Debt for Nature

PALACKÝ UNIVERSITY FACULTY OF SCIENCE

DEPARTMENT OF GEOGRAPHY

INTERNATIONAL DEVELOPMENT STUDIES

PETRA KRYLOVÁ

DEBT RELIEF

Bachelor Thesis

Supervisor: Doc. RNDr. Pavel NOVÁČEK, CSc. Olomouc, 2006

Palacký University Faculty of Science Department of Geography Academic year: 2004/2005

PROPOSAL FOR BACHELOR THESIS

Student: Petra Krylová Study Programme: International Development Studies Title of thesis project: Debt Relief

Covering outline:

I. Introduction

II. Body 1. Brief History of Third World Debt 2. Debt relief

• History • The World Bank and the IMF conditions • Paris Club, London Club

3. The Impact of Indebtedness on the environment and society in the developing countries • World Bank and the IMF practices

4. Debt Swaps • Debt for Nature swaps • Debt for Development swaps • Successful projects

5. Model projects for the Czech Republic in: • Debt for Nature Swaps • Debt for Development Swaps • Difficulties and Obstacles in Realization

III. Conclusion • Evaluation of the current situation and contemporary debt relief initiatives

Extent of graphics: as needed

Extent of the report: 35 – 45 pages List of relevant literature: will be compiled during the work www.eurodad.org Jubilee 2000 Database of the World Bank and International Monetary Fund Supervisor: Doc. RNDr. Pavel Nováček, CSc. Date of submission of thesis proposal: 2. 5. 2005 Completion Date: May 2006

................................................ .......................................................... Head of Department Supervisor Olomouc Date: 2.5. 2005

I declare in lieu of oath that I wrote this thesis myself. All information derived from the work

of others has been acknowledged in the text and a list of references is given.

Olomouc, 15.5. 2006 ............................................... Signature

Acknowledgement

I would like to express special thanks to my supervisor Doc. RNDr. Pavel Nováček, CSc. for

his valuable advice and guidance. I would like to thank Mgr. Irena Skacelová for

constructive advice and Bc. Ondřej Sedláček for language correction and incredible patience

during my work on the thesis.

TABLE OF CONTENTS

Table of contents................................................................................................. 6 Table of figures ................................................................................................... 8 List of Abbreviations .......................................................................................... 9 1. Introduction ................................................................................................. 11 2. Methodology ................................................................................................ 12 3. Brief history of the third world debt ......................................................... 13

3.1 The external causes of indebtedness ....................................................... 13 Global recession ........................................................................................ 14 Tariff barriers............................................................................................. 14 Oil crises .................................................................................................... 14 Interest rates skyrocketed .......................................................................... 15 Bipolar division ......................................................................................... 15

3.2 The Internal Causes of indebtedness....................................................... 15 Mismanagement......................................................................................... 15 White elephants ......................................................................................... 16 Corruption.................................................................................................. 16

3.3 Odious debts ............................................................................................ 16 Apartheid-caused debt ............................................................................... 17

3.4 The Debt Crisis........................................................................................ 17 3.5 The Third World debt today.................................................................... 18

4. Key terms ..................................................................................................... 19 4.1 Types of debt ........................................................................................... 19 4.2 Classification of indebtedness................................................................. 21

5. Who is running the show? .......................................................................... 23 5.1 World Bank ............................................................................................. 23 5.2 The World Bank Group........................................................................... 24 5.3 The International Monetary Fund ........................................................... 27 5.4 Regional Development Banks................................................................. 30

Inter-American Development Bank (IDB)................................................ 30 African Development Bank (AfDB) ......................................................... 30 Asian Development Bank (ADB).............................................................. 31 European Bank for Reconstruction and Development (EBRD)................ 31

5.5 Paris Club ................................................................................................ 32 5.6 London Club............................................................................................ 33

6. Debt relief: The never ending story........................................................... 34 6.1 Case-by-case approach............................................................................ 34 6.2 The Baker Plan ........................................................................................ 35 6.3 The Brady Plan........................................................................................ 36 6.4 Toronto Terms......................................................................................... 37 6.5 London Terms ......................................................................................... 38 6.6 Houston Terms ........................................................................................ 39 6.7 Naples Terms........................................................................................... 39 6.8 HIPC Initiative ........................................................................................ 40

6.9 Lyon Terms ............................................................................................. 42 6.10 Cologne Terms ...................................................................................... 42 6.11 MDRI..................................................................................................... 43

10. If there is a will, there is a way ................................................................ 45 11. The impact of indebtedness on the environment and the society of the debtor countries............................................................................................... 48

11.1 Structural Adjustment Programs ........................................................... 48 11.2 The impact of SAPs on the society ....................................................... 49 11.3 The impact of SAPs on the environment .............................................. 52 11.4 Other factors .......................................................................................... 59

12. A different alternative .............................................................................. 64 12.1 Debt conversions ................................................................................... 64 12.2 Debt for nature swaps............................................................................ 65

Successful Examples of Debt for Nature Swaps ....................................... 66 12.3 Debt for development swaps ................................................................. 67

Successful Example of Debt for Development Swaps .............................. 69 13. Conclusions for the Czech Republic........................................................ 72

13.1 Model Projects....................................................................................... 76 Debt for Nature Swap ................................................................................ 76 Debt for Development Swap ..................................................................... 79

14. Conclusion.................................................................................................. 8115. Summary.................................................................................................... 8216. List of references ....................................................................................... 8217. Annexes ...................................................................................................... 92

7

TABLE OF FIGURES

Fig 1. Number of countries not servicing all their foreign debts, 17 by region, 1970 - 1999 17 Fig 2. Amount of debts by region, 1970 - 2003 18 Fig 3. Short-, medium- and long-term debt as percentage of the total external

debt, as of 2003 20 Fig 4. Medium and long term debt 20 Fig 5. SILICs, MILICs, SIMICs, MIMICs, LILICs, or LIMICs, as of 2005 22 Fig 6. OECD countries voting power in the WBG 26 Fig 7. Members with Ten Largest Quotas 28 Fig 8. Industrial Promotion vs. Pollution Control 55 Fig 9. Gross Domestic Product per Capita in Latin America and Africa, 60 1950-1999 60 Fig 10. Share of Government Spending Covered by Foreign Borrowing and

Devoted to Foreign Debt Service and Basic Social Services, Selected Countries, 1996-97 62

Fig 11. Debt for nature swap in the Philippines 66 Fig 12. UNICEF debt-for-child development swaps 68 Fig 13. Debt-for-Development: Senegal 69 Fig 14. Countries owing debts to Czech Republic, 2005 (mil. CZK) 73 Fig 15. Debt Outstanding Serbia Montenegro 74 Fig 16. Debt for nature swap, Czech Republic 78 Fig 17. Debt for development swap, Czech Republic 80

8

LIST OF ABBREVIATIONS

ADB Asian Development Bank

ADMARC Agricultural Development and Marketing Corporation

AfDB African Development Bank

EBRD European Band for Reconstruction and Development

ECA Export Credit Agencies

ESAF Enhanced Structural Adjustment facility

HIPC I, II Heavily Indebted Poor Countries Initiative I, II

IBD Inter-American development Bank

IBRD International Bank for Reconstruction and Development

ICSID International Centre for Settlement of Investment Disputes

IDA International Development Association

IFC International Financial Corporation

IFIs International Financial Institutions

IMF International Monetary Fund

LILIC Low Indebted Low-Income Countries

LIMIC Low Indebted Middle-Income Countries

MDGs Millennium Development Goals

MIGA Multilateral Investment Guarantee Agency

MILIC Moderately Indebted Low-Income Countries

MIMIC Moderately Indebted Middle-Income Countries

MDRI Multilateral Debt Relief Initiative

MPLA Movimento Popular de Libertação de Angola

NGO Non-governmental organization

OECD Organization for Economic Co-operation and Development

PRFG Poverty Reduction Growth Facility

PRSP Poverty reduction Strategy Paper

SAF Structural Adjustment Facility

SAL Structural Adjustment Loans

SAP Structural Adjustment Program

SECAL Sectoral Adjustment Loans

SILIC Severely Indebted Low-Income Countries

SIMIC Severely Indebted Middle-Income Countries

9

UNCTAD United Nations Conference on Trade and Development

UNICEF United Nations Children’s Fund

UNITA União Nacional para a Independência Total de Angola

WB World Bank

WBG World Bank Group

WDM World Development Movement

WWF World Wide Fund for Nature

10

1. INTRODUCTION

Everybody would agree that debts should be repaid. The word ‘credit’ comes

from a Greek word ‘believe’. If I lent any of my belongings to anybody I believe I

will receive them back as soon as they fulfil their purpose. However, should all debts

be repaid?

At the beginning of the 21st century the developing countries debt amounted

$2.5 trillion. On the contrary, development assistance provided by the developed

countries was only $60 billion. These debts might have long history reaching to the

colonial times, some of them disappeared along the way and never reached their

destination while others sit and wait in foreign accounts of many dictators. Yet, they

still have to be repaid, by the people who live in the less fortunate part of the world

and a majority of them has to survive on less than $2 a day. Natural resources are

being exhausted in order to provide hard currency for debt repayments. Governments

have to cut their health and education budgets to save as much as possible. The

developed countries are, on one hand providing development assistance, on the other

hand they are receiving debt repayments that could have been invested in sustainable

development.

The aim of the thesis is to demonstrate possible solutions to the debt burden,

which can also help preserve the environment and promote development. Debt for

sustainable development swaps have been realized successfully in many developing

countries. Two model projects have been created in order to show the different

options of how debt swaps can be realized, especially from the Czech point of view.

The work summarizes the current situation, looks deeply at the debt relief attempts

that have been applied so far, and analyses the impact of the debt burden on the

environment and civil society in the developing countries. The work aims to provide

overall information about the debt situation.

I believe this work will support many environmental and development non-

governmental organizations as well as government and academic institutions in their

fight for debt cancellation, environmental protection and development promotion. I

hope debt for sustainable development swaps will become widely used not only by

the creditor governments and large international agencies but also by small-scale

organizations.

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2. METHODOLOGY

The Bachelor Thesis is a research-compilation work leading to the analysis of

the problem and possible solutions. The work was created using various methods of

gathering information. First, the author’s participation in a number of international

and national seminars and workshops namely Eurodad Annual Conference taking

place from 30th November to 3rd December 2003 in Prague, Controversial

International Debts organised by the Ecumenical Academy Prague from 14th to 15th

October 2005 in Prague and Project Cycle Management seminar organised by

Development World Wide in Prague from 8th to 9th December 2005. Second, the

author’s internship at the Development Centre of the Institute of International

Relations Prague over a one-month period in summer 2005. The Centre’s and

Institute’s library resources have been a valuable source of information. Third,

personal communication with the Ministry of Finance, Department of Development

Co-operation and International Claims in April 2006. Other sources of information

included book resources, articles from the Palacky University Online Resources and

mainly internet resources such as World Bank, International Monetary Fund,

WorldWatch Institute, Organization for Economic Co-operation and Development,

Paris Club, development and environmental NGOs’ webpages.

The thesis compiles and analysis available information. The author’s views on

particular subjects are presented as part of the thesis. The author also attempts to seek

possible solutions to the discussed problem; therefore model projects created by the

author form a part of the work.

Footnotes and annexes are used to provide the reader with additional

information on the discussed subject and to explain in detail more complex

information that was used in the text.

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3. BRIEF HISTORY OF THE THIRD WORLD DEBT

No one can exactly estimate when the first debts came into existence.

However, once people commenced trading between each other, we can presume that

they also begun to borrow the means of trade, be it cattle, crops or later money.

The history of the third world countries’ debt has its origins even before the

respective countries were born. At the time of colonial suppression, European empires

engaged in debt arrangements mainly with the purpose to help themselves to natural

resources located in the colonized territory (to build infrastructure, mines etc.), and

also to finance wars (usually to fight the pro-independence movements which was for

instance the case of Indonesia). When vast majority of these territories became

independent countries at the turn of the 1960s, it is estimated that the newly-born

sovereign states already owned $59 billion in external public debt. Furthermore, the

debt increased rapidly due to interest rates set at 14% per annum. (Guissé, 2004;

Wikipedia, 2006c)

Trying to eliminate poverty and get their countries on the right track to

development (Ferraro & Rosser, 1994), repaying previous debts (Guissé, 2004) and

being pushed by the 1970’s widely-believed paradigm of limitless growth (Budde-Iser

et al., 2004:9) were, in my opinion, the three main reasons the Third World countries

have taken on other debts.

Unlike many have perceived, the political and economical surroundings of the

1970’s did not prove development-friendly. According to the authors of Spravedlivé

oddlužení (Budde-Iser et al., 2004:9), we can distinguish two types of causes,

internal and external, why debts did not bring the intended results and furthermore

increased the debt burden.

3.1 The external causes of indebtedness

External causes can be classified as international circumstances that and were

not in any way affected by the debtor countries.

13

Global recession

In the 1970’s and 1980’s the world demand for primary commodities (main

export products of developing countries) dropped due to world economic recession.

This resulted in lower prices for such stock. In order to balance the export revenues

the developing countries had to export more which furthermore led to deeper decrease

of prices. (Budde-Iser et al., 2004:9)

Terms of trade index which measures how much countries can import with the

earnings from a given volume of their exports dropped from 100 in 1970 to 76 in

1985 and partially recovered to 85 by late 1990’s. (Roodman, 2001:33)

Tariff barriers

Due to recession, the developed countries were trying to secure their markets

by implementing various subsidies, import taxes and tariffs, thus making exports from

developing countries more expensive, and hence unbeneficial. The World Bank

estimates that if these barriers were erased today it would raise export earnings of the

developing countries by $100 billion a year, which would have been enough to repay

all the debts had it been occurring since 1982. “In effect, rich countries have

demanded that poor countries repay debts but refused the goods offered as payment,”

concludes D. Roodman (2001:34).

Oil crises

An important aspect of a developing-country’s debt before the oil crisis was

that majority of it was owed to bilateral and multilateral agencies, in particular the

IMF and the World Bank. These institutions intended to receive the given loans and

additional interest back, and therefore they made sure the investment was spent on

prospective projects. The oil crises in 1973 and later 1979 have had a number of

effects on the debt situation of the developing countries. Firstly, the oil products

became more expensive, thus raising costs for energy imports and subsequently

increasing prices of all commodities that required energy for their production.

Secondly, after the crisis commercial banks were full of ‘petrodollars’ from the oil-

producing countries. Having spare resources banks sought ways to make as much

profit as possible and issuing loans seemed the most profitable at that time. On the

other side, the developing countries welcomed financial injection in order to cope

with the increased oil prices and high inflation while oil-exporting countries wanted to

14

make as much profit as possible from their freshly accumulated wealth. One way or

the other, in the long term these loans did not generate any income to pay off the debt

because they were primarily used to handle the above mentioned situation, and not for

investment. (Ferraro & Rosser, 1994)

Interest rates skyrocketed

Due to several reasons such as the world economic recession as well as the

arms race which the USA funded mostly by loans, at the beginning of the 1980’s the

interest rates increased by 50% in nominal terms and 75% in real terms according to

UNCTAD. Taking into account lower earnings of the developing countries and higher

expenses on oil products, high interest rates resulted in more loans to cover the

previous ones, thus getting into the vicious circle of indebtedness. (Ferraro & Rosser,

1994; Budde-Iser et al., 2004:9)

Bipolar division

The ‘Cold’ War in the northern hemisphere was not so cold for the rest of the

world. Both the USA and the USSR were trying hard to win the hearts of other

leaders by providing them with either arms or finances, not being concerned with how

they were used. As a result developing countries generated more and more debt (in

some cases also odious debt – see Odious debt, p. 12). In the case of Angola each of

the superpowers were supporting different fighting group1 thus indirectly waging a

very ‘hot’ war between them. (Budde-Iser et al., 2004:9; Wikipedia, 2006b)

3.2 The Internal Causes of indebtedness

Internal causes can be described as mistakes of the debtors but in some cases

also the lenders.

