Will debt relief work?

The decision by the Paris Club of 19 creditor nations to offer a freeze on interest payments to Tsunami-affected nations could raise more questions than it answers.

Indonesia, Sri Lanka and the Seychelles are the only three of the countries affected who have taken up the offer. Thailand turned it down, fearing that its credit rating could be damaged.

Indonesia too, the country with the largest debt, needed assurances that its credit rating would not be damaged, and that it would not be hit by demands for larger payments when the freeze finishes.

Indonesian Foreign Minister Hassan Wirajuda made a tour of the larger European creditor nations before the Paris Club announcement seeking clarification of the offer, and particularly wanting to hear the details of any conditions to be imposed on the freeze.

None of the countries are eligible for debt relief under the so-called "HIPC initiative" which has been reducing debt in poor countries elsewhere.

Burden

Indonesia's debt stock, $132bn, was mostly built up during the long years of the Suharto dictatorship, and because of corruption and mismanagement in those years has not brought the benefits which such a huge sum should represent.

"[Paris club countries] have failed the Tsunami victims by refusing to take bold steps"
Oxfam

Almost half of the debts are to private institutions, not affected by the decision.

But the total which Indonesia pays to international institutions and Paris Club countries is around $4bn a year.

The freeze is expected to last for a year, while both the World Bank and IMF make full assessments of the cost of reconstruction, which will be highest in Indonesia.

Initial assessments suggest that around $7bn will be needed across the region.

That should theoretically be more than covered by the pledges of help from around the world which now top $10bn.

But even in the short term the debt freeze will impose a cost on the developed world, and questions will be asked about the fairness of this decision, given the greater development need in Africa.

On the other hand, a number of NGOs, like Oxfam, have criticised the Paris Club for not going far enough.

"Sadly they have failed the Tsunami victims by refusing to take bold steps," the organisation said.

"Instead of ensuring the Tsunami becomes a turning point out of poverty for the region, rich countries seem set to rebuild the poverty of the past."

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