The Role of the International Monetary Fund and World Bank

							       BENTLEY COLLEGE
  Bentley Model United Nations Program
16th Annual BMUN High School Conference
             28-31 May 2004
         La Cava Campus Center


BACKGROUND PAPER AND TOPIC SUMMARY




         Third World Debt
Executive Summary:

       The debt problems of developing countries that began in the 1980s still remain a huge

burden in the new millennium. Although there have been several initiatives like the Baker Plan,

the Brady Plan, and the HIPC Initiative to ease the burdens of those countries, many still

experience unsustainable debt. The debt burdens of developing and middle-income countries

increased from $500 billion in 1980 to $1 trillion by 1985. By 2000, their debt was about $2

trillion. The debts of HIPC countries increased from $60 billion in 1980 to $190 billion by 1990.

Even with relief programs like the HIPC Initiative, 8 countries under the Initiative experienced

worsening debt indicators even after reaching their completion points. The consequences of

developing countries’ inability to exit from debt payments go beyond the financial level. In

addition to economies being hurt, the peoples of developing countries will also feel the affects.

The United Nations established the Millennium Development Goals in 2000 that pledged to

halve income poverty between 1990 and 2015, but countries like those in Sub-Saharan Africa

will most likely not meet this goal.

       The problems delaying debt relief result from numerous actors. Creditors need to provide

additional financing and fulfil their commitments to debtor countries. The Bretton Woods

institutions need to speedily and effectively implement the enhanced HIPC. Some heavily

indebted countries still have to take policy measures to become eligible for the HIPC Initiative

and reach the decision point. All parties are responsible and must make greater efforts to reduce

the debt burdens in order to improve the lives of those people that are most affected.
Introduction:

       The debt burdens of developing countries continue to hinder their economic and social

developments. Although there have been several programs to try to resolve the problem, no one

program has proven to be completely effective. The debt burdens of developing and middle-

income countries have continued to rise. They increased from $500 billion in 1980 to $1 trillion

by 1985. By 2000, their debt was about $2 trillion. The debts of HIPC countries increased from

$60 billion in 1980 to $190 billion by 1990. With unsustainable debt, many of the worlds

poorest will not be able to receive an education, have access clean water, or be free from extreme

poverty due to their governments spending more on debt repayments than on social services.

The destinies of these people can be changed with the cooperation of international organizations,

developed countries, and developing countries to reduce debt payments and divert those savings

to social expenditures.

       To understand the scope of the debt problems of developing countries and see what

challenges they face, the problem has to be examined from multiple angles and from the

viewpoints of various actors. The current situation section highlights the most recent reports on

debt sustainability and what different organizations have done and still need to do to improve the

situation. The historic background section provides the history of how unsustainable debt was

incurred and the initiatives that were taken to reduce it by actors like the United Nations and

Bretton Woods Institutions. The country position section looks at the roles of the Paris Club, the

G8 countries, individual creditors, and the Bretton Woods Institutions in shaping the debt relief

situation. All these actors are vital in debt relief process and their actions or in-actions have

already and will continue to affect so many lives.
Current Situation:

        On April 16, 2004, the Development Committee of the World Bank and International

Monetary Fund issued the Global Monitoring Report 2004. The report found that current trends

indicate the Millennium Development Goals will not be met by many countries. The

Millennium Declaration, which was signed by 189 countries in the United Nations General

Assembly on September 2000, led to the Millennium Development Goals (MDGs). 1 Some of

MDGs targets included freeing men, women and children for abject and dehumanizing

conditions of extreme poverty. It aimed to halve the proportion of the world’s people whose

income was less than one dollar a day, to halve the proportion of people who suffered from

hunger, and to halve the proportion of people who did not have access to or could not afford safe

drinking water.2 The goal of halving income poverty between 1990 and 2015 will most likely be

met due to stronger economic growth resulting from improvements in policy. However, some

countries in different regions, especially Sub-Saharan Africa, will not meet this goal. Only 8

countries, which represent 15 percent of the population within this region, will accomplish the

task. The trends are similar for the MDG to cut in half the proportion of people suffering from

hunger. The global goal is expected to be met, but Sub-Saharan Africa and other countries in

different regions risk falling short.3

        The difficulties in achieving the MDGs are intertwined with many factors; one factor

being the current debt burdens of developing countries. The debt and debt repayments problems

of many countries are stumbling blocks to the achievement of their citizens’ social and economic


1
  Development Committee. “Global Monitoring Report 2004: Policies and Actions for Achieving the MDGs and
Related Outcomes.” DC2004-0006. International Monetary Fund. 12 April 2004. 1 May 2004
<http://www.imf.org/external/np/pdr/gmr/eng/2004/041204.pdf>.
2
  General Assembly, “55/2. United Nations Millennium Declaration,” A/RES/55/2, United Nations, 18 Sept. 2000.
1 May 2004 <http://www.un.org/Depts/dhl/resguide/r55.htm>.
3
  Development Committee.
development. For instance, Tanzania spends nine times more on debt payments than on basic

health and four times more than on primary education. Overall, Africa spends four times more

paying creditors than on health and education.4 In order for low-income countries to invest in

their people, they need funds to be allocated to social programs rather than debt repayments.

