Debt in 201 0: a Tale ofTwo CountriesDebt relief brings considerable benefits to Malawi but there is

still work to do…

Like many other countries, Malawi has witnessed significant

progress in fighting its development challenges as a result of debt

rel ief. There are more teachers in classrooms, more health staff in

hospitals and an improved chance of leading a healthy and happy

life. In spite of this, many impoverished countries are continual ly

forced to sacrifice valuable social spending for the repayment of

huge debts to the developed world. Bangladesh is such a country.

Despite over 80% of its population l iving in poverty and lacking

many basic services, Bangladesh now pays more on annual debt

repayments than it receives in foreign aid. Therefore now – as much

as any time in the past – action is require to ensure that debt does

not stand in the way of development.

Prior to debt relief under the HighlyIndebted Poor Country Initiative(HIPC) and the Multilateral DebtRelief Initiative (MDRI), Malawi hadan external debt of over $3 billion.This was debt which began to beacquired in the 1970s when,struggling economically under post‐colonial rule, Malawi was forced toincur considerable debts frominternational donors to fund aperiod of economic modernisationand globalisation often referred toas structural adjustment. As acondition of these loans, Malawi –along with most other developingcountries ‐ was forced to implementa variety of neo‐liberal economicpolicies under the paradigm of the‘Washington Consensus’, policies

which it is now widely acceptedwere misguided and not always inthe best interests of the recipientcountry. Thus, while the debt wasenormous the benefits were not,and countries such as Malawiremained severely poor andunderdeveloped. In order to growtherefore, countries had to continueto borrow and by the end of thecentury Malawi had racked up suchsignificant debts that it wasspending over $90 million a year ondebt repayment. As a countryranked as the 13th mostimpoverished country in the worldon the Human Development Indexthis was clearly an unwelcome useof limited resources.

JUBILEE BRIEFING / 1 0

Debt and Malawi

Supported by Jubilee Debt Campaignand the Scotland Malawi Partnershipwww.jubileedebtcampaign.org.ukwww.scotland­malawipartnership.org

Bangladesh mother Rina caresfor her young child in a ruralvillage: Government moneywhich should be invested toassist mothers like Rina raisehealthy, educated children isinstead being directed to richcountries in the form of debtrepayment.'"It's clear that over the lastthree years debt relief has hada hugely positive humanitarianimpact in Malawi, as it hasallowed the Government ofMalawi to devote more fundsto its various social welfareprogrammes."David Hope‐Jones, ScotlandMalawi Partnership

Photo:Chris

tianAid/M

ohammadurRahman

DEBT RELIEF HAS A HUGE IMPACTWhen the HIPC and MDRI initiativebegan in 1997 they were clearlywelcome relief, and by the time oftheir completion the direct impactshad been substantial. By 2008Malawi’s total external debt hadbeen reduced from over $3.2 billionto $750 million and debt repaymenthad fallen from $90 million in 2006to $13.3 million in 2007. In the2007/2008 budget, the first afterMalawi reached Completion Point,the finance minister GoodallGondwe announced that the moneysaved would be spent on ‘socialactivities that would benefit thepoorer segment of the population’.This commitment was honoured andas a result by 2007 spending onhealthcare was up 83% and spendingon education was up 56%,contributing to the followingbenefits:

• An increase of 6 million newoutpatients visits a year by trainedhealth staff between 2006 and 2007• A 7% increase in skilled healthcareattendants attending allconsultations between 2006 and2007• A significant expansion of HIV andAIDS services with the prevalence ofHIV/AIDS in 15‐49 year olds hasdeclined from 13.5% to 11.9%between 2000 and 2007• The recruitment of an extra 3,600teachers each year and an increasein the number of children remainingin school to standards 5 and 8between 2007 and 2008• A reduction in under 5 childmortality from 170 per thousandbirths to 127 per thousand birthsbetween 2000 and 2007.• An increase in life expectancy of1.4 years from 51 to 52.4 between2000 and 2007

The experience of Malawidemonstrates that debt relief isessential for any developing countrywith high levels of poverty anddebilitating debt. The debt reliefinitiatives with which Malawi havebenefited from have had aconsiderable role to play inenhancing pro‐poor spending andthis translates into significantimprovements in health, educationand well‐being.Malawi’s lower debt levels also makeit more attractive to future lenders,allowing it to be more selective inattracting new investment anddevelopment assistance and atterms more conducive to long‐termeconomic development andprosperity.

MOZAMBIQUEMozambique is another country forwhom debt relief has had atremendous impact on peopleslives. In 2001 Mozambique reachedcompletion point under the HIPCinitiative and as a result has savedover $4 billion in debt servicepayments. This money was put togood use and Mozambique has morethan tripled its spending on povertyreduction since 2001. As a resultthe percentage of children going toschool has increased from 64% toalmost 100%, an additional 120,000woman per year give birth in thepresence of trained health staff,and infant mortality has decreasedby just under a third.

Where before the completion of HIPC Malawian external debt was in excess of 100% of GDP.Debt relief has reduced Malawi’s external debt back to a more acceptable level allowing muchneeded resources to be directed towards social spending.

