JOHANNESBURG (IRIN) — The Jubilee Debt Campaign is calling for an immediate US$400 billion debt cancellation for developing countries to avoid returning to a 1980s-style crisis.
In the era of the ‘credit crunch’, where bail-outs and stimulus packages are often quoted in trillions of US dollars, Nick Dearden, a Jubilee director based in London, said debt cancellation would enable the world’s 100 poorest countries to fight poverty and relieve some of the devastating effects of the global recession on their economies.
To put it in perspective, Dearden said, the US government’s bail-out of one insurance company, American International Group (AIG), could have wiped out the entire debt of all sub-Saharan Africa countries.
The Jubilee report, ‘A New Debt Crisis – Assessing the Impact of the Financial Crisis on Developing Countries,’ warned that even before the effects of the global slowdown began to be felt, the World Bank had calculated that 38 of 43 indebted countries ‘required substantial debt cancellation’ to meet the needs of their people.
The Jubilee 2000 campaign for a one-off cancellation of the unpayable debts of the poorest countries, under a fair and transparent process, began in 1996 and led to a commitment by developed countries to write off $100 billion of poor country debt.
Dearden said pronouncements in 2005 by leaders of the developed world had created an impression that the debt of developing nations would be cancelled, but this had not occurred.
‘Today developing countries’ debt stocks stand at a staggering US$2.9 trillion, and every day the poorest countries pay the rich world almost US$100 million in debt repayments,’ the Jubilee report said.
The debt crisis afflicting the developed world was in many ways a mirror image of the debt albatross developing countries had been unable to shake in the past few decades, the report commented.
The debt trap
In the aftermath of World War II and the onset of decolonization, banks freely lent money to newly independent states; spurred by the geo-political concerns of the Cold War, governments often put a higher premium on political influence than financial prudence.
‘The situation was dramatically intensified in the 1970s, when cheap money flooded the financial markets and banks lent it on to poor countries without regard for what it was being spent on and whether it could be repaid,’ the report said.
‘The change in the economic situation from the late 1970s, with rising interest rates, deflation and falling commodity prices, caught developing countries in a spiraling debt trap.’
By 2005, Nigeria – then Africa’s largest oil exporter – had amassed a $30 billion debt from loans totaling $8 billion, made by military governments in the 1970s. The Paris Club, a group of rich creditor countries, canceled $18 billion, leaving the now democratic country liable for $12 billion in debt repayments, Jubilee said.
”Private capital flows to developing countries could fall to around US$165 billion in 2009. This is less than half the US$466 billion of 2008, and down 82 percent on the peak year of 2007”
In the current financial crisis the export markets of developing countries have collapsed and foreign capital has been withdrawn – resulting in rapidly depreciating exchange rates between local currencies and the dollar, the usual currency for debt repayments – while risk aversion has raised borrowing costs.
‘Private capital flows to developing countries could fall to around US$165 billion in 2009. This is less than half the US$466 billion of 2008, and down 82 percent on the peak year of 2007,’ Jubilee pointed out.
Recession in developed countries was also leading to a possible decrease in aid funding and lower export demands, as well as a smaller volume of remittances – $305 billion in 2008, about three times global aid levels.
Developing countries have become net food importers, making them even more vulnerable than they were a few decades ago. ‘A food trade surplus of US$1.9 billion in the 1970s was transformed into a US$17.6 billion deficit in 2000 and a US$9.3 billion deficit in 2004,’ Jubilee noted.
‘Jubilee Debt Campaign estimates that at least US$400 billion should be canceled for around 100 countries if they are to be able to pay for essential services for their people without having to tax those below the poverty line.’
Zambia – a case in point
The money saved by canceling $6.6 billion of Zambia’s debt in 2005 – leaving it with about $2.1 billion outstanding – has been used to eliminate or reduce school and health fees, fund agricultural projects and infrastructure development, Jubilee said. About two-thirds of Zambians live on $1 or less day.
”With Zambia’s export levels now plummeting, there is a real danger its debts will become unsustainable once more”
The collapse of the copper price – affecting about three-quarters of Zambia’s foreign currency earnings – and international investors shying away from large-scale infrastructural projects, are pushing the country towards an unpalatable future.
The World Bank uses the ratio of a country’s export earnings to debt as an indicator of its debt sustainability. ‘With Zambia’s export levels now plummeting, there is a real danger its debts will become unsustainable once more,’ Jubilee said.
‘A rough calculation would now put Zambia’s debt-to-export ratio at around 300 percent. This is more than double the 150 percent threshold considered sustainable by the World Bank.’