Although this is necessary, the main program to combat unsustainable debt for low-income

countries, the Heavily Indebted Poor Countries Initiative (HIPC), has been progressing at a slow

rate. As of March 2004, 27 heavily indebted poor countries out of the 38 potentially eligible

countries had reached their “decision point” and are receiving debt relief. Of those 27 countries,

10 reached “completion point,” which is when full debt relief has been provided.5

        Despite the efforts of the HIPC Initiative, some countries still have not achieved debt

sustainability. A report by the United Nations High-level Dialogue on Financing for

Development issued by the Secretary General in October 2003 announced that the countries who

reached the “completion point” still experienced worsening debt indicators. 6 The delays in

reaching the “decision point” result from different factors. There have been problems in

preparing the Poverty Reduction Strategy Papers (PRSPs), a country owned and led development

strategy that plays a key role in bringing national polices and international support together to

achieve the MDGS. It also has been attributed to countries’ inability to meet their fiscal targets

and to the evaluations of HIPCs by international financial institutions like the IMF and World

Bank to see if they have established a satisfactory track record of using sound economic




4
  Monitoring Development and Governance Division, “Debt and Sustainable Human Development,” Technical
Advisory Paper No.4, United Nations Development Program, 2 May 2004
<http://magnet.undp.org/docs/efa/techpaper4/default.htm>
5
  Economic and Social Council, “Coherence, coordination and cooperation in the context of the implementation of
the Monterrey Consensus,” E/2004/50, United Nations, 8 April 2004, 1 May 2004 <http://ods-dds-
ny.un.org/doc/UNDOC/GEN/NO4/305/37/PDF/NO430537.pdf?OpenElement>.
6
  Economic and Social Council.
policies.7 Some countries have had difficulties reaching the “decision point” due to conflicts or

their emergence from recent conflicts.

        The inability of many countries to reach the decision point has raised the questions of

whether the economic growth and feasible policy reforms were too high and unrealistic. The

Secretary-General, therefore, called for a deepening of the HIPC process and for donors to

provide additional contributions and relief, which creditor countries agreed was needed. He also

called for new external financing to be in non-debt creating forms such as providing grants

instead of loans to poor countries. During this meeting, creditor countries agreed to re-

investigate the option of “topping off,” which is another means to provide additional debt relief

to HIPCs still having unsustainable debt after their completion point. 8

        As for improving the HIPC Initiative itself, there have been recent suggestions to make it

more effective. Some of these suggestions include expanding the framework of the Initiative in

order to overcome external and natural disaster shocks like providing rapid financing by

international financial institutions. There have also been calls to creditor countries to stop

delaying their delivery on HIPC commitments and a proposal for the World Bank and IMF to

report on the compliance of member countries.9



Current role of the IMF and World Bank:

        Besides the HIPC Initiative, the IMF and World Bank are contributing through other

means to improve the situations of highly indebted countries. They are completing an analytical



7
   Economic and Social Council.
8
  “Financing for Development Briefing note 3: Unfinished business on developing country debt,” DPI/2330C,
United Nations, , October 2003, October 2003. 2 May 2004 <www.un.org/esa/ffd>
9
   “Summary by the President of the General Assembly of the High-Level Dialogue on Financing for Development,”
A/58/555, United Nations, 1 May 2004
<http://ods-dds/ny.un.org/doc/UNDOC?GEN/NO3/601/76PDF/NO060176.pdf>
framework for measuring the debt sustainability of low-income countries that provides separate

guidelines to those countries since their debt is mainly official debt.10 They are also

investigating whether an extension of the HIPC, which is due to expire by the end of 2004, will

be appropriate in addressing the problems of countries that have yet to benefit from the

program.11 On an individual basis, the IMF is improving its role in assisting low-income

countries by adapting financial and technical support to allow those countries to get donor

assistance, deal with post-conflict situations, respond to exogenous shocks, absorb the cost of

adjustment to multilateral trade liberalization, and create institutions to access private financing.

