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FINANCIAL WATCH: Why total debt cancellation is required
2005-06-22 09:28:19
By Theo Mushi
International organizations like OXFAM and Jubilee 2000 have been advocating total debt cancellation for the highly indebted poor countries.
This is a realization that rescheduling of external debt repayments and other forms of debt relief have not made LDCs external debts sustainable. Debt repayment obligations sometimes exceed 150% of a country’s export earnings.
Tanzania and other LDCs received debt relief from the IMF and the World Bank after reaching completion point of the HIPC iniatiave in 2000, and to date it has received debt relief to the tune of $ 1.3 billion.
Under the HIPC initiative debt relief from the multilateral donors would amount to $ 3 billion over a period of 20 years.
Paris Club member countries was the Naples Agreement under which, after meeting certain conditions, LDCs received 67 percent debt cancellation of outstanding obligations.
The new initiative by the British Prime Minister Tony Blair has led to 100 percent cancellation of old debts, and this will be followed by cancellation of debt owed to multilateral donors like the IMF, World Bank and the African Development Bank.
After the HIPC debt relief, Tanzania had more funds for budgetary allocation to spend on social services like education, health, water supply, rural roads and the fight against the HIV/AIDS pandemic.
The budget of the agricultural sector has increased more than 100 percent in the past two financial years.
This can explain why the sector registered a growth rate of 6 percent in 2004 against the projected growth rate of 4 percent .
The money that would have been used for debt servicing has been allocated to the social sector in order to contribute to poverty alleviation as stipulated in the country’s poverty reduction strategy paper (PRSP).
Debt cancellation has gone hand in hand with increased external aid to Tanzania in the form of grants and loans at concessionary interest rates which have gone to the budget support.
Increased borrowing has increased the debt stock and this means that most of the LDCs cannot get out of the debt trap.
Despite debt cancellation, Tanzania’s external debt still stands at about $ 9 billion.
It is not yet certain what the impact of the recent G8 initiative to cancel 100 percent of outstanding debt obligation will have on the debt stock and debt servicing obligations.
Available data from the Bank of Tanzania Economic Bulletin indicates that as of September 2004 external debt stock was $ 7.9 billion and disbursed loans by creditors were $ 6.7 billion.
The breakdown by creditors indicates that bilateral loans stood at $ 1.5 billion and multilateral loans reached $ 4.6.
This shows that the cancellation of the multilateral loans will reduce the debt stock and debt servicing obligations substantially.
In the same period commercial loans to Tanzania stood at $ 233 million, while unpaid interest arrears amounted to $ 1.16 billion.
Total debt stock stood at 8.8 billion and total debt as percentage of GDP was as high as 90 percent.
Advocates of total debt cancellation argue that this will make African leaders unaccountable in the use of the loans.
The USA, in particular, has not been in favour of debt relief and is instead advocating more grants and disaster relief like the HIV-AIDS pandemic fund.
Advocates of debt cancellation say that these debts owed by LDCs are unrepayable in any case and it is better to start from a clean state.
Tony Blair and Gordon Brown have been advocating 100 percent debt cancellation to be followed by a 100 percent increase in aid flows by creating the international finance facility for Africa which will target funding of priorities which will contribute to poverty alleviation in Africa.
As Tony Blair said: ``Poverty in Africa is a scar on the conscience of the world.``
In the 1960s and 1970s, industrialized countries pledged to set aside 0.7 of GNP and development assistance to the least developed countries.
Most of the industrialized countries are now contributing 0.4 of GDP as development aid in the form of loans or grants.
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