Mismanagement

Many developing countries tried to modernize as soon as possible. They

focused mainly on assets which Catherine Caufield calls the ‘talismans of change’

such as dams, pipelines, railways and roads. To be done properly, these ‘talismans’

require skilled workforce and capable government which is something developing

1 USA supporting UNITA and USSR supporting MPLA

15

countries do not have. When Mozambique became independent its Ministry of

Education had five employees and was managed by a 23-year old minister. Tanzania

spent $2 billion constructing roads which fell apart almost as fast as they were made

due to insufficient maintenance. The World Bank estimates that only 29% of Bank-

financed projects in Africa in the 1990’s were considered as likely to benefit long-

term development. (Roodman, 2001)

White elephants

Large sums of money were spent on useless and harmful but at the same time

expensive projects such as the nuclear power plant in the Philippines which cost $2.3

billion. It was built in Bataan which is one of the most geologically active places on

Earth. Thirty years later the government is still paying off the debt for a project that

did not produce a cent. (Columban Missionaries, 2002)

Corruption

Despite of corrupted governments, international institutions and especially

USA and the USSR borrowed money to such leaders. Promising his alliance to the

West, Mobutu Sese Seko generated roughly $5 billion in personal wealth

(Transparency International, 2004) while now-a-days the Democratic Republic of

Kongo owns a $11 billion debt – each resident owns $180 and GDP per capita is

$1052. Majority of these loans was used for weapons and armies. (Roodman, 2001)

3.3 Odious debts

Odious debts include some of the causes described above, both internal and

external such as bipolar division, white elephants and corruption. The doctrine of

odious debts was formalised by Alexander Sack in 1927. Odious debts, as described

by Jubilee Iraq (2006), are taken “without the consent of the people and not spent in

their interests and when the creditor is aware of this”. In order to classify debt as

“odious” all three conditions have to be met. (Jubilee Iraq, 2006)

2 Author’s calculations, using Debt and GDP figures – World Bank World Development Report 2006, population estimate – CIA, The World Factbook.

16

Apartheid-caused debt

The former South African government borrowed large sums of money in order

to maintain apartheid. Already in 1973 the United Nation described apartheid as a

crime against humanity. Therefore, the South African debt can be classified as

‘odious’. It is estimated that when the new democratic government was installed in

1994 it inherited $11.3 billion in foreign debt. This debt was mainly owed to other

governments and private companies. Today, the South African government debt is

almost $28 billion, of which more than one third falls under the definition of ‘odious’

debt. (ACTSA, 1998; WB, 2005b)

3.4 The Debt Crisis

In August 1982 Mexico declared itself unable to pay the debt service. This

moment is considered as the beginning of the developing world debt crisis. A couple

months later Brazil, Argentina and other countries found themselves in the same

situation and were offered the same solutions. International Financial Institutions

(IFIs) as well as governments of other countries tried to find various ways to manage

the crises (see Debt relief: The never ending story). However, their solutions only

postponed the situation but did not solve it.

Fig 1. Number of countries not servicing all their foreign debts,

by region, 1970 - 1999

Source: Roodman D. (2001), Still waiting for the Jubilee

17

3.5 The Third World debt today

According to the 2006 World Development Report, in 2003 the developing

countries owed 2.554 trillion dollars in external debt. Of this 414 billion belong to

low income, 1.053 trillion to lower middle income and 1.085 trillion to upper middle

income countries. The most indebted region is Latin America and the Caribbean

owing 779 billion. (WB, 2005a)

Fig 2. Amount of debts by region, 1970 - 2003

0

500

1,000

1,500

2,000

2,500

3,000

1970

1980

1990

1995

1996

1997

1998

1999

2000

2001

2002

2003

All developing countries East Asia and Pacific Eastern Europe and Central AsiaLatin America and Caribbean Middle East and North Africa South AsiaSub-Saharan Africa

Source: author, using World Bank Global Development Finance (2002, 2005a)

18

4. KEY TERMS

Key terms are aimed to provide basic information about the debt terminology

which is used in the thesis. Types of debt as well as classification of indebtedness are

explained in this section.

4.1 Types of debt

There are several types of debt depending on numerous factors. A debt can be

external or domestic. External debt can be described as “a part of the government

debt of a country which is owed to creditors outside the country”. Depending on the

debtor we can distinguish two types of debt - public and private. The first is owed by

the public and the latter by the private sector. Depending on the creditor we can

classify three types of debts:

Multilateral – Multilateral debts are owed to international financial

institutions such as the International Monetary Fund, World Bank and the

regional development banks.

Bilateral – Bilateral debt (also called official debt) is owed to governments or

their appropriate institutions. These debts are the result of either credit granted

to the developing countries to finance exports, or direct loans which may be

under concessional or market terms.

Private – Private debts are owed to the private sector institution such as

commercial banks, bondholders and suppliers.

(Paris Club, n.d.)

19

According to the World Bank 2005 Global Development Finance and the Paris Club

the developing countries debt can be broken as follows:

Fig 3. Short-, medium- and long-term debt as percentage of the total external

debt, as of 2003

Source: author, using WB (2005), Global Development Finance

medium- and long-term debt

84%

short-term debt16%

Fig 4. Medium and long term debt

2003 Medium and long term debt outstanding 2 152 100% Public and publicly guaranteed 1 557 Official creditors 933 Multilateral creditors 488 Bilateral creditors 445 Private creditors 624

72%

Private non guaranteed 595 28%

Source: Paris Club (n.d.), Types of debt

20

4.2 Classification of indebtedness

The World Bank recognizes several levels of indebtedness. In general,

indebtedness is measured according to two ratios:

• The ratio of the present value of total debt service to average GNI;

• The ratio of the present value of total debt service to average exports

(including worker remittances).

The critical rate for debt service to GNI ratio is defined as 80%, and for debt

service to exports it is 220%. If a country exceeds either of these measures it is

classified as severely indebted. If a country does not go over these thresholds but its

level of indebtedness is as high as three fifths of the critical value, being precise 48%

of debt service to GNI and 132% of debt service to exports, it is classified as

moderately indebted. If the level of indebtedness is lower than three fifths of the

critical value, then the country is classified as less indebted. (WB, 2002)

Countries are also classified by the level of income. According to 2003 GNI

per capita we can distinguish:

• Low-income countries – those with $765 GNI per capita or less;

• Middle-income countries – those with per capita GNI between $766 and

$9,385;

o Lower middle-income – $766 - $3,035;

o Upper middle-income – $3,036 - $9,385;

• High-income countries – countries with more than $9,386 GNI per capita.

(WB, 2005)

Putting together these criteria we can recognize several groups of countries:

• Severely indebted low-income countries (SILICs);

• Moderately indebted low-income countries (MILICs);

• Severely indebted middle-income countries (SIMICs);

• Moderately indebted middle-income countries (MIMICs);

• Less indebted low-income countries (LILICs);

• Less indebted middle-income countries (LIMICs).

21

According to World Bank, Global Development Finance 2005, the following

countries were classified as SILICs, MILICs, SIMICs, MIMICs, LILICs, or LIMICs.

Fig 5. SILICs, MILICs, SIMICs, MIMICs, LILICs, or LIMICs, as of 2005

Severely indebted

low-income countries

Severely indebted middle-income

countries

Moderately indebted


Moderately indebted middle-income

countries

Less indebted


Less indebted middle-income

countries o Angola o Bhutan o Burundi o Central

African republic

o Chad o Comoros

o Argentina

Source: author, using World Bank (2005a), Global Development Finance 2005 Although these criteria define the level of indebtedness they should be used

carefully because for instance they do not indicate the debt servicing capacity of a

country, and a minor change in the criteria or in one of the used indicators changes the

country’s status. (WB, 2002)

3 Classification excludes the effect of Russian Debt Settlement

o Congo, Dem. Rep. of

o Congo, Rep. of

o Cote d’Ivoire

o Eritrea o Gambia, The o Guinea o Guinea-

Bissau o Kyrgyz

Republic o Lao PDR o Liberia o Malawi o Myanmar o Rwanda o Sao Tome

and Principe o Sierra Leone o Somalia o Sudan o Tajikistan o Togo o Zambia o Zimbabwe

o Belize o Brazil o Bulgaria o Croatia o Dominica o Ecuador o Estonia o Gabon o Grenada o Guyana o Indonesia o Jordan o Kazakhstan o Latvia o Lebanon o Maldives o Panama o Peru o Samoa o Serbia and

Montenegro o Seychelles o St. Kitts and

Nevis o Syrian Arab

Republic o Turkey o Uruguay

o Benin o Burkina Faso

o Bolivia o Bangladesh o Albania o Cape Verde o Equatorial

Guinea o Algeria

o Cambodia o Chile o Armenia o Cameroon o Ethiopia o Kenya o Madagascar

o Colombia o Ghana o Azerbaijan o El Salvador o Haiti o Barbados o Honduras o India o Belarus o Hungary o Lesotho o Bosnia and

Herzegovina o Mauritania o Jamaica o Mali o Moldova o Mongolia3 o Niger o Nigeria

o Lithuania o Mozambique o Botswana o Malaysia o Nepal o China o Mauritius o Nicaragua o Costa Rica o Paraguay o Senegal o Czech

Republic o Pakistan o Philippines o Tanzania o Papua New

Guinea o Solomon

Islands o Uganda o Uzbekistan

o Poland o Vietnam o Djibouti o Russian

Federation o Yemen, Rep.

of o Dominican

Republic o Slovak

Republic o Egypt, Arab

Rep. of o Sri Lanka o Fiji o St. Lucia o Georgia o St. Vincent

and the Grenadines

o Guatemala o Iran, Islamic

Rep. of o Tunisia o Macedonia,

FYR o Turkmenistan o Venezuela, R.

B. de o Mexico o Morocco o Oman o Romania o South Africa o Swaziland o Thailand o Tonga o Trinidad and

Tobago o Ukraine

22

5. WHO IS RUNNING THE SHOW?

After two disastrous world wars and the Great Depression in 1930s world

leaders realized there was a need for international institutions that would set basic

rules and principles for economic cooperation in order to prevent such events

happening in the future.

In July 1944, before the actual creation of the United Nations, 44 government

representatives met at a conference in Bretton Woods, New Hampshire, USA. That is

when the International Monetary Fund (IMF) and the World Bank (WB) were formed.

Due to the location of their inception the IMF and the WB are also called “the Bretton

Woods institutions”.

5.1 World Bank

The World bank mission now-a-days is “to fight poverty with passion and

professionalism for lasting results – to help people help themselves and their

environment by providing resources, sharing knowledge, building capacity and

forging partnerships in the public and private sectors” (WB, 2006c) .

The evolution of the World Bank, as we now it today, has been a long process.

At first the bank consisted of only one institution – The International Bank for

Reconstruction and Development (IBRD) whose initial role was to help rebuilt the

devastated post-war Europe. The first loan for reconstruction was given to France in

1947. (World Bank, 2006b)

Within 10 years of its existence the Bank realized Europe is not the only

continent that is in need for financial help and therefore partially directed its attention

to the poorest countries. Knowing the developing countries would not be able to

borrow money under the existing terms of the IBRD the members of the WB decided

to create a new institution whose focus would be on lending money to the poorest

countries under the most auspicious terms. The International Development

Association (IDA) was agreed to be a part of the Word Bank (in order to keep the

same regulations for both institutions) and became operational in 1960. IDA borrows

23

money to 814 poorest countries in the world and also provides them with technical

assistance. IDA credits are issued for 20, 35 or 40 years with a 10-year grace period

before repayments of principal commence. There is a small service charge for the

issued credits. (WB, 2006a, d)

The International Bank for Reconstruction and Development and The

International Development Association function according to the same principles5 and

together they form the World Bank.

5.2 The World Bank Group

As the issues the original World Bank had to deal with expanded, there was a

need for more specialized agencies that would take on the specific issues.

In 1956 The Interantional Finanacial Corporation (IFC) was born. The

IFC focuses mainly on private sector investment and market creation in the

developing countries, it is the so called “private sector financing arm of the World

Bank Group”. As stated in their definition, “the IFC’s objective is to stimulate

economic growth in developing countries by promoting private sector investment. It

provides equity, long-term loans, structured finance and risk management products,

and advisory services to its clients. It provides finance in markets deemed too risky

for commercial investors in the absence of IFC participation and adds value to the

projects it finances through its corporate governance, environmental and social

expertise. It is the largest multilateral source of debt and equity financing for private

enterprise in developing countries”. (WBG, 2006a)

Considering the World Bank was the only international organization directing

the economic cooperation in the world, more and more often it also had to deal with

disagreements between states and the private sector concerning economic matters.

This was one of the main reasons why in 1966 another institution appeared in the

4 Eligibility criteria for IDA funding: Relative poverty, defined as GNP per capita below an established threshold, US$965 (as of July 1, 2005). Lack of creditworthiness to borrow on market terms and therefore a need for concessional resources to finance the country's development program. Good policy performance, defined as the implementation of economic and social policies that promote growth and poverty reduction.

5 IBRD and IDA share the same personnel, have the same president and evaluate projects on the same basis.

24

World Bank Group family. The International Centre for Settlement of Investment

Disputes (ICSID) was set up to take over the settlement of investment disputes

through conciliation and arbitration and by doing so promoting increased flows of

international investment. (ICSID, 2006)

The 1980’s is characterized by intense changes in the world economy such as

the free markets, and also by a major recession. These changes also affected the

developing countries and foreign investors did not have the ability to deal with the

political risks related to investment in the developing countries. In order to cope with

the situation the last member of the World Bank Group which joined in 1988 was The

Multilateral Investments Guarantee Agency (MIGA). MIGA’s main purpose was

“to provide political risk insurance (guarantees), offering investors protection against

non-commercial risks such as expropriation, currency inconvertibility, breach of

contract, war and civil disturbance”. (WBG, 2006b)

The World Bank Group consists of 5 closely affiliated agencies – IBRD and

IDA (which together form the World Bank), IFC, ICSID and MIGA. Each one of

these institutions has different financial resources and many different ways of lending.

Decision making

As stated in the description of the World Bank Group (WBG, 2006a) “…all[of

the five World Bank Group institutions][are] owned by member countries that carry

ultimate decision making power.”

In my opinion, only part of this statement is fully true. I do agree that the

World Bank Group, to be more precise the 5 concerned institutions, are owned by

member countries but do all member countries carry the decision making power

equally?

The voting power is divided proportionally among all members according to

their contribution to the agency. Above all it means that rich countries have more

votes than poor countries and thus have the ability to pursue their decisions more

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effectively. As we can see in the table bellow, in all institutions the OECD countries6

own above 50% of the total votes.