It is also working to improve Fund-supported economic programs to low-income countries and

enhancing the integration of PRSP.12



Current Activities by United Nations Organs:

        Different organs within the United Nations have also developed programs to help low-

income countries deal with unsustainable debt. Debt analysis has shown that these countries

have serious weaknesses in debt management. Few countries, especially those in Sub-Saharan

Africa, have been able to maintain accurate information on debt stock and arrears. They have

not been able to set up effective debt management policies like regulating debt undertakings and

making sure that unsustainable debt does not take away from sustainable development. In order

to provide effective debt management, the United Nations Development Program (UNDP) have

created global, regional and country level partnerships and programs. By June 1999, UNDP

upgraded the United Nations Conference on Trade and Development’s (UNCTAD) programme

for debt management and installed it in over 50 countries in Africa, Asia, Europe, Latin America,

10
   Economic and Social Council.
11
   Economic and Social Council.
12
   Development Committee.
and the Caribbean. It also created a regional program in Southern and Eastern Africa for debt

and reserve management known as ESADIARM and later MEFMI, the Macroeconomic and

Financial Management Institute of Eastern and Southern Africa. MEFMI is the only successful

debt management program in the African region. Its members contribute to its budget in

addition to donors, and it emphasizes high quality staff recruitment. MEFMI provides

workshops to identify user needs, thus, allowing members to gain new knowledge and learn new

practices. In addition to training, the program provides onsite training and advice so new debt

managers have constant support.13



Historic Background:

Incurrence of Debt:

       In the 1970s and 1980s, there was a rapid growth of banks lending to offshore markets.

Commercial banks provided loans to developing countries due to a lack of customers in

developed nations and the ability of the banks to earn quick profits from high risk countries. The

lending operations proved to be disastrous. By 1981, the debts of developing countries with

deficits rose to $470 billion (US) from $270 billion in 1977. Increasing debt resulted from major

disruptions during the 1980s. There was a huge increase of interest rates that did not return to

past levels.14 For instance, interest rates on loans reached up to 17-18 percent between 1979 and

1980. There were also exchange rate fluctuations, energy price increases, and the terms of trade

for non-oil developing countries deteriorated drastically since the mid-1970s. The prices of

manufactured goods increased while the prices of primary goods decreased. In addition to



13
 Management Development and Governance Division.
14
 United Nations Development Program, “DEBT MANAGEMENT-Report on te Joint Programmed of Debt
Management,” United Nations, 1 May 2004 <http://magnet.undp.org/docs/efa/Debt.htm>.
declining terms of trade, developing countries were also hurt by the protectionist policies that

limited access to the markets of developed countries.15

        The loans obtained by developing countries were often used in uneconomical ways that

went beyond the countries’ means. Loans were used to finance badly planned projects, to

balance budget deficits, and in some countries they were used private assets like bank deposits,

shares and property.16 In addition to poor policies by governments, inefficient debt management,

outside shocks such as bad weather and political factors such as civil war and social strife also

contributed to the debt crisis.17 As a result of incurring huge debt burdens, many countries had

to reduce spending on social services in order to make payments to creditors. This caused much

of their population to remain in poverty.

        The seriousness and depth of the debt crisis can be seen in the debt figures for developing

and middle-income countries. Their debt rose from $500 billion (U.S.) in 1980 to $1 trillion in

1985. By 2000, their debt was about $2 trillion. Forty-one HIPC countries’ debts increased

from $60 billion in 1980 to $105 billion in 1985 and $190 billion by 1990. Without debt

reduction measures, their debt would be close to $200 billion in 2000.18 These figures provide

evidence of the urgent need for debt reducing policies and mechanisms.



Efforts to Ease the Debt Crisis:

Baker Plan:




15
   United Nations Development Program.
16
   United Nations Development Program.
17
   Ray, Brooks et al. “External Debt Histories of Ten Low-Income Developing Countries: Lessons from Their
Experience” International Monetary Fund Working Paper. International Monetary Fund. May 1998. 27 Feb. 2994
<http://www.imf.org/external/pubs/ft/wp/wp9872.pdf>
18
   IMF Staff “The Logic of Debt Relief for the Poorest Countries” IMF Issues Brief. Sept. 2000. International
Monetary Fund. 9 Feb. 2004 <http://www.imf.org/external/np/exr/ib/2000/092300.htm>.
        One of first efforts to prevent third world countries from defaulting on their loans was the

issuance of new loans by the developed countries through institutions like commercial banks, the

IMF, and other multilateral agencies. The goal was to give indebted countries time to rework

their finances before repaying their debts in future years. Developing nations had to follow IMF

sponsored adjustment programs that included raising taxes, increasing tariffs, devaluating

currency, and even reducing government spending.19

        After it was evident that developing countries were not recovering from their debt

problems and were becoming more indebted, the five largest industrial countries met in New

York to deal with the crisis. They adopted the Baker Plan, which was developed by the U.S.

