Doing nothing for Ethiopia

A briefing by Jubilee Research at New Economics Foundation

1 March 2004


Twenty years ago, Bob Geldof, at the launch of Live Aid, argued: “Doing nothing for Ethiopia would mean you were complicit in murder.” This briefing is produced by Jubilee Research at nef (the new economics foundation) in February 2004 — 20 years after Live Aid, and one year after Ethiopia’s worst drought in history. We explain how G7 creditors, having promised substantial debt relief, have stalled the disbursement of relief, and are doing nothing for Ethiopia; this despite the fact that according to their own commitments and rules she is fully entitled to this relief. “Doing nothing for Ethiopia” we argue, is once again to be “complicit in murder”. Why? Because if Ethiopia is denied additional debt relief, her government will lose US$1 billion in new money, and be obliged to divert US$35 million [a year] to service debt repayments to much richer creditors. This money could instead be used for hospitals, clean water and sanitation.

Introduction

Late in 2003, the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
(Fund) and the World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

(Bank) deemed Ethiopia eligible for an additional US$700 million (“Topping Up”) debt relief. Such relief is necessary to return Ethiopia to sustainability, according to the Bank and make her eligible for US$1 billion in new lending. If Ethiopia does NOT receive topping up then the Government will have to spend an average of about $35 million per year more in debt service Debt service The sum of the interests and the amortization of the capital borrowed. over the next 10 years. In other words, getting the additional debt relief to lower Ethiopia’s ratio of present value of debt to exports to 150 per cent will reduce the annual debt service cost by about US$35 million per year over 10 years.

Jubilee Research at nef has been reliably informed that this promised relief is being delayed and blocked by the US with the tacit support of Germany and Japan. This is particularly ironic, as the Enhanced HIPC Heavily Indebted Poor Countries
HIPC
In 1996 the IMF and the World Bank launched an initiative aimed at reducing the debt burden for some 41 heavily indebted poor countries (HIPC), whose total debts amount to about 10% of the Third World Debt. The list includes 33 countries in Sub-Saharan Africa.

The idea at the back of the initiative is as follows: a country on the HIPC list can start an SAP programme of twice three years. At the end of the first stage (first three years) IMF experts assess the ’sustainability’ of the country’s debt (from medium term projections of the country’s balance of payments and of the net present value (NPV) of debt to exports ratio.
If the country’s debt is considered “unsustainable”, it is eligible for a second stage of reforms at the end of which its debt is made ’sustainable’ (that it it is given the financial means necessary to pay back the amounts due). Three years after the beginning of the initiative, only four countries had been deemed eligible for a very slight debt relief (Uganda, Bolivia, Burkina Faso, and Mozambique). Confronted with such poor results and with the Jubilee 2000 campaign (which brought in a petition with over 17 million signatures to the G7 meeting in Cologne in June 1999), the G7 (group of 7 most industrialised countries) and international financial institutions launched an enhanced initiative: “sustainability” criteria have been revised (for instance the value of the debt must only amount to 150% of export revenues instead of 200-250% as was the case before), the second stage in the reforms is not fixed any more: an assiduous pupil can anticipate and be granted debt relief earlier, and thirdly some interim relief can be granted after the first three years of reform.

Simultaneously the IMF and the World Bank change their vocabulary : their loans, which so far had been called, “enhanced structural adjustment facilities” (ESAF), are now called “Growth and Poverty Reduction Facilities” (GPRF) while “Structural Adjustment Policies” are now called “Poverty Reduction Strategy Paper”. This paper is drafted by the country requesting assistance with the help of the IMF and the World Bank and the participation of representatives from the civil society.
This enhanced initiative has been largely publicised: the international media announced a 90%, even a 100% cancellation after the Euro-African summit in Cairo (April 2000). Yet on closer examination the HIPC initiative turns out to be yet another delusive manoeuvre which suggests but in no way implements a cancellation of the debt.

List of the 42 Heavily Indebted Poor Countries: Angola, Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Comoro Islands, Congo, Ivory Coast, Democratic Republic of Congo, Ethiopia, Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Kenya, Laos, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Myanmar, Nicaragua, Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Somalia, Sudan, Tanzania, Togo, Uganda, Vietnam, Zambia.
Initiative was largely the creation of the German government, which obtained G8 G8 Group composed of the most powerful countries of the planet: Canada, France, Germany, Italy, Japan, the UK and the USA, with Russia a full member since June 2002. Their heads of state meet annually, usually in June or July. endorsement for more generous debt relief for countries like Ethiopia at the Cologne Summit of 1999. Furthermore, the denial of legitimate relief for Ethiopia is in stark contrast to the generous relief being considered for Iraq - whose future export revenues are projected to be 35 times those of Ethiopia.

In response to our demands that they proceed to implement their own rules and commitments, the US Treasury has argued that it is concerned that Ethiopia would have an excuse to borrow more from the Bank. “We are concerned about the bank being in a position where it is in a continual cycle of lending and forgiveness” said a US Treasury Official (FT 12 February 2004), to which we at Jubilee Research retort: the US should encourage the Bank to grant more aid - just as President Bush argued in July 2001. “Grants”, he said, “were the long-term solution to the debt burden of developing countries ... 50% of the funds, provided by Development Banks to the poorest countries be provided as grants for education, health, nutrition, water supplies, sanitation and other human needs.” (BBC News)

Ethiopia’s debt is not sustainable

Ethiopia needs additional debt relief, over and above that already granted, if she is to become sustainable, argue the Bank and the Fund. Under their stringent conditions, the external debt of poor countries is considered sustainable at no more than 150 per cent of that country’s annual export revenues. Under current debt relief arrangements Ethiopia’s ratio would be considerably higher.

To be eligible for debt relief, Ethiopia has met with the tough economic conditions set by creditors, and imposed through the Fund and the Bank, over the long five-year process of qualifying. Ethiopia has now, finally, reached completion point of the Enhanced HIPC process. Without the additional topping up — US$700 million that she has been promised and is now eligible for — the Bank and the Fund believe that Ethiopia will not emerge from an unsustainable level of indebtedness. If additional relief is denied, the Bank and Fund project that Ethiopia’s debt-to-export revenues ratio will rise to at 220 per cent after the full delivery of debt relief - fully 70 per cent above that considered sustainable.

Jubilee Research at nef has been reliably informed that although the Bank and the Fund finalised Ethiopia’s Debt Sustainability Analysis as far back as November 2003, publication of the Board paper that would move Ethiopia to completion point in the debt relief process is being delayed by the opposition of powerful Fund and Bank shareholders - notably the US, Germany and Japan. These creditors are attempting to bypass the HIPC framework, and in particular the principle of topping up debt relief for poor countries in the event of external shocks.

In other words two of the world’s richest creditors are attempting to adopt arbitrary criteria to deny a small and very poor country US$700 million of debt relief. If Ethiopia is denied this relief, debt service payments will be an additional US$35 million per year for the next 10 years. Worse, this denial of debt relief will prevent the World Bank from disbursing to Ethiopia a new, promised loan of US$1 billion - because HIPC rules prevent the Bank from lending to countries deemed unsustainable.

US$700 million of debt relief will have a significant impact on the Ethiopian economy as it represents almost twice the revenues from national exports per year. A fall in debt servicing of US$35 million per year will provide a significant fillip to Ethiopia’s budget for health, education, water and other vital services. Furthermore, if Ethiopia is to achieve its Millennium Development Goals - goals set by creditors like Germany and the US - additional debt relief, new loans and aid are urgently needed.




Source: 50 Years Is Enough: U.S. Network for Global Economic Jutice http://www.50years.org February 13, 2004.

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