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Last Updated: Tuesday, 11 January, 2005, 23:58 GMT
Will debt relief make a difference?
By Orla Ryan
BBC News business reporter

The world's richest countries are getting ready to grant a debt moratorium to countries affected by the tsunami.

But critics question whether the proposals - to freeze payments for a year or more - go far enough.

Some argue that the debt should be cancelled, not just temporarily suspended.

Others say the debt moratorium is ill-conceived, designed to reflect well on the world's richest countries while achieving little for the world's poorest.

More needed

Emergency aid will be needed even if debt payments are suspended, the Jubilee Debt Campaign (JDC) said in a statement.

It hopes that the moratorium - to be discussed at a meeting of the Paris Club of creditor nations on Wednesday - will become a vehicle for wider debt restructuring.

JDC wants all the debt to be 'dropped', trade to be made fair and aid to be delivered effectively.

Gordon Brown
UK Chancellor Gordon Brown is a leading light of the debt relief campaign

Ultimately, it says that sovereign and commercial creditors can afford to cancel the debt.

But even as it campaigns for greater debt relief, the JDC voices fears that lender countries will substitute debt relief for aid.

JDC campaigner Ashok Sinha says that while it is widely anticipated that the UK's contribution to debt relief will come on top of planned aid spending - it is not clear whether money spent on debt relief by other countries will come from their aid budget.

Freeing up cash now could also mean bigger payments in a few years time, Standard Chartered's Indonesian economist Sauzi Ichsan said.

Conditions attached?

The devil may be in the detail of the debt relief.

Given that the recipient countries are struggling to meet repayments because of a natural disaster, Indonesia has argued that there shouldn't be any conditions attached to the debt relief.

Campaigners agree - pointing out that attaching economic conditions to debt effectively deprives countries of the right to decide on their own economic policy.

The Indonesian central bank has said that the only condition it will accept is that the money should be spent on reconstruction in Aceh.

Others say that conditions - linked to either governance or economics - are needed to ensure the money is not squandered.

Total external debt per country
Indonesia $132.2b
India $104.4bn
Thailand $59.2bn
Malaysia $48.6bn
Sri Lanka $9.6bn
Somalia 2.7bn
Seychelles $560m
Maldives $270m

The fact that the central government has been fighting separatist rebels in Aceh for several years could cast doubt on the sincerity of their intention to spend the money there.

Peter Hardstaff, head of policy at pressure group World Development Movement says that all debt relief requires an act of faith in the recipient's democratic credentials.

"If that faith isn't there...then perhaps you are wasting your time. That is a judgement for the lender to make," he admitted.

Borrowing again

Debt relief might bring in the cash in the short term but can make it more difficult for countries to borrow money in the longer term.

The tsunami debt relief is expected to be confined to official government debt, a move which should protect Indonesia from the possibility of a credit rating downgrade, ratings agency Standard & Poor's said.

Forcing a restructuring of private debt would be well intentioned but ill conceived, it said - "inducing a default by Indonesia may well be a serious impediment to future private investment and lending to Indonesia."

Concerns about corruption, questionable political intent, economic sovereignty and the dangers of encouraging reckless spending surround the debate on debt relief.

Even with the best of intentions, it can be difficult to absorb the cash and turn it into real improvements on the ground.

Sri Lanka refugee
Refugees queue for food in Sri Lanka

The fact that most of the nations affected are middle-income countries should mean that the infrastructure is in place to enable the money to be absorbed, JDC's Ashok Sinha said.

Aid organisations and developing country governments have always found it hard to turn the streams of aid into the kind of growth that cuts poverty.

Securing finance is easy, said Kurt Hoffman, director of charity Shell Foundation. Turning it into real improvements of your conditions is much harder.

The Paris Club will almost certainly unveil a debt relief proposal after its meeting on Wednesday - but the jury is still out on whether it will lead to meaningful long-term development.

Indonesia restricts Aceh aid work
11 Jan 05 |  Asia-Pacific
Q&A: The weight of debt
05 Jan 05 |  Business

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