Multilateral Debt: A Growing Crisis
What is Multilateral Debt?
Multilateral debt is the debt owed by developing countries to the
World Bank and International Monetary Fund (IMF), known as the
Bretton Woods Institutions (BWIs). In the last
decade these institutions have become the major creditors of the developing
world.
Why is it a Problem?
The most severely indebted countries of the developing world are
trapped on a debt treadmill forced to take new loans to pay old
ones or risk default and potential economic collapse. Sub-Saharan
African countries, for example, paid more in debt between 1990 and
1993 than they spent on health care and education. Still they
watched their debt load double. As Southern governments reel under
financial pressure to generate foreign currency to pay the rising
debt, poverty and environmental devastation increase. This
situation is becoming increasingly unsustainable, economically,
socially, and environmentally.
How Much is Owed?
Between 1980-1994, the total developing country multilateral debt
rose from US$61.6 billion in 1980 to US$313 billion in 1994.
How Did Multilateral Debt Grow?
This dramatic increase came as a result of a series of lending
packages imposed by the IMF on debtor countries to ensure that
commercial bank debt was serviced. A significant amount of new IMF
and World Bank funds was used to repay outstanding interest on
debts owed to commercial banks. For example, from 1983 to 1989,
US$32.7 billion in loans from multilateral sources went to service
commercial bank debt, representing 17 per cent of total debt
service over the period.
The various rescheduling plans of the 1980s, have resulted in a
situation in which the IMF and the International Bank for
Reconstruction and Development (IBRD-the non-concessional wing of
the World Bank) are receiving far more in debt servicing from the
poorest countries than they are lending. As the graph indicates,
the multilateral debt problem affects the poorest countries with
high debts most severely. Debt servicing obligations to
multilateral institutions ros from less than $8.5 billion in 1982
to almost $40 billion in 1994, an almost five-fold increase. In
most cases, debt service to multilateral banks takes precedence
over all other debt service requirements.
How Have the Bretton Woods Institutions Responded to the
Problem?
The Bretton Woods institutions have
compelled
developing countries to re-organize their economies around the priority of
regularly servicing their multilateral debt. These programmes,
known as "structural adjustment programmes" or
SAPs are designed to increase foreign investment, boost foreign exchange
earnings and
reduce government deficits (see brief on "Structural
Adjustment").
The World Bank's International Development Association (IDA),
which is the arm of the Bank set up to provide concessional loans
and grants to the poorest countries, now provides a significant
amount of these funds for "structural adjustment support"
programmes. The World Bank also provides debt relief through a fund
known as the International Development Association's Debt Reduction
Facility and the so-called "Fifth Dimension" Fund. The IMF created
an Enhanced Structural Adjustment Facility (ESAF) which channels
aid dollars from donor countries to the poorest countries on more
concessional terms.
However, there is growing concern that most foreign aid to
indebted low-income countries simply goes straight back into the
coffers of the World Bank and IMF, because this aid is being used
to service outstanding World Bank/IMF debt.
How Can the Problem be Solved in the Short-Term?
In spite of international attempts to restructure debt
repayment plans, the extent of the debt trap for the most indebted
countries means that only debt reduction or outright cancellation
will offer any hope of economic, social and environmental recovery.
What is the Role for Canada?
Canada has provided some moral leadership in providing debt
relief by cancelling bilateral debts to sub-Saharan Africa and a
number of Caribbean countries, as well as offering debt-swapping
conversions for Latin American debt. However, Canada has been
unwilling to call for significant measures to deal with the problem
of multilateral debt.
The Canadian and other G-7 governments should call on IMF and World
Bank to cancel or reduce debts owed by severely indebted counries.
A series of concrete proposals have been advocated by
non-governmental organizations(NGOs) and international debt experts
as follows:
- the sale of IMF gold stocks to cancel debt owed to the IMF by low
income countries, and a reduction of debt owed by severely indebted
middle income countries;
- the use of existing IMF resources (known as "Special Drawing
Rights") to pay off debt;
- use of the World Bank's profits of close to US$14.5 billion to
reduce or cancel debts of severely indebted countries;
- cancelling undisbursed balances of World Bank loans and credits
made for projects that have proven to be non-viable;
- permit the repayment of multilateral debt in local currency.
Are These Measures Enough?
The debt crisis must be viewed as an integral feature of a
development model based on over-consumption by the few and
increasing disparities between rich and poor. Incorporating
concerns regarding debt into the larger context of more just global
economic and social policies and ecological sustainability poses
one of the greatest challenges over the coming years.
Therefore, while steps to cancel multilateral debt are critical,
a resolution of the Third World debt crisis must be accompanied by
the fundamental reform of the international financial system which
precipitated the crisis in the first place (see brief on "Reforming
the Bretton Woods Institutions").
What are the alternatives models for the future?
Alternative microeconomic finance and banking strategies are
being developed at the local level. Small-scale alternative
strategies receiving increasing attention include community-based
credit schemes which operate outside the traditional banking
structure and which do not result in borrowers falling into the
debt trap. In particular, these schemes have been successful in
targeting the rural and urban poor, especially women, who often
have no access to traditional sources of credit.
If our loans and aid are truly meant to help the poor, then
providing the poor with access to credit is one concrete and proven
measure to achieve this goal.