural, ethnical and economic backgrounds
and therefore the one-size-fits-all approach does not truly fit for all. They also
understood that due to a growing interest in development issues from the civil society
in the creditor countries transparency is very important and inevitable, so progress and
changes can be monitored and proper evaluation can be done. Finally, they also
opened themselves to a greater dialogue with all shareholders involved in the creditor
as well as debtor countries. However, questions about the real PRSP’s process, versus
what is on paper, remain.
As stated by the World Development Movement (2003) the names have
changed but the same old policies still remain in practice. One of the most important
aspects of the PRSPs is that they should be country-owned. However, the World Bank
and the IMF hold the veto power and thus “effectively control the process”, continues
the report. This means that again same policies such as privatisation, liberalization
and budget cuts can be imposed without the governments’ approval. (WDM, 2003)
The endorsement of the PRSP by the World Bank and the IMF represents future
financial resources that the countries cannot afford to loose. Therefore governments
prioritize the ‘needs’ of the IMF and WB rather than those of their citizens. (Citizen’s
Network on Essential Services, 2003) It is also found that the reluctance to allow the
new process and actors influence the underlying policies remains. (Possing, 2003)
58
It is not easy to adjust to new practices and it might take some time until all
shareholders can fully influence the creation of the PRSPs. Greater public awareness
about such issues will be important in both debtor and creditor countries in order to
call on the IFIs to fully abandon their dictating techniques and let the country control
its own economy.
11.4 Other factors
However, not all negative impacts on the environment and society were
caused by SAPs because not all developing countries agreed to take loans under
SAPs’ conditionalities and some battled indebtedness on their own. However, this
brings about a problem: How can indebtedness be linked to the negative impacts we
have witnessed to be occurring in majority of indebted developing countries?
D. Roodman (2001:8) explains the difficulty of linking the cause and the
effect, but also how it can be done by looking at the experience of the middle-income
countries.
“Because debt trouble set in gradually in low-income countries, no one can point to a
particular child dying in Mozambique from tetanus or to a particular plot of forest
cleared by a poor farmer in Honduras and say with confidence, “Debt caused that.”
But the experience of middle-income countries, where debt crisis developed with a
suddenness that spotlighted the link between cause and effect, offers a vivid picture of
its impact.”
In Latin America as well as Africa, GDP per person has been growing steadily
and between 1950 and 1980 it increased by 105% in Latin America and 72% in
Africa. At the beginning of the 1980’s it dropped and until 1999 Latin America
recovered only slightly for a net increase of 4.3%, whereas Africa experienced a fall
of 6.2%. (Roodman, 2001:32)
59
Fig 9. Gross Domestic Product per Capita in Latin America and Africa,
1950-1999
Source: Roodman (2001), Still Waiting For the Jubilee
According to D. Roodman (2001), in North East Brazil incidence of low birth
weight increased from 10.2% in 1982 to 15.3% in 1984. Infant mortality increased
over the same period. In 1982 nine out of 100 babies died in their first year, in 1984
twelve babies died in their first year. Although Roodman finds these as results of
structural adjustment, I would argue that in 1984 it was still too soon for SAPs’
policies to have such impacts. Countries had to ‘adjust’ their budgets with or without
SAPs in order to repay their debts.
Kahn and McDonald (1995) find that “debt can lead to myopic behaviour,
leading to deforestation rates that may not be optimal in the long run, but are
necessary in the short term to meet current constraints.” Furthermore, the study finds
that debt is an important aspect in tropical countries’ deforestation. I think these
findings can be implemented on social services such as education and health care as
well. In order to meet the next repayment countries adopt short-term policies which
60
will not bring any positive results in the future, and will furthermore decrease the
quantity and quality of natural as well as human resources.
Debt reduction reduces the levels of deforestation. Kahn and McDonald
(1995) find that a 10% reduction of either total or relative debt may reduce
deforestation by up to 3.1%. The reduction of debt would then lead to decreased
deforestation which would improve the environmental situation in the respective
countries and also help to preserve the world’s common good.
Debt reduction also leads to increased funding of social services. Due to debt
cancellation Mozambique was able to introduce free immunization for children, in
Uganda over 2 million people gained access to water, in Tanzania school fees were
abolished and 66% more children enrolled in primary schools, Benin spent 54% of
what it saved through debt relief on health care programs. (JDC, n.d.)
