For use of information media - Not an official record

10 June 1999

The United Nations today (11 June) called upon the Heads of State of the Group of Eight (G8) countries, meeting in Cologne, Germany, from 18-20 June, to improve substantially the terms on which relief is currently provided to heavily indebted poor countries, to eliminate "once and for all" their debt overhang problem and permit sustainable economic growth.

The foreign debt problem of developing countries has "dramatically worsened since the beginning of the 1990s," says the UN. And, based on the outlook for commodity prices and export volumes, over the medium term the ability to service their debts could deteriorate further, with serious consequences for their development prospects and enjoyment of basic human rights.

A new package of debt relief is on the agenda for the annual meeting of the G7 Finance Ministers, which opens today in Cologne. But disagreements are reported to exist among governments over the extent and nature of improved concessions. The Finance Ministers’ report will be submitted to the G8 Summit for endorsement.

In a letter last month to Chancellor Gerhard Schroeder of Germany, Chairman of the G8 Summit, Secretary-General Kofi A. Annan wrote that debt relief should not come at the expense of Official Development Assistance (ODA). The decline in ODA to a record low point of 0.22 per cent of the GNP of OECD donors is viewed with great dismay by the United Nations.

A new report from the UN’s Executive Committee on Economic and Social Affairs, "Finding Solutions to the Debt Problems of Developing Countries," stresses the importance of this link.

In line with proposals already tabled by several major countries, the UN says that all the ODA debt of heavily indebted poor countries (HIPCs) should be cancelled. It then goes further, calling for a reduction in other official bilateral debt by at least 80 per cent. Countries emerging from conflict or afflicted by serious natural disasters, as well as those with very low social and human indicators, should also be given a chance to wipe the slate clean.

The UN notes that over the period 1990-1997, on average, the HIPCs were able to service debt equivalent to up to 18 per cent of their exports. Furthermore, in its view, the share of fiscal revenue to be allocated to external debt service should be less than 25 per cent.

Ensuring that any new debt relief scheme is fully funded, to avoid disappointment on the part of recipients, is essential. But, "it would be naïve to assume that financing will cease to be an important constraint," the report says. Moreover, the possible negative impact of an enhanced debt relief scheme on the lending abilities of multilateral development agencies must be carefully weighed.

The financing of debt relief should not be provided at the expense of ODA. Funding of the initiative should therefore be obtained through a combination of gold sales by the IMF, a prompt and substantial new allocation of Special Drawing Rights (SDRs) and additional bilateral contributions to multilateral Trust Funds for debt relief.

The Heavily Indebted Poor Countries initiative launched by the IMF and World Bank in 1996, welcomed as a major step towards addressing the debt problems of the poorest countries in a comprehensive way, is nevertheless viewed as slow, cumbersome and overcomplicated. To date, only three of the 41 eligible countries on the IMF/World Bank list (Uganda, Bolivia and Guyana) have benefited from debt relief.

"The prior conditions and safeguards built into the current HIPC initiative must be reduced, to make receipt of debt relief less of an obstacle course," the UN says.

The present six-year period before relief can be obtained by a debtor country, supervised by the IMF under its Extended Structural Adjustment Facility programme, should be cut in half. The scope of the scheme should also be broadened, to include other low-income countries that have problems in servicing their foreign debt.

Welcoming the "refreshing urgency" which it says is now inspiring the search for lasting solutions to the debt problems of developing countries, especially the poorest, the report argues that the worsening problem of foreign debt has serious implications for the enjoyment of human rights. "Debt repayment should not take precedence over the fulfilment of human needs and human rights."

The connection between debt relief and poverty reduction is a key concern. But, contrary to conventional wisdom, the report believes that debt conversion schemes – "debt-for-equity" or "debt-for-environment" swaps, for example, or conversion of foreign debt into local currencies – are unlikely to make a major contribution to debt relief.

Estimates of the total cost of the various improved debt relief schemes on the table vary considerably. For example, the new debt forgiveness proposal put forward by the United States has been costed at $102 billion; costs to international financial institutions would be $14 billion. (By comparison, the Gulf war in 1991 cost $102 billion and, according to Lehman Brothers, the US investment bank, the bombing campaign against Yugoslavia has already cost NATO countries some $7 billion.) The financial implications of the United Nations proposal would come close to that of the US.

UNCTAD, which takes the lead within the UN system on debt questions and has been providing practical assistance to debtor countries for over 20 years, was responsible for preparing the study for the Executive Committee on Economic and Social Affairs. In addition to its research and analytical work, UNCTAD helps developing countries renegotiate their official debt in the Paris Club and strengthen the management of their public debt through its DMFAS programme.

For more information, please contact:
Director, John Toye
Division on Globalization and Development Strategies UNCTAD
T: +41 22 907 59 27
F: +41 22 907 0045
E: john.toye@unctad.org
Chief, Carine Richard-Van Maele
Press Unit UNCTAD
T: +41 22 917 5816/28
F: +41 22 907 0043
E: press@unctad.org.


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