Malawi’s debt relief enigma

14 July 2008

What was the value of Malawi’s debt cancellation (received in September 2006)?

If Malawi had received its debt relief with no hidden reductions and cuts, it would have had $101 million extra per annum free in its budget (the UK, in comparison, gave $180 million in 2006: SID, table 16.2). What it has really had is less impressive even than this. At best Malawi’s debt relief amounts to nothing more than a marginal adjustment to its domestic debt interest bill; at worst it amounts to less than nothing.

In September 2006 Malawi completed the Heavily Indebted Poor Countries process. Goodall Gondwe set out his intention to use the money saved specifically for the benefit of the poor. “Mr Speaker, Sir, and Honourable Members”, he stated, “during the budget review in March, it was proposed to spend these debt relief resources on those social activities that would benefit the poorer segment of the population.” (2007/8 Budget Statement, para. 48 – link now broken.)

But this appears to be impossible, since the terms and conditions of the debt relief Malawi received actually reduce the amount of money available for “the poorer segment”.

Gondwe’s 2007/8 Budget Speech explains that the overall debt stock was reduced from $3.0 billion to $0.5 billion, leading to saving in interest and capital repayments of $101 million in 2007/8; however, Malawi had been receiving $36 million per annum since the year 2000 in interim debt relief; so extra value provided by debt relief in 2006 was around $65 million per annum

However, a large proportion of this new debt relief money was provided under the terms of the deal agreed at the G8 Summit in Scotland in 2005: and under these terms, countries receiving debt relief also get a cut-back in the amount of development loans they receive from the World Bank. One of the terms of the debt relief deal for Malawi was that its World Bank funding would be reduced by $27 million per annum (this is, apparently, because the US won out over the UK during the 2005 G8 Summit debt relief negotiations: download article here). Now, the World Bank provides money to Malawi, it says, specifically to help with reducing poverty; given this, it seems fair to say that this $27 million per annum reduction is money that would have been, and now is not, available to benefit the “poorer segment”.

Malawi has – or had, in 2006 – huge domestic debts; this is because the government under Muluzi shored up its budgets by borrowing large amounts from Malawian and Malawi-resident businesses. An agreement was made with the IMF that a large proportion of the money saved through getting debt relief in 2006 would be directed towards reducing domestic debt. This agreement, set out in the 2006 Article IV Consultation(para. 22) ringfences $26 million per annum for the Malawian budget, and directs the the remainder to reducing domestic debt.

This means that only $26 million per annum is available for spending specifically on projects that benefit “the poorer segment of the population”. But we have already seen that the World Bank is reducing the money available for reducing poverty by $27 million per annum So Malawi had less, not more, money available for spending against poverty as a result of getting debt relief.

Certainly, by reducing domestic debt, the Malawi government will have a lower domestic debt interest bill to pay, and this will improve its financial situation overall. The IMF Article IV consultation says it will reduce domestic debt by 1.4% GDP; I have not tried to calculate the significance of this for the annual domestic debt interest bill. However, the claim made by governments and NGOs alike, was that debt relief money would go directly to pro-poor spending. “The debt relief to be provided as a result of reaching completion point will provide a great push to Malawi’s poverty reduction efforts”, said Michael Baxter, World Bank country director for Malawi.

This is a tremendous overstatement. If Malawi had received debt relief without these underlying conditions, it would have made less difference than an ungenerous donor. As it is, the debt relief will result in less money available specifically for “pro-poor” spending, but with some circumstantial reduction in the pressure of the domestic debt interest bill.

Debt relief is a noble cause: but delivered in this form it is vitiated.

Jubilee Scotland

Advertisements

G8 in Rostock: The State of Debt

7 June 2007

The “Another World is Possible” rally in Rostock, 2nd June.

At about 2.30pm, several thousand people dressed in black emerged from the ranks of the eighty-thousand peaceful demonstrators and marched at the police. Clashes started shortly afterwards. The police’s initial charges were limited, and did not disperse the group in black – though they did send panicking bystanders fleeing into the festival area that had been agreed as a no-conflict zone. After several hours, as crowds restricted access by fire engines to a burning car, heavy anti-riot machines were brought in and five hundred injuries from tear gas ensured, with two hundred arrests and injuries to twenty police (according to reports).

I don’t think that the violent protestors on Saturday had a thought-out political programme (whereas the peaceful summit blockaders do – and they are being injured and arrested in large numbers, possibly as a result of tougher policing following Saturday’s violence). However, their actions lent the Summit a needed air of crisis. For as regards the intermeshed causes of global poverty, the only thing in question at the Summit is what margin of backsliding will be countenanced. This G8 is a theatre of sterile debate: 2005’s categorical pledges to end global poverty have been broken down – as they always are – into incomprehensible technical formulae, which consume the intellectual energy that should be spent on making a just world.

