IDB cancels debt; financing details delayed

On November 17, 2006, the Inter-American Development Bank (IDB) agreed to cancel US$2.1 billion in debt out of US$3.5 billion owed to the IDB by five Latin American highly indebted poor countries (HIPCs, Bolivia, Guyana, Haiti, Honduras and Nicaragua). The IDB is the biggest lender in Latin America and these nations owe on average one third of their overall debt stocks to the institution. This decision by the IDB sets an important precedent: that the G8’s Multilateral Debt Relief Initiative (MDRI) can and should be expanded to include other important creditors.

IDB staff had admitted, in a recent leaked document, that cancelling this debt would seriously improve these countries’ debt sustainability outlooks and help them achieve the Millennium Development Goals (MDGs). The document showed that Latin American countries had benefited far less from the MDRI agreed last year due to the exclusion of lenders in the Latin America and Caribbean region.

The announcement on November 17 by IDB President Luis Alberto Moreno followed intense campaign and lobby efforts by organizations across Latin America, North America and Europe. Over the last 12 months, the “Justice for Latin America” coalition – which included Eurodad, Latindadd, Fundación Jubileo Bolivia, Jubilee USA, Social Justice Committee Canada and Manos Unidas Spain among other groups – had targeted the IDB and relevant national capitals with letters, phone calls, faxes and face-to-face meetings.

The deal will see US$380 million written-off for Bolivia; US$249 million for Guyana; US$333 million for Haiti; US$717 billion for Honduras and US$505 million for Nicaragua with a cut-off date of end-2003.

It follows months of protracted internal negotiations within the IDB as to how to finance the writedown. Key differences centered on replenishment of the Fund for Special Operations (FSO), the IDB’s concessional loan window for the poorest Latin American borrowers. If the FSO used its resources to finance this cancellation, its capacity to provide highly concessional finance to the poorest countries – which include, in addition to the five HIPCs, the Dominican Republic, Ecuador, El Salvador, Guatemala and Paraguay – would be seriously compromised because the FSO depends in large part on reimbursements. The United States had wanted to separate negotiations on debt cancellation from discussions on FSO replenishment, but some Latin American HIPCs such as Bolivia had feared that this would mean they would see reduced concessional finance in the future, which would not help their longer-term debt sustainability profiles.

In the end it appears as though key financing decisions such as these have been postponed until early 2007.

The IDB says that the agreedupon framework will ensure preservation of the FSO, but, according to Eurodad, it appears that some countries – Bolivia and Honduras – will in the future receive a mix of concessional and non-concessional resources which means that the overall level of concessional borrowing they are entitled to from the IDB will be reduced.

The IMF also has to give its seal of approval to the macroeconomic policies being pursued by these countries in order for the IDB to approve the cancellation.

Under the terms of the deal, Haiti cannot benefit from any of this cancellation until it completes the Heavily Indebted Poor Countries Initiative. Haiti is just at the start of this program which involves countries having to implement a whole series of economic and governance reforms in order to be awarded with the prize of debt relief at the end. But countries that have gone though this process already have experienced significant delays and serious disagreements over the reform measures the IMF and World Bank insist they implement. This is likely to mean that Haiti will not benefit from any of this debt cancellation until 2008 or 2009.
Faith in action:
Haiti needs debt cancellation now in order to support the country’s fragile peace and provide muchneeded funds for an impoverished nation’s development. Write to Héctor E. Morales, the U.S.’s representative on the IDB’s board of directors, 1300 New York Avenue, N.W., Washington, D.C. 20577, and urge a cancellation of Haiti’s debt without postponement or intrusive policy conditions.