Debt Relief
February 2005
(Update June 2005)
In the spirit of the book of Leviticus, Christians will have to raise their voice on behalf of all the poor of the world, proposing the Jubilee as an appropriate time to give thought, among other things, to reducing substantially, if not canceling outright, the international debt which seriously threatens the future of many nations.
—Pope John Paul II, Tertio Millennio Adveniente, 1994
Heavy debt burdens continue to draw precious government resources away from critical investments in health care, education, water and other sectors necessary to improve lives in the poorest countries. Debt burdens also impede the ability of governments to respond to crises such as HIV/AIDS, natural disasters and civil strife.
Many poor countries have begun to see their debts reduced through the Heavily Indebted Poor Country (HIPC) initiative that was adopted in 1996 and expanded in 1999 in response to successful advocacy by the global Jubilee 2000 movement, in which the Catholic Church played a major role. However, as implementation of the HIPC program progressed, it became increasingly apparent that the amount of debt relief provided was insufficient for the kind of “fresh start” that countries needed in order to address deep-seated poverty. To help assure deep debt relief to all HIPC countries, the USCCB developed a proposal that was passed into law with bipartisan support in 2003. The new law called on the Administration to work with other creditors to limit the annual debt payments of HIPC countries to no more than about 10% of government revenues, or in the case of countries suffering a public health crisis, no more than about 5% of government revenues.
Immediately after passage of the new law, the USCCB encouraged the Administration to move forward with implementation. Unfortunately, the Administration treated the law as “advisory” rather than mandatory and did not initiate the international consultations necessary to bring about a revision in the HIPC criteria. But the Administration became convinced that the HIPC program was not adequate to eliminate “unsustainable” debt burdens and began to develop a new approach. There were indications it would propose a dramatic new breakthrough on debt relief at the Summit of leading industrial nations plus Russia (the G-8) in June 2004.
Prior to the G-8 meeting, the USCCB urged President Bush to take the lead with his G-8 colleagues in making the Summit “an occasion of decisive action to complete the unfinished agenda of debt relief for poor countries.” While no specific action was taken in 2004, the G-8 did agree to consider “measures that can further help the poorest countries address the sustainability of their debt.” Both US and UK government officials subsequently indicated that they wanted options considered that would provide up to 100% debt cancellation from the International Development Association (the arm of the World Bank that makes loans on highly subsidized terms to very poor countries) and other international financial institutions, to which most of the remaining HIPC-country debt is owed.
Prior to the World Bank/IMF annual meetings last September, the Conference wrote to Treasury Secretary Snow again urging a resolution of the problem of poor country debt “in a way that offers new hope to some of the world’s poorest and most forgotten people.” He also urged that the losses of the international financial institutions from the debt cancellation not be offset by reductions in new assistance to poor countries. He stressed that, for us, debt cancellation is not about adjusting accounts, but about combating poverty. He urged that the costs of multilateral debt cancellation be financed through new resources from the donor countries and from resources that might be available within the international financial organizations. No agreement on new debt relief was reached at the World Bank/ IMF meetings, but the US and the UK have continued discussions about the shape of a proposal that might achieve a consensus within the G-8.
One major step forward is that an agreement appears to have been reached among the major donors to IDA that 100% of new IDA assistance to about 42 poor countries (including a substantial number of non-HIPC countries) should be in the form of grants rather than loans. Another 5 poor countries would receive close to 50% in grants. This agreement is an important complement to debt cancellation, as the two measures together should help assure that poor countries do not fall back into heavy international indebtedness in the future. The new agreement also highlights the need for inclusion of non-HIPC poor countries in any new debt cancellation proposal, as the analysis on which it is based shows that a substantial number of these countries have a similar or greater degree of debt distress.
The UK, as Chairman of the G-8 during 2005, is aiming for an agreement on new debt cancellation by the time of the July 6-8 Summit in Scotland. Bishop Ricard sent a new letter to Secretary Snow on January 27, 2005 in which he encouraged an agreement that would include all debt distressed poor countries, as well as new resources to finance the debt cancellation. At a subsequent meeting of industrialized country finance ministers, they expressed willingness to cancel "as much as 100%" of the multilateral debt of HIPC countries. They also appeared to open up the possibility of debt cancellation for non-HIPC countries; but exactly which countries will qualify and under what conditions remains unclear. Also the US seems to be holding firmly to its view that no new financing is needed. Some difficult discussions lie ahead, and strong advocacy will be necessary.
