Caution over G8 debt plan for poor countries By Chris Giles and Friederike Tiesenhausen Cave
While the Group of Eight finance ministers were hailing a "historic breakthrough" at the weekend after they agreed to cancel the debts of 18 poor but well-governed countries, doubts were already being raised about how great an impact the deal would have.
Ministers came to a last-minute compromise after Germany and Japan - under pressure from Gordon Brown, UK finance minister who chaired the London meeting - watered down the conditions they wanted to be attached to debt relief.
The agreement, which covers $40bn of debts of 18 heavily indebted poor countries (HIPC) with the World Bank, the International Monetary Fund and the African Development Bank, will cost rich countries $1.2bn a year for the next three years.
Development campaigners said that while the deal was a step in the right direction, much higher additional funds were necessary to lift Africa out of poverty. The Commission for Africa has recommended extra aid flows of $25bn a year.
As part of the weekend deal the industrialised nations promised more resources for the World Bank and African Development Bank for the next three years and made political commitments thereafter.
The IMF will be expected to fund its share of debt relief from its own resources. The G8 has dropped all its plans for the IMF to sell some of its gold reserves to fund the relief.
As other African countries meet the conditions in the long-standing HIPC initiative, they too would also become eligible for debt relief.
Mr Brown said nine more countries were likely to reach the completion point within the next 18 months.
Mr Brown later stressed the importance of the US agreement to pay between $700m and $960m more money to the World Bank over the next three years: "We could not have tolerated a situation where the World Bank was prevented from giving money to other poor countries because it was not compensated for the loss of debt interest payments from the heavily indebted poor countries."
But the G8 countries, including the UK, made it clear that initial payments would come out of existing aid budgets.
Campaigners said it was important that the debt deal should be matched by extra aid resources.
Stephen Rand, co-chair of the Jubilee Debt Campaign, said: "The deal is a step forward, there is no doubt about that. But the amount of money involved is very small and there is still a long, long way to go."
While the extra commitment covers only the next three years, G8 nations said at the weekend they would cover the full costs for the duration of the cancelled loans by topping up their regular payments to the International Development Agency - the World Bank's lending arm.
But as the regular replenishments are by no means fixed - the US's share of the contributions to the IDA fell from 20 per cent to around 13 over the last three years - it is impossible to know if the funds for debt relief will be additional to the amount the IDA would have received anyway after 2008.
However, the hopeful sign for poor countries is that European governments, at least, have made substantial commitments to additional development aid flows in the years to come.
Similar commitments have been made over the past 30 years and European politicians have cautioned that - given strained budgets - fulfilling these pledges depends on new revenue streams, such an airline ticket tax.
A sticking point over the weekend had been Germany and Japan's concerns that 100 per cent debt relief could encourage corruption and be seen as rewarding reckless borrowing among the countries offered the relief.
They had initially wanted to write off a smaller proportion of poor countries' multilateral debt if they were unable to meet payment schedules, but bowed in the end to the "political reality" of strong public support for the deal. Heeding their concerns, the G8 agreed to ask the World Bank and the IMF for a report on ways to ensure the money was used for poverty reduction and did not lead to corruption.
The IDA will in the future determine how much money individual countries receive based on their performance against governance and transparency criteria.
This means that if corruption in a recipient country increases after debt relief, it could be penalised in future aid and financial flows. The British had initially not wanted to include this element in the package but conceded at the last minute.
Caio Koch-Weser, the German deputy finance minister, sounded a note of caution on Saturday. He said international financial institutions had with this deal entered a "new world" that had considerable risks. "We will have to watch it carefully," he added.