Fig 6. OECD countries voting power in the WBG

(as of 2005) OECD members Non OECD members Number of members

IBRD 61.52% 39.48% 184

IDA 62.19% 37.81% 165

MIGA 56.06% 43.94% 167

IFC 70.38% 29.62% 178

ICSID Not applicable Not applicable 143 Source: Author’s calculations using data from IFC (2005), WB (2005a, b), MIGA (2004)

6 OECD – Organization for Economic Cooperation and Development – member countries as of 6.4.2006: AUSTRALIA, AUSTRIA, BELGIUM, CANADA, CZECH REPUBLIC, DENMARK, FINLAND, FRANCE,GERMANY, GREECE, HUNGARY, ICELAND, IRELAND, ITALY, JAPAN, KOREA, LUXEMBOURG, MEXICO, NETHERLANDS, NEW ZEALAND, NORWAY, POLAND, PORTUGAL, SLOVAK REPUBLIC, SPAIN, SWEDEN, SWITZERLAND, TURKEY, UNITED KINGDOM, UNITED STATES

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5.3 The International Monetary Fund

As already mentioned above, the IMF was together with the World Bank

conceived at the Bretton Woods conference in 1944. It came into existence a year

later when the first countries signed the Articles of Agreement. Although it had

undergone numerous changes due to the transforming world economics and trade, its

purposes remain the same as they were at the time of the Funds conception.

According to the Article I of the Articles of Agreement (IMF, 2004a) the IMF’s

purposes are as follows:

• promoting international monetary cooperation;

• facilitating the expansion and balanced growth of international trade;

• promoting exchange stability;

• assisting in the establishment of a multilateral system of payments; and

• making its resources available (under adequate safeguards);

• shortening the duration and lessening the degree of disequilibrium in the

international balances of payments.

The IMF’s main activities include monitoring economic and financial

development and policies in member countries as well as on global level and also

providing member states with policy advice. Financial assistance belongs to one of

the Fund’s core instruments to help member countries with balance of payments

problems. While the World Bank’s loans could be overall classified as long-term

development-focused, the IMF’s lending is characterized by the contrary – short-term

basis loans with the emphasis on the balance of payments and a country’s

international reserves. Technical assistance and training form integral parts of the

Fund’s activities offering governments and central banks of the member countries a

wide range of expertise. (IMF, 2004a)

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Funding and Decision making

Currently, there are 184 countries members of the IMF. Vast majority of the

Fund’s finances come from the member states in the form of capital subscriptions

(also called quota). Quotas should reflect relative size of a country in the world

economy - the stronger the economy the higher quota. For instance, the United States

of America quota accounts for almost one fifth of the total subscriptions.

Quotas not only establish how much money members pay in but also how much

money they are entitled to receive from the Fund, and furthermore how much voting

power they have. (IMF, 2004a)

Fig 7. Members with Ten Largest Quotas

Source: IMF (2004), What Is the International Monetary Fund?

From Trust Fund to PRFG

The IMF has been providing financial assistance to developing countries under

favourable terms since mid 1970’s. In 1975 the Oil Facility Subsidy Account was

created to help countries overcome the oil crisis. A year later the so called Trust Fund

came into existence. The Trust Fund as well as the oil Facility were financed through

separate resources other’s than the IMF’s general resources. The capital for the

Facility was attained through contributions of 25 member countries and the necessary

financial resources for the Trust Fund were acquired by selling some of the Fund’s

stock of gold. The Trust Fund’s role ended in 1981 and the Facility stoped operating

two years later. However, the situation in many developing countries was not

changing for the better, rather the contrary, so the Fund applied number of facilities in

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order to provide financial assistance to the low-income countries. In March 1986 the

Structural Adjustment Facility was created to take over the Trust Fund’s role. A year

later the SAF was reviewed and the Enhanced Structural Adjustment Facility was

conceived and lasted for more than a decade. Countries with IDA-only borrowing

status were eligible for ESAF funding, which indicated 80 countries. Those were able

to borrow a maximum of 140% of their IMF quota7 and 0.5% annual interest rates

with repayments starting after 5 years and ending after 10 years. In 1999 ESAF was

replaced by Poverty Reduction Growth Facility which provides assistance to member

countries in applying their Poverty Reduction Strategy plans. (Boughton, 2001; IMF,

2004b)

7 The limit of 140% could be increased under exceptional circumstances to 185% of the IMF quota.

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5.4 Regional Development Banks

Inter-American Development Bank (IDB)

The IDB was established in 1959 as a first regional development bank. Today,

Ida is the largest RDB with 46 members, of which more than half (26) comes from the

Latin American and the Caribbean region. IDA is a member of the Inter-American

Development Bank Group which includes 3 other institutions.

The Bank’s mission is to ”contribute to the acceleration of the process of

economic and social development of the regional developing member countries,

individually and collectively.” With the aim of fulfilling its objective IDA focuses on

4 main areas: encouraging competitiveness, social development programmes

(education, drinking water, micro credits, etc.), modernizing the state with the purpose

of good governance, and fostering regional economic integration. Overall IDA is the

main financial source in the respective region. (IDB, 2006; SADC, n.d.)

African Development Bank (AfDB)

The AfDB was founded five years after its American colleague – IDB, with

the intentions to support social and economic development in the African region.

Currently it has 77 member countries from different continents but the important fact

is that Regional members-borrowers hold 60% of shares.

Over time two other agencies accompanied AfDB in its goal of a poverty-free

continent. It was the African Development Fund and the Nigerian Trust Fund, and

together these three institutions form the African Development Bank Group. The

Group focuses on four key tasks – granting credits, technical assistance, promoting

both public and private investments, and financing infrastructure projects. After a

revision of previous strategies the Bank decided to focus on only fewer priority areas

which in 2003-2007 strategy include agriculture and sustainable rural development –

focusing mainly on water supply, human resources building especially through

primary education and health, also improving infrastructure and economic integration.

The AfDB is the most significant multilateral organization in Africa. (AfDB, 2005;

SADC, n.d.)

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http://www.iadb.org/aboutus/I/members.cfm?language=English

Asian Development Bank (ADB)

The ADB was founded in 1966 with similar aims as those of IDB and AfDB.

To date, there are 64 members of which 46 come from the Asian – Pacific region.

In recent years the Bank decided to make its primary goal the fight against

poverty as well as following their three pillar strategy which consists of promoting of

sustainable economic growth, fostering social development (especially focusing on

the poorest members of the population), and last point focuses on good governance.

Through various means such as technical assistance, loans and grants provision,

public and private investments for development, policy dialogue and guarantees, as

well as advisory assistance in coordinating development policies and plans of

respective countries.

The Bank also manages the Asian Development Fund which provides

advantageous loans and grants to the most poverty-stricken countries of the region.

(ADB, 2006; SADC, n.d.)

European Bank for Reconstruction and Development (EBRD)

The EBRD is the youngest member of the Regional Bank’s Family. It was

founded in 1991 in response to the political and consequently economical changes in

the Central-Eastern European region with the aim of helping the respective countries

to adapt to the democratic environment and also providing support in the economical

transition.

The Bank currently has 62 members - 60 countries and 2 intergovernmental

institutions - European Community and the European Investment Bank and it works

in 27 countries of the respective region along with some countries from Central Asia.

The Bank encourages structural and sectoral reforms, competitiveness, privatisation

and entrepreneurship, stronger financial institutions and legal systems, development

of infrastructure required to support the private sector and strong governance. The

EBRD is the largest investor in the region and in addition it also activates foreign

direct investment. (EBRD, 2006)

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5.5 Paris Club

Paris Club describes itself as “an informal group of official creditors whose

role is to find co-ordinated and sustainable solutions to the payment difficulties

experienced by debtor nations”.

The history of Paris Club can be traced back to 1956. At that time, Argentina

was experiencing financial difficulties and it agreed to meet some its creditors in

Paris, in order to concur in new arrangements such as debt payments restructuring.

The new measures that were taken then helped Argentina overcome a financial crisis

that was at its dawn.

Now-a-days the Club meets on a six-week basis - usually 10-11 times a year.

Meetings are held at the French Ministry of the Economy, Finance, and Industry

which also servers as secretariat to the Club. There are 19 permanent members of the

Paris Club – governments which have significant claims on other governments all

over the world, namely: Austria, Autralia, Belgium, Canada, Denmark, Finland,

France, Germany, Ireland, Italy, Japan, Netherlands, Norway, Russian Federation,

Spain, Sweden, Switzerland, United Kingdom, and United States of America.

There are also those creditor countries which are invited on case-by-case basis.

Among those, the following countries have taken part in a specific rescheduling

process: Abu Dhabi, South Africa, Argentina, Brazil, Korea, Israel, Kuwait, Mexico,

Morocco, New Zealand, Portugal, Trinidad and Tobago, and Turkey.

Since its “foundation” the Paris Club itself or random groups of the Club

members have reached almost 400 agreements with more than 80 countries

accounting for more than half a trillion dollars (since 1983 $504 billion).

(Paris Club, n.d.; Koerner, 2003)

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5.6 London Club

The OECD (2003) definition of the London Club is as follows:

“A group of commercial banks whose representatives meet periodically to negotiate

the restructuring of debts of sovereign borrowers. There is no organizational

framework for the London Club comparable to that of the Paris Club.”

The London Club fist met in 1976 regarding payment difficulties of the

Democratic Republic of Congo (at that time Zaire). Meetings of the London Club take

place ad hoc – meeting sessions are formed upon a debtor proposal and adjourn once

an agreement is reached. The Club’s meetings are not related to one particular place

as those of the Paris Club, the banks representatives meet at various financial centers

such as London, Paris, New York etc. (IIF, 2005; Wikipedia, 2006e)

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6. DEBT RELIEF: THE NEVER ENDING STORY

For many centuries the Bible has been the fundamental moral code which was

(and still is) respected by many leaders in many countries. In Book Leviticus the

Bible says:

“Consecrate the fiftieth year and proclaim liberty throughout the land to all its

inhabitants. It shall be a jubilee for you; each one of you is to return to his family

property and each to his own clan. … In this Year of Jubilee everyone is to return to

his own property.”

Leviticus 25:10,13

We can regard this advice as one of the first attempts for debt relief. However,

as will be presented in this section, not many creditors have followed this guidance.

6.1 Case-by-case approach

As mentioned in Brief History of the Third World Debt, with the start of the

debt crisis International Financial Institutions as well as other governments, various

banks and other creditors tried to find ways to prevent other countries from defaulting.

Re-establishing economic viability of affected countries was to promote sustainable

growth, and thus avoid a major destabilization of the international financial system

which would also affect the rich part of the world. (Boughton, 2001:359) At the

beginning of the crisis there was no systematic approach and countries were dealt

with on a case-by-case basis. This management involved comprehensive rescheduling

mainly by the Paris Club countries, new lending possibilities from multilateral

organizations, and some additional credit from the Export Credit Agencies (ECAs).

These arrangements were attached to the so called structural adjustment programs

aimed to restructure countries’ macroeconomic policies that were supported mainly

by the IMF and the WB. Although this strategy was in some aspects successful,

rescheduling also facilitated further increase in the debt stocks. (US Dep., 1991)

Rescheduling as applied by the Paris Club “involved the creditor accepting to

delay receipt of payments falling due during the period of an economic program

supported by the IMF, and to reschedule such amounts for eventual repayment over

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the medium and long term” (Daseking & Powell, 1999), also called the ‘flow

rescheduling’. In addition, Paris Club for a long period of time believed that

rescheduling should not occur at concessional rates, thus maintaining the net present

value of the debt. (Menzies, 2001) Over a decade period, from 1976 to 1988, the

members of the Paris Club settled 81 flow reschedulings8, accounting for almost $23

billion to be postponed into the future. (Daseking & Powell, 1999)

In a few cases these newly implemented policies met their objective as shows

the example of Chile which was missed by the crisis to great extent. Unlike other

countries from South America that include Argentina, Mexico and Brazil where the

consequences were much graver, and these countries would require much more time

to recover. (Boughton, 2001:359) Neither of the highly indebted countries noted much

success, with debt service payments rising from 17% of exports on average in 1980 to

30% of exports on average in 1986. (Daseking & Powell, 1999)

It soon became obvious that the so-far-applied measures would not be

sufficient to bring the intended results and that new measures would have to be taken.

6.2 The Baker Plan

In 1985 the US Treasury Secretary James A. Baker, III, presented the

Program for Sustained Growth which called for a more comprehensive and

systematic approach to the debt crisis which would, in the long term, lead to

sustainable growth.

Baker identified three problems that were associated with the current strategy:

main indebted countries’ efforts for adjustment were gradually declining, support of

multilateral agencies and other creditors was fragmented, and there was a decline in

net lending by commercial banks. In his plan, Baker suggested the following

measures should be taken in order to deal with the current situation successfully:

• Debtor countries should adopt comprehensive macroeconomic and structural

policies which must be supported by the international financial community

with the purpose of promoting growth, balance-of-payments adjustments and

to reduce inflation.

8 27 of the debtor countries involved in reschedulings are now identified as HIPCs

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• Central role of the IMF is highly desirable, together with increased and more

effective structural adjustment lending by the multilateral development banks,

consequently assisting the debtor countries in adopting market-oriented

policies for growth.

• Private banks should also increase their lending9 and thus support the

comprehensive economic adjustment programs.

In his second point, Baker mainly called on the World Bank and the Inter-

American Development Bank to increase their financial support to principal debtors

by 50% from the current yearly level of $6 billion. This additional funding was aimed

at the 15 most heavily indebted countries which became known as the ‘Baker 15’ of

which 10 were from the Latin American region10. (US Dep., 1991; Boughton,

2001:360-414)

Similarly to the first approach the Baker Plan did not meet its primary

objectives. New financial provisions were mainly used to repay the previous loans,

and they did not promote any more growth in the indebted countries. (Jubilee Iraq,

2003)

6.3 The Brady Plan

Realizing the Baker Plan mostly failed, the newly-appointed US Secretary of

Treasury Nicholas F. Brady, identified a list of options aimed to reinforce the

international debt strategy and thus prevent further international economic

destabilization. Brady’s strategy comprised 5 new elements:

• commercial banks – the banks agree to a general waiver of the sharing and

negative pledge clauses for each performing debtor, to enable individual banks

to negotiate debt or debt service reduction operations11;

• ‘set-asides’ – the IMF and the World Bank should dedicate a portion of loans

to qualified countries to finance specific debt reduction plans, primarily to

help countries buy back their bank debts at a discount;

9 Baker suggested new lending amounting $20 billion over the next three years. 10 Latin America: Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay, and Venezuela; rest of the world: Côte d’Ivoire, Morocco, Nigeria, the Philippines, and Yugoslavia; In practice two additional countries we encompassed in the plan: Costa Rica and Jamaica. 11 Without this element, any small creditor bank could continue to block agreement, and negotiating flexible and innovative exit strategies would remain cumbersome and time-consuming.

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• augmentation – the World Bank and the IMF should offer new, additional

financial support to collateralize a portion of interest payments for debt or debt

service reduction transactions;

• U.S. position – a shift toward favouring an increase in the IMF quotas in order

to support the provision of resources for the new debt strategy;

• rethinking requirements – the IMF should consider requiring firm financing

assurances to be in place. The banks and the country should negotiate the type

of financing needed.

