Multilateral Debt: A Growing Crisis

What is Multilateral Debt?

Multilateral debt is the debt owed by developing countries to the World Bank and International Monetary Fund (IMF), known as the Bretton Woods Institutions (BWIs). In the last decade these institutions have become the major creditors of the developing world.

Why is it a Problem?

The most severely indebted countries of the developing world are trapped on a debt treadmill forced to take new loans to pay old ones or risk default and potential economic collapse. Sub-Saharan African countries, for example, paid more in debt between 1990 and 1993 than they spent on health care and education. Still they watched their debt load double. As Southern governments reel under financial pressure to generate foreign currency to pay the rising debt, poverty and environmental devastation increase. This situation is becoming increasingly unsustainable, economically, socially, and environmentally.

How Much is Owed?

Between 1980-1994, the total developing country multilateral debt rose from US$61.6 billion in 1980 to US$313 billion in 1994.

How Did Multilateral Debt Grow?

This dramatic increase came as a result of a series of lending packages imposed by the IMF on debtor countries to ensure that commercial bank debt was serviced. A significant amount of new IMF and World Bank funds was used to repay outstanding interest on debts owed to commercial banks. For example, from 1983 to 1989, US$32.7 billion in loans from multilateral sources went to service commercial bank debt, representing 17 per cent of total debt service over the period.

The various rescheduling plans of the 1980s, have resulted in a situation in which the IMF and the International Bank for Reconstruction and Development (IBRD-the non-concessional wing of the World Bank) are receiving far more in debt servicing from the poorest countries than they are lending. As the graph indicates, the multilateral debt problem affects the poorest countries with high debts most severely. Debt servicing obligations to multilateral institutions ros from less than $8.5 billion in 1982 to almost $40 billion in 1994, an almost five-fold increase. In most cases, debt service to multilateral banks takes precedence over all other debt service requirements.

How Have the Bretton Woods Institutions Responded to the Problem?

The Bretton Woods institutions have compelled developing countries to re-organize their economies around the priority of regularly servicing their multilateral debt. These programmes, known as "structural adjustment programmes" or SAPs are designed to increase foreign investment, boost foreign exchange earnings and reduce government deficits (see brief on "Structural Adjustment").

The World Bank's International Development Association (IDA), which is the arm of the Bank set up to provide concessional loans and grants to the poorest countries, now provides a significant amount of these funds for "structural adjustment support" programmes. The World Bank also provides debt relief through a fund known as the International Development Association's Debt Reduction Facility and the so-called "Fifth Dimension" Fund. The IMF created an Enhanced Structural Adjustment Facility (ESAF) which channels aid dollars from donor countries to the poorest countries on more concessional terms.

However, there is growing concern that most foreign aid to indebted low-income countries simply goes straight back into the coffers of the World Bank and IMF, because this aid is being used to service outstanding World Bank/IMF debt.

How Can the Problem be Solved in the Short-Term?

In spite of international attempts to restructure debt repayment plans, the extent of the debt trap for the most indebted countries means that only debt reduction or outright cancellation will offer any hope of economic, social and environmental recovery.

What is the Role for Canada?

Canada has provided some moral leadership in providing debt relief by cancelling bilateral debts to sub-Saharan Africa and a number of Caribbean countries, as well as offering debt-swapping conversions for Latin American debt. However, Canada has been unwilling to call for significant measures to deal with the problem of multilateral debt.

The Canadian and other G-7 governments should call on IMF and World Bank to cancel or reduce debts owed by severely indebted counries.

A series of concrete proposals have been advocated by non-governmental organizations(NGOs) and international debt experts as follows:

Are These Measures Enough?

The debt crisis must be viewed as an integral feature of a development model based on over-consumption by the few and increasing disparities between rich and poor. Incorporating concerns regarding debt into the larger context of more just global economic and social policies and ecological sustainability poses one of the greatest challenges over the coming years.

Therefore, while steps to cancel multilateral debt are critical, a resolution of the Third World debt crisis must be accompanied by the fundamental reform of the international financial system which precipitated the crisis in the first place (see brief on "Reforming the Bretton Woods Institutions").

What are the alternatives models for the future?

Alternative microeconomic finance and banking strategies are being developed at the local level. Small-scale alternative strategies receiving increasing attention include community-based credit schemes which operate outside the traditional banking structure and which do not result in borrowers falling into the debt trap. In particular, these schemes have been successful in targeting the rural and urban poor, especially women, who often have no access to traditional sources of credit.

If our loans and aid are truly meant to help the poor, then providing the poor with access to credit is one concrete and proven measure to achieve this goal.

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