The Bush administration is considering throwing its weight behind a British-backed plan that would eliminate the debt owed by some of the world's poorest countries to international lending institutions, according to people familiar with the matter.
The initiative would significantly deepen the debt relief available to poor countries under a program launched during the 1990s. It may help Washington obtain broad backing for its efforts to forgive most of Iraq's debt, because proposals to grant debt relief to Baghdad have raised questions about why an oil-rich country should get generous terms while poorer nations remain financially strapped.
The initiative is still being debated within the administration, and although advocates had hoped it might get a major push forward at this week's Group of Eight summit meeting in Sea Island, Ga., that is unlikely, administration officials said.
Some critics of the initiative argue that it is unwise to write off poor countries' debts entirely, because the countries' governments may have less incentive to adopt sensible economic policies if they assume their obligations will be forgiven eventually. Another problem is the cost, because it is far from clear that the administration is willing to commit the billions of dollars that would have to be spent in coming years to underwrite the write-off of debt by the World Bank and other international lenders.
Still, the plan has powerful boosters -- top officials in the U.S. and British treasury departments. The British government has been a leading champion of increasing aid and debt relief, and for Prime Minister Tony Blair, getting American backing for the plan would enable him to show a payoff for the support he gave to President Bush on the Iraq issue.
Officials from both governments were extremely guarded in discussing the plan and refused to be quoted by name, citing the fluid nature of the negotiations. Tony Fratto, a Treasury spokesman, declined to comment. A White House official said, "There are a lot of ideas in the U.S. government and in the international community on this issue, but we have not settled on an approach."
Under one option, reported by the British newspaper the Guardian yesterday, the debt owed to the International Monetary Fund, World Bank and other lenders by 27 countries in sub-Saharan Africa, Latin America and South Asia would be eliminated. About 10 more countries could become eligible for such relief; moreover, future World Bank aid to those countries would be given in the form of grants rather than loans.
A complete write-off would be considerably more generous than the terms that the 27 countries can currently get under the Highly Indebted Poor Countries initiative. The HIPC plan, which was launched in 1996 and expanded in 1999, is aimed at reducing the countries' obligations to a manageable level, defined as a certain multiple of their exports. The world's rich countries have financed much of the initiative by contributing to a trust fund used to pay the debts of the poor countries to the IMF and World Bank as they come due.
Debt-relief advocates who have been talking with officials in Washington and London about the proposal voiced hope that it would get a rhetorical endorsement at the summit. They have been prodding the summiteers to provide at least enough funding to extend the existing HIPC program.
"This summit can and should keep old promises on debt relief," said Jamie Drummond, executive director of DATA, a group founded by the rock star Bono to support aid, debt relief and trade concessions for Africa. "But the proposal of 100 percent relief is something more -- a historic breakthrough, a lasting exit from the shackles of debt for the poorest nations."
The rich nations would have to put up substantially more money -- over $1 billion a year for the next few years, and significantly greater amounts in later years -- to fund the proposed 100 percent write-off plus the conversion of loans to grants. Otherwise, the loss of debt payments from the poor countries would hurt the financial condition of the World Bank and other multilateral lenders, restricting their ability to aid other developing countries that need assistance.
The need to ensure that money will be forthcoming from the rich countries is a potentially major obstacle. The British, in particular, have insisted that a concrete plan must be established to guarantee funding.
"It's very important to acknowledge a point of principle about the need for greater multilateral debt relief," a British official said. "That shouldn't be diminished. But it has to have a credible financing plan to back it."
Although adoption of the plan could help Bush politically by possibly burnishing his image as a "compassionate conservative," a number of economists are strongly opposed to 100 percent debt write-offs, even for very poor countries. Among them is John Williamson, a scholar at the Institute for International Economics, co-author of a book proposing a substantial expansion of HIPC.
"It will go down well with all the debt campaigners, but it's not terribly good development policy," Williamson said. "Once one establishes the principle that at the end of the day a country gets a 100 percent debt write-off, that destroys any incentive" for prompt adoption of the economic reforms required to become eligible for HIPC.
"The other thing is the question of equity," Williamson said. "It's one thing to bring down the indebtedness of HIPC countries, but it seems to me to be terribly inequitable to give them a total write-off" when other poor nations, such as Indonesia, don't qualify because their debt burden isn't quite as overwhelming or their per-capita incomes aren't as low.
For the administration, the more important comparison may be Iraq. Since Bush wants Baghdad's creditors to forgive most of its debt, which the administration estimates at about $120 billion, it might help to show that poor countries are also getting a generous deal.
But White House officials stressed that they consider the Iraqi debt a separate issue. "There is no way there is going to be a grand bargain combining HIPC and Iraq debt," a senior administration official said. "That is not going to happen."