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Last Updated: Saturday, 11 June, 2005, 16:20 GMT 17:20 UK
Q&A: African debt relief
By Andrew Walker
BBC economics correspondent

Children in Ethiopia
Poverty has been increasing in many African countries

Relieving the burden of debt on poor countries is at the top of the agenda for July's G8 summit of the word's richest countries.

G8 finance ministers agreed at a meeting in London on 11 June to write off $40bn in debt owed by 18 of the world's poorest countries, most of them in sub-Saharan Africa.

BBC News looks at the progress of debt reduction efforts, and the sticking points which continue to hamper the process.

Why has debt relief become such an important issue?

This year is an important stage in efforts to achieve a set of targets known as the millennium development goals for reducing poverty and related problems. These efforts will be a key theme for the G8 summit in Gleneagles, Scotland in July, and at the United Nations summit in September in New York.

Britain is hosting the G8 summit this year and can more or less set the agenda.

Tony Blair has chosen climate change and Africa as the big themes, and he - and Gordon Brown - want the G8 to agree action in three key areas. They have been calling for 100% debt relief for the poorest countries, a large increase in development aid and changes to world trade rules that to make it easier for African economies to grow.

Who is the money owed to?

Most of the very poor countries in sub-Saharan Africa owe money to rich country governments and to international organisations - the main ones being the World Bank, the IMF and the African Development Bank. Oil-rich Nigeria is an important exception.

About 80% of the debt is to rich country governments, but African countries also owe money to private sector lenders.

Although they are not nearly as large as the debts owed to governments and organisations, some creditors have taken court action in an effort to secure full repayment.

How much difference could debt relief make for poor countries?

If poor countries don't have to spend so much on debt payments, they can use the money instead for things which help reduce poverty.

Among the most common priorities are basic health-care and education and improving roads in rural areas - which is where poverty is often at its worst.

That said, countries which have already been through the current crop of debt relief initiatives are still paying about $2.5bn to service their remaining debts.

What debt relief programmes already exist?

The main one is the Highly Indebted Poor Countries Initiative (HIPC) which was launched in 1996 and for which a total of 38 countries, mostly in Africa, are in principle eligible.

To qualify, countries have to be very poor and have a very heavy debt burden.

They also have to maintain economic stability and produce a strategy for reducing poverty.

A total of 18 have reached what is called the "completion point" - the end of the HIPC process. These are the countries that will immediately benefit from the plan announced in London on 11 June.

Another nine have got to the "decision point", at which debt relief starts to kick in.

The World Bank says the total debts of these 27 countries went from $80bn to $28bn as a result of HIPC and other debt relief initiatives.

It also says that what it calls "poverty-reducing expenditure" went from 40.9% of government revenue in 1999 to 48.5% in 2003.

There are another 11 HIPC countries yet to reach their decision points. Most have had difficulties such as internal conflicts, which have prevented them doing all that is required for debt relief under the initiative.

Why has it taken so long to reach a final agreement?

There have been disagreements about how to fund the debt relief.

Extra money will be needed from the G8 nations so that the World Bank and African Development Bank will not have to take all the cost themselves - that could mean less new aid money being available.

There has been a disagreement about whether to sell gold from the IMF's reserves to pay for debt relief, a policy which the US opposes.

This idea appears to have been ruled out, however. At the G8 meeting in London, UK Chancellor Gordon Brown said the write-off of debts owed to the IMF would be funded from the IMF's existing resources.

It remains unclear just how many countries would benefit from further debt relief, or exactly what conditions they would have to meet.


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