The USCCB/CRS commend the Administration for considering new proposals that would cancel “as much as 100%” of debts owed to IDA and other international financial institutions by poor countries. We will:
- continue to encourage the Administration’s efforts to obtain agreement on multilateral debt cancellation, and
- advocate with the Congress for its approval and appropriation of funding that may be necessary.
Pressure has been mounting for deeper debt relief for poor countries, recognizing that the current debt reduction program has been insufficient. Any cancellation of the debt owed to the World Bank and other international financial institutions (the so-called IFIs) requires the agreement of the governments of the G-7, which includes the US, United Kingdom, Canada, Germany, France, Italy and Japan.
The UK, as Chair of the G-8 (the group of seven major industrial nations plus Russia) during 2005, is anxious to reach an agreement on new debt cancellation at the July 6-8 Summit in Scotland. A critical step in this process is the G-7 meeting on June 10, where plans for deeper debt relief will be on the agenda as ministers prepare for the July G-8 meeting. USCCB issued an action alert asking Catholics to call Secretary Snow before the G-7 meeting and urge him to reach a deal with his colleagues on new debt cancellation.
The US and the UK have put forward proposals on debt relief that are similar in that both embrace the principle of 100 percent cancellation of debts owed to the World Bank and African Development Bank. However, some key differences remain. The US wants to limit further debt relief to those countries previously defined as heavily indebted under the Heavily-Indebted Poor Countries (HIPC) initiative. The UK proposal, meanwhile, would include non-HIPC countries and would also cancel debts owed to the International Monetary Fund (IMF). The US has backed away from canceling the debt of the IMF, in part because of disagreements about how it would be financed.
The UK (along with other G-7 members) is pushing for an increase in development aid to accompany international financial institution (IFI) debt cancellation; however, the US points to recent increases in US foreign aid, most notably for combating HIV/AIDS. The US opposition so far to new financing may be the major sticking point.
USCCB and CRS recently launched the Catholic Campaign Against Global Poverty that incorporates debt relief, trade, and foreign aid as essential elements of a comprehensive development strategy. Based on our respect for the life and dignity of every person and the Church’s call for justice and equity in relationships between rich and poor countries, USCCB and CRS have long supported relieving the burdensome debts of low income countries. We will continue to encourage the Administration’s efforts to obtain agreement on multilateral debt cancellation, and advocate with the Congress for its approval and appropriation of funding that may be necessary.
Because IFI debt cancellation has the capacity to free up major new resources for investments in health, education and poverty reduction in some of the world’s poorest countries, we strongly support a new debt relief agreement that would provide 100 percent cancellation of debts owed by Heavily Indebted Poor Countries to the major IFI’s, including the International Monetary Fund. Fairness dictates that other, non-HIPC very poor countries should also be included in any new agreement. Finally, we urge the Administration to join the UK and other G-7 members in offering new financing in order to secure a deal on 100 percent IFI debt cancellation.
In contacts with the Administration and Congress, urge the following:
- The U.S. should push for an agreement on 100 percent cancellation of poor country debts owed to international financial institutions, and should offer new funding to help secure a deal.
- HIPC countries as well as all non-HIPC countries that would receive grant financing under the new agreement of IDA donors should be eligible for inclusion in the debt cancellation proposal.
- The debt cancellation should be financed with new resources provided by the major creditor countries, and, to the extent feasible, from contributions by the international financial institutions.
- The debt of the International Monetary Fund should be included, using the IMF’s own resources to pay for it.
- Any debt relief should help the poorest people in the countries involved.
See the letters from Bishop Ricard to Secretary Snow dated September 20, 2004 and January 27, 2005 at www.usccb.org/sdwp/international/letters.shtml
For more information contact: Gerry Flood, 202-541-3167; gflood@usccb.org