G. Questions and Answers on Debt

1. We’re always hearing about the debt crisis, but where did it originate?

The origins of the debt crisis are complex. The issue came to a head in 1982 when Mexico declared that it could not service its foreign debt. Twenty-five countries followed Mexico’s example or threatened to adopt the same stance. How did it get to that stage?

The price of oil was increased by OPEC producing countries in 1973-74, leading to a glut of money in commercial banks, who in turn offered it for loan at low interest rates. As a result, developing countries were courted to take loans to finance "development". Although the absolute size of debt of sub-Saharan African countries was relatively small in proportion to the external indebtedness of developing countries, the size of the debt (and the cost of servicing that debt) in relation to the resources and productive capacity of these African countries were significantly large.

But that glut was short-lived. Coinciding with the period of the emerging technological revolution in microcomputers and in gene technology that attracted capital to new fields where the rates of profit were likely to be substantial, the 1980s saw significant increases in the cost of borrowing. As interest rates rose, and debtor countries were suddenly faced with servicing the interest on loans that absorbed the ever-greater proportions of export earnings. Debt had now become the central issue of "concern" in development circles. This further provided the entry point for international financial institutions into African countries. The IFIs offered loans on condition of the adoption of a clutch of social and economic policies that came to be known as structural adjustment programmes. The social and political impact of these policies were to position the multilateral lending agencies (with the support of the bilateral aid agencies) where they could determine both the goals of development and the means for achieving them.

Another influence on the debt crisis was the Cold War, when donor countries were more concerned with their strategic interests than whether money they lent was spent on constructive activities. The most oft-cited example of this in Africa is Mobutu in Zaire, who was able to borrow huge amounts of money as long as he pledged his loyalty to the West. This is the reason why the argument is made that the debt crisis is not only about the responsibility of indebted countries, but also about the responsibility of creditor countries for creating the crisis in the first place.

2. Sure, but everyone knows that if you borrow money you have to pay it back. Why should the debt of African countries be cancelled?

Countries are trapped in an endless cycle of debt repayments created by an economic system which worked against their interests and by previous generations of leaders that were able to borrow money because they slotted into the geopolitical interests of the superpower of the day. But the problem was created by the fact that when they borrowed, the interest rates were low, but there after they grew and grew, with the result that nearly all the national wealth is used just to pay the interest – let alone the original amount that was borrowed.

People living in highly-indebted poor countries don’t and never have benefited from these loans. In actual fact, they have suffered as a result of money being diverted from spending on healthcare and education in order to service enormous debts. This means that any talk of development is the equivalent of a fools ranting until debt is cancelled. If African countries have to channel vast amounts of money into servicing their debt, how are they ever going to be engaged in meaningful development activities?

Besides, UN statistics show that indebted countries, although they have paid back three times more money than they originally borrowed, still owe more than they owed in 1980. It is in this context that campaigners have made a strong moral argument for the cancellation of debt, stressing that it is a key element used by rich countries to dominate smaller countries.

3. Who do indebted countries owe money to?

There are several different types of loans, all with their own particular history.

Bilateral State Loans have their origins in the Cold War, when scheming super powers were only to eager to dish out cash in order to secure the dependency of weaker states. Little was done in the way of a credit check as dictators lined up to access cash. Today, the populations of their countries are still paying the price.

Another type of loan was known as Export Credit Agency Corporate Loans. It goes without saying that corporate loans come at a far higher interest rate than bilateral loans. These loans increased from the 1980s onwards and were underwritten by so-called Export Credit Agencies. These are basically government agencies that fund or insure domestic corporations seeking to extend their business to high-risk areas. Again, it is the people of countries taking loans that face the burden of repayment.

Commercial Bank Loans took hold in the 1970s as petro bucks flooded banks, who looked around in glee for a way to make more profits. The answer: Lend it to the developing world and don’t worry that much about who you’re lending to or whether they can pay it back. It all went sour at the end of the 70s – interest rates rocketed, leaving indebted countries with a debt repayment headache that kept on getting worse.

Lastly, Multilateral Loans came about when the good old World Bank and International Monetary Fund came to the party, and offered rescue packages to make sure that indebted countries could at least pay the interest rates on the loans they had contracted. Later, The WB/IMF came up with the Brady Plan. The deal was that they would offer guarantees for the repayments of loans, while a portion of the debt was cancelled. The catch: Indebted countries had to open up markets and slash social expenditure. Again, you guessed it, the people took it on the back.

* This short description of the types of loans was compiled with assistance from an article on RISQ, an independent association of scholars, journalists, politicians, and activists who seek to render international political decision-making more inclusive, equitable, and responsible. For the full article, visit http://www.risq.org/article389.html

4. What is the total amount owed?

According to the Jubilee Debt Campaign, the original debt of the world's 52 poorest and most indebted countries is $375 billion. This translates into repayments of around GBP30 million every day. Zambia's debt repayments to the IMF alone cost $25 million, more than the country's education budget despite 40% of rural women being unable to read and write, according to Jubilee, which states that while Sub-Saharan Africa receives $10 billion in aid every year it has to pay back at least this amount in debt repayments.