For background information, and pictures, see Jubilee Scotland’s website.

Debt and poverty: the trends and debates.

Level of reduction

The G8’s debt deal has been implemented for twenty-two countries. This has reduced the net debts of these countries from US$34.7 billion to US$15.4 billion (calculated by Eurodad using World Bank figures: see Eurodad p.6). Of these twenty-two, the eighteen in Sub Saharan Africa have had debts reduced from US$26.3 billion to US$9.3 billion.

Meanwhile:

The World Bank offsets the costs of this debt cancellation by reducing the loans it makes to the countries in question (see “World Bank Debt Relief – TOTAL scam“, and “Disappearing Debt Relief“).

The crucial question for us is: by how much are countries’ monthly debt repayments being reduced? The IMF’s recent State of Implementation for HIPC (PDF here) report shows that, due to new borrowing, the debt service is not reducing by very much at all. It looks like it is down by about a fifth (18%) (p.10, fig.4).

How can it be that the overall debts are being reduced by over half, but the debt service reduces only by a fifth? One reason is that countries are taking on new loans. The IMF says that countries will have to show “strengthened management of both external and domestic debt” to avoid falling back into unsustainable debt. That is, it blames the countries themselves for their debt problems. But, arguably, the root problem of debt was not poor financial management: it was the structurally unfair trade that prevents the poorest negotiating a fair price for their exports. The fact that countries are having to take on new loans to survive suggests that the structural problems are unresolved. There will always be those, however, who want to present the African finance ministers as feckless or venal. Another reason may be that the loans being cancelled were not really being serviced anyway, or that there were other debts that were not being serviced which were serviced using the relief (this certainly happened in Zambia), such that the debt cancellation was on paper only.

However, some judge the debt cancellation a success, because what definitely is reducing is the ratio between debt service and export earnings. This is down by over half (p.10, fig.4). The very poor countries are making more from exports, and so are judged by able to pay off their debts.

The IMF reports that poverty reducing expenditures have increased from 7% of GDP to 10% of GDP in the poorest, most indebted countries, since 1999; however, the definition of what counts as a poverty reducing expenditure has also been expanding over that period, so the actual increase may be lower. An alternative World Bank report says there is an increase in education spending, and a very slight increase in health spending, in the poorest countries (p.12 nt.16).

A fair summary of the present situation, then, could be that the G8 has done very little to solve the problem of debt, and that the high primary goods prices caused by China’s growth are providing a temporary respite to Africa’s problems.


Disappearing debt relief

29 November 2006

The debt relief offered to Zambia through the Heavily Indebted Poor Countries (HIPC) initiative would reduce the money available for human development.  This is a surprising claim in a paper by John Weeks and Terry McKinley for the United Nations Development Programme (PDF here).  When G8 Debt Deal cancellation (MDRI) is added, Zambia does see a net benefit: but only a very slight one, and far below what was promised.

Officially, Zambia is receiving a reduction in debt service equal to 5.3% of its GDP, annually, over the next few years; but according to McKinley and Weeks the new money available for anti-poverty spending is only 0.8% of GDP.  Where’s the rest?

1. Redirection of G8 debt relief to private debts

According to Weeks and McKinley, over half of the funds accruing to Zambia by way of debt relief are redirected to pay other debts.

Given that the Bank of Zambia faced large debt service obligations, whose non-payment could have resulted in a curtailment of non-HIPC donor assistance, [some of the] HIPC interim debt service relief accruing to the Bank of Zambia was designated for debt service payments.  [IMF 2005]

Thus, according to McKinley and Weeks, “over half of HIPC interim debt relief (3.1 out of 5.7 percentage points) was merely an accounting entry.”

The debts to be serviced by this redirection of HIPC money are likely to be private sector debts – possibly government bonds bought by domestic businesses, possibly commercial banks in donor (G8) countries.  If so, banks are benefitting from money supposedly given to the poor.  Note that the figures given above are for interim HIPC relief; the figures for relief at completion point are lower (see section 3, below), but still considerable.

2. Tighter public spending limits

One of the conditions Zambia had to meet for debt relief was a reduction in its fiscal deficit: public overspending was to be reduced from 3.9% of GDP (2000-2004) to 0.6% of GDP (2006 onwards) (p. 11, table four).  Unless these savings are found by cutting budgets which have nothing to do with human development, the consequences will be felt by the poor.

3. Reduction in grants and other loans

As pointed out previously, the World Bank reduces the amount of aid available to heavily indebted countries in order to offset the cost of debt cancellation.  According to EURODAD, Zambia will receive debt service reduction of $38 million in financial year 07-08; but it will have its loans from the World Bank’s International Development Association reduced by about $31 million (pdf of report here; table 4; loans reduction calculated by subtracting column three from column two, or column four from column one).  Net benefit to Zambia of G8 deal is thus $7 million a year.

