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Last Updated: Friday, 15 July, 2005, 12:29 GMT 13:29 UK
G8 debt deal under threat at IMF
By Steve Schifferes
BBC News economics reporter

George Bush, Tony Blair
Talks between Mr Bush and Mr Blair unlocked the deal

Even before the ink has dried on proposals to relieve poor countries' debts to international lenders, the deal agreed by the G8 at Gleneagles is under threat.

A number of European governments are apparently having second thoughts about proposals for debt relief which formed a key part of the help world leaders offered to Africa at last week's summit.

These proposals are in direct contradiction to what millions of campaigners and poor people were told by the G8
Stephen Rand,
Jubilee Debt Campaign

The Belgians have apparently proposed changing the terms of the deal to give lenders more leverage over poor countries than they would have if they simply wrote off 100% of their debt.

In a document that has been leaked to the activist group Jubilee Debt Campaign, Belgian IMF representative Willy Kierkens is quoted as telling the IMF executive board that "rather than giving full, irrevocable and unconditional debt relief... countries would receive grants".

The IMF would then be able to withdraw the grants if countries failed to meet IMF conditions such as implementing the Poverty Growth Reduction Strategy which is a pre-requisite for receiving debt relief.

The head of the Jubilee Debt Campaign, Stephen Rand, says: "These proposals are in direct contradiction to what millions of campaigners and poor people were told by the G8."

The debt issue explored

The proposals have also alarmed African officials at the IMF, if the leaks are accurate.

The three African directors representing sub-Saharan Africa say any change to the G8 debt deal "would delay benefits" and that it "does not seem appropriate that debt cancellation would reintroduce conditionality".

Britain is against changing the terms of the deal agreed at Gleneagles, a UK spokeswoman said.

The Gleneagles deal aims to foster good governance and root out corruption among governments receiving aid, she added.

Mr Kierkens was travelling in Europe and unavailable for comment, his Washington office told the BBC.

The IMF had been expected to approve its part of the deal at its annual meeting in Washington in September.

Politics of aid

If the G8 countries stick to their guns, it is unlikely that the smaller nations on the IMF can derail the deal.

But as it only takes 15% of the votes on the IMF to block a deal, the attitude of larger G8 countries like Germany and Japan will be crucial.

Although they signed the debt deal at a meeting of G8 finance ministers in June, the Germans in particular were known to be unhappy with the plan for complete debt cancellation.

They are believed to have argued that this would create a moral hazard, with the poor countries who borrowed irresponsibly being rewarded, while other countries like Botswana who prudently avoided international borrowing receiving less aid.

And there is also the problem of funding the debt deal.

Funding

While the G8 finance ministers agreed to fully fund the World Bank and African Development Bank portion of the deal, there was a fudge when it came to paying for debt relief in relation to the IMF.

The finance ministers' statement says that the IMF debt relief "should be met by the use of existing IMF resources".

But, it adds, "in situations where other existing and projected debt relief obligations cannot be met form existing resources, donors commit to provide the additional resources necessary" on a "fair-burden sharing basis".

At the G8 press conference, UK Chancellor Gordon Brown suggested that the IMF had found additional resources by revaluing its gold reserves.

And indeed the Belgians say that the total cost of the deal may be as much as 4.1bn SDR ($2.4bn) and suggest selling up to 2bn SDR ($1.2bn) worth of IMF gold to finance debt relief.

This is likely to be blocked by the US and Canada, who fear it will hurt their domestic gold producers.

Slow pace

Many activists have been disappointed by the slow pace of debt relief since campaigning began a decade ago.

That it has taken so long to get agreement on the multi-lateral deal is a reflection of the deep disagreements among the major industrial countries - and the slow pace at which such relief has been administered.

And the US has been reluctant to put up additional funds to pay for the World Bank's share of any debt relief.

It took high-level negotiations between Tony Blair and US President George W Bush to change this position - and open the way to a deal.

It probably helped that sums involved in debt relief are relatively modest - with the US, for example, expected to put in just $175m a year over 10 years.

The debt deal is worth around $1.5bn - critical sums to some very poor countries, but only 3% of total aid flows of $50bn per year.

And the amount is also modest because so few poor countries - just 18, perhaps rising to 27 in a few years - qualify for debt relief under the Highly Indebted Poor Country (HIPC) initiative.




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