Treasury Secretary James A. Baker in 1985. The plan provided $29 billion worth of new

financing for indebted countries over a three year period. The Baker Plan used commercial

banks to provide lending, required that multilateral institutions actively participate in the solution

and required that borrowers meet the conditions of those institutions. It was also a voluntary

plan, which made it ineffective.20



Brady Plan:

        A successive plan to resolve the crisis was the Brady Plan, which was created in 1989.

This plan increased the roles of the World Bank and IMF while focusing on mostly middle-

income countries in Latin and Central America. The plan contained measures that would entice

commercial banks to rewrite existing contracts by exchanging debt for liquid assets on better

terms or for cash.21 Under the Brady Plan, 18 countries had agreed to forgive $60 billion worth


19
   Ian Vasquez,“The Brady Plan and Market-Based Solutions to Debt Crises,” The Cato Journal, Vol. 16, No. 2, 6
May 2004 <http://www.cato.org/pubs/journal/cj16n2-4.html>.
20
   United Nations Development Program.
21
   United Nations Development Program.
of debt by May 1994. Also, the IMF and World Bank provided $12 billion each, and the

Japanese Import-Export Bank provided $8 billion for securitization. A deal made under this plan

led to a 30 to 35 percent reduction of a country’s debt.22



Heavily Indebted Poor Countries Initiative:

        In 1996, further debt relief was provided by the IMF and World Bank in the form of a

joint Initiative for the Heavily Indebted Poor Countries (HIPC). The Initiative provided

resources for countries to achieve sustainable debt within a reasonable period of time.23 Under

the HIPC Initiative, the poorest countries had the highest priority in obtaining low interest rate

debt relief, especially those that had strong performance records under programs supported by

the IMF and World Bank and those that would not achieve sustainable debt even after traditional

debt relief. The measure used to determine external debt sustainability was the ratio of the net

present value (NPV) of debt to exports ratio which ranged from 200 to 250 percent of exports.24

        To be eligible for assistance from the Initiative countries had to have an annual per

capital income of less than $900, and they were required to have used all existing debt relief

mechanisms without reaching sustainable levels of debt. In addition, they had to prove that they

had a strong record of economic and structural reforms while receiving concessional financing

from the Paris Club.25 If they strayed from that track, they would have to wait longer for relief.26

The adopted policies were designed to solve a country’s balance of payment difficulties and add

to strong economic growth by creating greater economic stability. They were intended to


22
   Ian Vasquez.
23
   Andrews, David et al. “Debt Relief for Low-Income Countries-The Enhanced HIPC Initiative,” IMF Pamphlet
Series, No. 51. International Monetary Fund. 1999. 7 March 2004
<http://www.imf.org/external/pubs/ft/pam/pam51/contents.htm>.
24
   Andrews, David et al.
25
   Andrews et al.
26
   Management Development and Governance Division.
address structural problems impeding healthy growth, measures to strengthen financial systems

or to improve governance.27 The IMF and World Bank’s responsibility was also to ensure that

the resources of donor governments were properly being used.28

        After successfully implementing the economic and structural reforms for a three year

period, the countries reached decision point. At this stage, the Executive Boards of the IMF and

World Bank would determine a country’s eligibility for the Initiative. Assistance was then

provided after a country was deemed eligible based on a debt sustainability analysis by the IMF

and Bank staff and country authorities. When a country was eligible for assistance under the

Initiative, assistance was provided at the completion point. Between the decision point and

completion point, countries had to continue implementing economic and structural reforms, and

they had to continue receiving concessional lending from the IMF and World Bank.29

        The results of the HIPC Initiative were limited to a few countries. Fourteen countries

were considered for eligibility under the Initiative and seven of those countries which included

Uganda, Bolivia, Burkina Faso, Guyana, Cote d’Ivoire, Mozambique and Mali received

assistance. Under the Initiative, there was a 20% reduction in debt and total debt relief in

nominal terms of $6.77 billion.30 Although these figures were substantial, the number of

countries and people benefiting from the Initiative was limited. Initially 41 countries, mostly in

Africa, were considered to be heavily-indebted poor countries with about 300 million people

living on less than a $1 per day.31 The Initiative, therefore, was not able to reach all the people

and countries requiring assistance.



27
   “IMF Conditionality,” International Monetary Fund, Dec. 2002, 8 March 2003
<http://imf.org/external/np/exr/facts.conditio.htm>
28
   IMF Staff “The Logic of Debt Relief for the Poorest Countries.”
29
   Andrews et al.
30
   Andrew et al.
31
   IMF Staff, “The Logic of Debt Relief for the Poorest Countries.”
        In 1999, the HIPC Initiative was reviewed by the Executive Boards of the IMF and

World Bank who consulted with religious groups, nongovernmental organizations, the media,

international organizations, and governments.32 This review resulted in changes to the HIPC

Initiative, thus, creating the most recent measure known as the Enhanced HIPC.

