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In the news: Ministers reach deal on historic debt cancellation scheme

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
October 2005
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The International Monetary and Financial Committee and the Development Committee reached agreement on a proposal put forward by the Group of Eight (G8) countries to cancel 100 percent of the debt owed by the world’s heavily indebted poor countries (HIPCs) to the IMF, the World Bank, and the African Development Fund (AfDF). After months of debate, IMFC Chair and U.K. Chancellor of the Exchequer Gordon Brown announced during the September 24-25 IMF-World Bank Annual Meetings that “agreement has been reached on all the elements,” meaning that “this historic process of completing the debt write-off that started many years ago has ended today.”

Cancellation of the debt, estimated at around $55 billion will go a long way toward freeing up resources to help these countries accelerate poverty reduction and reach the Millennium Development Goals (MDGs). The 18 HIPCs that could benefit immediately are Benin, Bolivia, Burkina Faso, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania, Uganda, and Zambia.

Outstanding issues resolved

Agreement by the IMF Governors had hinged on three key issues: additionality, that is, an assurance that the debt relief initiative increase funds available to low-income countries and, in particular, would not reduce the lending capacity of the IMF, the World Bank, and AfDF; uniformity of treatment, which means that eligibility must be based on relevant criteria; and conditionality—conditions that would be placed on recipients of debt relief. “The breakthrough is that we now have a set of proposals that are supported by the whole international community,” Brown said. Referring to the debt deal as “the G184 proposal,” Trevor Manuel, South Africa’s Minister of Finance and Development Committee Chair, said that it sets the stage for faster implementation of the MDGs. Both de Rato and World Bank President Paul Wolfowitz pledged that their respective Executive Boards will now take up approval of the arrangements needed for debt cancellation by the end of 2005.

The issue of how to preserve additionality without affecting the finances of the World Bank was resolved when the G8 pledged in a letter to Wolfowitz to “cover the full cost to offset dollar for dollar the foregone principal and interest repayments of the debt cancelled for the duration of the cancelled loans.” While the IMF will cover the costs of debt relief with its own resources, the G8 proposal ensures that the IMF has sufficient financial capacity to assist low-income countries. The G8 members also committed themselves to providing contributions to cover additional needs related to the protracted arrears cases (Liberia, Somalia, and Sudan) and other countries that may qualify for assistance under the HIPC initiative.

The issue of uniformity of treatment had come up early in the debate because the G8 proposal had offered debt relief to HIPCs but not poor countries that had been servicing and paying their debt on time. The issue was handled by using per capita income to distinguish how debt relief would be provided by the IMF to the various HIPCs.

Asked by reporters whether debt cancellation could tempt countries to default, Brown said that nobody should draw this conclusion. He said the fact that the conditionality attached to the HIPC process is needed to qualify for debt relief should not be overlooked. The deal “is in no way a signal for people to be profligate.”

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