The World Bank and International Monetary Fund could easily cancel the debts owed to them by the world's most heavily indebted poor countries without touching their financial health, according to an accountants' report which was released Tuesday, the FT (p.11) reports. The report was commissioned by the campaigning group, Drop the Debt, from Chantrey Vellacott, the City of London accountancy firm.
It suggested that the two organizations could immediately reduce debts of the 26 so-called Highly-Indebted Poor Countries (HIPC) by some $3 billion, and after that generate a further $1 billion a year that would retire debt and pay interest as they came due. This would allow the cancellation of the debt over the next quarter century.
At the World Bank, spokeswoman Caroline Anstey argued that the numbers supplied by Drop the Debt "don't add up," and stressed that the institution is committed to expanding debt relief, AFP notes.
She pointed to the Bank's concessional lending arm, the International Development Association (IDA), which makes zero interest loans to the world's neediest nations -- those that had a per capita income in 1999 of less than $885. Nearly half of new IDA commitments each year, about $6.5 billion, are financed from loan repayments and investment, she said, adding that if the obligations were simply written off the ability of the Bank to continue making interest-free loans would be undermined.
"IDA has no provisions for losses arising on credit to members," she said. "That means that a write-off would be a direct dollar-for-dollar reduction in IDA's ability to make future credits to poor countries. So that in effect means that IDA credits would be cut in half." To support further credits in the absence of repayments, according to Anstey, rich countries would have to double their contributions to the IDA fund -- "which in our present political climate doesn't seem likely."
Reuters also reports.
In a separate story, the FT (p.11) says behind technical debates over credit ratings and prudent accounting lies a fear that total debt cancellation could permanently reduce the role of multilateral institutions in developing countries. James Wolfensohn, World Bank president, told the German parliament last week: "If you advance the notion that you have complete debt relief you will of course wipe out the World Bank . . . severely limit the IMF and in the end it will come back on your governments."
John Chambers, deputy head of sovereign ratings at Standard & Poor's, is less sanguine than the campaigners, although less alarmist than Wolfensohn. "All the multilaterals are extremely well capitalized compared to commercial banks," he is quoted as saying. But he warns: "The World Bank's rating rests on its combination of public policy role and its financial strength. Part of that derives from its status as a preferred creditor. The more the HIPC debt relief net is widened, the more that status is eroded."
Geoff Lamb, director of resource mobilization at the Bank, is quoted as sying: "If we have to forgive all the HIPC countries' debts to IDA that would require a reduction in IDA lending of around 23 per cent unless donor countries come up with a politically improbably high increase in contributions."
However, Drop the Debt has been casting around in vain to find a Group of Seven government willing to champion its proposal. The present UK government has always been close to the debt relief campaigners. It has expended political capital by trumpeting new initiatives, such as a "trust fund" for countries yet to qualify for relief, which other G7 governments regard as mainly good public relations. But, as one UK official said: "People have started to sigh and look at the ceiling when we bring the subject up."
Other governments have yet to fill the gap. The Italian government will concentrate on debt and development at the G7 summit in Genoa this summer, but prefers widening debt relief to 66 poor countries rather than deepening it for existing recipients. Meanwhile the US Treasury, which even under former Treasury secretary Larry Summers was a reluctant supporter of the current debt relief program, is an unknown quantity.
World Bank officials worry that uncomfortable truths like the need to continue capital flows to poor countries after relief has been given, in order to complete their transition out of poverty, are often ignored. Axel von Trotsenburg, head of the HIPC division at the World Bank, says: "On average, HIPC eligible countries get 10 per cent of their gross domestic product in net transfers every year. Do people want a total cessation of financial relations with these countries?"
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