Question

Banking on Forgiveness

When James Wolfensohn became head of the World Bank, he bluntly admitted the bank had "screwed up" in Africa. Decades of loans had erected a vast modern infrastructure (dams, roads, and power plants) for Africa's poor, but the gap between rich and poor did not narrow. In fact, the policies of the bank and global financial regulators had created a new crisis in sub-Saha- ran Africa: These nations were now mired in debt they could not possibly repay. Africa's total debt at the time almost equaled the annual gross national product of the entire continent. For instance, in Mozambique, where 25 percent of all children die from infectious disease before the age of five, the government was spending twice as much paying off debt as it was spending on health care and education. 

But just when many countries were receiving debt relief, the debate over aid versus loans arose again. Groups debated how to prevent economic collapses and debt problems in the developing world and how to use dwindling aid more efficiently. Some countries wanted to give more foreign aid but wanted the money to be given as grants to financially and politically stable nations. They also wanted World Bank funds to be given to poor nations as grants and not loans that nations would need to repay. 

Other nations feared that giving the money away as grants would drain the World Bank's coffers, as well as their own. They acknowledged that they may not be able to do as much for the least-developed countries, but that the role of the World Bank, after all, is to act as a bank and not a donor. Support for this view was World Bank data that showed more than 95 percent of all loans are repaid and that poor nations are more careful with loans than they are with handouts. 

For years, nongovernmental organizations (NGOs), such as advocacy group Oxfam International, had lobbied the Bank and the International Monetary Fund (IMF) to write off loans to their poorest borrowers, calling for "debt forgiveness" or "debt relief." Fortunately for the African people and their advocates, the new head of the bank put debt forgiveness at the top of his agenda. 

In the fall of 1996, the World Bank and the IMF announced a plan to reduce the external debt of the world's poorest, most heavily indebted countries. The purpose of the plan, called the Heavily Indebted Poor Countries (HIPC) Debt Initiative, was to slash overall debt stocks by 50 percent, lower poor nations' debt service, and boost social spending in poor nations. The HIPC initiative identified countries in Africa, Latin America, Asia, and the Middle East that may qualify for debt reduction. But debt relief was not automatic. The international banking community used debt as both a carrot and a stick: Whereas nations with good reform records obtained relief, those without reforms did not. 

Then, in 2006, the world's largest international lending institutions launched the Multilateral Debt Relief Initiative (MDRI) to work alongside the HIPC initiative to help countries reach their debt-relief goals. By 2017, the 36 participating countries that received HIPC assistance had obtained a total debt relief of $99 billion from the IMF and other creditors. These countries saw their debt stocks reduced by 80 percent and their debt service as a percentage of GDP drop from 114 percent to 35 percent. 

One success story is Uganda Uganda was the first country declared eligible for assistance in 1997 and was the first to receive debt relief under the HIPC initiative in 1998. The decision to begin the program with Uganda was not an arbitrary one. While under the brutal dictatorship of Idi Amin, Uganda was treated as a pariah by creditors. But then President Yoweri Museveni led the country through a decade-long process of economic reform. Uganda became a model country, boasting a steady growth rate of around 5 percent, with coffee as its main export. By offering debt relief to Uganda, the World Bank and the IMF rewarded Uganda's exemplary track record by reducing its debt to the lowest possible level-about twice the value of its exports. Savings from the debt-relief program are pledged to improve health care and to make primary education available to all Ugandan families. 

Thinking Globally 

10-18. The World Bank and the IMF had once argued that the leniency of debt forgiveness would make it more difficult for themselves to borrow cheaply on the world's capital markets. If you were a World Bank donor, would you have supported the HIPC Debt Initiative or argued against it? Explain 

10-19. While working together on the HIPC Debt Initiative, things came to a standstill when the IMF gave a more optimistic forecast for Uganda's coffee exports than did the World Bank and so argued against the need for debt relief. Which organization do you think should play a greater role in aiding economic development? Explain. 

