Debt: This Hot Potato Just Gets Hotter

As the Third World's burden rises, so do hurdles to forgiving it

Drop the Debt! That is the battle cry of protesters who soon will fill the streets of Washington, D.C., for the annual meetings of the World Bank and International Monetary Fund. Debt forgiveness does seem like the easiest way to fix the absurd financial plight facing destitute countries. At a time when infectious diseases and famine threaten millions of lives, 39 of the world's poorest nations are struggling to repay $150 billion owed to rich nations and multilateral institutions. In fact, many African nations spend more on debt service than on education or health. So rather than focus on more foreign aid, why not just write off the debt?

Easier said than done. Global agencies have been trying to erase the debt of the poorest nations for six years, with mixed results. The World Bank-IMF strategy, the Heavily Indebted Poor Countries (HIPC) initiative, seems sensible: Rich nations cancel roughly two-thirds of debt for countries deemed too poor to pay. So that relief is not wasted, debtor nations must heed IMF-approved economic reforms and fiscal policies for two years. And they must spend the savings directly on education, health care, and other poverty-reduction programs. Then, with their finances in order, these nations presumably would be on track to sustain healthy growth.

But so far, only six nations have qualified for outright debt cancellation: Bolivia, Burkina Faso, Mauritania, Mozambique, Tanzania, and Uganda, which together have had $12.2 billion in loans written off. The program has led to dramatically higher spending on health care and education in these nations. But several of them are sliding back into a debt trap due to weak exports or renewed borrowing. Twenty other nations are in limbo. They are getting temporary debt relief, but they have yet to meet economic targets or comply with a gaggle of IMF conditions. Eight other basket cases, including Somalia and Liberia, are too corrupt, strife-torn, or ill-managed even to negotiate seriously.

Drop-the-debt crusaders are demanding speedier action. "This is unconscionable," says Mara Vanderslice, spokesperson for the activist group Jubilee USA Network. "Debt cancellation should be provided immediately without unreasonable IMF conditions." Other poverty experts want the HIPC to be simplified. "It's time to seriously rethink the entire process of debt relief," says Nancy Birdsall, president of Washington's Center for Global Development.

The biggest holdup is getting countries to agree to and honor detailed policy plans meant to promote long-term growth. Honduras, for example, wants to hike civil-servant pay more than the IMF thinks is fiscally prudent. Debt-reduction programs have stalled in Guyana and Nicaragua partly because the IMF insists they move faster to privatize state-owned sugar companies, airlines, and utilities.

Plunging commodity prices also are a complication. The HIPC's goal is to reduce a country's debt to less than 150% of exports and annual debt service to 8% of exports. Debt cuts for many nations were based on projections that exports would rise. Instead, world prices for key commodities like cotton, copper, and fish are falling. Uganda, a model reformer, now needs new debt relief because coffee prices have dropped 53% over three years.

The IMF and World Bank are unlikely to unveil any major changes this year. Instead, they are urging patience. If all 26 countries now receiving help under the HIPC stick to reform commitments, they will see their debts cut by $40 billion by 2004, enabling them to hike social spending to 9% of gross domestic product, from an average of 6% in 1998. "The international community wants to help countries that help themselves," says Vikram Nehru, the World Bank's HIPC manager.

Indeed, some skeptics think international agencies are too soft. To placate critics, says former World Bank economist William Easterly, countries like Cameroon are on a fast track for relief despite weak progress in cleaning up corruption and bad policy. "This creates terrible incentives for countries to borrow more in the expectation new debts will be forgiven," he says. Whether they think the HIPC is too demanding or too lenient, on this most critics agree: The mountain of debt burying poor nations is going nowhere fast.

By Pete Engardio in New York

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