Debt Cut Is Set for Poorest Nations
Deal Would Cancel $40 Billion in Loans

By Paul Blustein
Washington Post Staff Writer
Sunday, June 12, 2005

The world's wealthiest nations agreed yesterday to cancel more than $40 billion in debts that some of the world's poorest nations owe to international lenders -- a move inspired by the belief that full debt forgiveness is necessary to give those countries a chance to escape the trap of hunger, disease and economic stagnation.

The agreement, struck at a meeting in London of finance ministers from the Group of Eight major industrial nations, is the most significant debt-relief measure yet for poor countries because it cancels the debts that the eligible countries owe to the World Bank, International Monetary Fund and other multilateral lenders such as the African Development Bank.

Previous plans offering partial relief have led to disappointment and criticism from aid activists, who said many poor countries are forced to spend more on debt service -- paying principal and interest on international loans -- than on health and education.

Under the agreement, 18 countries would receive immediate forgiveness on more than $40 billion that they owe in coming years, a combined savings for those countries estimated at $1.5 billion a year.

Most are in Africa: Benin, Burkina Faso, Ethiopia, Ghana, Madagascar, Mali, Mauritania, Mozambique, Niger, Rwanda, Senegal, Tanzania, Uganda and Zambia. Four others -- Bolivia, Guyana, Honduras and Nicaragua -- are in Latin America. Another nine African nations are likely to qualify soon, once they satisfy IMF and World Bank requirements for improving their governance and economic policies. Another 11 countries could also benefit eventually.

"We are conscious of the abject poverty that so many countries and individuals face. We're being driven forward by the urgent need to act," said Gordon Brown, the British chancellor of the exchequer, at a news conference after the meeting. His American counterpart, Treasury Secretary John W. Snow, called the pact "an achievement of historic proportions." He added that debt has been "locking these poorest countries into poverty and preventing them from using their own resources," a situation he called "morally wrong."

The accord was a coup for the British government, which has taken the lead in exhorting other rich countries to come to Africa's aid with the aim of producing a far-reaching package of measures next month at the G-8 summit in Gleneagles, Scotland.

But it does not cover all poor countries, and it involved important compromises with the Bush administration, which also favored full debt relief but differed with London about how to go about it. Moreover, it does not include an even more ambitious British proposal, viewed negatively by Washington, to double about $50 billion in aid given annually by rich countries.

Aid activists who have played crucial roles in marshalling popular support for debt forgiveness cheered yesterday's announcement while voicing determination to press for more. A group of celebrities, led by rock musicians Bob Geldof and Bono, is planning free concerts and rallies in the hope of spurring the G-8 to adopt the aid-doubling plan.

"The journey of equality took another step today, and broke free millions of people in some of the poorest countries from the bondage of immoral and unjust debts," Bono said in an e-mailed statement. "There's long nights ahead of us all to build up the speed and accelerate for a comprehensive debt-aid-trade deal."

Neil Watkins, national coordinator of the Jubilee USA Network, a group that has put primary emphasis on debt forgiveness, said the accord "is an important first step, but the deal must be expanded to include all impoverished countries" rather than the G-8's more restrictive list. Among the low- and lower-middle income nations that do not qualify are Indonesia and Nigeria, for example.

Reaction in Africa from countries that stand to benefit was generally enthusiastic. "That's great news for us. It will be good for our programs, including education, health and poverty eradication," Ugandan Information Minister James Nsaba Buturo told the Associated Press. Finance Minister Ng'andu P. Magande of Zambia told the Reuters news agency that he already had plans for the money his country would save, including recruiting 7,000 new teachers waiting for employment since leaving college.

In Kenya, which does not qualify under the program, a senior official voiced a complaint commonly heard about debt relief plans -- that they reward borrowers who fail to honor their obligations at the expense of other debtors. "Those faithful in servicing their debt like Kenya are being ignored," Kenyan Planning and National Development Minister Peter Anyang Nyongo told Reuters.

An important breakthrough toward the accord came in the last few days when U.S. and British policymakers reached a compromise after a meeting Tuesday in Washington between President Bush and Prime Minister Tony Blair.

Up to that point, Washington and London had been divided over how to handle the debts owed to the World Bank, IMF and African Development Bank, which the rich nations control through their dominant voting power on the institutions' boards. U.S. officials favored an approach that would essentially pay for debt cancellation out of the resources of the lending agencies. The British, fearful of undermining the financial strength of those institutions, favored a plan by which rich countries would assume the burden of making the debt payments owed by the poor nations.

The deal announced yesterday struck middle ground. A communique issued by the G-8 said donor countries would commit to providing "additional contributions" to the World Bank and African Development Bank "to offset dollar for dollar the foregone principal and interest of the debt cancelled," with the new contributions apportioned in the same manner as existing contributions.

Even after the Americans and British had struck an alliance, they had to overcome objections from other members of the G-8, including Germany, which has long taken a dim view of blanket debt-forgiveness schemes. Other members of the group are Japan, France, Italy, Canada and Russia.

Debt forgiveness plans have been announced before with great fanfare, but they have often fallen far short of the hoped-for results. Some critics contend this is because the countries that benefit are hopelessly corrupt, while others contend that the terms have simply been too stingy.

In the 1980s and early 1990s, rich countries forgave much of the debt owed to them directly by poor countries under successively more generous plans.

Since those deals still left countries in debt to the IMF and World Bank, a new program was launched in 1996 to reduce those obligations and it was expanded in 1999. Yesterday's plan is aimed at wiping the slate clean, at least for the countries that qualify, once and for all.

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