Objections Emerge to G-8 Debt Relief Plan

Full debt relief for the world's poorest countries was finally in the bag. Or so it seemed two months ago when leaders from the Group of Eight major industrial powers, at their summit in Scotland, approved a plan to cancel the debts that 18 nations, mostly in Africa, owe to international lenders such as the World Bank.

But objections to the plan are emerging as it heads toward an official vote at the annual meetings of the World Bank and International Monetary Fund. Most notable is an internal World Bank report that warns the plan could deplete the bank's coffers so severely as to impair its ability to provide new aid for impoverished nations.

Debt cancellation was one of the key goals of the movement that mobilized behind the "Live Eight" concerts in early July aimed at prodding President Bush and other G-8 leaders to spare no expense in assisting the developing world. The movement had a powerful ally in the British government, which agreed that debt loads were keeping nations such as Tanzania, Uganda and Bolivia mired in poverty even after previous rounds of partial forgiveness. Many activists were pleasantly surprised when the Bush administration embraced that logic as well.

But the debt-relief bandwagon got hung up on the issue of who would bear the cost. The bulk of the loans in question were no-interest, 40-year loans granted by IDA, which gets its money mainly from two sources -- repayments of prior loans and periodic infusions of cash from rich donor nations. Failing to provide IDA with additional donations to replace the revenue lost to debt relief would risk diminishing the World Bank's role on the global stage -- and that, some policymakers and experts suspected, was the Bush team's true aim.

The G-8 summit communique issued in Scotland reflects a compromise on the issue that, according to the World Bank's internal report, does not go far enough in protecting IDA. Although the communique contains firm commitments to cover the $1 billion that IDA would lose over the next three years, the report projects that losses would total $8.9 billion in the first decade, $17.6 billion in the second decade, $14.1 billion in the third decade, and $1.8 billion in the last decade if all 38 countries potentially eligible received full cancellation of their debts. (Only 18 countries so far have met the criteria for full relief, though more are expected to do so.)

The report acknowledges the G-8's pledge that for the period after the first three years, "donors will commit to cover the full costs for the duration of the cancelled loans" by making additional contributions to IDA. But the pledge has no binding force, and there is no "benchmark" for gauging how much donors would have given before the supplemental contributions, notes the report, which proposes several options to more firmly ensure IDA's future financing.

The Treasury's Fratto blasted as "absurd" the fear that Washington would fail to honor its pledge to provide additional contributions to IDA, and he ridiculed the report's assumption that debt repayments by poor countries are a reliable source of income.

"The World Bank's analysis seems to give greater credence to the ability of a Niger to pay back its unsustainable debt than it does for the G-8 countries to meet their commitments," Fratto said.

Another objection to the G-8 plan voiced by policymakers in recent days, according to IMF officials, is that it may violate a long-standing IMF rule assuring "uniformity of treatment" to all member countries. The plan would fully cancel the debts to the IMF of only nations that qualify as "heavily indebted poor countries," while leaving untouched the obligations of nations such as Kenya and Indonesia that are not heavily indebted enough to be included.

[Excerpted from an article written by Paul Blustein, Washington Post ]

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