        The Enhanced HIPC is designed to offer greater debt relief and extend relief to more

countries. The new framework lowers targets and modifies performance requirements. It

simplifies the design and implementation of the HIPC Initiative while also lowering the

uncertainties of how much debt relief will be provided to HIPCs. It adds to the original Initiative

by requiring the full participation of all creditors and focusing on sustainable development.33

The Enhanced HIPC increases the number of countries that could potentially qualify for

assistance from 29 to 36, with the potential for more countries to be involved.34

        The Enhanced HIPC also emphasizes the link between debt relief and poverty reduction.

This comes in the form of the Poverty Reduction Strategy Paper (PRSP) which is prepared by the

government with involvement from civil society, nongovernmental organizations, donors, and

international organizations. PRSPs are intended to make the voice of the poor heard and ensure

that HIPC resources are truly used to reduce poverty. It is also the basis for the IMF concessional

lending that will provide 10-year loans at a rate of 0.5 percent to low-income countries. 35

        The Enhanced HIPC has provided greater relief to the low-income countries able to meet

the requirements of the IMF and World Bank. Twenty-seven countries have reached completion

points, and over $31 billion of debt relief have been committed to these countries. In 2002, the

NPV terms were estimated to fall from $77 billion before traditional relief to $32 billion after the


32
   Andrews et al.
33
   Andrews et al.
34
   Andrews et al.
35
   IMF Staff, “The Logic of Debt Relief for the Poorest Countries.”
delivery of traditional relief and the HIPC Initiative, and $26 billion with additional relief from

different creditors. The annual debt service by the 27 countries is projected to be 30% lower for

2001-05 than in 1998 and 1999. This allows $1.0 billion in debt service to be saved, therefore,

allowing the savings to be spent on poverty-reducing expenditures. Poverty-reducing spending

increased from $6.1 billion in 1999 to $8.4 billion in 2002. It is projected to increase to $11.9

billion in 2005.36

        The gains show how the Enhanced HIPC of the IMF and World Bank has been and will

continue to be a positive mechanism for reducing the debt of third world nations and improving

the lives of their citizens. It is, however, not the only mechanism needed to ensure that millions

of people will be lifted out of poverty. Collaboration between all parties, which include the IMF,

World Bank, the United Nations, debtor countries, and creditor countries, is essential to meet this

goal.



Actions by United Nations Organs:

        In 1989, a group of independent experts presented a United Nations Development Report

on debt management. It found that excessive foreign debt was an obstacle for economic growth

and development for many countries during the 1980s and contributed to problems between the

North and South. Although it was being addressed, the problem still persisted. The report and

its recommendations led to the UNDP, UNCTAD and the World Bank to establish the Joint

Programme in 1991. The program was created to bring countries’ debt management capacity to

acceptable levels that would allow sustainability and prevent the government from being put in

circumstances that led to the debt crisis of the 1980s. The program provided new technologies

36
  IMF and World Bank Staff, “Poverty Reduction Strategy Papers—Detailed Analysis of Progress in
Implementation,” Heavily Indebted Poor Countries Documents, International Monetary Fund, 12 Sept. 2003, 1
March 2004 <http://www.imf.org/external/np/hipc/2003/status/091203.pdf>.
like UNCTAD’s Debt Management Financial Analysis System (DMFAS), which was a state-of-

the-art computer-based debt management system designed to collect, record, validate, and report

data. It also provided technical assistance, technical training of staff, monitoring of country

projects, exchanges of information, and research and development work supporting debt

management activities. The Joint Programme was financed by UNDP through 1994 but due the

reduction of UNDP’s budget, it was unable to in 1995 and 1996. However, UNCTAD was still

able to pursue its work as a result of special fund-raising.37



United Nations Resolutions:

General Assembly Resolutions:

             There have been several United Nations General Assembly resolutions trying to urge

the international community to resolve the unsustainable debt problems of developing countries.

The resolutions adopted by the General Assembly were: 48/165 on December 21, 1993, 50/92

on December 20, 1995, 51/164 on December 16 1996, 52/185 on December 18, 1997, 53/175 on

December 15 1998, 54/202 on December 22, 1999, 55/184 on December 2000, 56/184 on

December 21, 2001, 57/240 on December 20, 2002, and 58/203 on December 23, 2003. Of the

many resolutions that have been adopted, some significant resolutions, Resolution 51/164,

55/184, and 58/203, will be explored.