However, too many countries still spend more resources on servicing debt than
on education or healthcare. One reason is the IMF/WB imposed cutbacks but another
reason is simply the unsustainable debt burden.
The table bellow shows the proportion of the national budgets that countries
spend on servicing foreign debts compared to basic social services as well as the
percentage of the budget covered by foreign borrowing.
61
Fig 10. Share of Government Spending Covered by Foreign Borrowing and
Devoted to Foreign Debt Service and Basic Social Services, Selected Countries,
1996-97
Source: Roodman (2001), Still waiting for the Jubilee
Brazil
Brazil has been home to the Amazon rainforests which is one of the world’s
most biologically diverse areas. Yet over the past few decades the Amazon has
experienced unsustainable rates of deforestation of up to 52 000 square kilometres per
year. Average annual deforestation between 1981 and 1985 was around 25 000 square
kilometres. Within 10 years the total deforested area rose from 41.5 million hectares
in 1990 to 58.7 million hectares in 2000. In 1996 the level of deforestation increased
by 34% compared to 1992. It is estimated that of the original rainforest nearly one
fifth 17.1% has already disappeared. “Cattle ranching is the most common land use in
deforested areas throughout the region” states the Amazon Institute of People and the
Environment.
In 1998 under significant financial pressure Brazil agreed to an IMF stabilization
program. In order to ‘stabilize’ the country the proposed program includes a 90% possible
reduction of conservation programs as well as a two-thirds decrease in rainforest protection.
In 1999 $6 million was spent on environmental protection programs in comparison to $57
million on debt service. Reduced capability in environmental protection does not allow the
government to control and penalize illegal logging. However, it is not only structural
62
adjustment that causes deforestation. As history shows indebtedness itself does not allow
people to prosper and forces them to destroy the valuable rainforest to make a living. SAPs
‘only’ add a further pressure and increase the rate of deforestation which would have been
occurring anyways. With $235 billion of foreign debt in 2003 Brazil belongs to Severely
Indebted Middle Income Countries. It seems that the future of the Amazon lies in the hands of
Brazil’s creditors. (Barreto et al., 2006; Montanye & Welch, 1999; Wikipedia, 2006a)
63
12. A DIFFERENT ALTERNATIVE
Despite numerous debt relief initiatives claiming to ”end the debt burden once
and forever”, many countries still have to sacrifice free education, health care, clean
water, clean and diverse environment for debt repayments. Many might argue that
there is not any other way; debt is a promise to pay and most developing countries
need structural reforms. Indeed there is a different way that promotes environmental
protection, health care and education instead of cutbacks and adjustment policies.
12.1 Debt conversions
OECD defines debt conversion as “the exchange of debt - typically at
substantial discount for equity or counterpart domestic currency funds to be used to
finance a particular project or policy”. (OECD, 2003)
There are many types of conversions such as debt-debt swap which can be
defined as a change of creditors holding a country’s loan. (United Nations, 1990)
Another widely used model of debt conversion is the so called debt for equity swap in
which the debt is exchanged for local investments in the debtor country. In 1990
Argentina retired $5 billion in debt by giving the creditors its national airline and its
phone company. (Roodman, 2001:56) While these models of conversion are primarily
used for the profit of the investor, over time conversions such as debt for development
or debt for nature have been developed. Unlike the former, these conversions are
focused on providing substantial funds for development or environmental activities in
the debtor country hence benefiting the debtor not the investor or creditor. (Resor,
1997)
Debts can be swapped either directly when the lender initiates this conversion
or indirectly when an independent institution such as an environmental or
development organization or private firm buys external debt from the lender or
secondary market at a discounted price and exchanges it for an asset in the debtor
country. The lender can also donate either the whole debt or part of it to a non-profit
organization which then swaps it with the debtor country. The debt swap can also be
initiated by the debtor government as in the case of Costa Rica (described bellow).
64
We can also distinguish commercial and bilateral swaps depending on the origin of
the debt.
12.2 Debt for nature swaps
Debt-for-nature swaps can be defined as “agreements in which lenders forgive
some debt in exchange for the debtor’s commitment to convert designated territories
into natural parks and wildlife preserves.” (Blackman, Mathins & Nelon, 2001:13)
Debt for nature swaps were first initiated by Thomas Lovejoy from the World
Wild Fund in 1984. Debt for nature swaps are based on a previous model of debt for
equity swap in which lender forgives some debt in exchange for local currency
investment in the debtor country. However, both these models have very different
purposes. While debt for equity swap aims to generate profit for the ‘forgiver’, debt
for nature swap provides additional funds for conservation purposed in the debtor
country. (Resor, 1997) At first non-government organizations were the primary
initiators of debt conversions, however over time bilateral aid agencies became the
major players. (Roodman, 2001:53)
The first debt for nature swap took place in 1987 in Bolivia and Costa Rica.
