Structural adjustment
Debt and conditionality: multilateral debt relief initiative and opportunities for expanding policy space
Does debt relief lead to increased policy space for developing countries?
Authors:
C. Tan
Publisher:
Third World Network , 2007
Following the G8 meeting at Gleneagles in 2005, the Multilateral Debt Relief Initiative (MDRI) was introduced, aiming to cancel 100 percent of eligible debt stock owed by eligible countries to international financial institutions. This paper examines the key aspects of the MDRI and considers the opportunities this framework creates for indebted countries to expand their policy space.
The paper argues that one of the significant constraints on national policy space in developing countries over the past two decades has been the impact of the debt overhang in these countries. These restrictions on national policy space have been exacerbated by conditional debt relief operations, notably under the Highly Indebted Poor Countries Initiative (HIPC), and conditions attached to debt rescheduling, such as those undertaken by the Paris Club creditors. The paper finds that this conditionality has continued under the MDRI, where there has been no real expansion of policy space nor reduction in the conditionalities attached to stabilisation or adjustment programmes.
Despite these conditions of debt relief, the paper argues that post-debt countries enjoy more policy space in several ways:
- debt relief frees up fiscal space previously occupied by debt service, as more resources are now available to the government budget to fund economic growth and poverty reduction
- the expanded policy space which accompanies debt relief can facilitate greater government autonomy on how those resources can be utilised
- without the constraints of a structural adjustment programme, governments will enjoy more freedom to choose from various options in thier macroeconomic policy, social policies, and medium- and longer-term development policies and strategies
- governments will now have more freedom to choose from a wider range of financing options for project and national development plans from a variety of different sources
The paper concludes that the developing countries should take advantage of this increased policy space and seek alternative financing options which do not impose economic conditionality.
