KAIROS Analysis of Outcome of Feb. 4-5, 2005

The G7 is made up of the seven wealthiest countries in the world. Since the devastating tsunami in South Asia and eastern Africa, the Finance Ministers of these wealthy nations faced calls for full and unconditional cancellation of the debts crippling the world's poorest countries before they met in London February 4-5. Mainstream media reports have played up the generosity of the proposed debt relief package coming out of these meetings without delving into the fine print. KAIROS and its numerous Canadian and global partners have studied the actual agreement closely, and concluded that the relief package is not only less than generous, but actually reflects a step backwards from the promises made by G7 Ministers in the weeks and days leading up to the meeting.

Background to the G7 Finance Ministers Meeting

In early February of 2005 media reports heralded a significant breakthrough by the Group of Seven (G7) towards 100% debt relief for the poorest countries. Yet the platitudes that emanated from the G7 Finance Ministers, led by the UK's Gordon Brown, could barely conceal the reality that the these seven men failed to agree on any substantive commitments.

In the run up to the meeting in London various G7 Ministers played up their own proposals for multilateral debt relief for the poorest countries. The proposal given most prominence was championed by the UK's Gordon Brown, who implied that the UK was proposing 100% debt cancellation for low-income countries.

In fact, the actual British plan is not for debt cancellation, but just debt relief until 2015 for only 21 countries - not the 70 mentioned in some media reports.1 After 2015 these countries would then be forced to resume payments on their multilateral debts. The UK proposes to pay for debt relief (of which the British share would be 10% of the total cost) out of future Official Development Assistance (ODA) spending and the sale or revaluation of IMF gold.

In addition, Brown proposed a way to meet the shortfall in financing needed to meet the Millennium Development Goals. According to the United Nations an additional US$50 billion per year of ODA is needed to meet the goals of cutting in half the proportion of people living in extreme poverty and who suffer from hunger, achieving universal primary education, eliminating gender discrimination in education, reducing child-mortality by two-thirds and maternal mortality by three-quarters, halting the spread of HIV/AIDS, malaria and other major diseases and halving the number of people without safe drinking water - all by 2015.

The civil society response to the UK and Canada

KAIROS undertook an analysis of the UK proposal, uncovered its many hidden flaws and drafted a response which became the basis for a letter from the Halifax Initiative and the Africa Canada Forum to Finance Minister Ralph Goodale. The letter urged the Minister not to follow the UK proposal but instead to "lead a movement to

SECURE the immediate and unconditional cancellation of 100% of the debts owed to multilateral financial institutions by all impoverished countries that need debt cancellation in order to meet the Millennium Development Goals, including halting the HIV/AIDS pandemic;

ENSURE that countries are free to implement their own national development strategies by ending IMF and World Bank Structural Adjustment Programs;
RECOGNISE that neither the people of Iraq, nor citizens of other countries formerly ruled by dictators, should be obliged to repay odious debts; and
GUARANTEE adequate financing for impoverished countries including through the dedication of 0.7% of Gross National Income to Official Development Assistance."

To read the Halifax Initiative/Africa Canada Forum letter see:
http://www.halifaxinitiative.org/index.php/Home/594

On Feb. 2 Finance Minister Goodale came out with a Canadian proposal for "100% debt relief for the world's poorest countries" to much fanfare. A closer look at the proposal revealed that it was a less ambitious version of Brown's plan, covering just 19 countries.2 Goodale would not back the sale of IMF gold to pay the costs of IMF debt relief if it were to disrupt world gold markets. Instead, Canada would call on donors to pay the cost of IMF debt relief directly. Other shortcomings include the fact that the Canadian plan would cover only loans to the World Bank's International Development Association (IDA) and the African Development Bank's African Development Fund (AfDF). It does not cover all multilateral debts for eligible countries like Bolivia and Nicaragua that have loans from other multilateral institutions such as the Inter-American Development Bank.

Canada would expect to spend only C$172 million to replenish the IDA and AfDF over the next five years. This would increase Canada's contribution to low-income country debt relief by just 28% over the amount of bilateral debt relief already accorded to 14 HIPCs over the years 2001-2004. Canada has granted almost as much debt relief to Iraq alone (C$600 million) as has been granted to 14 HIPCs (C$609.1 million). The C$172 million Canada would set aside for multilateral debt relief pales in comparison to the almost C$1 billion Canada has committed to reconstruction in Afghanistan, Iraq and Haiti.