Conservation International, an NGO from the United States, bought $650,000 of
Bolivian external debt at a discounted price of $100 000. In return, the Bolivian
government ensured maximum legal protection for Beni Biosphere Reserve, created
three adjacent protected areas, and it also provided funds for management activities in
the Beni Reserve. (Resor, 1997) “In effect, Bolivia paid off loans by ‘exporting’ the
service of protecting forests for the rest of the world, rather than exporting trees,”
concludes D. Roodman (2001). The debt swap in Costa Rica was better developed.
The government agreed to pay 75% of the face value of any debt provided for
conservation. The payment was made into a special fund that could only be used for
environmental projects. It is estimated that by 1990 Costa Rica reduced its debts by
$75 million in this way. (United Nations, 1990)
Kahn and McDonald (1995) find that debt for nature swaps have dual effect
on deforestation. First they are designed to preserve forests as part of the swap.
Second the reduction of debt itself reduces deforestation.
65
Successful Examples of Debt for Nature Swaps
In 1988 WWF acquired $390 000 of the Philippine debt at discounted price of
$200 000. This debt was then redeemed by the Central Bank of the Philippines for the
equivalent of the full face value of the debt in local currency. Haribon foundation, an
environmental organization, then used the money for various conservation projects
such as improved management for national parks or training programs for
conservation professionals.
The Philippines no longer owed $390 000 in dollars to the commercial banks,
on the contrary, they were able to keep the money in the country and support
environmental projects and thus generate investment, instead of shipping it from the
country. It also reduced the pressure on the Bank’s scarce stock of hard currency.
(Resor, 1997)
Fig 11. Debt for nature swap in the Philippines
$390 000 of
debt cancelled
WWF
$200 000
purchase price
Central Bank
of the
Philippines
$390 000
of peso
equivalent paid
$390 000
of debt
Haribon
Foundation
Creditor
Conservation
Projects
Source: Author
66
Management
Support
Training
Projects
In 1994 Canada forgave 75% of Peruvian debt. The remaining 25% was paid
by the Peruvian Ministry of Economics and Finance in local for social and
environmental purposes. The overall amount was divided between FONCODES (the
fund for poverty), UNICEF and PROFONANPE (the fund for nature). (Kaiser &
Lambert, 1996:6)
In 1995 Switzerland forgave 20% of Bulgarian official debt. Bulgaria in
exchange agreed to spend the equivalent in local currency on environmental projects.
The payments were made subsequently in four years and were deposited in a special
environmental fund. The fund then provided grants to non-commercial environmental
projects with technical assistance from the World Bank under the guidelines of
Environmental Action Program for Central and Eastern Europe. (Kaiser & Lambert,
1996:7)
12.3 Debt for development swaps
Similar definition that was used for debt for nature swaps can be used for debt
for development swap with the difference that the debtor commits to fund a
development project. Such swaps actually evolved from debt for nature swaps, when
they were properly established organizations from various sectors engaged in similar
arrangements.
The first project that can be specified as debt for development swap was
launched by UNICEF in 1988. Midland Bank agreed to donate a worthless Sudanese
debt of $800 000 to UNICEF which then redeemed this debt for local currency and
the money was used to fund a development program in Kordofan area which suffered
from drought. (United Nations, 1990)
UNICEF is also one of the most important actors in swapping debt for
development. Between 1989 and 1995 21 debt conversions have taken place in
countries such as Sudan, Madagarcar, Zambia, Phillipines, Jamaica or Bolivia. These
conversions retired $199 million while the costs were only $29 million and money
generated for development projects was $52 million. (Moye, 2001) Kaiser and
Lambert (1996:13) attribute UNICEF’s success to three main factors: projects are
always formulated in partnership with the government and address national priorities
67
of the respective country; projects are chosen for their sustainability and high localcost content; project duration is 3-4 years to guard against inflation or currency
devaluation.