At first, although the overall objectives of the plan were welcomed, a number

of countries opposed some components of the plan, especially the risky use of the

Fund’s resources. In response, the US agreed that any funds set aside for buybacks or

other debt reduction operations would be restricted by the normal access limits. The

G7 ministerial meeting then agreed to support the initiative. The plan was designed to

support 39 heavily indebted middle income countries. Debtors had to qualify by

implementing sustainable macroeconomic policies and structural adjustment reforms.

(Boughton, 2001; Budde-Iser et al., 2004:11)

6.4 Toronto Terms

The 1988 G7 summit took place in Toronto. One of the issues that were on the

summit’s agenda was also the debt crisis and what measures should be taken. Some of

the participating countries already had clear opinions about what should be done. The

UK proposed lower interest rates charged on reschedulings, France recommended to

reduce falling-due payments by a third with the appropriate market interest rate for

the remainder, Japan presented the Miyazawa Plan which endeavoured restricting the

debt relief to reductions in the interest rates. The USA, on the other hand, opposed

any form of present value reduction but agreed to reschedule debts with longer grace

periods. (Boughton, 2001:480) A compromise was reached during the summit giving

the creditors three options for providing debt relief to highly indebted low-income

countries form Sub-Saharan Africa12. (US Dep., 1991) As described by the Paris Club

(n.d.) these three options are as follows:

12 In 1990 the Toronto agreement extended to poor countries in other regions.

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• debt reduction – 33.33% of the claims treated were cancelled, outstanding

debt being rescheduled at the appropriate market rate with a 14-year

repayment period including an 8-year grace period;

• debt service reduction – the claims treated were rescheduled at reduced

interest rates with a 14-year repayment period including an 8-year grace

period;

• commercial and non-concessional settlements – the claims treated were

restructured at the appropriate market rate over an extensive 25-year-long

repayment period including a 14-year grace period.

During the three-year period when the Toronto terms applied, 28

reschedulings have taken place with 20 LICs reaching an agreement, consequently

$6 billion of disbursements falling due were either partially cancelled or rescheduled

under concessional terms. However, these measures soon proved to be insufficient to

avert the prolonged and unsustainable increase in the debt stocks. As a result, at the

Commonwealth Finance Minister’s meeting in Trinidad, the UK Chancellor of the

Excheque John Major, suggested that the full stock of a country’s eligible debt needed

to be addressed, and present value should be reduced by 67%. This proposition

became known as the Trinidad or Enhanced Toronto Terms. (Daseking & Powell,

1999)

6.5 London Terms

However, not all Paris Club members agreed with the proposed 67%. In

December 1991, the creditor countries partially adopted some of the proposed

changes by increasing concessionality to 50%. These new strategies became known as

the London Terms. During their implementation, since December 1991 to December

1994, 26 reschedulings, concerning 23 countries, accounting for almost $9 billion

have occurred. Creditors also agreed that after some time of presenting good

economic and financial performance (three to four years) they would be willing to

consider the full stock reduction. (Daseking & Powell, 1999; US Dep., 1991)

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6.6 Houston Terms

In 1990 the Paris Club members accepted a new strategy with the purpose to

support lower middle-income countries which do not qualify for the previous terms

but are also highly indebted13. The so called Houston Terms do not contain any debt

reduction schemes but provide the respective countries with a more generous

repayment period. (Hillyard, 1998:36) The Houston Terms, as described by the Paris

Club (Paris Club, n.d.), grant three important improvements:

• Lengthening the repayment period – for non-ODA credits: 15 years or more

with a grace period 2-3 years; ODA credits: 20 years with a grace period of up

to 10 years;

• Concessional rates reschedulings for ODA credits;

• Debt swaps can be arranged on a bilateral or voluntary basis.

The Houston Terms are still used now-a-days. Up to date 19 countries have

benefited from them. (Paris Club, n.d.)

6.7 Naples Terms

Following the G8 summit in Naples in 1994, the Paris Club members accepted

a new set of policies affecting highly indebted poor countries. The so called Naples

Terms fulfilled the Trinidad proposal by providing up to 67% debt relief14 together

with an option one-off reduction of the debt stock. To be eligible countries have to be

successfully fulfilling IMF programs and Paris Club agreements for at least 3 years,

have low GDP per capita, and qualify for IDA-only financing.

Debt relief for non-ODA credits can be implemented either through debt

reduction when 67% of the debt is cancelled and the remaining amount is rescheduled

at appropriate market rate or via debt service reduction when the concerned claims are

rescheduled at a reduced interest rate. ODA credits can be rescheduled for up to 40

years with a 16-year grace period at the most favourable interest rates possible.

Voluntarily, countries can also have an option to engage in bilateral debt swaps.

Naples Terms came into effect in January 1995 and are applied since then.

They have replaced the Toronto and London Terms. From the time when they were

13 Defined as falling under at least two of the following criteria: debt to GDP higher than 50%, debt to exports higher than 275%, scheduled debt service over exports higher than 30%. 14 In 1999 creditors agreed that all debt relief under the Naples Terms would be conducted at 67%.

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put into force 26 counties have undertaken 34 reschedulings and 7 debt stocks deals,

accounting for over $17 billion. (Daseking & Powell, 1999; Paris Club, n.d.)

In June 1996 the world leaders met again in Halifax. Prior to the summit,

Mexico experienced another economic crisis, and it was obvious that a profound

action would have to be taken on an international level. In Halifax, the G8 group

agreed on a new strategy which was then accepted by the WB and the IMF.

(Wikipedia, 2006; Bayne, 2001) As described by Bayne (2001:6) the following

strategy was agreed upon: “stronger IMF surveillance for all countries, based on

better data, a new emergency financing mechanisms, backed by extra funds, better

cooperation between regulators of financial institutions, and exploring procedures for

countries comparable to insolvency of firms.”

6.8 HIPC Initiative

As a reaction to the summit and to the debt sustainability problems that were

still experienced by many countries, the World Bank and the IMF proposed a joined

action of bilateral, multilateral and commercial creditors. The Heavily Indebted Poor

Countries Initiative was launched in September 1996 and its main objective was to

help the respective countries bring the debt burden to a manageable level. (IMF, 2000;

Paris Club, n.d.)

Countries are defined as HIPC according to following factors (Eurodad, n.d.):

• Assessment by the World Bank and IMF showing a 'potential need for HIPC

debt relief’;

• Per capita income below $785, with entitlement to borrow on IDA-only terms

from the World Bank and from the IMF's PRGF.

Once a country qualifies it has to undergo a two-stage process. The first step usually

takes three years and includes:

• Applying macroeconomic reforms and structural adjustment programs

supported by WB and IMF;

• Rescheduling debts with the Paris Club members under Naples Terms;

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• Preparing an Interim Poverty Reduction Strategy Paper15.

When a country fulfils these requirements it reaches the so called decision

point when the World Bank and the IMF prepare a debt sustainability analysis which

determines whether the country requires further assistance from the Initiative or

whether a sustainable level of indebtedness can be reached by applying traditional

debt-relief methods. If a country meets one of the following criteria it is eligible for

debt relief under the HIPC Initiative:

• Net Present Value debt-to-export ratio still above 150%;

• For countries particularly open to international trade16 the debt-to-revenue

ratio must be above 250%.

If additional assistance from the Initiative is agreed on, then countries further have to

show a record of good performance under IMF and WB programs, prepare a full

PRSP (those who did not prepare one prior to the decision point), and implement their

poverty reduction plan for at least one year. After these conditionalities are met a

country reaches the completion point when their debts, as decided at the decision

point, are cancelled (for more information about the HIPC process see Annex 2). In

between the individual points creditors may (and most of them do) provide interim

debt service relief. (Jubilee Research, n.d.; Andrews D. et al., 1999)

In 1996, 42 countries17 qualified for the HIPC Initiative; however for: Angola,

Kenya, Vietnam and Yemen the World Bank decided their debts were already

sustainable. (Jubilee Research, n.d.)

The process of debt relief under HIPC I was long and in three-years time only

a small number of countries was making any progress: only7 countries reached the

decision point. In 1999 a review of the Initiative occurred resulting in a number of

15 PRSP is a country-led, country-written document that provides the basis for assistance from the World Bank and the International Monetary Fund, as well as debt relief under the Heavily Indebted Poor Country initiative. A Poverty Reduction Strategy Paper describes a country's macroeconomic, structural, and social policies and programs to promote growth. It summarizes the country's objectives, policies, and measures for poverty reduction. A Poverty Reduction Strategy Paper should be country-driven, comprehensive in scope, partnership-oriented, and participatory.(WB,…) 16 export-to-GDP ratio above 30% and a revenue-to-GDP ratio of 15% or more 17 Angola, Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Comoros, Congo, Congo, Dem Rep., Côte d'Ivoire, Ethiopia, The Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Kenya, Lao PDR, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Myanmar, Nicaragua, Niger, Rwanda, Sierra Leone, São Tomé Principe, Senegal, Somalia, Sudan, Tanzania, Togo, Uganda, Vietnam, Yemen, Rep. of, Zambia (Jubilee Research)

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changes affecting the eligibility criteria. An Enhanced HIPC18 (HIPC II) was agreed

on with stronger practices with the purpose to deliver deeper debt relief more quickly

and to a wider range of countries. (Andrews D. et al., 1999)

Up to date 18 countries have reached the completion point, 11 countries have

reached the decision point and 11 countries are in pre-decision stage and Haiti and

Eritrea have joined the HIPC list (see Annex 1).

However questions about the principles of HIPC still remain. As stated by

Jubilee Research (n.d.): “In April 2002, the World Bank admitted that of the six

countries that had by then passed their Completion Points, at least two still did not

have a sustainable level of debt. Furthermore, the external debt sustainability of half

of the 20 countries which were between Decision Point and Completion Point at that

time had significantly worsened.”

6.9 Lyon Terms

After the HIPC initiative was established the Paris Club member countries

decided to further increase the level of cancellation up to 80% for the group of HIPC.

Creditors had the options of debt reduction, debt service reduction and capitalisation

of moratorium interest19 for non-ODA credits. ODA credit reduction options remain

the same as under Naples Terms, and countries were also offered the debt swaps

option. Under these terms 5 countries have undergone rescheduling and debt

cancellation accounting for roughly $5 billion.

The Lyon Terms are no longer in use within the Paris Club framework. The

current use is limited to those 5 countries that previously benefited from them and still

have not reached the decision point under the HIPC Initiative. (Paris Club, n.d.)

6.10 Cologne Terms

In reaction to the unsuccess of the first stage of the HIPC Initiative the leaders

of G8 countries decided at the Cologne summit to push for a further increase in debt

18 The eligibility criteria described in the text apply to the Enhanced HIPC. The original eligibility criteria were much more strict: debt-to-export target from 200–250%; debt-to-revenue target 280%; the eligibility thresholds for the openness of an economy (export-to-GDP ratio) 40% and revenue effort (revenue-to-GDP ratio) 20% (Andrews D. et al., 1999) 19 As explained by the Paris Club: the claims treated were rescheduled at a reduced interest rate (40-year repayment period including 8-year grace and progressive payments).(Paris Club, Lyon Terms)

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reduction20. As a result the Paris Club creditors accepted the Cologne Terms under

which countries with a history of good performance and those within the HIPC

Initiative framework were entitled to receive non-ODA credit cancellation of up to

90% while the untreated debt is rescheduled at appropriate market rates for a

maximum of 23 years with a 6-year grace period. Out of 41 countries eligible, 27

have benefited from these terms. The Cologne Terms replaced the Lyon Terms and

are currently used within the Paris Club. (Paris Club, n.d.)

Over the past few years debt relief has in fact remained on the agenda of G8

annual meetings as well as other international seminars and conferences. Mainly

because too many countries are, even after a long process of debt reduction as

described above, experiencing debt sustainability problems. The year 2005 was

symbolised by a number of important meetings of the international decision making

community – G8, United Nations Summit, etc. These events were accompanied by an

enormous world campaign Global Call against Poverty which was organized by a

number of organizations and supported by different celebrities from all around the

world. Debt relief was one of the main points campaigners demanded from the world

leaders.

6.11 MDRI

At their summit in Gleneagles, the G8 leaders decided a further action

concerning debt relief will have to be taken in order to fulfil the Millennium

Development Goals (see Annex 3). A new framework, later called the Multilateral

Debt Relief Initiative, was conceived. Under MDRI 100% of debt owed to IMF, IDA

and AfDB will be cancelled for those countries that have successfully reached, or at

some point in the future will reach, the completion point under the enhanced HIPC

Initiative.

Although MDRI is a joint initiative, the decision to grant debt relief belongs

solely to each of the participating institutions and therefore the approach and

implementation may vary. For instance, with the aim to uniform the process the IMF

agreed to include all countries (HIPC and non-HIPC) with an annual income of $380

20 At the Cologne summit the G7 countries agreed on 90% debt reduction of bilateral debt, however by the next summit in 2000 all of the G7 countries were offering 100% debt relief on their own debts. (Bayne:4)

43

per capita or less; thus more countries became eligible for IMF debt relief under

MDRI. (IMF, 2006)

Although this agreement could be considered a historic milestone in debt relief

history, it also encompasses a number of drawbacks. Among these stands out that

only a limited number of countries is eligible and debt relief is granted from only a

few of the multilateral creditors. (OXFAM, 2005:7) Besides this fact, Jurgen Kaiser

(2005) also points out that the cancelled debt will be deducted from future resources

the respective countries were pledged by the respective creditors.

The planned relief should account for $8.54 billion from the AfDB, $37 from

IDA and more than $7 billion from IMF, all together amounting for more than $50

billion. While the IMF has already provided some debt relief under MDRI in January

2006, IDA is expecting to commence 1st of July and AfDB approved debt cancellation

for 33 countries of which 13 will benefit from it immediately on the 19th of April.

(AfDB, 2006; IMF, 2006; WB, 2006f)

44

10. IF THERE IS A WILL, THERE IS A WAY

Despite of numerous rules, conditionalities, regulations and restrictions the

history shows that in certain cases creditors were more than willing to forgive and

cancel a country’s debt.

In 1898 after the United States annexed Cuba, which was still a Spanish

colony at that time, they refused to accept the colonial debts. The USA explained that

the loans taken by the colonial government were used against the independence

movement in such ways as putting people into concentration camps, and therefore the

loans that were used against the people should not be the responsibility of the people.

