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debt

Something that is owed by a person, organization, or country, usually money, goods, or services. Debt usually occurs as a result of borrowing credit. Debt servicing is the payment of interest on a debt. The national debt of a country is the total money owed by the national government to private individuals, banks, and so on; international debt, the money owed by one country to another, began on a large scale with the investment in foreign countries by newly industrialized countries in the late 19th to early 20th centuries. By the end of the 20th century, the two main types of debt in developing countries were multilateral debt (owed to international financial institutions such as the World Bank) and bilateral debt owed to governments, either for aid loans or export credit guarantee department (ECGD) loans (made to underwrite exports). International debt became a global problem as a result of the oil crisis of the 1970s. Debtor countries paid an ever-increasing share of their national output in debt servicing (paying off the interest on a debt, rather than paying off the debt itself). In 1996 the World Bank and International Monetary Fund (IMF) introduced the Heavily Indebted Poor Countries (HIPC) debt-relief initiative, a debt-relief programme. The Cologne Debt Initiative (or HIPC2), launched by the Group of Eight (G8) industrialized nations in 1999, sought to speed up this process and release funding for poverty reduction.

Debt relief

By the 1980s, countries such as Mexico and Brazil had reached a debt-servicing ratio (proportion of export earnings which is required to pay off the debt) of more than 50%, but disagreement over who should bear the cost of debt relief delayed any real reform. Austerity measures imposed by the and International Monetary Fund (IMF) in exchange for loans provoked riots and an increase in nationalist sentiment. International debt spiralled as debtor countries took further loans in order to repay existing debts. The debtor countries paid more than $1,300 billion between 1982 and 1990, yet their debt increased by 61%. Africa transferred $10 billion a year (1993) to the rich countries in debt repayments. Banks in the creditor countries had received $44–50 billion in tax relief on bad debts by 1993.

In order to provide debt relief for low-income member countries, the IMF and World Bank launched the Heavily Indebted Poor Countries (HIPC) initiative in 1996. Countries eligible for HIPC relief have their debts to multilaterals, and ECGD debts to governments, reduced. Governments associated with the initiative, such as the UK, contribute to a trust fund towards the costs of the multilaterals reducing debts. In 1999 members of G8 launched the Cologne Debt Initiative to provide funds for development aid programmes, and expand and speed up the debt relief process. It aimed to cancel $70 billion by the end of 2000, but failed to reach this target. In December 1999, the UK announced its decision to write off the debt payments made by the world's poorest countries. By April 2001, 22 low-income countries were benefiting from debt relief of around $20 billion provided by the IMF, World Bank, and other creditors. However, the global debt-relief campaigners Jubilee 2000 said that 16 of these countries continued to spend more on debt servicing than health.

Countries qualifying for relief under the HIPC initiative by the end of 2000 were Benin, Bolivia, Burkina Faso, Cameroon, Gambia, Guinea, Guyana, Guinea-Bissau, Honduras, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, São Tomé and Príncipe, Rwanda, Senegal, Tanzania, Uganda, and Zambia. Eligibility for HIPC relief is decided by analysis of a country's economy and its plans for using the relief. However, the process is slow as many developing countries lack the expertise to create detailed proposals. They may also be asked to implement reforms, such as privatization schemes, that counter government policy or ideology. Debt-relief may also be postponed if it is suspected that money released will be used to fund military conflict rather than fighting poverty. The failure of some parties, such as the USA, Japan, and the EU, to meet promised levels of funding also hamper the debt-relief initiatives.

History of the debt crisis As a result of the Bretton Woods Conference in 1944, the World Bank (officially called the International Bank for Reconstruction and Development) was established in 1945 as an agency of the United Nations to finance international development, by providing loans where private capital was not forthcoming. Loans were made largely at prevailing market rates (‘hard loans’) and therefore generally to the industrialized countries, who could afford them.

In 1960 the International Development Association (IDA) was set up as an offshoot of the World Bank to provide interest-free (‘soft’) loans over a long period to finance the economies of industrializing countries and to assist their long-term development. The cash surpluses of Middle Eastern oil-producing countries were channelled by Western banks to countries in the developing world. However, a slump in the world economy, and increases in interest rates, resulted in the debtor countries paying an ever-increasing share of their national output in debt servicing (paying off the interest on a debt, rather than paying off the debt itself). As a result, many loans had to be rescheduled (renegotiated so that repayments were made over a longer term). For the Western industrialized countries, the possibility of a confidence crisis causing panic withdrawals of deposits and consequent collapse of the banking system finally prompted multilateral organizations and governments to look at ways of offering debt relief to lower-income countries.

In 1987 the world's largest bank, Citibank of New York, announced that it was writing off $3 billion of international loans, mainly owing to Brazil's repeated rescheduling of debt repayments. Brazil began making repayments on its debt in 1988, and the USA and Mexico negotiated reduction plans. Poland, which ceased making repayments on international debts 1980–81, received substantial loans in 1990 from the USA and Western Europe to assist its transition to a market-based economy. Progress towards debt relief for low-income countries was made with the launch of the HIPC initiative in 1996.