Resolution 51/164:

             In 1996, the General Assembly passed Resolution 51/164 which stated that it was

aware of the improvements of the debt situation of many developing countries since the 1980s

due to measures taken by creditors, but it called for the full and swift implementation of
37
     United Nations Development Program.
programs especially to the poorest and heavily indebted countries. It asked for more financing of

the HIPC Initiative from multilateral and bilateral creditor governments. The General Assembly

also urged the developed countries to give the Initiative the support it needed in order to make

the Initiative more flexible and ensure that its intended purpose of debt reduction and assisting

indebted countries in exiting from debt rescheduling would be achieved.38



Resolution 55/184

        In 2000, Resolution 55/184 was adopted by the General Assembly. The General

Assembly was still concerned with the continuing debt and debt-servicing problems of heavily

indebted developing countries, which it saw as adversely affecting their development efforts and

economic growth. It reaffirmed the importance of finding other measures to deal with the debt

of developing countries so they reach the Millennium Development Goals. It welcomed the

efforts and encouraged debtor countries to pursue structural adjustment programs. It also called

for close attention to be paid to the impact economic reforms had on the poor through the linking

of country-owned poverty reduction strategy papers to the Heavily Indebted Poor Countries

Initiative and urged that debt relief be more closely linked to poverty reduction. It approved of

the Enhanced Heavily Indebted Poor Countries Initiative, launched by the G7 major

industrialized countries at their meeting held at Cologne, Germany, in June 1999, and its efforts

to provide deeper, broader and faster relief.

        The resolution urged all creditor countries to participate in providing debt relief to

developing countries and to provide additional resources to fulfill the future needs of the




38
  General Assembly, “Resolution 51/164” United Natinons,16 Dec. 1996, 9 May 2004
<http://www.un.org/documents/ga/res/51/a51r164.htm>
Initiative. It called for creditor countries to agree to cancel all bilateral official debts of the

heavily indebted poor countries if they demonstrated their commitments to poverty reduction.

        The General Assembly welcomed the adoption by the Executive Boards of the

International Monetary Fund and the World Bank of a number of measures to speed up the

implementation of the enhanced HIPC Initiative, to make the eligibility criteria more flexible, to

make the HIPC more country-driven, and to make it more inclusive of civil society. It welcomed

the decision of the countries that cancelled bilateral official debt and urged creditor countries that

did not yet do so to consider the full cancellation and equivalent relief of the bilateral official

debts.39



 Resolution 58/203:

        The most recent efforts by the United Nations General Assembly to address the debt

crisis have been the release of a new resolution. On February 4, 2004, the General Assembly

adopted Resolution 58/203 which noted with great concern that the continuing debt and debt

servicing problems of heavily indebted poor countries was one element hindering their

sustainable development efforts and development goals, including those containing the

Millennium Declaration. It was aware that highly indebted countries, both low and middle

income countries, still have difficulties meeting their external debt-servicing obligations. The

General Assembly realized the positive outcomes of the Heavily Indebted Poor Countries

Initiative, but encouraged all creditor countries including those in the Paris Club to forgive on a

unilateral basis up to 100 percent of all remaining claims after HIPC debt relief. It also urged

official and commercial creditors to participate in the HIPC.


39
  General Assembly, “Resolution 55/184” United Nations, 22 Jan. 2001, 9 May 2004
< http://ods-dds-ny.un.org/doc/UNDOC/GEN/N00/609/88/PDF/N0060988.pdf?OpenElement>
       The resolution urged countries whose resources were freed through debt relief to direct

those resources towards poverty eradication, sustainable economic growth, sustainable

development, and meeting the internationally agreed development goals. It also called upon the

indebted countries who have not taken policy measures to become eligible for the HIPC and to

reach the decision point by creating poverty reduction strategies.

       The General Assembly stressed the need to the international community including the

U.N. system, Bretton Woods institutions, and the private sector to speedily and effectively

implement the Enhanced HIPC while addressing changes in the economic circumstances of those

developing countries. These changes include natural catastrophes, severe terms-of-trade shocks

or conflict. It also called on them to acknowledge the problems of debt sustainability of some

low-income countries that are not heavily indebted and provide those countries with debt

treatment that takes into consideration their financial needs and has the objective of ensuring

long-lasting debt sustainability. It called on them to reduce the debt burdens of developing

countries through debt relief, debt cancellation and other mechanisms aimed at the debt

problems. The resolution encouraged exploring innovative mechanisms to deal with debt

problems such as debt-for-sustainable-development swaps or multi-creditor debt swap

arrangements. It called for establishing debt-tracking mechanisms in developing countries and

strengthening technical assistance for debt management and tracking through the cooperation of

organizations providing these types of assistance.
Country Positions:

The Paris Club:

        One of the major actors in providing debt relief to indebted countries has been the Paris

Club. The Paris Club, founded in 1956, is an informal group of creditor countries which today

includes Austria, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland,

Italy, Japan, Netherlands, Norway, the Russian Federation, Spain, Sweden, Switzerland, the

United Kingdom, and the United States. It was created to provide debt relief to debtor countries

with temporary liquidity problems in order to prevent them from defaulting on their loans.