The same way Costa Rica refused to pay its foreign debts contracted by the dictator

Frederico Tinoco Granados. The US arbitrator in the dispute stated that the creditor

knew the dictator would use the money for his personal use and therefore Costa Rica

should not be repaying such debts. (Roodman, 2001:16)

However, such examples are very rare in history and only powerful nations

can dare to refuse to repay their debts. During the First World War United Kingdom,

France and other European countries took large loans from the USA. In 1923 the

repayment period was extended and interest was reduced, however in 1934 five

European countries including United Kingdom defaulted, and no other repayments

have been made since. Nevertheless the debts are still on the books. According to the

US treasury, the First World War debts owed to the US as of June 1997 amounted

$33.5 billion of which UK owes $14.6 billion, France owes $11 billion and Italy $3.2

billion. (Hanlon, 1998)

After the Second World War, Germany was not able to repay its debts. In

1952 official as well as private creditors and commercial banks met in London in

order to solve the German debt situation. Germany was represented by Hermann-Josef

Abs a German banker. From the beginning creditors were concerned about the

economic and political situation in Germany and therefore all debt repayments were

inferior to economic and political stability of the country. It is estimated that the value

of the debt was almost 30 billion German marks. However, this amount represents

45

only the face value of the debt without any interest which was not even calculated into

the debt. Approximate calculations assume that the interest accounted for more than

15 billion German marks thus this debt was cancelled at the very beginning. It was

calculated that if Germany were to repay the entire debt (without interests) its debt-

service-to-exports ratio would be 10% which Abs considered intolerable21. Under the

London agreement which was signed in 1953, the creditors agreed to forgive more

than two thirds of the German debt. The remaining debt was to be repaid until 1978 at

annual payments of 570 million German marks for the first five years and 765 million

marks afterwards. Repayments at the time of the agreement accounted for 3.5% of

1952 exports and were never expected to be more than 5% of exports. In addition

Germany was to make the debt repayments only from export surplus not from new

loans or other reserves, which meant that creditors had to buy German exports in

order to ensure debt repayments. In the case of no export surplus Germany was

allowed to stop repayments. Due to rapid economic growth Germany repaid the rest

of the debt in 1960. (Hanlon, 1998, Budde-Iser et al., 2004:33)

In 1968 Indonesia found itself trapped by debts amounting $2.1 billion and the

Paris Club calculated that in the next few years it would inevitably default. Hermann-

Josef Abs again took on the role of a negotiator-analyst whose aim was to prepare a

debt analysis and prepare a suitable plan for debt repayments. Abs suggested 30

annual repayments without any grace periods, and all interests were to be cancelled.

The creditors almost fully agreed with the proposed plan with the exception of the

interests’ cancellation. The interest was set at a lower rate of 0.5% but was to be paid

only from 1985, which in the long term made only a slight difference. Repayments

started in 1970 and the debt-service-to-export ratio at that time was 6.6% and was

planning to decrease afterwards. As in the case of Germany, Indonesia was able to

repay its debts. (Hanlon, 1998; Budde-Iser et al., 2004:35)

It might be argued that these debt settlements were agreed on before the

concessional debt cancellation of the Paris Club or the HIPC Initiative were launched,

however, we can find cases of similar favourable settlements in late 1990’s as well.

21 Debt-service-to-exports ratio under the HIPC Initiative is considered sustainable at 15%

46

After the end of the war in Yugoslavia and change of regime the country owed

approximately $13 billion. It was classified as a Less Indebted Middle-Income

Country and there for it would be entitled for Paris Club relief under usual market

terms, which means that the debt would be rescheduled for later with additional

interest. However, especially the United States were pushing for greater relief in order

to promote the reconstruction of the country. The aim was to reach the Naples Terms

which are granted only for highly indebted countries with IDA-only status.

Yugoslavia does not meet any of these criteria and therefore under regular

circumstances would not be able to receive such relief. Nonetheless, despite of

Russia’s opposition in November 2001 the United States enforced and agreement

where 66% of the debt (which amounted $4,5 billion) was cancelled immediately,

unlike under the Naples terms where relief is provided over a two or three-year long

period. (Budde-Iser et al., 2004:14, Wikipedia, 2006f) Similar agreement was also

reached with commercial creditors in the London Club in July 2004 where 62% of the

debt was cancelled. In 2002 the country concluded a three-year Extended Fund

Facility arrangement with the IMF which started the first phase of a 51% write-off.

Additionally, after finishing another IMF program in 2006 a further debt relief from

the Paris Club will be provided reducing 15% of the net present value of the original

debt. (EC, 2005; Kaiser, Kowsky & Schuleller 2006:67)

In my opinion, further interest and favourable debt relief for Serbia and

Montenegro might be expected from the creditors. As with the case of Germany after

the Second World War geopolitical and economical interests are put ahead of debt

repayments, which is without any doubt good news for this Severely Indebted Low

Income Country22.

As for the rest of the developing countries, most of them with much higher

debt burden, they will have to manage with regularly provided debt relief. After all,

they account for only 3% of the world’s GDP and most of them are not geopolitically

important.

22 As of 2005 Serbia and Montenegro was classified as SILIC.

47

11. THE IMPACT OF INDEBTEDNESS ON THE ENVIRONMENT

AND THE SOCIETY OF THE DEBTOR COUNTRIES

In reaction to the third world debt crisis in the late 1970’s and early 1980’s the

international financial institutions as well as official and commercial creditors realized

there was a need for a major structural change in many of the defaulting countries in

order to help them repay their debts and thus prevent a further crisis.

11.1 Structural Adjustment Programs

In order to promote the changes the IMF together with the World Bank created

a neo-liberal set of economic policy reforms to be implemented by the developing

countries in order to foster economic growth, eliminate balance of payments deficits,

implement institutional and structural reforms and overall increase the flexibility and

adaptability of the economy in order to make the economy less vulnerable to future

shocks. These reforms became known as the Structural Adjustment Programs

(SAPs). (Wikipedia, 2006g)

SAPs consisted of two main elements:

• Macroeconomic stabilization with a short-term objective;

• Structural reforms of the economy with a long-term objective.

The first of the two objectives was carried out by the IMF’s SAF, later ESAF, while

the latter was promoted by the World Bank’s Structural Adjustment Loans (SALs)

and Sectoral Adjustment Loans (SECALs). Borrowing financial resources from the

Adjustment facilities was thus conditioned by a number of structural, economic and

policy changes which the country had to implement in order to qualify for a loan.

(Rahman, n.d.)

These conditionalities were meant to promote economic growth and help

countries to ease the debt burden; however, most of the countries where SAPs were

implemented experienced the very contrary. SAPs usually included the following

conditionalities:

• Eliminating government intervention in the economy;

• Focusing on direct export and resource extraction – emphasizing the

production of cash crops and other commodities such as coffee, cocoa, tea,

rubber, cotton, copper etc.;

48

• Government cuts in social expenditures such as health and education, and

implementing fees for these services;

• Reduction of subsidies and price controls;

• Devaluation of local currency;

• Trade liberalization – eliminating all trade-related restrictions;

• Privatization of government-owned enterprises;

• Attracting foreign direct investment by applying high interest rates.

(Chebucto, 2006; Ohkubo, 1997; Wikipedia, 2006g)

Criticism

SAPs have been criticised for various reasons, mainly because they threaten a

country’s sovereignty, put short-term interests before long-term development

objectives, prioritize economic structural reforms and debt repayments over social

welfare, environmental protection and well being of the peoples. For some countries

such as the East Asian tigers, SAPs brought some success, however for majority of

developing countries they did not. (Roodman, 2001) I would like to focus the next

few pages on the impacts of structural adjustment policies on the environment and

society in the debtor countries.

11.2 The impact of SAPs on the society

Structural adjustment programs affected people living in the respective

countries in a number of ways, while the poorest have usually been hit the hardest and

women and girls suffered more than men.

"I believe that banking institutions are more dangerous to our liberties than standing

armies."

Thomas Jefferson

Education budgets were cut down and school fees were introduced. As a

result, “Zaire fired a fifth of its school teachers in 1984” (Roodman, 2001:34) and

Tanzania where elementary education was almost universal had to introduce school

fees in 1986 which disabled the poorest children to go to school. A similar story

happened in Nicaragua where one quarter of the elementary students did not enroll

49

into school after fees were introduced. D. Roodman (2001) also notes that poor rural

areas suffered much harder than ‘urban elites’ when primary education cuts were

larger than those of universities. On the other hand, when school fees were abolished

in 1994 in Malawi, school enrollment increased by 50% and most of the new students

were girls. (Roodman, 2001:34,35; Hong, 2000:17)

Health care budgets were exposed to the same restrains. In the 1980’s the

health budget of Mexico dropped from 4.7% to 2.7%. Within the same time period

“infant deaths from nutritional deficiencies tripled to rates higher than those in the

1970s as a result of cutbacks in social and health spending” describes Evelyne Hong

from the Third World Network. (Hong, 2000:16) United Nations Childrens Fund

estimates that half a million children died each year in developing countries in the late

1980’s as a subsequence to the adjustment policies. (Roodman, 2001:35) In

Zimbabwe’s spending on healthcare per person has decreased by third since

adjustment policies were introduced in 1990. (Jubilee, n.d.) Health care cuts also

resulted in the decrease of disease-prevention. Diseases previously eliminated came

back in a number of regions. In Subsaharan Africa malaria, yellow fever, and cholera

reappeared, South America experienced increase in malaria and dengue cases, and in

India the outbreak of plague in 1994 is believed to be “the direct consequence of a

worsening urban sanitation and public health infrastructure which accompanied the

compression of national and municipal budgets under the 1991 IMF-WB, sponsored

structural adjustment programme” (Hong, 2000:18).

“According to UNICEF, over 500,000 children under the age of five died each year in

Africa and Latin America in the late 1980s as a direct result of the debt crisis and its

management under the International Monetary Fund’s structural adjustment

programs.”

Ross P. Buckley

In South America SAPs helped the increase of poverty from 130 million

people in 1980 to 180 million in the 1990’s. However, not all people suffered from

the applied policies. Especially in Latin America, the gap between the minority of the

rich and the majority of the poor widened even more. In Mexico, for instance, 20% of

the richest people owned more than half of the national income while the poorest 20%

50

owned only 5%, and the number of billionaires increased from 2 to 24. (Hong,

2000:15)

SAPs also resulted in salary decline. In Mexico, within a six-year period

wages fell to 50% of their value in 1982. In Peru the situation was even worse with

wages being reduced to 90% while the price of bread increased 12 times over night. In

most countries women have been affected the most. (Hong, 2000:15) In Costa Rica

after reductions in state expenditures 85% of the public-sector employees who were

fired were women. (Thompson & Toro; 1999)

Due to an IMF/WB-imposed emphasis on exports many countries experienced

a painful shift from a diverse domestic food production to growing mainly cash crops.

The IMF/WB logic was simple, the more countries export, the more they will earn.

However, the real situation was a bit different. Due to world recession, the prices of

primary commodities were low and large exports even more enhanced the decline of

prices on the world markets, thus more production resulted in lower prices. In 1985

Thailand exported 31% more than the previous year and it earned 8% less. (Roodman

2000:33) In Brazil per capita production of crops for daily-consummation dropped by

13% from 1977 to 1984 whereas production of export-oriented crops went up by 15%.

The shift from domestic production to export production lowered the nutrition levels

resulting in 50% of Brazilians being malnourished. (Hong, 2000:15)

The Food crisis in Malawi

In 2002 the Sub Saharan country of Malawi was hit by a serious food crisis.

While many believe the main cause was floods and corrupted government, in fact

other far more serious factors were the main culprits.

Malawi has always suffered from hunger and food shortages, consequently

32% of the population have low nutrition levels. However, due to food aid and

government subsidies for basic food which were distributed by the Agricultural

Development and Marketing Corporation, the Malawi people were able to live

through the unfavourable seasons, despite the long-lasting government corruption

The IMF/WB-proposed reforms did not take into consideration differences

and specifics of individual countries, and thus the agriculture sector in Malawi has

been restructured in the one-size-fits-all approach. Subsidies were reduced, price

51

controls and regulations abolished and agencies such as the ADMARC were

restructured or privatized. Within half-a-year, from October 2001 to March 2002, the

price of maize increased by 400%. Prior to the adjustment reforms, the government

was able to ensure food availability even in distant, isolated areas. Today, Malawi

faces serious chronic food insecurity.

No one disputes Malawi needs agricultural reforms in order to improve food

productivity and security, as well as institutional and governance reforms. However,

the main issues troubling food production in Malawi such as rural poverty, the impact

of HIV/AIDS and discrimination against women, have not been addressed. On the

contrary, SAPs brought deregulation, privatization and austerity.

Even after debt relief under the HIPC Initiative Malawi’s external debt

accounts for 29% of government expenditures and even at the time of hunger and

food crisis donors insist on debt repayments. (Owusu & Ng’ambi, 2002)

Altogether the number of people that were adversely affected by the

adjustment programs exceeds the number of men and women killed in the Second

World War.

11.3 The impact of SAPs on the environment

Similar way adjustment practices affect society they also affect the

environment in the respective countries. SAPs in fact degrade the environment

through different means. The Friends of the Earth’s report The IMF: Selling the

environment short recognizes three ways how SAPs encouraged environmental

degradation:

• Increase in natural resources exploitation;

• Reductions in environmental spending;

• Weakening of environmental laws.

By focusing on increasing their export earnings countries over-exploit their

natural resources in an unsustainable manner. Debtor countries most important

exports comprise of timber, oil and gas, minerals, cash crops and fish. The

accelerating pace of the exploitation is not sustainable and in the long-term

52

perspective leads to excessive deforestation, soil degradation, erosion and salinization,

desertification, loss of biodiversity, water and air pollution and so on.

(Chebucto, 2006)

Natural resources exploitation

In Thailand, the government encouraged farmers to focus on rice and rubber

production by lowering tariffs on these particular products. Consequently farmers

abandoned cassava farming and went ahead to seek a suitable land for rubber

plantations which they have found by clearing the rainforests. (Roodman, 2001:36)

Due to agricultural expansion deforestation has increased also in Nicaragua

(Gueorguieva, 2000:12) and many other countries. In Cote d’Ivoire in 1960 the forests

covered 12 million hectares of the country. Increase in cocoa production has been the

primary source for deforestation in Cote d’Ivoire where forests represent only on 3.9

million hectares today. Although the government as well as the IMF realized the

critical situation and accepted various measures to prevent further deforestation, the

remaining forests are threatened by illegal farming which in 1997 comprised of 30%

of the protected forests. As extensive farming is degrading the soils, more farmers are

still moving into the protected forests. (Montanye & Welch, 1999:5)

Cameroon is one of the ecologically most unique countries in Africa. Its

forests reserves account for 22 million hectares, of which 14 million are tropical

rainforests. Due to the economic crisis of the 1980’s Cameroon found itself in a

difficult debt situation, and agreed to implement IMF/WB led adjustment programs

which commenced in 1988 and on and off are continuing to the present. The

adjustment programs included, as always, various measures such as diversifying the

economy and stimulating export production in the non-oil sectors, note Montanye and

Welch (1999:6). The dense and ecologically rich forests seemed to be a perfect option

for the economical diversity. The IMF promoted lower export taxes on forests

products and the devaluation of currency. Due to these implemented policies the

production of forest products skyrocketed, the number of logging companies rose

form 194 in 1994 to 351 in 1995 and lumber exports increased by 50% between 1995-

1996 and 1996-1997. The report concludes that these changes inevitably led to

deforestation which further threatens endangered species such as the black rhinoceros

living in the forests. (Montanye & Welch, 1999:6)

53

Guyana belongs to one of the most forested tropical countries in the tropics

with forests covering three quarters of the country. In 1988 Guyana accepted a

structural adjustment program guided by the IMF/WB. Guyana’s vast gold reserves

became an important part of the imposed adjustment. The implementation of SAPs

resulted in the increase of foreign multinational corporations, which inevitably led to

an increase in foreign ownership. Today there are 32 foreign mining corporations

operating in Guyana and large-scale mining permits cover 10% of the country.