Sources: "Heavily Indebted Poor Country (HIPC) Initiative." World Bank web- site (www.worldbank.org), October 10, 2016; "Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative," Factsheet, International Monetary Fund website (www.imf.org), March 24, 2014: Heavily indebted Poor Court rries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI-Status of Implementation, World Bank website (www.worldbank.org), May 19, 2010,

Answer 1

I support HIPC Debt Initiative. It is because the country, availing the benefits of debt relief will be free from the burden of repaying it and this will give opportunity to improve her social infrastructure. And, this improvement in social infrastructure will also reduce the future borrowing of that country and will help her to improve her internal public debt solving problems rather than thinking about the future repayment or future borrowing. Also, get free of cost counseling and expert advice from comparatively more developed nations which will help her for faster achieving the development path. And, by 2017, around 36 participating countries have availed the benefit of this debt forgiveness and around 80% of their debt stock has been reduced and their debt to GDP % has also come down significant margin. And, studies have also shown that debt forgiveness is more beneficial for countries with high borrowing with a track record of not paying it on time. This highly indebted countries include Pakistan, Malaysia, and some others. They are not so poor but the intension of not to repay on time or further borrowing to settle previous loans is more in these countries. Therefore, the main aim of the HIPC should be to reduce debts to sustainable levels ensuring future Sustainable Debt borrowing which will help to maintain her debts at a manageable level without causing long term damage to her economy, by enabling resources to be reallocated towards poverty reduction. But, burdensome debt relief is indeed problematic. Studies have proved it has discouraged desirable economic activity and also create a sense of not to pay her loans back to the lending country because some day or the other day debt relief initiative will help her to bring it back to normal. So, sometime loan forgiveness will cause more problems than it solves. But its advantages are much more than its disadvantages so, it is beneficial for poor country to get her development path without having a fear of loan repayment.

In aiding the economic development of world's poor nations, I World bank is more beneficial in debt forgiving. It is because it seeks to promote the economic development of the world's poorer countries while IMF is known for giving benefits to the merber countries, world bank is open to all. And, the higher capacity of working people makes it suitable enough to handle a larger proportion of the world at the same time. Also, World Bank promotes long - term economic development and poverty reduction by providing financial and technical support to help countries to reform country's social infrastructure related issues such as building schools and health centers, ensuring water and electricity facilities, curing disease, and protecting the environment. And, World Bank assistance is generally for long period and is funded both by member country contributions and through bond issuance. But, joint efforts of these two organisation is essential for a country to get rid out of poverty in the earliest time. So, working together World Bank and IMF both can aid the countries more effectively and efficiently and can also find new solution to encourage economies not to borrow to settle your previous loans.

Answer 2

As a World Bank donor, I would indeed have supported the HIPC Debt Initiative. Apart from my moral standing being if aid is available, it should be offered; it was well known by 1996 that the countries the initiative was created for were stuck in a cycle of poverty and debt for at least a decade. International agencies had previously attempted to patch up the Developing Nations’ Debt crises, delaying deadlines and revising interest rates but it was not nearly enough to effectively aid the problem. Countries like Africa, Mexico, Brazil and others were experiencing runaway inflation and unable to provide basic health and education services to their citizens leading to widespread disease and death, there was no real chance for countries to pay back their debts. The purpose of the World Bank is to “provide funding for countries’ efforts toward economic development” and the HIPC Debt Initiative was a practical plan. Ensuring approved countries have a track record of reform almost guarantees the debt will not reaccumulate. There was no way it would be lucrative to me as a donor if I continued to let an already suffocating debt get any worse. While the debt relief wasn't automatic, giving the poorest countries a boost out of the mud would in turn ensure more profit, a better economy and better quality of life, for all parties long-term. 

I feel the World Bank should play the greatest role in aiding economic development because one of its main purposes is to aid financially in economic development and poverty reduction. Regardless of the export forecast, Uganda was a qualified candidate, and the entire point of the initiative was to relieve the unimaginable mountain of debt for. The better projections should just mean Uganda is able to stabilize their economy quicker than expected, I see that as a win/win situation.