McKinley and Weeks calculate the reduction in grants, plus the accounting entries described above, to total 3.0% of GDP.  In summary (paraphrasing p.11):

The G8 debt deal ought to reduce Zambia’s debt service by 6.9% of GDP.  Better terms of trade also improves things by 0.2% of GDP.  Total improvement in Zambia’s finances ought to be 7.1% of GDP (as it stood in 2005).

However:

Redirection of debt relief to commercial debt service, plus reduction in grants, reduces this by 3.0. Tighter deficit limits reduces it by 3.3.

So:

Real benefit to Zambia of G8 Debt Deal is: 0.8% of GDP.

However…

The use of debt relief to service commercial debts looks like a naked transfer of aid money to the private sector, but it’s possible that the IMF is doing Zambia a favour by allowing this.  Officially, countries are meant to clear debt arrears before they can receive HIPC relief; this redirection of interim relief might have been a way for Zambia to meet that criteria and so qualify for completion point.  This needs further investigation.

On the face of it, though, it seems the conditions attached to debt relief have the effect of making virtually all the money disappear.  If the analysis is right – and if, as seems possible, what holds for Zambia also holds generally – we can expect very little improvement over the next few years, and the lack of improvement might well be used to discredit the idea of debt relief itself. 

But if the situation really is as McKinley and Weeks describe, debt relief is not at fault: the fault lies with the conditions under which it is disbursed.


World Bank Debt Cancellation – a TOTAL scam?

3 July 2006

On the face of it, the G8 debt deal is a scam. The money that qualifying countries save on debt repayments is almost entirely balanced by a corresponding cut in the aid that they receive from the World Bank.

The G8’s debt deal seems to work like this: the financial flows out of the country represented by debt service payments are cut, and at the same time there is a cut in the financial flows into the country represented by World Bank development aid. Result: countries find themselves in pretty much (not quite, but pretty much) the same situation they were in in the first place. They are paying less debt service and receiving less aid.

I would love to hear from people who think I’ve got this wrong – particularly if you work at the Bank and worked on the deal. As, if it’s not wrong, the G8 Debt Deal (the “Multilateral Debt Relief Initiative” or MDRI) is a near-total scam.

Not a total scam, though, for at least three reasons. For one thing, the IMF (International Monetary Fund) has cancelled its share of the debts of (pretty much) those nineteen countries. This happened in January, and doesn’t seem to have the same caveats as the World Bank proposal. But the IMF’s debt only amounted about 10% of the debt cancellation package agreed by (actually: prior to) the G8 in Gleneagles.

Second, the World Bank is generally upping its aid to the countries that are supported by the IDA (International Development Association), so even after their aid is cut to offset the debt cancellation, they will be in a better situation than before. Only not much better. According to a report from EURODAD (based on report from Debt Relief International here) the net benefit of the World Bank’s part of the debt deal ranges between $53 million a year to $1 million a year (mean benefit about $13 million), with the money being awarded according to what the World Bank thinks of national social and economic policy. Big winners are Ethiopia ($53m), Tanzania ($39m) and Uganda ($27m); little winners are Guyana ($1m), Bolivia ($4m), Niger ($5m). These are the figures which – as far as I can tell – represent the true value of the G8 Debt Deal.

Third, because the debt cancellation, even if offset by a cut in development aid, might leave the governments of the countries in question in a better position to respect their own internal democratic processes in setting economic and development policy. Last week Susan George came to Edinburgh (where I’m writing this) and spoke at the Scottish Parliament. Debt, she says, is power: the creditors have great influence over economic policy in the developing countries. For someone who takes this view (as I do), the G8 debt cancellation ought to be welcome since it might make a political difference even if the financial difference is small. But in the present case, the debt cancellation is only available to countries that have already satisfied the IMF that they will adopt and pursue strong programmes of adjustment and reform – to countries, it seems, that have already had the power exercised over them.

The World Bank debt deal has had a lot of publicity: Reuters/ABC tells us, for example, that $2.7 billion of cancellation has been granted to Zambia. Wonderful! And what’s the overall benefit to them this year? errr… $7 million (according to EURODAD).

I am very cynical about cynicism: it can be very superficially attractive (think only of Han Solo), and it’s a great way to make oneself look more clever than one actually is: but generally speaking it’s a rocky road. This isn’t meant to be cynical; it’s mean to be sceptical. If anyone thinks I am missing something, if there’s a substantial reason why this debt deal really is to be welcomed, I’d like to hear it.

Ben at Jubilee Scotland