Fig 12. UNICEF debt-for-child development swaps
Source: Moye (2001), Overview of Debt Conversion
68
Successful Example of Debt for Development Swaps
In December 1993 UNICEF completed a complex debt for development swap
in Senegal. The conversion comprised of education, health, sanitation and water
projects throughout the country. UNICEF acquired $24 million face value of both
bilateral and commercial debt owed by Senegal to Argentina at a discounted price of
$6 million. The Senegalese government agreed to pay the equivalent of $11 million in
local currency for three years in support for UNICEF projects.
Fig 13. Debt-for-Development: Senegal
Source: Moye (2001), Overview of Debt Conversion
Debt for development swaps can be further divided into debt for education,
debt for health, debt for child development etc.
69
Although debt swaps seem to be a good alternative for the indebted countries
because it gives them opportunity to decrease the amount of debt and promote
environmental conservation and development projects at the same time, there are also
some negative aspects of debt swaps. According to Melissa Moye (2001:8), such
disadvantages include:
•
Budgetary impact – debt swaps usually require payment in local currency,
therefore they might be less beneficial for countries with large domestic debt
because they have a lack of fiscal resources;
•
Risk of inflation – in some countries debt conversions resulted in the injection
of large amounts of local currency into the national economy later causing
inflation;
•
Transaction costs – debt swap transactions are complex and time-consuming,
therefore governments need to devote significant resources to negotiation,
documentation and monitoring;
•
‘Round-tripping’ – the use of profits from debt conversions should be
monitored in order to prevent investors transfering the gains from swaps out of
the country;
•
Policy conditionality – in some countries debt swaps have been considered as
a form of foreign dominion and challenge to national sovereignty because
certain types of debt swaps (especially debt for equity swaps) result in the
transfer of local assets to foreign ownership or control;
•
Subsidisation of investment – the debtor governments may be subsidising
investments that would have occurred anyway; debt-equity swaps were a
major incentive for foreign investment and a boost to privatisation programs.
However, being aware of the possibility of such negative impacts particular
steps can be taken to prevent the above mentioned disadvantages. Budgetary impact
can be minimised by payments being made over time, inflation can be eliminated by
placing a ceiling on the amount of local currency paid through debt swaps and by
payments being made subsequently. In order to minimise transaction costs some
countries have commissioned foreign advisers to assist them and many governments
have charged a transaction commission. Conditionality is difficult to address and
some countries have stopped participating in such conversions. The first debt for
70
nature swap in Bolivia involved policy changes which were difficult to implement and
provoked controversy. Since then only one more debt for nature swap involved policy
change. (Moye, 2001:8) Such controversy can be also eliminated by addressing the
countries’ priorities (one of UNICEF’s main elements) and by consulting the debtor
government.
I believe that the positive aspects of debt for sustainable development swaps
outweigh the possible disadvantages. However, it should be noted that they are not a
panacea for the debt burden, they should be viewed as a useful tool in debt reduction
and development and environmental promotion. (United Nations, 1990:4)
Despite of their positive impacts on the environment and development, debt
for sustainable development has been minimally implemented so far. Many
governments find them complex and many NGOs do not have the necessary
knowledge and experience to be able to engage in such arrangements. (Kanninen,
n.d.)
71
13. CONCLUSIONS FOR THE CZECH REPUBLIC
Czech Republic once belonged to generous lenders, especially during the
socialist regime. In order to assure further alliance from other communist countries
the Czech Republic supported most of the socialist world. Assistance was very often
provided in form of loans which were either used for investment or ‘technical’
purposes. (Stojanov, 2006)
There are no official reports about the present situation of developing
countries’ debt owed to the Czech state, and release of such information is currently
being reviewed in relation to the act 412/2005 coll. and international and commercial
agreements which the Czech Republic has to follow. We can only roughly estimate
the approximate amount of debts by putting together fragmented information from the
media. However, to large extent this information reflects the reality. (Vlkova,
personal communication, 10 April 2006)
Since 2002 the Czech Republic focuses its development assistance activities
on 8 priority countries: Angola, Bosnia and Herzegovina, Moldavia, Mongolia, Serbia
and Montenegro, Vietnam, Yemen and Zambia. Some countries such as Bosnia and
Herzegovina or Serbia and Montenegro represent ‘priority’ of the priority countries
(per oram, Petr Jelínek, 8 December 2005). It has been calculated (Novinky, 2005)
that former Yugoslavia’s debt owed to Czech Republic exceeds 2 billion Czech
crowns. Not having the exact data how the debt was divided after Yugoslavia ceased
to exist it is difficult to estimate the exact amount of debt owed by the successor
countries. However, it has been stated (Novinky, 2005) that Czech Republic and the
former Yugoslavia countries are preparing an agreement concerning further
repayments. Although this information did not come from an official source, I believe
there is still debt owed to Czech Republic by the respective countries.
