Intelligence update on IDB debt cancellation for Latin America
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Source: Eurodad
Gail Hurley
Fri Mar 31 2006

One of the most important issues on the agenda of the IDB Annual Meeting is debt cancellation for the five poorest Latin American countries considered heavily indebted (Bolivia, Guyana, Honduras, Nicaragua plus Haiti). It is a matter of justice and fairness that these countries receive the same treatment as that of their African counterparts.

UPDATE: Justice for Latin America. Inter-American Development Bank Annual Meeting in Belo Horizonte, April 3-5.

The Inter-American Development Bank will hold its Annual Meeting of the Boards of Governors next week. As Eurodad extensively reported earlier, one of the most urgent issues will concern the “extension” of the Multilateral Debt Reduction Initiative to the institution: indeed, it is a mere question of justice and fairness that at the very least the five poorer Latin American countries considered heavily indebted (Bolivia, Guyana, Honduras, Nicaragua plus Haiti) receive the same treatment as that of their African counterparts.

The IDB is an extremely solid institution which does not lack the resources to go ahead with a fundamental step toward the achievement of the Millennium Development Goals for its less developed members. On the contrary, its financial robustness (the capital of the Bank stands at US$101 billion) is such that a cancellation could take place without endangering its present credit rating, and hence without being detrimental to the needs and interests of its major borrowers (and shareholders) such as Argentina, Brazil, Mexico or Venezuela.

Indeed, in this particular case it is important to heed the fact that the principal players are not the “usual (G7) suspects”, but rather resource-strapped middle income countries in Latin America with their own very binding budget constraints and poverty-related problems. But Eurodad’s research has shown that the IDB's net income has consistently revolved around the US$1 billion mark, and the reserves linked to the OC have increased from US$8 billion in 2000, to more than US$14 billion in 2004. It is also noteworthy that since its inception, there have been no write-offs in the sovereign portfolio of the OC. Moreover, the IDB, as with other multilateral development banks such as the World Bank, has the authority to modify the terms of loans. Debt cancellation is therefore forseen and is fully consistent with the IDB’s Articles of Agreement. The amount that needs to be written-off for the 4 Latin American HIPCs plus Haiti over the next 40 years stands at around US$7bn.

In this sense global civil society should keep the pressure on the IDB decision makers to achieve this much needed cancellation. A proposal from the US Government is currently on the table but some HIPCs fear that the plans presented by the US will reduce their access to concessional loans from the IDB in the future. For example, under current proposals, the FSO would basically cease to exist as the concessional window of the IDB. Instead, OC and FSO resources would be blended. Under the new “blended” fund, Bolivia, Guyana and Honduras would receive a 25% grant element and Nicaragua 45%. This compares to a 43% grant element for current FSO lending. Impoverished Haiti would be entitled to 100% grants but the volume would decrease significantly from US$80mn it currently receives in loans to US$50mn in grants per annum until 2009.

In a memo obtained by Eurodad, a number of European EDs to the IDB outline their position in relation to the US proposal. Overall, they seem very positive about the need for this cancellation, which should be welcomed. The mechanisms however remain to be defined and they feel that it would be “counterproductive” to agree this debt cancellation without “consensus on all the outstanding financial and policy issues”. By this they mean most importantly the heated issue of zero compensation of the FSO. Under the G8 debt cancellation deal, donors promised to reimburse IDA for lost reflows. Under current IDB proposals, the FSO will not be compensated for the loans it cancels. The Europeans seem to be grappling with the issue of how far they should strive to ensure the FSO’s capacity in the long-term is not reduced as a result of this cancellation vs. the immediate benefits this debt cancellation will undoubtedly bring. Ultimately the Europeans are smaller shareholders at just 11% overall and it is the Latin American HIPC and middle-income country members that must make these crucial decisions – not the US, nor the Europeans. This cancellation needs to happen though: that much has clearly been established. But how far IDB members grapple over the details remains to be seen and a decision in April in Belo Horizonte looks unlikely.

One word of caution should be urged in relation to this cancellation though. Already there are some very worrying elements creeping-in. In the same memo, European EDs are already speaking of conditionalities possibly being attached to any deal. They ask whether relief should be delivered up-front or in a phased approach to ensure that the resources are “used productively”. Once again, Eurodad would stress that these countries have already undergone significant and lengthy reform processes under the HIPC Initiative and that this should be enough to secure upfront, irrevocable debt cancellation.

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