(Montanye & Welch, 1999) Most of the reserves are located in the forest. Mining has

adversely affected the environmental sustainability mainly by deforestation,

destroying wildlife habitats, destroying river banks, increasing toxic threats and

widespread contamination, and by spread of domestic and industrial waste in the

rivers. In addition, local authorities are not able to properly monitor and control

companies which results in breakdown of environmental standards and ignorance of

environmental regulations. Furthermore, illegal small-scale mining is taking place

which leads to increased use of mercury, contamination of rivers, decline in fish

species, threatening human lives via contaminated fish, incursion and destruction of

wildlife habitat and protected areas, and also the increase in malaria cases caused by

water holes in the mined out areas. (Williams, n.d.)

Omai Gold

In 1995 mining activities of a foreign company Omai Gold Mines Ltd. resulted in

release of 3 million cubic meters of cyanide-laced waste into Guyana’s main river

Essequibo. The accident was caused by a burst of a tailing dam and it was the largest

spill of four that happened previously in the year. Subsequently the river was

contaminated, aquatic life was killed and 3 people were hospitalized for cyanide

poisoning. (Montanye & Welch, 1999)

Reductions in environmental spending

In order to meet their budget requirements countries were very often forced to

lower the number of government employees. Usually the first ones to go are those

from the education, health as well as forestry, fishery and agriculture departments,

environmental protection agencies and other government institutions. (F Montanye &

Welch, 1999)

Where governments tried to care for their employees they had to cut the

funding for the agencies which disallowed them to do their jobs properly. This was

54

the case of Zambia, Tanzania and Cameroon. A study undertaken by the World Wild

Fund for Nature shows that in El Salvador environmental organizations were steadily

being destroyed. “Such cuts may hurt more in the long term than the short term, since

young environmental agencies in developing countries often wield little effective

power, but will gain strength over time if properly supported,” remarks D. Roodman

(2001:36).

Weakening of environmental laws

Reductions in environmental institutions’ budgets already imply eliminated

ability of the government to enforce environmental laws and protection. Budget

priorities are given to increase of investment which further complicates environmental

protection.

In Thailand the government was forced by the IMF to abandon majority of the

resources focused on environmental protection. Before the financial crisis in South

East Asia in 1997 Thailand was implementing Economic and Social Development

Plan which stressed the importance of sustainable development. However, after the

economic crisis Thailand agreed to financial assistance from the IMF which

prioritized investment promotion over environmental protection efforts. (Montanye &

Welch, 1999)

Fig 8. Industrial Promotion vs. Pollution Control

The graph shows the increase of govern-ment spending on industrial activities, mainly promotion and development, whereas funding for pollution control has declined sharply after the financial crisis in 1997 and subsequent intervention of the IMF.

Source: Montanye & Welch (1999), The IMF: Selling the Environment short

In the Philippines, the IMF perceived restrictions to direct investment as

barriers to exploitation of the country’s vast natural resources. The new law which

was accepted in reaction to the IMF’s suggestions encourages and facilitates large-

55

scale mining as well as increase in investment, especially by foreign-owned

companies. In addition, the law also gives the foreign companies full possession and

rights to exploitation, utilization and development of the natural resources, which

violates the Philippines Constitution from 1987 which states that in mining

development and exploitation there needs to be 60% ownership by the citizens of the

Philippines. (Montanye & Welch, 1999)

People and the environment were also affected by the projects managed by the

WB and the IMF such as dams and power plants. It is estimated that more than 3

million people were displaced as a result of ‘development’ projects. “In India, some

300,000 poor people have been displaced by the construction of the Singrauli coal-

fired power plant, a highly polluting energy project that contaminated air and water

with toxic ash,” says a report by the Center for International Environmental Law

(2003). Many of these displacements were accompanied by opposition from the

affected people which were, the report continues, dealt with brutally and resulted in

killings of the opposing people. (CIEL, 2003)

SAPs and their impact on the environment and society have not gone

unnoticed by the people in the respective countries who became the victims of

adjustment. Few of them accepted the new reality of no education, health care,

unemployment, food insecurity and damaged environment silently, however, most of

them tried to fight for their lives and liberties. In the following countries people

expressed their hopelessness and frustration by demonstrations or mass movements,

and many of them lost their lives:

• Algeria - 1988

• Benin - 1989

• Bolivia - 1985

• Ecuador - 1987

• Jamaica - 1985

• Jordan - 1989

• Mexico - 1994

• Morocco - 1990

• Niger - 1990

• Nigeria - 1986, 88,

89, 90, 92

• Russia - 1993

• Sudan - 1987

• Trinidad - 1990

• Tunis - 1984

• Uganda - 1990

• Venezuela - 1989

• Kongo, D.R. -

1985

• Zambia - 1987

(Whirled Bank Group, 2003; Hong, 2000)

56

After more then 20 years of adjustment which have not brought much success

in alleviating poverty and assisting the developing countries to achieve bigger growth

and economic stability, many non-governmental, not-for-profit, development

organizations as well as academic institutions from across the world began to criticize

the Fund’s and Bank’s ‘development’ practices. These organizations joined in a

coalition called Jubilee 2000 whose goal was to promote cancellation of the debt of

the developing countries and also to set basic rules for debt relief in the form of a Fair

and Transparent Arbitration Process. Although the Third World debt has not been

cancelled, Jubilee 2000 succeeded in gathering more than 24 million signatures for

debt cancellation petition. (JDC, n.d.) It should be noted that without the pressure

from civil society organizations calling for debt relief, raising public awareness and

speaking out about the impacts of debt, debt relief would not be on the international

agenda as often (for more information about organizations focusing on debt relief see

Annex 4).

The Bank and the Fund themselves started to realize that structural adjustment

implemented in one-size-fits-all approach did not bring the prognosed growth nor

poverty reduction. A World Bank report by William Easterly (2000) found “no

evidence for a direct effect of structural adjustment on growth. The poor benefit less

from output expansion in countries with many adjustment loans than in countries with

few adjustment loans.” D. Roodman (2001:45) also states that in relation to Africa

“Bank researchers now recognize that structural adjustment has mostly failed.”

Due to the international pressure on the IFIs to change their practices in the

developing countries, both institutions made a shift towards poverty eradication. In

1999 the IFIs introduced Poverty reduction Strategy Papers which became the new

conditionality for debt relief and also for new lending. PRSP is a three-year national

development strategy. Official definition by the World Bank describes PRSP as:

”…a country-led, country-written document that provides the basis for assistance

from the World Bank and the International Monetary Fund, as well as debt relief

under the Heavily Indebted Poor Country initiative. A Poverty Reduction Strategy

Paper describes a country's macroeconomic, structural, and social policies and

programs to promote growth. It summarizes the country's objectives, policies, and

57

measures for poverty reduction. A Poverty Reduction Strategy Paper should be

country-driven, comprehensive in scope, partnership-oriented, and participatory.”

(WB, 2006e)

At the same time PRSPs came into existence, ESAF was replaced by Poverty

Reduction Growth Facility (PRFG) which was established with the purpose to “make

the objectives of poverty reduction and growth more central to lending operations in

its poorest member countries” (IMF, 2004b).

Although I find this change a rather rhetoric one, I believe that it shows some

progress in the IFIs’ attitudes towards development. After 20 years of adjustment

failures the World Bank and the IMF at last admitted that the proposed policies did

not achieve their goals. They also realized that countries themselves should be

involved in shaping the countries’ policies because each country has its own unique

characteristics coming form different cultural, ethnical and economic backgrounds

and therefore the one-size-fits-all approach does not truly fit for all. They also

understood that due to a growing interest in development issues from the civil society

in the creditor countries transparency is very important and inevitable, so progress and

changes can be monitored and proper evaluation can be done. Finally, they also

opened themselves to a greater dialogue with all shareholders involved in the creditor

as well as debtor countries. However, questions about the real PRSP’s process, versus

what is on paper, remain.

As stated by the World Development Movement (2003) the names have

changed but the same old policies still remain in practice. One of the most important

aspects of the PRSPs is that they should be country-owned. However, the World Bank

and the IMF hold the veto power and thus “effectively control the process”, continues

the report. This means that again same policies such as privatisation, liberalization

and budget cuts can be imposed without the governments’ approval. (WDM, 2003)

The endorsement of the PRSP by the World Bank and the IMF represents future

financial resources that the countries cannot afford to loose. Therefore governments

prioritize the ‘needs’ of the IMF and WB rather than those of their citizens. (Citizen’s

Network on Essential Services, 2003) It is also found that the reluctance to allow the

new process and actors influence the underlying policies remains. (Possing, 2003)

58

It is not easy to adjust to new practices and it might take some time until all

shareholders can fully influence the creation of the PRSPs. Greater public awareness

about such issues will be important in both debtor and creditor countries in order to

call on the IFIs to fully abandon their dictating techniques and let the country control

its own economy.

11.4 Other factors

However, not all negative impacts on the environment and society were

caused by SAPs because not all developing countries agreed to take loans under

SAPs’ conditionalities and some battled indebtedness on their own. However, this

brings about a problem: How can indebtedness be linked to the negative impacts we

have witnessed to be occurring in majority of indebted developing countries?

D. Roodman (2001:8) explains the difficulty of linking the cause and the

effect, but also how it can be done by looking at the experience of the middle-income

countries.

“Because debt trouble set in gradually in low-income countries, no one can point to a

particular child dying in Mozambique from tetanus or to a particular plot of forest

cleared by a poor farmer in Honduras and say with confidence, “Debt caused that.”

But the experience of middle-income countries, where debt crisis developed with a

suddenness that spotlighted the link between cause and effect, offers a vivid picture of

its impact.”

In Latin America as well as Africa, GDP per person has been growing steadily

and between 1950 and 1980 it increased by 105% in Latin America and 72% in

Africa. At the beginning of the 1980’s it dropped and until 1999 Latin America

recovered only slightly for a net increase of 4.3%, whereas Africa experienced a fall

of 6.2%. (Roodman, 2001:32)

59

Fig 9. Gross Domestic Product per Capita in Latin America and Africa,

1950-1999

Source: Roodman (2001), Still Waiting For the Jubilee

According to D. Roodman (2001), in North East Brazil incidence of low birth

weight increased from 10.2% in 1982 to 15.3% in 1984. Infant mortality increased

over the same period. In 1982 nine out of 100 babies died in their first year, in 1984

twelve babies died in their first year. Although Roodman finds these as results of

structural adjustment, I would argue that in 1984 it was still too soon for SAPs’

policies to have such impacts. Countries had to ‘adjust’ their budgets with or without

SAPs in order to repay their debts.

Kahn and McDonald (1995) find that “debt can lead to myopic behaviour,

leading to deforestation rates that may not be optimal in the long run, but are

necessary in the short term to meet current constraints.” Furthermore, the study finds

that debt is an important aspect in tropical countries’ deforestation. I think these

findings can be implemented on social services such as education and health care as

well. In order to meet the next repayment countries adopt short-term policies which

60

will not bring any positive results in the future, and will furthermore decrease the

quantity and quality of natural as well as human resources.

Debt reduction reduces the levels of deforestation. Kahn and McDonald

(1995) find that a 10% reduction of either total or relative debt may reduce

deforestation by up to 3.1%. The reduction of debt would then lead to decreased

deforestation which would improve the environmental situation in the respective

countries and also help to preserve the world’s common good.

Debt reduction also leads to increased funding of social services. Due to debt

cancellation Mozambique was able to introduce free immunization for children, in

Uganda over 2 million people gained access to water, in Tanzania school fees were

abolished and 66% more children enrolled in primary schools, Benin spent 54% of

what it saved through debt relief on health care programs. (JDC, n.d.)

However, too many countries still spend more resources on servicing debt than

on education or healthcare. One reason is the IMF/WB imposed cutbacks but another

reason is simply the unsustainable debt burden.

The table bellow shows the proportion of the national budgets that countries

spend on servicing foreign debts compared to basic social services as well as the

percentage of the budget covered by foreign borrowing.

61

Fig 10. Share of Government Spending Covered by Foreign Borrowing and

Devoted to Foreign Debt Service and Basic Social Services, Selected Countries,

1996-97

Source: Roodman (2001), Still waiting for the Jubilee

Brazil

Brazil has been home to the Amazon rainforests which is one of the world’s

most biologically diverse areas. Yet over the past few decades the Amazon has

experienced unsustainable rates of deforestation of up to 52 000 square kilometres per

year. Average annual deforestation between 1981 and 1985 was around 25 000 square

kilometres. Within 10 years the total deforested area rose from 41.5 million hectares

in 1990 to 58.7 million hectares in 2000. In 1996 the level of deforestation increased

by 34% compared to 1992. It is estimated that of the original rainforest nearly one

fifth 17.1% has already disappeared. “Cattle ranching is the most common land use in

deforested areas throughout the region” states the Amazon Institute of People and the

Environment.

In 1998 under significant financial pressure Brazil agreed to an IMF stabilization

program. In order to ‘stabilize’ the country the proposed program includes a 90% possible

reduction of conservation programs as well as a two-thirds decrease in rainforest protection.

In 1999 $6 million was spent on environmental protection programs in comparison to $57

million on debt service. Reduced capability in environmental protection does not allow the

government to control and penalize illegal logging. However, it is not only structural

62

adjustment that causes deforestation. As history shows indebtedness itself does not allow

people to prosper and forces them to destroy the valuable rainforest to make a living. SAPs

‘only’ add a further pressure and increase the rate of deforestation which would have been

occurring anyways. With $235 billion of foreign debt in 2003 Brazil belongs to Severely

Indebted Middle Income Countries. It seems that the future of the Amazon lies in the hands of

Brazil’s creditors. (Barreto et al., 2006; Montanye & Welch, 1999; Wikipedia, 2006a)

63

12. A DIFFERENT ALTERNATIVE

Despite numerous debt relief initiatives claiming to ”end the debt burden once

and forever”, many countries still have to sacrifice free education, health care, clean

water, clean and diverse environment for debt repayments. Many might argue that

there is not any other way; debt is a promise to pay and most developing countries

need structural reforms. Indeed there is a different way that promotes environmental

protection, health care and education instead of cutbacks and adjustment policies.

12.1 Debt conversions

OECD defines debt conversion as “the exchange of debt - typically at

substantial discount for equity or counterpart domestic currency funds to be used to

finance a particular project or policy”. (OECD, 2003)

There are many types of conversions such as debt-debt swap which can be

defined as a change of creditors holding a country’s loan. (United Nations, 1990)

Another widely used model of debt conversion is the so called debt for equity swap in

which the debt is exchanged for local investments in the debtor country. In 1990

Argentina retired $5 billion in debt by giving the creditors its national airline and its

phone company. (Roodman, 2001:56) While these models of conversion are primarily

used for the profit of the investor, over time conversions such as debt for development

or debt for nature have been developed. Unlike the former, these conversions are

focused on providing substantial funds for development or environmental activities in

the debtor country hence benefiting the debtor not the investor or creditor. (Resor,

1997)

Debts can be swapped either directly when the lender initiates this conversion

or indirectly when an independent institution such as an environmental or

development organization or private firm buys external debt from the lender or

secondary market at a discounted price and exchanges it for an asset in the debtor

country. The lender can also donate either the whole debt or part of it to a non-profit

organization which then swaps it with the debtor country. The debt swap can also be

initiated by the debtor government as in the case of Costa Rica (described bellow).