72
Fig 14. Countries owing debts to Czech Republic, 2005 (mil. CZK)
Country
Russia
Iraq
Former Yugoslavia countries
Sudan
Nicaragua
Iran
Burma
Syria
Albania
China
Democratic Peoples Republic of Korea
Afghanistan
Cambodia
Belarus
Slovenia
Laos
Cuba, Algeria, Libya
Debt owed to Czech Republic
8172
7058.8
2213.2
1941.9
940.3
939.8
826.6
483.4
299.3
244.2
201.8
78.2
63.0
43.4
5.5
4.6
Classified information
Source: Novinky (27.11.2005), Zahraničí dluží Česku 37 miliard, nejvíc Rusko
Furthermore, I would like to focus on Serbia and Montenegro mainly because
it is classified as a severely indebted country, we can presume it still owes some assets
to the Czech republic and it is one of the ‘priority’ of the priority countries where
Czech development assistance is focusing its aims.
In the late 1990’s the European Union members agreed on three principles of
development assistance. These became known as “3Cs” which stand for coherence,
complementarity and coordination. Being a member of the EU the Czech Republic
should follow these principles. I find it incoherent to be assisting a country in its
further development on one side, and on the other to be receiving debt repayments.
Serbia and Montenegro is currently further from reaching the MDGs than it
was in 1990. In 1990 ‘only’ 7.3% of the population was considered poor, in 1999 it
was over 40%. Among these more than 18% lived in extreme poverty. Although the
situation has been improving high numbers remain and therefore Serbia’s primary
focus is the elimination of poverty.
73
Debt situation
The total external debt of Serbia and Montenegro is approximately $14.8
billion 23 . In 2001 former Yugoslavia received exceptional debt relief from the Paris
Club members of 66%. In 2004 the London Club also agreed to write off 62% of
former Yugoslavia’s debt. In 2002 the country concluded a three-year Extended Fund
Facility arrangement with the IMF which started the first phase of a 51% write-off. A
further 15% relief is expected from the Paris Club members. (see If there is a will,
there is a way)
Debt Indicators:
Net Present Value debt-to-export ratio 183%
Total debt to GNI: 72.6%
Fig 15. Debt Outstanding Serbia Montenegro
Debt Outstanding Serbia Montenegro
16000
Short Term Debt
US$ in Million
14000
Private non guaranteed
12000
Private Other
10000
Private Banks
8000
Private Bonds
6000
Bilateral concessional
4000
Bilateral non concessional
2000
Multilateral concessional
Multilateral non concessional
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
Source: Kaiser, Kowsky & Schuleller (2006), Sovereign Debt in Central/Eastern European and
Commonwealth of Independent States Countries
A recent study (Kaiser, Kowsky & Schuleller, 2006:68) states that for Serbia
and Montenegro macroeconomic risks in early 2005 continue to be high and despite
successful reschedulings, there remains a high risk of debt distress. The authors
23
$14,885 million estimated by GDF 2005 for 2003; $14,876 million according to Kaiser, Kowsky,
Schuleller (2006:65)
74
suggest that since a high debt-to-GNI ratio prevails, and the country still has a
relatively high proportion of short-term debt, new debt renegotiation process with the
main creditors would be appropriate in order to strengthen the economy before the
proposed EU acceptance.
Looking at the information described above and learned in previous chapters I
believe debt for sustainable development swaps would be a good solution for Serbia
and Montenegro from the Czech point of view. Such agreements would ease the debt
burden and further assist the country in reaching their set goals as well as the MDGs.
On this basis, I am suggesting a debt-for-development and a debt-for-nature
swaps which are supposed to demonstrate debt-for-sustainable-development projects
from the Czech point of view. Each project is based on different principles with the
purpose to show different possibilities.