Originally, the Paris Club only rescheduled interest so the debt problem worsened due to the

interest being capitalized as new debt. This led to the creditor countries of the Paris Club to

increase debt relief to the poorest countries.40

        Rescheduling terms were applied to countries on an individual basis, but after the debt

crisis in 1980, the Paris Club began to grant more long-term rescheduling to reduce developing

countries’ debt burdens. Since this did not end the debt problem, in 1987 the Paris Club agreed

to reschedule debt on concessional terms for the first time. They granted the Venice terms which

allowed longer grace and maturity periods to the poorest countries in Sub-Saharan Africa. 41

        In addition to the Venice terms, new terms were adopted by the Paris Club at the G-7/8

summits. The Group of 7/8, a group of major industrial democracies that meet annually to

discuss major economic and political issues, include: France, the United States, Great Britain,

Germany, Japan, Italy, Canada, and Russia (since 1998). Their summits were held in Toronto,

Trinidad, London, Naples, and Cologne to develop new means of debt relief.42 At the Toronto


40
   Juan Carlos Vilanova and Mathew Martin, “Publication No. 3: The Paris Club,” Debt Relief International, 2001,
2 May 2003 <http://www.dri.org.uk/pdfs/EngPub3_Paris_Club.pdf>
41
   Juan Carlos Vilanova and Mathew Martin.
42
   IMF Staff “The Logic of Debt Relief for the Poorest Countries.”
summit in 1988, they agreed to additional debt relief under the Toronto Terms which granted

33% relief. In 1991, the London Terms were created to replace the Toronto Terms, and it

provided 50% debt reduction. By 1994, the Naples Terms were adopted, which increased debt

relief to 67% for the poorest and most indebted countries. The relief was determined on the

present value of the debt rather than its nominal value. The Paris Club also introduced an option

that allowed countries to exit from the debt restructuring process by reducing their debt stock.

HIPCs or countries that had benefited from the Toronto or London terms were also eligible under

the Naples Terms. By 1996, the club created the Lyons Terms which provided 80% present

value reduction, but they were only given to HIPCs that had received relief under the Naples

Terms and had qualified for the HIPC Initiative. At their decision point, these countries could

receive the Lyons Terms on their debt and on their debt stock at the completion point.43

           The final terms were adopted by the Paris Club on June 1999 during the G7 summit in

Cologne. Under the Cologne Terms, 90% forgiveness of non-concessional Official

Development Assistance (ODA) and more if needed to reach the sustainability under the HIPC

Initiative. The terms called for all creditor countries to forgive ODA debt of qualifying countries

on top of the amounts needed to achieve debt sustainability. Canada, the United Kingdom, and

the United States promised to cancel bilateral debt including export credits. Australia, the

Netherlands, Norway and Sweden agreed to cancel ODA which includes post cutoff date debt,

debt incurred after the date when the country first requested assistance from the Paris Club.

Spain agreed to this action on a case-by-case basis. Australia is also thinking of cancelling non-

ODA debt that is past the cutoff date.44




43
     Debt Relief International.
44
     Debt Relief International; Management Development and Governance Division.
Role of HIPC Creditors:

          The HIPC Initiative that is so vital to debt reduction in heavily indebted poor countries

was initially reluctantly supported by many key creditors including Germany, Japan, Italy,

France, the United States, and the IMF. The United States wanted low threshold levels but long

monitoring periods while France only wanted to assist countries that were once former colonies.

Germany, Japan and Italy were against the Initiative and wanted high thresholds and long

monitoring periods for the HIPC since this would reduce the relief that would be needed.

Currently, Germany has shifted its position while Italy and the United States are adopting more

flexible approaches.45

          The United Kingdom, Nordic countries, Switzerland, the Netherlands and Canada

supported the Initiative from the beginning. The creditors support low threshold levels and early

completion points. Austria, Belgium, Greece and Luxembourg agree with same requirements.

During the G-7/8 summit in 1997, Russia was admitted into the Paris Club. This puts Russia in a

position of providing 80 percent discounts on debts to HIPCs. It will then provide debt relief and

reduction on the same basis as other Paris Club creditors under the Naples Terms or the Lyon

Terms for HIPCs reaching their completion points.46



Individual G- 8 Member Contributions to Debt Relief:

          Each member of the G8 has contributed to debt relief in various amounts. The Russian

Federation cancelled $11.2 billion of African countries debt in 1998-2002. Japan has committed

to cancelling $4.9 billion official debts of African HIPCS under the enhanced HIPC Initiative.