64

We can also distinguish commercial and bilateral swaps depending on the origin of

the debt.

12.2 Debt for nature swaps

Debt-for-nature swaps can be defined as “agreements in which lenders forgive

some debt in exchange for the debtor’s commitment to convert designated territories

into natural parks and wildlife preserves.” (Blackman, Mathins & Nelon, 2001:13)

Debt for nature swaps were first initiated by Thomas Lovejoy from the World

Wild Fund in 1984. Debt for nature swaps are based on a previous model of debt for

equity swap in which lender forgives some debt in exchange for local currency

investment in the debtor country. However, both these models have very different

purposes. While debt for equity swap aims to generate profit for the ‘forgiver’, debt

for nature swap provides additional funds for conservation purposed in the debtor

country. (Resor, 1997) At first non-government organizations were the primary

initiators of debt conversions, however over time bilateral aid agencies became the

major players. (Roodman, 2001:53)

The first debt for nature swap took place in 1987 in Bolivia and Costa Rica.

Conservation International, an NGO from the United States, bought $650,000 of

Bolivian external debt at a discounted price of $100 000. In return, the Bolivian

government ensured maximum legal protection for Beni Biosphere Reserve, created

three adjacent protected areas, and it also provided funds for management activities in

the Beni Reserve. (Resor, 1997) “In effect, Bolivia paid off loans by ‘exporting’ the

service of protecting forests for the rest of the world, rather than exporting trees,”

concludes D. Roodman (2001). The debt swap in Costa Rica was better developed.

The government agreed to pay 75% of the face value of any debt provided for

conservation. The payment was made into a special fund that could only be used for

environmental projects. It is estimated that by 1990 Costa Rica reduced its debts by

$75 million in this way. (United Nations, 1990)

Kahn and McDonald (1995) find that debt for nature swaps have dual effect

on deforestation. First they are designed to preserve forests as part of the swap.

Second the reduction of debt itself reduces deforestation.

65

Successful Examples of Debt for Nature Swaps

In 1988 WWF acquired $390 000 of the Philippine debt at discounted price of

$200 000. This debt was then redeemed by the Central Bank of the Philippines for the

equivalent of the full face value of the debt in local currency. Haribon foundation, an

environmental organization, then used the money for various conservation projects

such as improved management for national parks or training programs for

conservation professionals.

The Philippines no longer owed $390 000 in dollars to the commercial banks,

on the contrary, they were able to keep the money in the country and support

environmental projects and thus generate investment, instead of shipping it from the

country. It also reduced the pressure on the Bank’s scarce stock of hard currency.

(Resor, 1997)

Fig 11. Debt for nature swap in the Philippines

WWFCentral Bank

of the Philippines

Creditor Haribon Foundation

$390 000 of debt cancelled

$200 000 purchase price

$390 000 of debt

$390 000 of peso

equivalent paid

Conservation Projects

Training Projects

Management Support

Source: Author

66

In 1994 Canada forgave 75% of Peruvian debt. The remaining 25% was paid

by the Peruvian Ministry of Economics and Finance in local for social and

environmental purposes. The overall amount was divided between FONCODES (the

fund for poverty), UNICEF and PROFONANPE (the fund for nature). (Kaiser &

Lambert, 1996:6)

In 1995 Switzerland forgave 20% of Bulgarian official debt. Bulgaria in

exchange agreed to spend the equivalent in local currency on environmental projects.

The payments were made subsequently in four years and were deposited in a special

environmental fund. The fund then provided grants to non-commercial environmental

projects with technical assistance from the World Bank under the guidelines of

Environmental Action Program for Central and Eastern Europe. (Kaiser & Lambert,

1996:7)

12.3 Debt for development swaps

Similar definition that was used for debt for nature swaps can be used for debt

for development swap with the difference that the debtor commits to fund a

development project. Such swaps actually evolved from debt for nature swaps, when

they were properly established organizations from various sectors engaged in similar

arrangements.

The first project that can be specified as debt for development swap was

launched by UNICEF in 1988. Midland Bank agreed to donate a worthless Sudanese

debt of $800 000 to UNICEF which then redeemed this debt for local currency and

the money was used to fund a development program in Kordofan area which suffered

from drought. (United Nations, 1990)

UNICEF is also one of the most important actors in swapping debt for

development. Between 1989 and 1995 21 debt conversions have taken place in

countries such as Sudan, Madagarcar, Zambia, Phillipines, Jamaica or Bolivia. These

conversions retired $199 million while the costs were only $29 million and money

generated for development projects was $52 million. (Moye, 2001) Kaiser and

Lambert (1996:13) attribute UNICEF’s success to three main factors: projects are

always formulated in partnership with the government and address national priorities

67

of the respective country; projects are chosen for their sustainability and high local-

cost content; project duration is 3-4 years to guard against inflation or currency

devaluation.

Fig 12. UNICEF debt-for-child development swaps

Source: Moye (2001), Overview of Debt Conversion

68

Successful Example of Debt for Development Swaps

In December 1993 UNICEF completed a complex debt for development swap

in Senegal. The conversion comprised of education, health, sanitation and water

projects throughout the country. UNICEF acquired $24 million face value of both

bilateral and commercial debt owed by Senegal to Argentina at a discounted price of

$6 million. The Senegalese government agreed to pay the equivalent of $11 million in

local currency for three years in support for UNICEF projects.

Fig 13. Debt-for-Development: Senegal

Source: Moye (2001), Overview of Debt Conversion

Debt for development swaps can be further divided into debt for education,

debt for health, debt for child development etc.

69

Although debt swaps seem to be a good alternative for the indebted countries

because it gives them opportunity to decrease the amount of debt and promote

environmental conservation and development projects at the same time, there are also

some negative aspects of debt swaps. According to Melissa Moye (2001:8), such

disadvantages include:

• Budgetary impact – debt swaps usually require payment in local currency,

therefore they might be less beneficial for countries with large domestic debt

because they have a lack of fiscal resources;

• Risk of inflation – in some countries debt conversions resulted in the injection

of large amounts of local currency into the national economy later causing

inflation;

• Transaction costs – debt swap transactions are complex and time-consuming,

therefore governments need to devote significant resources to negotiation,

documentation and monitoring;

• ‘Round-tripping’ – the use of profits from debt conversions should be

monitored in order to prevent investors transfering the gains from swaps out of

the country;

• Policy conditionality – in some countries debt swaps have been considered as

a form of foreign dominion and challenge to national sovereignty because

certain types of debt swaps (especially debt for equity swaps) result in the

transfer of local assets to foreign ownership or control;

• Subsidisation of investment – the debtor governments may be subsidising

investments that would have occurred anyway; debt-equity swaps were a

major incentive for foreign investment and a boost to privatisation programs.

However, being aware of the possibility of such negative impacts particular

steps can be taken to prevent the above mentioned disadvantages. Budgetary impact

can be minimised by payments being made over time, inflation can be eliminated by

placing a ceiling on the amount of local currency paid through debt swaps and by

payments being made subsequently. In order to minimise transaction costs some

countries have commissioned foreign advisers to assist them and many governments

have charged a transaction commission. Conditionality is difficult to address and

some countries have stopped participating in such conversions. The first debt for

70

nature swap in Bolivia involved policy changes which were difficult to implement and

provoked controversy. Since then only one more debt for nature swap involved policy

change. (Moye, 2001:8) Such controversy can be also eliminated by addressing the

countries’ priorities (one of UNICEF’s main elements) and by consulting the debtor

government.

I believe that the positive aspects of debt for sustainable development swaps

outweigh the possible disadvantages. However, it should be noted that they are not a

panacea for the debt burden, they should be viewed as a useful tool in debt reduction

and development and environmental promotion. (United Nations, 1990:4)

Despite of their positive impacts on the environment and development, debt

for sustainable development has been minimally implemented so far. Many

governments find them complex and many NGOs do not have the necessary

knowledge and experience to be able to engage in such arrangements. (Kanninen,

n.d.)

71

13. CONCLUSIONS FOR THE CZECH REPUBLIC

Czech Republic once belonged to generous lenders, especially during the

socialist regime. In order to assure further alliance from other communist countries

the Czech Republic supported most of the socialist world. Assistance was very often

provided in form of loans which were either used for investment or ‘technical’

purposes. (Stojanov, 2006)

There are no official reports about the present situation of developing

countries’ debt owed to the Czech state, and release of such information is currently

being reviewed in relation to the act 412/2005 coll. and international and commercial

agreements which the Czech Republic has to follow. We can only roughly estimate

the approximate amount of debts by putting together fragmented information from the

media. However, to large extent this information reflects the reality. (Vlkova,

personal communication, 10 April 2006)

Since 2002 the Czech Republic focuses its development assistance activities

on 8 priority countries: Angola, Bosnia and Herzegovina, Moldavia, Mongolia, Serbia

and Montenegro, Vietnam, Yemen and Zambia. Some countries such as Bosnia and

Herzegovina or Serbia and Montenegro represent ‘priority’ of the priority countries

(per oram, Petr Jelínek, 8 December 2005). It has been calculated (Novinky, 2005)

that former Yugoslavia’s debt owed to Czech Republic exceeds 2 billion Czech

crowns. Not having the exact data how the debt was divided after Yugoslavia ceased

to exist it is difficult to estimate the exact amount of debt owed by the successor

countries. However, it has been stated (Novinky, 2005) that Czech Republic and the

former Yugoslavia countries are preparing an agreement concerning further

repayments. Although this information did not come from an official source, I believe

there is still debt owed to Czech Republic by the respective countries.

72

Fig 14. Countries owing debts to Czech Republic, 2005 (mil. CZK)

Country Debt owed to Czech Republic Russia 8172 Iraq 7058.8 Former Yugoslavia countries 2213.2 Sudan 1941.9 Nicaragua 940.3 Iran 939.8 Burma 826.6 Syria 483.4 Albania 299.3 China 244.2 Democratic Peoples Republic of Korea 201.8 Afghanistan 78.2 Cambodia 63.0 Belarus 43.4 Slovenia 5.5 Laos 4.6 Cuba, Algeria, Libya

Classified information

Source: Novinky (27.11.2005), Zahraničí dluží Česku 37 miliard, nejvíc Rusko

Furthermore, I would like to focus on Serbia and Montenegro mainly because

it is classified as a severely indebted country, we can presume it still owes some assets

to the Czech republic and it is one of the ‘priority’ of the priority countries where

Czech development assistance is focusing its aims.

In the late 1990’s the European Union members agreed on three principles of

development assistance. These became known as “3Cs” which stand for coherence,

complementarity and coordination. Being a member of the EU the Czech Republic

should follow these principles. I find it incoherent to be assisting a country in its

further development on one side, and on the other to be receiving debt repayments.

Serbia and Montenegro is currently further from reaching the MDGs than it

was in 1990. In 1990 ‘only’ 7.3% of the population was considered poor, in 1999 it

was over 40%. Among these more than 18% lived in extreme poverty. Although the

situation has been improving high numbers remain and therefore Serbia’s primary

focus is the elimination of poverty.

73

Debt situation

The total external debt of Serbia and Montenegro is approximately $14.8

billion23. In 2001 former Yugoslavia received exceptional debt relief from the Paris

Club members of 66%. In 2004 the London Club also agreed to write off 62% of

former Yugoslavia’s debt. In 2002 the country concluded a three-year Extended Fund

Facility arrangement with the IMF which started the first phase of a 51% write-off. A

further 15% relief is expected from the Paris Club members. (see If there is a will,

there is a way)

Debt Indicators:

Net Present Value debt-to-export ratio 183%

Total debt to GNI: 72.6%

Fig 15. Debt Outstanding Serbia Montenegro

Debt Outstanding Serbia Montenegro

0

2000

4000

6000

8000

10000

12000

14000

16000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

US$

in M

illio

n

Short Term Debt

Private non guaranteed

Private Other

Private Banks

Private Bonds

Bilateral concessional

Bilateral non concessional

Multilateral concessional

Multilateral non concessional

Source: Kaiser, Kowsky & Schuleller (2006), Sovereign Debt in Central/Eastern European and Commonwealth of Independent States Countries

A recent study (Kaiser, Kowsky & Schuleller, 2006:68) states that for Serbia

and Montenegro macroeconomic risks in early 2005 continue to be high and despite

successful reschedulings, there remains a high risk of debt distress. The authors

23 $14,885 million estimated by GDF 2005 for 2003; $14,876 million according to Kaiser, Kowsky, Schuleller (2006:65)

74

suggest that since a high debt-to-GNI ratio prevails, and the country still has a

relatively high proportion of short-term debt, new debt renegotiation process with the

main creditors would be appropriate in order to strengthen the economy before the

proposed EU acceptance.

Looking at the information described above and learned in previous chapters I

believe debt for sustainable development swaps would be a good solution for Serbia

and Montenegro from the Czech point of view. Such agreements would ease the debt

burden and further assist the country in reaching their set goals as well as the MDGs.

On this basis, I am suggesting a debt-for-development and a debt-for-nature

swaps which are supposed to demonstrate debt-for-sustainable-development projects

from the Czech point of view. Each project is based on different principles with the

purpose to show different possibilities.

75

13.1 Model Projects

Debt for Nature Swap

Environmental protection in Serbia and Montenegro has suffered enormously

during the past several decades; at first, during the socialist regime, later during the

war in Kosovo. It is estimated (Ministry for the Protection, 2000) that warfare damage

to the environment in Serbia amount to more than $4 billion. The Government of

Serbia defined National Environmental Priorities (Ministry for the Protection, 2000)

which focus on:

Building and reinforcing of institutions and services relevant to the system of

environmental protection;

Adoption of Framework Law on System of Environmental Protection and

designing and implementation of the new Environmental Strategies;

Environmental Hot Spots remediation and the starting of problem realization

in waste and wastewater treatment;

The preparation and implementation of National Environmental Action Plan,

as well as other strategic relevant documents;

Development of the integral environmental information system;

Preparation of Local Environmental Action Plans.

The model project of debt for nature swap follows these priorities in order to

assist the country in achieving what they consider most acute. In particular the project

addresses building and reinforcing institutions and services relevant to the system of

environmental protection and environmental hot spot remediation.

Steps

1. The Czech government cancels 100% (depends on the agreement between the

countries, the cancelled amount does not necessary have to be 100%) of Serbia

and Montenegro’s debt.

2. The Ministry of Finance of Serbia and Montenegro will pay the equivalent of

agreed amount (might be 100% of the cancelled debt or less) over 5 years to a

special Environmental Fund.

3. The Fund will be governed by the Board of Directors which will include

representatives of both civil society organizations (mainly environmental) and

76

governmental institutions. The Board of Directors will also establish a Committee

for project selection.

4. The activities of the Fund will be supervised by the Board of Trustees which will

include representatives of the Federal government, international institutions such

as UNDP and a representative of the Czech Embassy.

5. The Fund could be managed on a daily basis by the Institute for Nature

Conservation or by Ministry for the Protection of Natural Resources and

Environment.