75
13.1 Model Projects
Debt for Nature Swap
Environmental protection in Serbia and Montenegro has suffered enormously
during the past several decades; at first, during the socialist regime, later during the
war in Kosovo. It is estimated (Ministry for the Protection, 2000) that warfare damage
to the environment in Serbia amount to more than $4 billion. The Government of
Serbia defined National Environmental Priorities (Ministry for the Protection, 2000)
which focus on:
ƒ
Building and reinforcing of institutions and services relevant to the system of
environmental protection;
ƒ
Adoption of Framework Law on System of Environmental Protection and
designing and implementation of the new Environmental Strategies;
ƒ
Environmental Hot Spots remediation and the starting of problem realization
in waste and wastewater treatment;
ƒ
The preparation and implementation of National Environmental Action Plan,
as well as other strategic relevant documents;
ƒ
Development of the integral environmental information system;
ƒ
Preparation of Local Environmental Action Plans.
The model project of debt for nature swap follows these priorities in order to
assist the country in achieving what they consider most acute. In particular the project
addresses building and reinforcing institutions and services relevant to the system of
environmental protection and environmental hot spot remediation.
Steps
1. The Czech government cancels 100% (depends on the agreement between the
countries, the cancelled amount does not necessary have to be 100%) of Serbia
and Montenegro’s debt.
2. The Ministry of Finance of Serbia and Montenegro will pay the equivalent of
agreed amount (might be 100% of the cancelled debt or less) over 5 years to a
special Environmental Fund.
3. The Fund will be governed by the Board of Directors which will include
representatives of both civil society organizations (mainly environmental) and
76
governmental institutions. The Board of Directors will also establish a Committee
for project selection.
4. The activities of the Fund will be supervised by the Board of Trustees which will
include representatives of the Federal government, international institutions such
as UNDP and a representative of the Czech Embassy.
5. The Fund could be managed on a daily basis by the Institute for Nature
Conservation or by Ministry for the Protection of Natural Resources and
Environment.
All necessary expenditures with the management would be covered from the
Fund. The Fund would primarily support environmental projects addressing the
national priorities such as capacity building and hot spot remediation. Majority of the
finances (80%) should be distributed to activities proposed by NGOs, academic or
government institutions, the remaining 20% would support activities of the private
sector.
77
Fig 16. Debt for nature swap, Czech Republic
Czech
Government
Debt
cancellation
Government of
Serbia and
Montenegro
Board of Trustees
Equivalent of
cancelled debt
in local currency
Ministry for the
Daily
Protection of Natural
management
Resources and
Environment /
Institute for Nature
Conservation
Environmental
Fund
Supervising
Governing
Board of Directors
Funding for projects
Capacity
Building
Projects
Training
Projects
Project selection
Committee for Project
Selection
Source: author
78
Environmental
Hot Spots
Remediation
Projects
Debt for Development Swap
Due to the considerably small size and financial resources of Czech NGOs it
would be almost impossible for a single NGO to acquire some debt on the secondary
market. A possibility might be a donation of the debt by a commercial creditor or an
assignment of the debt by the creditor government which will be the case of the
following model.
As mentioned before, the level of poverty in Serbia and Montenegro has risen
in the 1990. After 6 years of the end of the Kosovo conflict there are still refugee
camps. The Agency for Development Assistance and Humanitarian Aid of the
Olomouc Region, o.p.s. is aware of 15 refugee camps. The members (internally
displaced people) live in conditions that do not meet the basic standards. They seek
out food for themselves and they are not accepted by local communities. Although the
government is aware of the situation necessary steps are not taken in order to solve
the current state.
The model debt for development project addresses the situation of the refugee
camps. The project activities may include a detailed analysis of the situation,
monitoring needs of the members, training schemes, educational and free-time
activities for children and so forth. After the analysis is completed further projects
might focus on helping the refugees join the local community and assisting them in
finding job positions. These activities only demonstrate many possible ways of how
the situation can be addressed.
Steps
1. The creditor government ‘donates’ the claim to an NGO under certain conditions.
2. The NGO then negotiates the value of the debt with the debtor government, and
because it received the debt for free, the NGO can swap the debt at a very low
price.
3. The debtor Ministry of Finance will pay the equivalent of the agreed amount to
the local NGO. Payments can be made at once or over an agreed period of time.
4. The NGOs then use the resources for funding development project/program.
5. An experienced UN agency such as the UNHCR is a partner organization acting
as a consultant in the project.
