Debt Relief

Heavily Indebted Poor Countries scheme

- In 1996, the IMF and World Bank (with help from NGOs and other organisations) produced the HIPC programme
- Its aim was to ensure that no poor country faces a debt burden it cannot manage
- It provided debt relief and low interest loans to 39 eligible countries to reduce debts to manageable levels
- The countries, in return, had to meet a number of economic management and performance targets

• To decide whether countries are eligible for debt relief they must pass the “decision point” - countries have met stringent qualifications, including income thresholds.
• The countries then receive debt relief, but must achieve certain reforms and take concrete steps to reduce poverty - these are known as 'Structural Adjustment Policies' (SAPs) and include:

           - cutting public spending
           - removal of import/export barriers
           - opening up to FDI
           - removing subsidies (money to help industries given by government)
           - privatising state industries and services (water supply, healthcare and energy)

Critics argue that these are just another way for LEDCs to be controlled by OECD countries (Organisation for Economic Co-operation and Development)
Or that the Washington consensus (the economic reforms above which were advised to be undertaken as a part of an SAP) opens up countries and workers to exploitation by TNCs

The Multilateral Debt Relief Initiative

- In 2005, the G8 countries proposed to cancel the entire debt of the countries under the HIPC programme under the MDRI
Countries would be eligible for debt cancellation if they met more conditions:

• satisfactory economic performance under an IMF poverty reduction and growth facility programme
• satisfactory progress in implementing a poverty reduction strategy
• an adequate public expenditure management system, meeting minimum standards for governance and suitable use of public resources

As of January 2012, 36 countries have benefitted from full or partial debt relief
Combined, HIPC and MDRI have cancelled $95 billion worth of debt


Debt reduction positives:

• Boosting public spending - before the HIPC Initiative, countries were spening most of their GDP on debt relief and less on healthcare and education. Now, on average, spending on health, education and other social services is about 5x the amount of debt service re-payments
• Reducing debt service - for the 36 countries receiving debt relief, debt service paid has declined by about 2% of GDP between 2001-2011
• Improving public debt management - debt relief hugely improved level of debt and vulnerability to debt for countries which have completed the scheme. To completely reduce vulnerability, countries need to be aware of different borrowing policies and strengthen public  debt management