Reducing the cycle of debt

The G7 ministers, as well as those attending the IMF and World Bank annual meetings in Washington, could only "impotently bluster" about how to contain the steep rise in oil prices. They settled for the lowest common denominator -- the need to increase production. In a manner of speaking, theirs was an exercise that only offered the pretence of action.

Similarly, on China, their response was also diluted. There was very little real pressure on that country to adopt flexible exchange rates. Their virtual lack of influence on China was further underlined by that country's finance minister Jin Renqing who stated that China had "no immediate plans" to join the G7.

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The real failure of the G7 was however in an area where they do have considerable leverage: debt relief.

Many countries had hoped, and several had been led to believe, that the latest round of meetings in Washington would produce solid plans for action to reduce the levels of debt servicing still being demanded of heavily indebted poor countries, most of them in sub-Saharan Africa and many of them spending as much or more on debt payments as they do on health and education.

It may be recalled here that Action Aid and Oxfam have calculated that even after debt relief under the HIPC scheme only seven countries have seen their debt burden reduced to levels considered sustainable. For example, Ghana spends more on repaying debt than it does on health; Zambia devotes more money to its creditors than it does to its education sector.

Such a situation is also present in many other countries in Asia and Latin America. This has been an important reason why very poor countries, in most cases are stuck in a cycle of debt (owed to the IMF, the World Bank, and regional development banks, much of it dating to the 1970s) that has made them unable to provide decent education and health care. This tragedy has been further complicated by the nature of accounting and the process of repayment.

The interesting aspect is that many of the poor countries have paid back in interest more than they originally borrowed, but have not been able to touch the principal. Consequently, the cycle has continued. Nigeria, for example, borrowed $5 billion. It has paid back $16 billion and still owes about $30 billion on the same debt.

Today, sub-Saharan Africa pays $1.30 in debt service for every dollar it gets in aid. In the case of certain countries, it is four times what they spend on health care.

Everyone agrees that this is unjust. There is now an international consensus that these debts should be paid off -- and quickly. However, as has been evidenced a few days ago, the international bodies appear to be hamstrung by arguments between the wealthiest and most influential countries over how the debt relief should proceed.

Britain's Gordon Brown has his own complex plans, which involve revaluing the IMF gold reserves at market rates and using the surplus to pay off the debts of only 27 poor countries. Such a view is based on the contention that the IMF owns more than 103 million ounces of gold, a hold-over from the gold standard days that it continues to value at about 10 per cent of the market price. It is argued that the IMF could sell a small part of that gold at market rates or simply revalue it for the purpose of accounting that would in turn finance debt cancellation painlessly.

Mr. Brown's plan is however opposed by many within the IMF, including the US, which has its own plan. Some developing nations such as South Africa also do not agree with the British idea, worried that this would hurt their future gold exports.

Unfortunately, the latest meeting could not agree with Mr. Brown. He also failed to get sufficient support from members of the IMF policy-making committee.

In the recent past, The US presidency has been exhibiting quite a bit of interest in debts and writing them off, particularly for the poorer countries. This has mostly arisen out of its involvement in Iraq and efforts to greatly reduce the debt of that unfortunate country. The US administration realised that other nations would object to such a write-off for oil-rich Iraq if the broader picture did not include the really poor countries in Asia and Africa. As such, the US led a campaign to get the multilateral banks to give money, rather than lend it, to the poorest nations.

Unfortunately, current efforts to reduce these debts have not been successful. The Heavily Indebted Poor Countries (HIPC) Initiative began in 1996, and was expanded in 1999, but the results have been very limited. The concept of eliminating $100 billion in debt has not reduced debts to manageable levels.

There appears to be stark contrast in attitudes and statements. This has been noted most aptly in the International Herald Tribune of October 2-3 by Kevin Watkins and Ngaire Woods. They have commented that "rich countries are ardent advocates for democracy all around the world, but when it comes to the IMF and the World Bank, government of the many by the few is the preferred option."

It would be worthwhile to point out here that with votes weighted to reflect their financial stakes, rich countries enjoy a built-in-majority on the executive boards of the IMF and World Bank and in its decision making. Membership of the two institutions now totals 184 countries, but the G7 industrial countries account for around 40 per cent of the total votes. Most interestingly, Africa accounts for a quarter of the membership and just over 4 per cent of the vote. Belgium (population 10 million) has more votes than Nigeria, Ethiopia, Zambia, Tanzania, Mozambique, and South Africa combined (total population around 300 million). Africa's voice is further weakened by an unwieldy and profoundly unfair system of executive management. Africa, unlike the larger industrialised countries has just two executive directors to represent 44 countries. This under-representation among the poorer countries is further compounded by political overload.

Developing nations, particularly the poorer bloc, also face other drawbacks. The sheer size, diversity, and competing interests of their several constituencies make it that much more difficult to forge a consensus that will be strong enough to challenge industrialised countries with regard to the central question of tackling poverty at the roots.

The scenario is complex, but the reduction of poverty through the multilateral mechanism can still be accomplished given political will. Some modest reforms could improve the responsiveness and the efficiency of the IMF and the World Bank. The starting point should be an overhaul of the voting structure. Over time, the slice of "basic vote" as conceived in 1944, has been eroded to less than 2 per cent of the total i.e. one-fifth of the level in 1970. Reversing this process would give Africa and other developing regions a stronger voice.

The executive management system also needs reform. One formula might be to have more executive directors, each of them representing not more than eight countries.

The last meeting in Washington might not have concluded with full acceptance of agreed principles, but fortunately, strands of hope were left in the air. Both Mr. Brown and the US Treasury Secretary John Snow were right to mention that details were not always important. I agree with them. I believe that the post-US presidential election scenario will see movement forward. What is vital is that the world's wealthiest countries continue to work on writing off 100 per cent of the debt belonging to the world's poorest countries.

The patience of the poor, specially the extreme poor in many countries, is wearing thin. This has to be understood. It is no longer enough to just convene grand meetings and adopt well-meaning resolutions. If poverty is not reduced, it will continue to be the breeding ground for terrorists and instability.

Muhammad Zamir is a former Secretary and Ambassador.