79
Fig 17. Debt for development swap, Czech Republic
Negotiated
debt
cancellation
Debt
assignment
Czech
Government
UNHCR
Czech NGO
Debt for development
project
implementation
Guidance,
consultancy
Government of
Serbia and
Montenegro
Equivalent of
cancelled debt
in local currency
NGO in Serbia
Educational
programs for
children
Free time
activities
Retraining
schemes
Detailed
ananlysis
Source: author
The possible disadvantage of such conversion is the conditionality the creditor
government may attach to the swap, such as limited price of the debt or the how the
money is going to be used. (Kaiser & Lambert, 1996:30)
However, I find this type of conversion as the most attractive for Czech NGOs
because it does not require any financial investment or technical negotiation.
Nonetheless, it should be noted that such conversions involve large amounts of
finances and thus the projects implemented under such swaps are large-scale,
therefore small-size NGOs should seek guidance and advice from experienced
‘swappers’.
80
14. CONCLUSION
After more than three decades of debt relief many countries are still
experiencing difficulties with balancing their budgets. Finances are spent debt
repayments instead of education, health care and environmental protection.
The aim of this thesis was to show the impacts debt burden can have on the
debtor countries and also show the possible solutions. Debt for sustainable
development swaps represent a new alternative not only for official creditors, but also
for non-governmental organizations. Although complex, they have dual positive
effect on the debtor country. They ease the debt burden and provide resources for
development programs and environmental protection.
However, it should be noted that debt for sustainable development swaps also
carry some negative aspects, and therefore an institution that would wish to
participate in such arrangements should seek out guidance from experienced
‘swappers’.
There is still insufficient research about the link between the cause and the
effect of indebtedness. More research will have to be done to show the exact impacts
of the debt burden on the environment and the society in the developing countries.
There is also not enough evidence about debt for sustainable development swaps.
Although, I believe, that successful examples have shown that such arrangement work
and mostly result in positive impacts.
The near future of debt relief lies partially in the hands of multilateral
agencies. Neither of the International Financial Institution have so far applied such
methods. More influence from the civil society organizations is needed in order to
push for more alternative methods of debt relief. The debtor countries should more
often initiate such arrangements with their bilateral and official creditors.
The issue of debt relief and the impact of debt on the developing countries is
very broad. A similar thesis could focus more on debt for sustainable development
swaps from the theoretical but also practical point of view. More evaluation and
monitoring need to be done, in order to show their positive impacts.
81
15. SUMMARY
The Bachelor thesis focuses on the problem of debt burden many developing
countries are facing now-a-days. Its purpose is to provide the reader with overall
information about the debt situation in the developing countries, show the solutions
that have been applied and subsequently failed, analysis the impact of indebtedness on
the environment and civil society in the developing countries, and seeks out possible
solutions for the contemporary state of environmental and social difficulties which are
directly or indirectly linked to the debt burden.
The first part of the work explains the history of indebtedness, which provides
basic facts about the circumstances of the past three decades when the debt situation
worsened. Afterwards key terms are explained and main actors such as the World
Bank and the International Monetary Fund are introduced. Furthermore, the thesis
looks closely on the solutions that have been applied by the international financial
institutions and so far failed to solve the problem. The work later focuses deeply on
the impacts of indebtedness on the environment and social society in the developing
countries. The near end of the work leads to possible solution in form of debt for
sustainable development swaps which preserve the environment and promote
development and ease the debt burden at the same time.
The last part of the thesis applies the gathered information and derives
conclusions for the Czech Republic. Two model project of debt for sustainable
development swaps demonstrate possible solutions from the Czech perspective.
KEY WORDS
Debt, relief, impact, environment, society, debt for nature swap, debt for development
swap
82
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17. ANNEXES
1.
2.
3.
4.
List of HIPC countries
HIPC procedure
Millennium Development Goals
Organizations focusing on the debt issue
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Annex 1
Source: WB (2006f), List of HIPC
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Annex 2
Source: World Bank, List of HIPC countries
Source: IMF (2000), HIPC procedure
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Annex 3
The Millennium Development Goals are drawn from the Millennium
declaration which was adopted by 189 countries in 2000. Each goal has one or more
targets and indicators how progress is going to be measured. The MDGs should be
achieved by 2015.
