Debt and Aid

T Longren trackbacked to my last entry on debt cancellation. I’ve never been fond of trackbacks from entries that don’t in turn link to me, but this post got my attention because it seemed to misunderstand the origin of the debts which the G8 has announced plans to cancel.

The debts which are to be cancelled are not the result of overseas development aid. While it’s true that some of what rich governments describe as ‘aid’ is in the form of loans, most of the debts are the result of loans (explicitly described as such) granted in the 60s and 70s. Those loans were granted on terms derived from an economic situation which quickly deteriorated and many argue that they were only granted because the west was at the time cash-rich and wanted to turn much of that cash wealth into investment wealth.

There are some terrible stories of loans being granted without any apparent vigilence on the part of lenders, such as one granted to the Phillipines to build a nuclear power station on a tectonic fault line (it could never be switched on) and many granted to governments (such as that of Mobutu) that lenders knew to be deeply corrupt. The simple checks which any domestic bank would make before granting a mortgage, considerations of the risks involved and the financial stability of those taking the loan, were not applies.

Most of those debts are now owned by the IMF, World Bank and various regional development banks. Many countries are spending many times their aid income in debt service, but because of the interest rates no progress is being made towards paying them off. Nigeria, for example, borrowed $17 billion, has now paid back $18 billion, but still owes $34 billion (“In The Balance“, JDC, Action Aid, Christain Aid June 2005).

Until now debt cancellation has only ever been partial, meaning that debts quickly got out of control again in situations where the countries granted that ‘relief’ could not afford the interest payments, let alone any payment on the debt stocks. Assessment of relief to be granted was often made many months (and even years) before the relief materialised and in the meantime the debts had escalated still further. The new agreement is for complete cancellation, which should prevent that problem from recurring in those countries which qualify.

Further development aid will not lead to a new build up of debt if the money is, in fact, aid. And the moneys freed up from debt servicing can be invested in vital infrastructural improvements. But there are problems. First among them is that the debt cancellation is currently granted based on promises to adopt certain financial models, regardless of whether they are appropriate for the countries in question. And the second is that there is not yet a solid process in place to independently arbitrate any future loans that may be taken out. Some countries may still need loans in order to invest in their infrastructures, but before that can happen there should be sensible rules managing that.

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1 comment

  1. eek, sorry James. Added the trackback but forgot to link the text. Linked now though, sorry for the linkless trackback. I dun like em either.