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The Delusion of Debt Forgiveness

ROME: Governments from around the world will gather in Brussels under UN auspices on May 14th to discuss the plight of poor countries. As they talk, the leaders of rich countries may strike a self-satisfied pose, recalling as they do the old proverb, which says that forgiveness is divine. For little more than a year ago they agreed to forgive much of the debt of the world’s poorest countries. Of course, forgiving the debts of the poor is undoubtedly noble. Sadly, not everything that is noble is smart and effective.

Many of the debts of poor countries that have been forgiven were already considered as, de facto, lost and thus unrecoverable. Interest and principal payments made by many poor countries were, as a result of this, much smaller than what was actually owed. Ethiopia, for example, was paying a sum equal to 10% of its exports; payments of 70% would have been needed to cover the nominal value of its debt.

The Cologne Agreement on poor countries with the highest level of debt – the Highly Indebted Poor Countries (HIPC) initiative – that was agreed to last year declared that debts will be forgiven up to the point at which interest payments become “sustainable”: in other words, the agreement substitutes unrecoverable debt for a debt load that is nominally lower but “real.” According to calculations by Britain’s Treasury, with the HIPC agreement Mozambique pays about the same proportion in debt service as it was paying before the accord was signed.

More than a shell game is at work here, however. For the countries accorded debt forgiveness under the HIPC must renounce other forms of aid. This restriction led Ghana to ask to opt out of the HIPC altogether.