$70 billion debt write-offs expected

by Ramesh Jaura

Bonn, Jun 17 -- Pressured by non-governmental organisations and representatives of the Catholic and Protestant churches, the major donor nations are expected to announce a partial cancellation of debts of the world's poorest countries, at their summit in Cologne this weekend.

According to the German minister of Economic Cooperation and Development (BMZ), Heidemarie Wieczorek-Zeul, who initiated the move last January, the group of seven leading industrial nations (G-7) was expected to decide to write off unpaid debts worth as much as $70 billion.

The meetings in Cologne June 18-20 will be attended by the heads of government and state of the US, Canada, Japan, Great Britain, France, Germany and Italy as well as Russia.

This expected write-off would include debts resulting from official aid - because of the recipient countries' inability to pay interest charges and repay the loans in instalments - as well as from credits they took in financing their imports from donor nations.

However, the amount is still far from alleviating the burden of the $2.5 trillion in commercial and official debt owed by some 160 developing countries at the end of 1997. Of these, the 41 poorest among them had some $200 billion worth unpaid debts.

A preliminary decision in favour of a $70 billion debt write-off for the poorest was taken by the G-7 finance ministers last Sunday in Frankfurt.

The move, once endorsed by the G-7, promised to be a big step toward "solving major developmental tasks, reaching out into the next millennium" Wieczorek-Zeul told reporters this week.

These included social justice, creating conditions which enable people to live in dignity, alleviate poverty and ensure respect for human rights, she said. This set of criteria, generally characterised as 'good governance', will have to be fulfilled by countries that wish to benefit from the debt cancellation. In principle as many as 36 out of 41 heavily indebted poor countries (HIPC) could benefit from the move.

The implementation will be in the hands of the World Bank and the International Monetary Fund (IMF).

In their view, the principal objective of the debt initiative is to bring the debt burden of a country in question to sustainable levels, subject to satisfactory policy performance, so as to ensure that adjustment and reform efforts are not put at risk by continued high debt and debt service burdens. "The HIPC debt initiative is designed to facilitate a comprehensive resolution to the debt problem, that is, the Initiative requires participation by all relevant creditors.

Hence, debt relief efforts will have to be closely coordinated," says the World Bank in a background paper.

A key criteria, evolved at the Development Committee meeting on a German initiative, provided for sustainability targets to be defined on a case-by-case basis in the range of 200-250% net present value (NPV) debt-exports-ratio and 20-25% of the debt service-to-exports ratio.

The "Cologne Debt Initiative", however, envisages reducing the 200-250% to the level of 150%, thus enabling a larger number of heavily indebted poor countries to qualify for the debt initiative.

Germany's development minister said she expected the money saved by countries qualifying for debt write-offs, to be invested in priority sectors such as education, health and basic infrastructure.

Sources at Germany's development cooperation ministry say their move had been given flanking support by the Church and NGOs which had launched the so-called 'Jubilee 2000' initiative. NGOs are holding an international congress, called the Alternative World Economic Summit, on Jun 17-18.

Last Sunday, Catholic bishops from 17 countries in Africa, Asia, Latin America gathered in Cologne and urged the G-7 to agree on "comprehensive measures to substantially reduce or fully write off the debts of developing countries and restore just relations between the peoples of the world".

German Chancellor Gerhard Schroeder expressed support for debt write-offs and says he is even prepared to sell some of Germany's gold reserves - a move which stands in stark contrast to the opposition to such a proposal by the centre-right government headed by Helmut Kohl (1982-1998). (IPS)

The above article by the Inter Press Service appeared in the South-North Development Monitor (SUNS).