Japan also just recently changed its method of debt relief measures concerning ODA debts of


45
     Management Development and Governance Division.
46
     Management Development and Governance Division.
HIPCs and other countries owed to the Japan Bank for International Cooperation. France

cancelled about €10 billion before the Cologne summit and is committed to cancelling €10

billion for HIPC African countries. The United States cancelled 100 percent of the debts

incurred by HIPC countries before the June 1999 Cologne Economic Summit. The U.S.

estimates that it will forgive about $4.2 billion worth of debt belonging to African countries by

2004. Italy has cancelled $1.5 billion worth of debt. Germany has cancelled €3.5 billion before

the Cologne summit and €2.5 billion for HIPC African countries. Canada agreed to forgive all

the debts of 6 African HIPCs once they reach their completion points. It has done so for

Tanzania and Benin. It is expected to forgive C$1.1 billion owed by 14 African HIPCs. The

United Kingdom is committed to providing 100 percent debt relief on both aid and non-aid debts

for qualifying HIPCs and is ready to cancel ₤2 billion of debts owed by African HIPCs.47

        In addition to providing relief to HIPC countries, the Paris Club developed new

agreements affecting non-HIPC low and middle income countries. On May 17, 2003, new

agreements were made that are expected to open the prospects of additional progress towards

lasting debt sustainability.

        Although creditor countries have provided over several billion dollars worth of debt

relief, there is still a greater need for additional aid from creditor countries. Creditors voluntarily

provide debt relief so they are in a position to decide how much relief will be provided and what

form the relief will be in. Their decision to act or not act determines the outlook of the debt

problems of developing countries and whether those countries can achieve the Millennium

Development Goals. All nations and organizations involved are aware of the additional

financing needed for relief programs like the HIPC Initiative, which rely on creditors as key


47
  “Implementation Report by Africa Personal Representatives to Leasers on the G8 Africa Action Plan,” G8
Information Center, 1 June 2003, 6 May 2003 <http://www.g7.utoronto.ca/summit/2003evian/apr030601.html>
players in the process. Although the United Nations General Assembly have called for greater

and deeper creditor participation over the years, the gap has not been completely filled. There is

also an existing need for creditor countries to increase the speed of their commitments to debtor

countries. The effectiveness of debt relief initiatives, therefore, depends on consistent, timely

and innovative creditor participation.



Role of the IMF and World Bank:

        The IMF and World Bank, like individual creditor countries, play a huge role in

providing debt relief especially through the HIPC Initiative. During the decision point of the

HIPC Initiative process, the Executive Boards of the IMF and World Bank determine a country’s

eligibility for the Initiative. The Bank is also the world’s largest single donor source for

development finance, and it provides about $20 billion each year in loans, credits, and

guarantees. Although the Bank and IMF are key players in the relief process and their decisions

determine which developing countries receive debt relief, those developing countries do not have

strong representation within both institutions. For instance, 46 sub-Saharan African member

countries together control a small percentage of the board’s voting power and have only two

directors on the executive board of both the Bank and the IMF.48 One group of African countries

has 3.01 percent while another group has 1.42 percent voting power in the IMF.

        While these African countries lack voice and decision making power, countries that

contribute more to finance the Fund wield greater influence over the IMF’s decisions. Some of

the major contributing countries include the United States with 17.14%, Japan with 6.15%,




48
  Jim Lobe, “US Blocks Stronger African Voice at World Bank-NGO,” Inter Press Service, 26 June 2003, 3 May
2004 <www.globalpolicy.org/socecon/bwi-wto/wbank/2003/0626blocks.htm
Germany with 6.01%, France with 4.96% and the United Kingdom with 4.96%.49 These same

countries also have greater influence in the Bank. This results in the stronger members,

especially the United States, having a greater ability to block any proposals to change the

governance structure of the World Bank and IMF. The United States did so in 2003 when it

blocked the proposal to reform the Bank’s structure that would modestly increase the

representation of African countries on the governing board. Without greater representation, the

poor countries not only have less voice but also a smaller sense of responsibility and ownership

of the IMF and World Bank and its operations that been geared toward helping them with their

debt burdens. 50




49
   “IMF Executive Directors and Voting Power,” International Monetary Fund, 16 April 2004, 5 May 2004
<www.imf.org/external/np/sec/memdir/eds.htm>
50
   Jim Lobe.
Suggested Readings for Further Research:

United Nations
       http://www.un.org
General Assembly Resolutions
       http://www.un.org/documents/resga.htm
UNDP
       http://www.undp.org/
IMF
       http://www.imf.org
World Bank
       http://www.worldbank.org
Debt Relief International
       http://www.dri.org.uk
Paris Club
       http://www.clubparis.org/en/
G7/8
       http://www.g7.utoronto.ca
       http://www.g8.utoronto.ca
Global Policy Forum
       http://www.globalpolicy.org
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