5. Why cancellation? We already have the HIPC to take care of these concerns.

Following unprecedented pressure from debt campaigners, the Heavily In-debt Poor Countries (HIPC) initiative was set up in 1996 by the rich nations through the IMF and World Bank. It was intended for countries that had debt burdens of more than four times their annual export earnings and laid out certain conditions that had to be met by countries before they could be classified as having met a 'completion point', after which they would qualify for limited debt relief.

The conditionalities of the HIPC have been the subject of much criticism, as these prescriptions are regarded by many as contributing to poverty in highly indebted countries. Furthermore, there are questions as to whether the amounts of debt written off are sufficient. Many criticize the fundamental approach of the HIPC, which sets out to make debt sustainable rather than writing it off.

6. What is the human cost of the crisis?

Even for elite world leaders who have never stepped out of their comfort zones, it doesn’t take a huge leap of imagination to work out the massive human cost of procrastination on debt relief. In Zambia, for example, life expectancy is expected to plummet to an alarming 33 years as a result of HIV/AIDS. Over half a million children are out of school. One would have thought that this would be cause for massive investment in health care and education, but debt service, even after HIPC completion, chews up more cash than the combined spending on health and education.

A UNDP study estimates that for each additional one per cent of GDP spent on health and education, child mortality is reduced by 24 per cent. Therefore, taking 1999 as an example, when Zambia spent
$438.5 million (13 percent of GDP) on debt servicing, child mortality could have been reduced from 202 deaths per 1,000 live births to only 8 per 1000 live births.

How many lives is that over a ten-year period? There’s a frightening sum for leaders like Bush and Blair.

7. What is all this talk amongst the G7 about financing debt relief?

One of the major blocks to debt relief has been bickering amongst the G7 over how to fund any write-offs, the economic rationale being that the money has to come from somewhere.

At the recent G7 meetings in London, news reports indicated that most leaders favoured selling some of the International Monetary Fund’s gold reserves to finance debt relief. The IMF is the third largest holder of gold and this option would involve selling the gold to an interested party or revaluing the gold as a way of raising funds.

But it is never that simple: Gold producers are less than happy as they feel such a mass sale would disrupt gold markets. Lawmakers in the US, which has the world’s biggest gold stockpile, have opposed gold sales, saying it will harm the industry and cause job losses. Instead, the US favours a system where outstanding debts are cancelled and replaced with grants linked to human rights records.

Meanwhile, the world’s biggest gold producer, South Africa, has said through its finance minister Trevor Manuel that they support the use of IMF gold reserves to finance debt relief. Manuel’s comments may mask divisions within his own cabinet however. His cabinet colleague, Mineral and Energy Affairs Minister Phumzile Mlambo-Ngcuka, came out against the plan and put it on record that other African mining ministers were also concerned.

Some of the other ideas put forward for financing debt cancellation include increasing multilateral development bank charges for middle-income countries and the provision of new funds by creditor nations. It’s clear that there are no lack of options on how to finance debt cancellation, but what is lacking is the political agreement and will to get things underway. Given that the US has basically said that debt cancellation isn’t in the budget this year, maybe the disputes over the financing of debt cancellation are just a mask to cover a wider political inertia.

8. If there was debt cancellation tomorrow, would that development hit the fast track?

Some analysts are already pointing to the new dangers posed by trade agreements and foreign direct investment flows. The argument goes that an outflow of resources from African countries as a result of, for example, World Trade Organisation (WTO) agreements could lead to greater financial problems than those caused by the debt crisis.

For example, an article on the website of Third World Network-Africa, based on a paper by David Woodward, economist and consultant, warns that foreign direct investment (FDI) is not a risk-free answer to the capital problems of developing countries. It was “dangerously mistaken” to view FDI in the same way as foreign loans to developing countries were viewed up to the 1980s just before the debt crisis struck.

There are a number of reasons why FDI could be worse than debt. Firstly, there is no fixed schedule for the outflows in the form of the repatriation of profits. Secondly, the rate of profit on FDI is much higher than the interest rates even on commercial loans. For Sub-Saharan Africa, the rate is estimated at 24-30% per year.

The conclusion of the argument is that FDI is like contracting a foreign loan at an interest rate of 24 – 34% a year. Any country exposed to this rate of FDI is faced with a net outflow of foreign exchange and the only way to avoid this is to attract new investment to cover the profits on existing investment.

* To read the full article on which this short report is based, please visit http://www.twnafrica.org/news_detail.asp?twnid=380

* Sources used to compile this Q&A

http://finance.channels.netscape.ca/finance/article.adp?id=200502250736…
http://finance.channels.aol.ca/finance/article.adp?id=20050303220709990…
http://www.eldis.org/static/DOC13141.htm
http://story.news.yahoo.com/news?tmpl=story2&u=/nm/20050210/bs_nm/econo…
http://www.bicusa.org/bicusa/issues/spotlight/1877.php
http://www.twnside.org.sg/title/thomas-cn.htm
http://www.jubileedebtcampaign.org.uk/?lid=247
http://www.globalissues.org/TradeRelated/Debt/HIPC.asp
http://www.jubilee2000uk.org/databank/usefulstatistics/generalstats.htm