NCPA - National Center for Policy Analysis


November 3, 2005

Third world debt relief may be in sight according to the Economist. The authors argue that debts owed by the world's poorest countries are unpayable. These nations are servicing their obligations, but only because debtor institutions offer them new grants and loans to help them repay their old ones.

This recycling of funds keeps up appearances on the balance sheets of the International Monetary Fund (IMF) and World Bank, but it is complicated and inefficient, consuming the time and energy of creditors and debtors alike.

A new G-8 proposal would stop this cycle. The authors report:

  • There are now 38 countries deemed poor and indebted enough to warrant forgiveness.
  • Between them, these countries owe $42.5 billion to the World Bank, $10 billion to the African Development Bank (AfDB) and $5 billion to the IMF.
  • Some 18 countries have met conditions designed to test their commitment to sounds policies and may have their debt wiped by the end of the year.

Under the proposal, the institutions will stop collecting debts and cut the flow of new money to these countries by the same amount. Moreover, the World Bank has successfully convinced its donors to compensate it for writing off loans it could not have collected in full. However, this creates a new set of problems, say the authors:

  • This compensation is supposed to come on top of the regular contributions made to the Bank, such as the $18 billion already pledged for the years 2006 to 2008.
  • Beyond 2008, however, it is impossible to know how much nations would donate in the absence of debt relief.
  • Essentially, the World Bank has swapped the risk that poor countries will not repay their loans for the risk that rich countries will not redeem their promises.

Source: "Bad loans made good -- The IMF and World Bank meetings," Economist, October 1, 2005.

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