Goal 1. Eradicate extreme poverty and hunger
Target 1: Reduce by half the proportion of people living on less than a dollar a day
Target 2: Reduce by half the proportion of people who suffer from hunger
Goal 2. Achieve universal primary education
Target 3: Ensure that all boys and girls complete a full course of primary schooling
Goal 3. Promote gender equality and empower women
Target 4: Eliminate gender disparity in primary and secondary education preferably
by 2005, and at all levels by 2015
Goal 4. Reduce child mortality
Target 5: Reduce by two thirds the mortality rate among children under five
Goal 5. Improve maternal health
Target 6: Reduce by three quarters the maternal mortality ratio
Goal 6. Combat HIV/AIDS, malaria and other diseases
Target 7: Halt and begin to reverse the spread of HIV/AIDS
Target 8: Halt and begin to reverse the incidence of malaria and other major diseases
Goal 7. Ensure environmental sustainability
Target 9: Integrate the principles of sustainable development into country policies and
programmes; reverse loss of environmental resources
Target 10: Reduce by half the proportion of people without sustainable access to safe
drinking water
Target 11: Achieve significant improvement in lives of at least 100 million slum
dwellers, by 2020
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Goal 8. Develop a global partnership for development
Target 12: Develop further an open, rule-based, predictable, non-discriminatory
trading and financial system Includes a commitment to good governance,
development, and poverty reduction — both nationally and internationally
Target 13: Address the special needs of the least developed countries Includes: tariff
and quota free access for least developed countries’ exports; enhanced programme of
debt relief for HIPCs and cancellation of official bilateral debt; and more generous
ODA for countries committed to poverty reduction
Target 14: Address the special needs of landlocked countries and small island
developing States
Target 15: Deal comprehensively with the debt problems of developing countries
through national and international measures in order to make debt sustainable in the
long term.
Target 16: In cooperation with developing countries, develop and implement
strategies for decent and productive work for youth.
Target 17: In cooperation with pharmaceutical companies, provide access to
affordable essential drugs in developing countries
Target 18: In cooperation with the private sector, make available the benefits of new
technologies, especially information and communications
(UNDP, 2006)
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Annex 4
Many NGOs from the ‘developed’ as well as developing countries are
focusing on the debt issue either from the analytical or campaigning perspective. This
section names only a few but major ones.
AFRODAD
The African Forum and Network on Debt and Development, is a civil society
organisation born of a desire to secure lasting solutions to Africa’s mounting debt
problem which has impacted negatively on the continent’s development process.
www.afrodad.org
Bretton Woods Project
The Bretton Woods Project works as a networker, information-provider, media
informant and watchdog to scrutinise and influence the World Bank and International
Monetary Fund. Through briefings, reports and the bimonthly digest Bretton Woods
Update, it monitors projects, policy reforms and the overall management of the
Bretton Woods institutions with special emphasis on environmental and social
concerns. brettonwoodsproject.org
Debt and Development Coalition Ireland
The Debt and Development Coalition Ireland (DDCI) is composed of organisations
and individuals who share a deep concern about the injustice of the debt crisis and a
commitment to work together for an effective, fair and speedy solution to the crisis.
www.debtireland.org
EURODAD
The European Network on Debt and Development, is a network of 48 development
non-governmental organisations from 15 European countries working for national
economic and international financing policies that achieve poverty eradication and the
empowerment of the poor. www.eurodad.org
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IFIwatchnet
IFIwatchnet is an international network which connects organisations worldwide
which are monitoring international financial institutions (IFIs) such as the World
Bank, the IMF, and regional development banks. www.ifiwatchnet.org
Jubilee Debt Campaign
Jubilee Debt Campaign is the UK's campaigning successor to Jubilee 2000 and Drop
the Debt. It is a coalition of local/regional groups and national organisations. JDC
focus is on changing UK government policy on debt, including to ensure that the
maximum influence is brought to bear on the World Bank and International Monetary
Fund - on whose governing bodies the UK is represented.
www.jubileedebtcampaign.org
Jubilee Research
Jubilee Research is part of the Global and National Economics (GNE) programme at
NEF. It is also the UK's campaigning successor to Jubilee 2000. Jubilee Research
provides up-to-date, accurate research, analyses, news and data on international debt.
www.jubileeresearch.org
Jubilee South
Jubilee South is a network of jubilee and debt campaigns, social movements,
people's organizations, communities, NGOs and political formations. The Jubilee
South network aims to and is in the process of emerging and developing as an
international South movement on the debt. It has members from over 40 countries
from the regions of Latin America and the Caribbean, Africa and Asia/Pacific,
composed of 85 groups. www.jubileesouth.org
NEF
New Economics Foundation is an independent think-and-do tank that inspires and
demonstrates real economic well-being. nef works with all sections of society in the
UK and internationally - civil society, government, individuals, businesses and
academia - to create more understanding and strategies for change.
www.neweconomics.org
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