Debt cancellation not a wise option

While the optimistic remarks by the new Minister for Planning about the country’s economic prospects are a welcome confidence-building measure, his call to the Minister for Finance to campaign for debt cancellation rather than more aid, may need further analysis and scrutiny.

The West has tried to reduce the effect of debt burdens on the developing world by offering debt cancellation in return for more investment in the social sectors under the Highly-Indebted Poor Countries (HIPC) Initiative.

However, the qualification criterion has been such that only a few countries have made it to the list. A country is considered potentially eligible for debt relief under the initiative if it is eligible for aid from the International Development Association (IDA) of the World Bank; and from the International Monetary Fund’s Poverty Reduction and Growth Facility.

Further, its debt burden indicators must be above the thresholds established under the HIPC Initiative after full application of traditional debt relief mechanisms. The thresholds are 150 per cent for the ratio of the net present value of debt (NPV) to exports of goods and services and 250 per cent for the ratio of NPV to fiscal revenue.

To qualify under the second criterion a country must have ratios of exports of goods and services to GDP and fiscal revenue to GDP above 30 per cent and 15 per cent, respectively. In addition, the country must also have begun a reform programme supported by the IMF and IDA between October 1, 1996 and December 31, 2006, when a sunset clause of the initiative expired.

Kenya, not being as highly-indebted as most other African nations, did not qualify at that point, and it is doubtful that it will qualify now.

There is also debate on whether any debt cancellation is helpful to a nation. Critics of forgiveness initiatives argue that debt relief comes with conditions similar to those on traditional aid and loans. The thresholds and ratios used often seem arbitrary and do not ensure that debt relief will be sufficient for meeting the Millennium Development Goals.

Many civil society organisations have called for debt payment caps limiting annual principal and interest debt payments to percentages of exports, the national budget or GDP. The 2003 UNDP Human Development Report mentions a debt cap where relief would be provided so that debt servicing does not exceed two per cent of GDP annually. Even ministers from HIPC recipients feel debt relief is too slow and too timid. Hence, many HIPC countries cannot advance to completion point due to their inability to comply with conditions set.

On this matter, all that glisters is not gold.