All necessary expenditures with the management would be covered from the

Fund. The Fund would primarily support environmental projects addressing the

national priorities such as capacity building and hot spot remediation. Majority of the

finances (80%) should be distributed to activities proposed by NGOs, academic or

government institutions, the remaining 20% would support activities of the private

sector.

77

Fig 16. Debt for nature swap, Czech Republic

Source: author

Government of Serbia and

Montenegro

Czech Government Board of Trustees

Environmental Fund

Training Projects

Capacity Building Projects

Ministry for the Protection of Natural

Resources and Environment /

Institute for Nature Conservation

Board of Directors

Environmental Hot Spots

Remediation Projects

Committee for Project Selection

Debt cancellation

Equivalent of cancelled debt

in local currency

Daily management Governing

Supervising

Funding for projects

Project selection

78

Debt for Development Swap

small size and financial resources of Czech NGOs it

As mentioned before, the level of poverty in Serbia and Montenegro has risen

The model debt for development project addresses the situation of the refugee

amps.

teps

Due to the considerably

would be almost impossible for a single NGO to acquire some debt on the secondary

market. A possibility might be a donation of the debt by a commercial creditor or an

assignment of the debt by the creditor government which will be the case of the

following model.

in the 1990. After 6 years of the end of the Kosovo conflict there are still refugee

camps. The Agency for Development Assistance and Humanitarian Aid of the

Olomouc Region, o.p.s. is aware of 15 refugee camps. The members (internally

displaced people) live in conditions that do not meet the basic standards. They seek

out food for themselves and they are not accepted by local communities. Although the

government is aware of the situation necessary steps are not taken in order to solve

the current state.

c The project activities may include a detailed analysis of the situation,

monitoring needs of the members, training schemes, educational and free-time

activities for children and so forth. After the analysis is completed further projects

might focus on helping the refugees join the local community and assisting them in

finding job positions. These activities only demonstrate many possible ways of how

the situation can be addressed.

S

e creditor government ‘donates’ the claim to an NGO under certain conditions.

3. tor Ministry of Finance will pay the equivalent of the agreed amount to

4.

ting

as a consultant in the project.

1. Th

2. The NGO then negotiates the value of the debt with the debtor government, and

because it received the debt for free, the NGO can swap the debt at a very low

price.

The deb

the local NGO. Payments can be made at once or over an agreed period of time.

The NGOs then use the resources for funding development project/program.

5. An experienced UN agency such as the UNHCR is a partner organization ac

79

Fig 17. Debt for development swap, Czech Republic

Source: author

le d advantage of such conversion is the conditionality the creditor

overnment may attach to the swap, such as limited price of the debt or the how the

attractive for Czech NGOs

es not require any financial investment or technical negotiation.

The possib is

g

money is going to be used. (Kaiser & Lambert, 1996:30)

However, I find this type of conversion as the most

because it do

Nonetheless, it should be noted that such conversions involve large amounts of

finances and thus the projects implemented under such swaps are large-scale,

therefore small-size NGOs should seek guidance and advice from experienced

‘swappers’.

Czech NGOGovernment of

Serbia and Montenegro

NGO in Serbia

assignment

Equivalent of cancelled debt

in local currency

Debt

Czech Government

cancellation

Debt for development project

implementation

Negotiateddebt

Educational programs for

children

Free time activities

Retraining schemes

Guidance, consultancyUNHCR

Detailed ananlysis

80

14. CONCLUSION

three decades of debt relief many countries are still

ve on the

nable development swaps also

is still insufficient research about the link between the cause and the

ef lies partially in the hands of multilateral

encie

countries is

After more than

experiencing difficulties with balancing their budgets. Finances are spent debt

repayments instead of education, health care and environmental protection.

The aim of this thesis was to show the impacts debt burden can ha

debtor countries and also show the possible solutions. Debt for sustainable

development swaps represent a new alternative not only for official creditors, but also

for non-governmental organizations. Although complex, they have dual positive

effect on the debtor country. They ease the debt burden and provide resources for

development programs and environmental protection.

However, it should be noted that debt for sustai

carry some negative aspects, and therefore an institution that would wish to

participate in such arrangements should seek out guidance from experienced

‘swappers’.

There

effect of indebtedness. More research will have to be done to show the exact impacts

of the debt burden on the environment and the society in the developing countries.

There is also not enough evidence about debt for sustainable development swaps.

Although, I believe, that successful examples have shown that such arrangement work

and mostly result in positive impacts.

The near future of debt reli

ag s. Neither of the International Financial Institution have so far applied such

methods. More influence from the civil society organizations is needed in order to

push for more alternative methods of debt relief. The debtor countries should more

often initiate such arrangements with their bilateral and official creditors.

The issue of debt relief and the impact of debt on the developing

very broad. A similar thesis could focus more on debt for sustainable development

swaps from the theoretical but also practical point of view. More evaluation and

monitoring need to be done, in order to show their positive impacts.

81

15. SUMMARY

The Bachelor thesis focuses on the problem of debt burden many developing

countries are facing now-a-days. Its purpose is to provide the reader with overall

information about the debt situation in the developing countries, show the solutions

that have been applied and subsequently failed, analysis the impact of indebtedness on

the environment and civil society in the developing countries, and seeks out possible

solutions for the contemporary state of environmental and social difficulties which are

directly or indirectly linked to the debt burden.

The first part of the work explains the history of indebtedness, which provides

basic facts about the circumstances of the past three decades when the debt situation

worsened. Afterwards key terms are explained and main actors such as the World

Bank and the International Monetary Fund are introduced. Furthermore, the thesis

looks closely on the solutions that have been applied by the international financial

institutions and so far failed to solve the problem. The work later focuses deeply on

the impacts of indebtedness on the environment and social society in the developing

countries. The near end of the work leads to possible solution in form of debt for

sustainable development swaps which preserve the environment and promote

development and ease the debt burden at the same time.

The last part of the thesis applies the gathered information and derives

conclusions for the Czech Republic. Two model project of debt for sustainable

development swaps demonstrate possible solutions from the Czech perspective.

KEY WORDS

Debt, relief, impact, environment, society, debt for nature swap, debt for development swap

82

16. LIST OF REFERENCES:

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http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/0,,contentMDK:20653660%7EmenuPK:72312%7EpagePK:51123644%7EpiPK:329829%7EtheSitePK:29708,00.html

http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/0,,contentMDK:20653660%7EmenuPK:72312%7EpagePK:51123644%7EpiPK:329829%7EtheSitePK:29708,00.html

http://web.worldbank.org/WBSITE/EXTERNAL/PUBLICATION/INFOSHOP1/0,,contentMDK:20121974%7EmenuPK:277863%7EpagePK:162350%7EpiPK:165575%7EtheSitePK:225714,00.html

http://web.worldbank.org/WBSITE/EXTERNAL/PUBLICATION/INFOSHOP1/0,,contentMDK:20121974%7EmenuPK:277863%7EpagePK:162350%7EpiPK:165575%7EtheSitePK:225714,00.html

http://siteresources.worldbank.org/INTDEBTDEPT/Resources/MDRIFactsheetpublicfinal.pdf

http://siteresources.worldbank.org/INTDEBTDEPT/Resources/MDRIFactsheetpublicfinal.pdf

http://www.worldbankgroup.org/

http://www.worldbankgroup.org/

WDM (October 2003) Treacherous Conditions. Colludo, Campaign briefing. London, World Development Movement. Acquired at the Eurodad Annual Conference, 30th November – 3rd December 2003. WELCH C. (September 2001) Structural Adjustment Programs & Poverty Reduction Strategy. Foreign Policy, In focus. Vol. 5, No. 14. [cited 04/05/2006] Available from: http://www.fpif.org/pdf/vol5/14ifsap.pdf WHIRELED BANK GROUP (2003) Structural Adjustment Program. [online] © 2003 [cited 24/04/2006] Available from: http://www.whirledbank.org/development/sap.html WIKIPEDIA, the free encyclopaedia (2006a) Amazon Rainforest. [online] Last modified May 11, 2006. [cited 12/05/2006] Available from: http://en.wikipedia.org/wiki/Amazon_Rainforest WIKIPEDIA, the free encyclopaedia (2006b) Angola. [online] Last modified May 13, 2006. [cited 14/04/2006] Available from: http://en.wikipedia.org/wiki/Angola WIKIPEDIA, the free encyclopaedia (2006c) Developing countries' debt. [online] Last modified May 7, 2006. [cited 14/04/2006] Available from: http://en.wikipedia.org/wiki/Third_world_debt WIKIPEDIA, the free encyclopaedia (2006d) G8. [online] Last modified 25 April, 2006 [cited 26/04/2006] Available from: http://en.wikipedia.org/wiki/G8 WIKIPEDIA, the free encyclopaedia (2006e) London Club. [online] Last modified 11 May, 2006 [cited 11/04/2006] Available from: http://en.wikipedia.org/wiki/London_club

WIKIPEDIA, the free encyclopaedia (2006f) Serbia and Montenegro. [online] Last modified May 8, 2006. [cited 05/05/2006] Available from: http://en.wikipedia.org/wiki/Serbia_and_Montenegro WIKIPEDIA, the free encyclopaedia (2006g) Structural adjustment. [online] Last modified 2 May, 2006 [cited 04/05/2006] Available from: http://en.wikipedia.org/wiki/Structural_adjustment_program WILLIAMS P. (n.d.) The IMF/World Bank Structural Adjustment Program and its Consequences for Guyana’s Environment: An Examination of the Mining and Forestry Sectors[online] [cited 09/05/2006] Available from: http://hdgc.epp.cmu.edu/mailinglists/hdgcctml/mail/pdf00006.pdf

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http://www.whirledbank.org/development/sap.html

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http://en.wikipedia.org/wiki/Angola

http://en.wikipedia.org/wiki/Third_world_debt

http://en.wikipedia.org/wiki/London_club

http://en.wikipedia.org/wiki/Serbia_and_Montenegro

http://en.wikipedia.org/wiki/Structural_adjustment_program

http://hdgc.epp.cmu.edu/mailinglists/hdgcctml/mail/pdf00006.pdf

17. ANNEXES

1. List of HIPC countries 2. HIPC procedure 3. Millennium Development Goals 4. Organizations focusing on the debt issue

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Annex 1

Source: WB (2006f), List of HIPC

93

Annex 2

Source: IMF (2000), HIPC procedure

Source: World Bank, List of HIPC countries

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Annex 3

The Millennium Development Goals are drawn from the Millennium

declaration which was adopted by 189 countries in 2000. Each goal has one or more

targets and indicators how progress is going to be measured. The MDGs should be

achieved by 2015.

Goal 1. Eradicate extreme poverty and hunger

Target 1: Reduce by half the proportion of people living on less than a dollar a day

Target 2: Reduce by half the proportion of people who suffer from hunger

Goal 2. Achieve universal primary education

Target 3: Ensure that all boys and girls complete a full course of primary schooling

Goal 3. Promote gender equality and empower women

Target 4: Eliminate gender disparity in primary and secondary education preferably

by 2005, and at all levels by 2015

Goal 4. Reduce child mortality

Target 5: Reduce by two thirds the mortality rate among children under five

Goal 5. Improve maternal health

Target 6: Reduce by three quarters the maternal mortality ratio

Goal 6. Combat HIV/AIDS, malaria and other diseases

Target 7: Halt and begin to reverse the spread of HIV/AIDS

Target 8: Halt and begin to reverse the incidence of malaria and other major diseases

Goal 7. Ensure environmental sustainability

Target 9: Integrate the principles of sustainable development into country policies and

programmes; reverse loss of environmental resources

Target 10: Reduce by half the proportion of people without sustainable access to safe

drinking water

Target 11: Achieve significant improvement in lives of at least 100 million slum

dwellers, by 2020

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Goal 8. Develop a global partnership for development

Target 12: Develop further an open, rule-based, predictable, non-discriminatory

trading and financial system Includes a commitment to good governance,

development, and poverty reduction — both nationally and internationally

Target 13: Address the special needs of the least developed countries Includes: tariff

and quota free access for least developed countries’ exports; enhanced programme of

debt relief for HIPCs and cancellation of official bilateral debt; and more generous

ODA for countries committed to poverty reduction

Target 14: Address the special needs of landlocked countries and small island

developing States

Target 15: Deal comprehensively with the debt problems of developing countries

through national and international measures in order to make debt sustainable in the

long term.

Target 16: In cooperation with developing countries, develop and implement

strategies for decent and productive work for youth.

Target 17: In cooperation with pharmaceutical companies, provide access to

affordable essential drugs in developing countries

Target 18: In cooperation with the private sector, make available the benefits of new

technologies, especially information and communications

(UNDP, 2006)

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Annex 4

Many NGOs from the ‘developed’ as well as developing countries are

focusing on the debt issue either from the analytical or campaigning perspective. This

section names only a few but major ones.

AFRODAD

The African Forum and Network on Debt and Development, is a civil society

organisation born of a desire to secure lasting solutions to Africa’s mounting debt

problem which has impacted negatively on the continent’s development process.

www.afrodad.org

Bretton Woods Project

The Bretton Woods Project works as a networker, information-provider, media

informant and watchdog to scrutinise and influence the World Bank and International

Monetary Fund. Through briefings, reports and the bimonthly digest Bretton Woods

Update, it monitors projects, policy reforms and the overall management of the

Bretton Woods institutions with special emphasis on environmental and social

concerns. brettonwoodsproject.org

Debt and Development Coalition Ireland

The Debt and Development Coalition Ireland (DDCI) is composed of organisations

and individuals who share a deep concern about the injustice of the debt crisis and a

commitment to work together for an effective, fair and speedy solution to the crisis.

www.debtireland.org

EURODAD

The European Network on Debt and Development, is a network of 48 development

non-governmental organisations from 15 European countries working for national

economic and international financing policies that achieve poverty eradication and the

empowerment of the poor. www.eurodad.org

97

http://www.debtireland.org/

http://www.debtireland.org/

IFIwatchnet

IFIwatchnet is an international network which connects organisations worldwide

which are monitoring international financial institutions (IFIs) such as the World

Bank, the IMF, and regional development banks. www.ifiwatchnet.org

Jubilee Debt Campaign

Jubilee Debt Campaign is the UK's campaigning successor to Jubilee 2000 and Drop

the Debt. It is a coalition of local/regional groups and national organisations. JDC

focus is on changing UK government policy on debt, including to ensure that the

maximum influence is brought to bear on the World Bank and International Monetary

Fund - on whose governing bodies the UK is represented.

www.jubileedebtcampaign.org

Jubilee Research

Jubilee Research is part of the Global and National Economics (GNE) programme at

NEF. It is also the UK's campaigning successor to Jubilee 2000. Jubilee Research

provides up-to-date, accurate research, analyses, news and data on international debt.

www.jubileeresearch.org

Jubilee South

Jubilee South is a network of jubilee and debt campaigns, social movements,

people's organizations, communities, NGOs and political formations. The Jubilee

South network aims to and is in the process of emerging and developing as an

international South movement on the debt. It has members from over 40 countries

from the regions of Latin America and the Caribbean, Africa and Asia/Pacific,

composed of 85 groups. www.jubileesouth.org

NEF

New Economics Foundation is an independent think-and-do tank that inspires and

demonstrates real economic well-being. nef works with all sections of society in the

UK and internationally - civil society, government, individuals, businesses and

academia - to create more understanding and strategies for change.

www.neweconomics.org

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