Debt Relief Must Be Expanded

The International Monetary Fund, the World Bank and the seven richest countries have been working on a way to ease the crushing debt of the world’s 41 poorest countries. What they have offered so far is a plan under which only two of those countries--Uganda and Bolivia--could qualify. That’s not enough. The G-7, whose finance ministers are meeting this weekend in Frankfurt, Germany, to improve the offer, should draw up a much more generous plan that would both ease the burden and reward countries for progress in putting their economic houses in order.

Much of the debt to international financial institutions and the developed countries, amounting to about $130 billion, was incurred in the 1970s, largely to finance ill-conceived projects, prop up corrupt regimes or bail out commercial lenders. In the subsequent years, debtor countries had to borrow simply to pay the interest. As their economies deteriorated and the prices of commodities declined, the burden of their debt increased. Today, most of the 700 million people of the so-called “highly indebted poor countries” live in grinding poverty, their economies saddled with revolving credits and unable to attract commercial lenders. The toll in human terms is staggering, as governments spend more on servicing their debts than on health or education.

The existing international debt reduction programs are designed to cut the poor countries’ debt to “sustainable” levels, provided they stick to IMF-prescribed restructuring targets for six years.

A U.S. proposal to the G-7 is somewhat more generous than the IMF initiative, but it too doesn’t go far enough. It calls for forgiveness on most aid-related loans, which account for less than a third of the total, and sets unrealistically high sustainable target levels for the bulk of the debt. Ten or more countries still would not be able to meet those thresholds.

The plan ultimately agreed on by the G-7 governments should benefit all poor countries that pursue prudent economic policies. Specifically, it should provide for a complete write-off of aid-related loans. Other debt should be written down to levels that the countries can service without sacrificing their health, education and sustainable development programs. The plan should be flexible enough to provide greater relief for countries struck by natural disaster or a sudden drop in commodity prices. Anything less would only perpetuate their poverty.