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World Bank to write off $ 27 bn debt of poorest countries

R C Murthy in Washington

A plan to cancel upto $27 billion in debt owed by poorest of the poor countries was approved by the Development Committee of the World Bank after generous last minute contributions by some rich nations bridged the shortfall in funding requirements.

At the fag end of negotiatiions on Sunday which spilled into Monday, donor countries raised their contributioins by nearly $300 million to make the enhanced heavily indebted poor countries (HIPC-II) debt initiative a reality.

This $300 million are part of the $4.7 billion contribution for a trust fund that would finance debt cancellation by multilateral lenders such as the World Bank, African Development Bank and Inter-American Development Bank.

If these regional banks have to forego, their balance sheets would be in trouble. The rich nations are funding the multilateral banks' share.

Had that amount been not forthcoming, the World Bank was also planning to increase its lending rates to all its borrowers, including India, to make up its share of the shortfall, besides drawing on its net yearly surpluses.

India objected to such a course of action. Not only will it put fresh burden on other developing countries but the World Bank would have weakened considerably.

The HIPC-II initiative would be launched immediately benefiting some 19 countries, mostly in sub-Saharan Africa.

Credit should go to Gordon Brown, UK's Chancellor of the Exchequer, whose Labour government has been championing the HIPC cause.

Detailed figures are not yet available, as officials worked through Monday to arrive at exact contributions of each country.

But World Bank President James Wolfensohn announced at a press conference on Monday evening that enough funds were forthcoming to avoid any pressure on his bank.

Four benefits flow out of the HIPC-II initiative:

• First, a lowering of the debt sustainability thresholds will be achieved to provide a greater cushion and increased prospects for a permanent exit from unsustainable debt.
• Second, the provision of faster debt relief will be possible through interim assistance.
• Third, the introduction of floating completion points that would shift the focus of assessment towards positive achievements and outcomes is possible rather than the length of track record.
• And fourth, an increase in the number of countries expected to be eligible for debt relief is possible.

Wolfensohn emphasised that cancelling debt was only the first step in lifting the poorest nations. A framework was proposed to strengthen the link between debt relief and poverty reduction.

The Development Committee welcomed the proposed poverty reduction strategy papers, to be prepared by national authorities in close collaboration with the Bank and Fund staff.

It was stressed that the poverty paper should be in place by the decision point; it also recognised that on a transitional basis the decision point could be reached without agreement on a poverty paper, but in all cases demontrable progress in implementing a poverty reduction strategy would be required by the completion point.

The HIPC initiative has better chances of success because Wolfensohn is to have a second five-year term and has enough time to ram through his plans.

Meanwhile, Prof Jagdish Bhagwati of Columbia University criticised Wolfensohn for departing from the "old approach of an exclusive focus on growth" and on "trickle-down" economics.

The Clinton administration recommended for Wolfensohn a five-year extension from June next, when he is due to leave the bank.

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