Canada does not back Brown's plan for an IFF nor other proposals from France to increase financing for development.

KAIROS, along with many other NGOs from the Halifax Initiative and Africa Canada Forum responded quickly to Goodale's proposal by criticizing its shortcomings and for its failure to take leadership.

To read the Press Release see:
http://www.halifaxinitiative.org/index.php/Home/595

Other countries' proposals

Other G7 Ministers took other proposals into the February 4-5 G7 Finance Ministers meeting:

The USA's own plan for debt relief would see future IDA financing reduced by one dollar for every dollar of debt relief. But it would not free countries from IMF surveillance as it would create a new IMF program monitoring arrangement whereby the IMF would oversee the economic policies of countries even if they had no loans outstanding from the Fund. The IMF seal of approval would still be needed before they could get financing from other lenders. Unfortunately, Canada is reportedly backing this part of the US proposal. On the issue of increasing ODA flows the US flatly rejected the IFF idea as well as any plans to use IMF gold for debt relief.

France also introduced its own strategy of raising funds by taxing international capital flows, including financial transactions and plane tickets. By the end of the Feb.4th meeting it appeared that only a proposal for taxing fuel used by airlines was still on the table, although this idea will be fiercely opposed by the airline industry.

Japan opposes writing off debt and instead wants to establish a fund at the African Development Bank that would lend to African companies at low interest rates. Japan also said it won't agree to Brown's IFF.
Outcomes of the February 4-5 meeting:

Despite Chancellor Brown's statements about a "breakthrough" for debt relief, a careful reading of G7 communiqué shows, if anything, steps backward:

Instead of replacing the failed HIPC initiative with a new plan it calls for fully implementing HIPC.

Instead of deciding on 100% multilateral debt cancellation it speaks only of providing "as much as 100% multilateral debt relief"
It leaves the IMF and World Bank to continue conducting assessments of debt sustainability using a failed mechanism. 9 of the 27 countries receiving HIPC debt relief have higher debt service payments than previously and 9 of 14 HIPCs still have "unsustainable" debts after reaching their completion points.
The issue of whether to use IMF gold was referred back to the IMF itself for further study despite the well-known fact that in 1999-2000 the IMF successfully revalued a portion of its gold stock without driving down world gold prices.
What now?

Six years after the Cologne G7 Summit received 24 million Jubilee debt petition signatures the overall debt of the 42 HIPC countries has barely changed. While some bilateral debts have been written off, between 1999 and the end of 2002, the HIPCs' multilateral debts increased by $10 billion. The HIPC initiative has strengthened creditors' imposition of Structural Adjustment Programs opening them up to trade and transnational corporate investment; privatizing water, telecommunications, electricity and other public services; and imposing user fees on health care and education that put these essential services out of the reach of millions of impoverished people.

If the G7 had the political will they could make the two Bretton Woods institutions finance the cancellation of low-income countries multilateral debt from their own resources. As of June 30, 2004 the World Bank had US$3.5 billion in loan loss provisions and US$24 billion worth of retained earnings. As demonstrated during 1999 and 2000, the revaluation of a portion of the IMF's 103.4 million ounces of gold (which have a current market value of over US$43 billion) is feasible without depressing the price of gold on international markets.

The failure once again of G7 leaders to take meaningful action means that we must redouble our efforts in the lead up to the G7 Summit in Scotland in July. KAIROS, in concert with many other organisations in Canada and globally will be demanding of the G7 leaders 100% unconditional multilateral debt cancellation for the poorest countries. We are planning a mass card action as part of the "Making Poverty History" global campaign that will begin in March. Stay tuned for more details.

1. Brown proposed to pay debt service over the period up to 2015 owed by just 15 countries that have completed the HIPC initiative and 6 other low-income countries (Albania, Armenia, Mongolia, Nepal, Sri Lanka and Vietnam) that have diligently applied World Bank approved adjustment policies. This excludes another 12 HIPCs still in the "interim period" and another 11 countries still to be considered for HIPC. Together these 23 countries have debts almost as large as the 15 countries that have passed their completion points. If any of these 23 countries were to reach their completion points before 2015 they would also become eligible for multilateral debt relief as might some other low-income countries designated as "IDA-only" countries adhering to World Bank dictates.

2. In addition to the 15 completion point HIPCs it would cover only 4 other low-income countries (Mongolia, Nepal, Sri Lanka and Vietnam) Canada says that another 37 countries (22 HIPCs that have not reached their completion points and another 15 low-income countries) might eventually become eligible