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INDEPTH: ECONOMY
Debt relief FAQs
CBC News Online | January 12, 2005
The financial obligations facing
the world's poorer countries are onerous, to say the least. Over the years, they've borrowed hundreds of billions of dollars from other governments, commercial lenders, and from international financial bodies like the World Bank and the International Monetary Fund (IMF).
AMOUNT LOW-INCOME COUNTRIES SPEND EACH DAY ON DEBT REPAYMENT:
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$100 million US.
Source: Oxfam Canada
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In many cases, it's money that will likely never be repaid. Sometimes the required repayments are so large that they dwarf what some countries spend on health care or education – money that would be better spent on their own citizens' needs.
Given the debt burden, a variety of measures have been proposed to help poorer nations deal with temporary crises or unsustainable debt levels.
What kinds of debt relief are there?
Debt moratoriums are really postponements or rescheduling of debt repayments, not reductions in total repayment obligations. The debt help offered to the countries hit by the Asian tsunami fits into this category. The 19 creditor nations in the so-called Paris Club of wealthy countries (of which Canada is a member) agreed to temporarily suspend debt repayments for at least a year. The decision will allow Indonesia, the most heavily-indebted of the tsunami-affected countries, to save at least $3 billion US in debt-servicing costs this year.
AMOUNT CANADA IS OWED BY TSUNAMI-AFFECTED COUNTRIES:
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$1 billion.
Source: federal government
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Debt reduction programs can include interim relief to reduce debt payments, and partial or total debt forgiveness. Debt relief is provided through a variety of programs such as the Heavily Indebted Poor Countries (HIPC) Initiative. Countries that agree to abide by a number of economic and policy reforms and adopt a "poverty reduction strategy" are eligible for interim relief on debt service payments. Eventually, they can apply for partial or total debt reduction.
Why don't the world's richer countries just cancel the debts of poorer countries?
This is what many aid groups are calling for. There is little doubt that current debt relief measures are failing to give poor nations the lift they need to raise themselves out of their perennial poverty. Oxfam, for instance, points out that low-income countries paid $39 billion US to service their debts in 2003, while they received $27 billion US in aid. Zambia, for example, now spends more servicing its debt than it spends on education.
CANADA'S FOREIGN AID COMMITMENT:
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Funding increase of 8% a year until 2009.
Source: 2004 federal budget
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Many countries – Canada included – have agreed to cancel bilateral (government-to-government) debts owed to them by the poorest HIPCs and other low-income nations. But debts owed to such multilateral bodies as the World Bank and the IMF aren't as easy to write off.
For one thing, the World Bank's International Development Association (IDA) cannot, on its own, choose to simply forgive any of its loans, because it uses the loan repayments to fund further loans and grants. So the IDA
must find money from other sources (that means wealthier nations) if it is to provide debt relief. Canada has committed to give extra money to the IDA to allow it to provide debt relief.
What are some other ways of helping poor countries?
Still, there is considerable opposition to wiping out all developing-world debt. Some Western leaders (like Australia's John Howard) say debt forgiveness does not provide enough guarantees that the poorest countries would actually use the money to alleviate poverty.
AMOUNT OF FOREIGN DEBT FORGIVEN BY CANADA SINCE 1978:
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$1.3 billion.
Source: Department of Finance
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The preferred method of dealing with poor nations continues to be sending direct aid. It's not hard to see why. Foreign aid is often dependent on the recipient country making major economic reforms. It's also frequently tied to the donor country's strategic or economic interests. For instance, the top recipients of U.S. aid in 2002 were not in sub-Saharan Africa, but Egypt, Russia and Israel.
Most Western countries also tie their aid to their own domestic economies.
"Tied aid," as it's known, obliges donor countries to buy goods and services destined for foreign countries in the donor country, instead of spending it in the recipient countries where it would help boost local economies.
An OECD report in 2000 estimated that 66 per cent of Canadian bilateral aid was tied – a level exceeded only by Spain and the U.S.
Supporters point out that tying aid to domestic purchases helps to build political support for foreign aid programs, which have suffered a worldwide decline in recent years. Indeed, a 2002 survey by the Asia Pacific Foundation of Canada found that 74 per cent of Canadians support tied aid and want it to continue. But three-quarters of those who support tied aid also said the amount of tied aid should be reduced.
Aid groups say Western countries could greatly help the developing world by reducing or eliminating trade barriers that keep products exported by poor countries out of Western markets. Despite all the talk about free trade, the West still subsidizes its own agricultural industries at levels that make it impossible for poor countries to compete.
But aid groups say if the industrialized world would only live up to its 1970 commitment to spend 0.7 per cent of its gross national income on foreign aid, that alone would provide almost all the help poor nations would need. Stephen Lewis, the UN's special envoy for HIV/AIDS in Africa, said in 2002 that such a level of development aid would "result in the virtual eradication of poverty by 2015."
Canada's foreign aid budget in 2003 (about $3 billion) represented 0.26 per cent of its gross national income. The U.S. contribution was just 0.14 per cent.
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