Fool's Gold: the case for 100% multilateral debt cancellation for the poorest countries

This paper critically examines the HIPC initiative’s progress to date, and argues that a new approach is needed if developing countries are going to reach the Millennium Development Goals. It focuses specifically on debt owed to multilateral creditors, as they are owed the bulk of outstanding debt.

The paper puts forward a case for further multilateral debt relief based on the following arguments:

• the progress made to date through the HIPC initiative remains woefully inadequate. Only 7 countries have actually seen their debts brought down to levels considered ‘sustainable’, even according to the narrow and inadequate criteria of the HIPC initiative
• debt and the MDGs: the majority of low income countries will require total debt cancellation, plus significant increases in aid, if the MDGs are to be met
• to date debt relief has been well used: poverty-reducing expenditure in African HIPC countries has increased as a result of debt relief on average by 6% and up to 14% in some countries
• creditor equity: the HIPC initiative was based on the agreement that all creditors would bear some of the burden of debt relief. However, while some bilaterals have given 100% debt relief, multilateral creditors in some cases have cut their own contribution to debt relief as a result, leaving the debtor country no better off
• future financing: in order to make use of future aid financing to reach the millennium development goals, HIPC countries need 1000% debt relief now, as the alternative is the risk of rejecting future financing or facing another debt crisis.

In order to bring poor country debts down to something approaching sustainable levels, and to restore ‘creditor equity’, the paper calls for:

• 100% multilateral debt cancellation must be provided to all low-income countries which need such relief in order to meet the MDGs, under a fair and transparent process
• debt relief should not be financed out of existing aid budgets, but from new donor contributions, and the sale or revaluation of IMF gold
• debt relief should not be confined to HIPCs, but should also be extended to other poor countries that need debt relief in order to meet the MDGs
• there should be an end to harmful economic policy conditionality associated with debt relief. Debt relief should be provided to any country able to use such relief to meet the MDGs
• moving forward, we believe that in countries where human development needs are greatest, and where the feasible tax base is narrow, future aid flows should be in the form of grants rather than loans for the foreseeable future
• in future, a fair, transparent and comprehensive international insolvency process should be created to allow creditor and debtor countries to resolve debt crises without compromising the ability of poor countries to meet the basic social needs of their people, and without forcing poor countries to repay what the insolvency process determines to be odious debts.