Africa Debt Cancellation -- FAQ
January 2007
Q. Did the 2005 G8 debt deal help Africa?
The G8 deal on debt cancellation, announced on June, 11, 2005, is an important first step on a long journey. The deal launched the Multilateral Debt Relief Initiative (MDRI), which guarantees 100% debt cancellation to nations that have reached, or will eventually reach, completion point under the IMF and World Bank Highly Indebted Poor Countries (HIPC) initiative. [1]
As of July 2006, 19 nations have qualified for 100% debt cancellation under the MDRI--fifteen of which are in Africa including Benin, Burkina Faso, Cameroon, Ethiopia, Ghana, Madagascar, Mali, Mauritania, Mozambique, Niger, Rwanda, Senegal, Tanzania, Uganda, and Zambia. A total of $49 billion in multilateral debt has been cancelled in Sub-Sahara Africa through both the HIPC and MDRI programs. [2]
These savings are now being used for health care, education, clean water, HIV/AIDS prevention, and social services. This is indeed a victory for Africa, but there is still much more that needs to be done.
...savings are now being used for health care, education, clean water, HIV/AIDS prevention and social services.
Q. How indebted is Africa and to whom is the debt owed?
How Much: According to analysts, Sub-Saharan Africa, economically the world’s poorest region, but carries US$201 billion in debt [3] and pays $14 billion annually in debt service. [4]
Paying billions of dollars a year in debt service takes away from Africa’s already scarce resources to invest in economic development, job creation, education, and health care. With some 300 million people living on less than $1 a day in Africa, approximately 38 million are facing a hunger crisis. [5] Adding to this, with only 10% of the world’s population, approximately 60% of the world’s HIV/AIDS cases (25.8 million) are found in Sub-Saharan Africa. [6]
To Whom: There are three main types of international debt: bilateral, multilateral, and private.
- Bilateral: a government owes money to another government
- Multilateral: a government owes money to a lending institution such as the World Bank
- Private: a government owes money to a private institution, like a bank.
Africa’s debt includes all three types; however, multilateral creditors such as the World Bank, IMF, and African Development Bank are the largest creditors to African nations.
Q. Who pays for debt cancellation?
Bilateral: Much of the bilateral debt of the poorest countries has already been forgiven or paid back. The cancellation of bilateral debt is financed by the creditor nation.
Multilateral: Most of Africa's remaining debt is multilateral, or owed to the International Financial Institutions, such as the IMF and World Bank. Who should foot the bill for multilateral debt cancellation? The answer to this question is one that is currently in debate. Some members of Congress and debt activists propose that debt cancellation be fully financed by the International Financial Institutions. Independent auditors have shown that the World Bank and IMF have sufficient funds to pay for debt cancellation without affecting their future lending. Jubilee USA and others propose that the IMF alone could fully finance debt cancellation by selling its substantial gold reserves. As of July 31, 2006, the IMF’s gold holdings amounted to $65.4 billion, at then current market prices. [7]
Q. What does debt cancellation cost the U.S.?
The Commission for Africa estimates that 100% multilateral debt service relief for all Sub-Saharan African countries would cost less than $2 billion per year. [8] This is the equivalent of $7 per American, or, roughly the cost of one move ticket or meal at a fast food restaurant. The U.S. would not be expected to foot the bill for debt cancellation alone, however, it could in fact do so.
Q. How can we be sure that cancellation dollars will be used to benefit people?
There is now a clear record of success of debt relief going to fight poverty. Many nations have already put plans into action to ensure the proper use of the released funds. They have demonstrated their commitment to use the funds to fight poverty and illness, and to promote education. Some highlights:
- In Ghana, the money saved is being used for basic infrastructure, education, and health care.
- In Nigeria, the finance minister Ngozi Ogonzi-Iweala has set up a poverty action fund to channel the proceeds from debt relief with specific expenditures that include training thousands of new teachers.
- In Tanzania, debt cancellation allowed the nation to increase education spending and eliminate school fees for elementary school education as well as resources to help with importing vital food supplies for those affected by drought.
Q. OK, debt harms Africa, but the U.S. has problems to!
Canceling the debt is actually in U.S. economic interest. The burden of debt leads to low wages in indebted countries and this has a series of boomerang effects on the U.S. For example, increased competition form cheap imports, job loss, and less U.S. made products sold in those countries. There is a preponderance of evidence that large debts discourage private investment and increase capital flight.
Cancelling the debt, therefore, is not only an ethical decision, but also a financially sound one.
Q. What can I do?
NOTES:
1. The HIPC initiative was established by the World Bank and the IMF in 1996 to coordinate debt reduction. To be eligible countries must participate in economic reform programs which have required privatization of assets, reductions in social spending, and other conditions that have proven to be harmful to developing nations.
2. HIPC Initiative and MDRI—Status of Implementation, International Development Association and IMF, August 21, 2006. This includes HIPC initiative assistance committed and MDRI assistance delivered or expected to be delivered to African nations that reached Completion Point (15) and Decision Point (9).
3. According to Professor and United Nations Advisor Jeffery Sachs. Philip Ngunjiri, The East African (Nairobi), 25 Jan. 2006.
4. Africa Out of the Limelight: The Debt Crisis One Year After the Gleneagles G8, Africa Action, July 2006.
5. The Hunger Site, sponsored by DATA, CARE, World Food Program and others http://www.greatergood.com/newsroom/ths/FaminePage.html
6. UN AIDS http://www.unaids.org/en/Regions_Countries/default.asp
7. Gold in the IMF, International Monetary Fund, Aug. 2006.
8. Our Common Interest: Report of the Commission for Africa, Commission for Africa, March 2005. (Chpt 9: Where Will the Money Come From: Resources, 301-338).
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