As a result of debt relief primary school fee’s were abolished in Malawi, meaning that thousands morechildren like these were afforded their right to free primary education. Photographer: Leo Williams,Scotland Malawi PartnershipThanks to the benefits of debt relief, babies inMalawi have a 25% better chance of surviving tothe age of 5. Photographer: Leo Williams, ScotlandMalawi Partnership

spending for debt repayment as,according to rich countries, thesedebts are ‘affordable’. An assesmentof what is ‘affordable’ shouldhowever take into account morethan arbitary indicators of what isdeemed financially sustainable. Afair assesment should take intoaccount measures of a populationsunsatisfied basic needs, theirpoverty and their suffering.Unfortunately in these criteriaBangladesh scores much higher. Forexample in Bangladesh:•49.6% of the population live below$1.25 a day and 81.3% below $2•53.5% of adults are illiterate•48% of children under 5 areunderweight•69 out of every 1000 children diebefore the age of 5•There is a 25% of not surviving tothe age of 60It is quite unacceptable, given thelevels of poverty and apparent needfor improved healthcare andeducation, that such a large amountof limited resources flows out ofdeveloping countries in the form ofdebt repayment. What is more, themajority of this outflow is to richcountries, the same countries whoprovide the majority of internationalaid. In Bangladesh external debtrepayments and OfficialDevelopment Assistance are closelymatched and most recently moremoney flowed out of the country indebt repayments than flowed in ininternational aid. It is no wonderthat aid effectiveness is acontentious issue when aid isactually subsituting Governmentspending rather than supplementingit.

BURDENED BY DEBTOther poor countries who have notyet been granted debt reliefinclude: Cambodia, Nigeria,Mongolia, Vietnam, Sri Lanka,Somalia, Sudan, Cote d’Ivoire,Nepal, Liberia, Eritrea, Togo,Guinea, Kenya.

Unlike Malawi, Bangladesh has lostrather than won out of the debtrelief initiatives. However likeMalawi, Bangladesh was subject tomuch of lending from theInternational Financial Institutionswhich created huge debts withoutthe associated benefits.Consequently Bangladesh’s externaldebt now stands at well over $23billion ‐ bigger than that of anycountry in sub‐saharan Africa (otherthan South Africa) and one of thehighest external debt levels of anydeveloping country.With such a large level of debtcomes considerable costs. In orderfor a developing country to continueto borrow to finance investment –which poor countries likeBangladesh must do with lowGovernment revenue – it musthonour its existing debts, thisincludes paying back the moneylended (principal) and the cost ofborrowing that money (interest).This is obviously a significant drainon national resources and inBangladesh in 2008 repayments inprincipal and interest amounted to astaggering $2.1 billion, more thancombined Government spending onHealthcare and Education in 2006.DOESN'T QUALIFY?Despite ranking 146th in the worldin terms of human development andhaving annual debt repayments of$2.1 billion, Bangladesh did notqualify for the debt relief initiativeswhich have so far benefited 28 ofthe worlds poorest countries andamounted to over $100 billion ofmultilateral debt relief. As a result,Bangladesh has not received a singledollar or taka in debt relief underthe HIPC or MDRI initiatives,whereas countries with significantly

less debt and sometimes less severepoverty have received full debtcancellation from the InternationalFinancial Insititutions and Paris Clubcreditors.The reason is that Bangladesh doesnot have an external debt that isdeemed to be ‘unsustainable’ underthe framework laid out in the debtrelief initiatives by the World Bankand the IMF. This means that thedebt is not either 150% of exports or250% of Government revenue.Therefore Bangladesh is beingforced to suffer for allowing itsexternal debt to remain relativelylow in relation to other economicindicators. This perverse incentivecomes directly from the very sameinsitutions who ‐ when distributingtheir aid and grants ‐ vigorouslydemand countries act prudentlywhen it comes to externalborrowing.Indeed one of the reasons thatBangladesh’s external debt is notlarger in relation to its GDP is thatBangladesh has sustained a programof subsitituting external debt fordomestic debt, meaning that thecountry also has a significant levelof public debt and that annual debtrepayments are far larger than justindicated by the external debtstatistics.UNAFFORDABLEMany countries are in this position,forced to continue sacrificing social

Debt and Bangladesh

In 2008 Bangladesh received the equivalent of $9 per head of Aid, however was forced topay out the equivalent of $13 per head in debt repayment.

SOURCESActionAid, Bangladesh Bureau ofStatistics, DfID, Eurodad, GlobalDevelopment Finance 2010, IMF,Jubilee Debt Campaign, OECD, UNDPHuman Development Report,University of Birmingham, WorldHealth Organisation, WorldDevelopment Indicators.

CLIMATE DEBTThe level of indebtedness indeveloping countries is set only toincrease as climatic change putsnew pressures on national resourcesand finance is sought from theinternational community to takeaction to tackle the consequences.This is especially true forBangladesh who, despiteGovernment and Civil Societyprotests, is being forced to have itsUK Climate Finance allowancechanneled through the World Bank.Anger comes due to the fact thatthe World Bank has continually beenresponsible for funding high carbonprojects that cause climate changewhile additionally imposingconditions on its lending, whichforces countries to spend the moneyand make policy changes which,rather than relieve poverty andsuffering, have caused it. Thereforedeveloping countries are to befurther indebted to developedcountries for climate financedespite climate change being aresult of the actions of developedcountries and the recipients havinglittle say on how the money is spent.‘Money from the UK for tacklingclimate change should be seen ascompensation, meaning that weshouldn’t be imposing how it shouldbe delivered – which is like trashingsomeone’s house, giving them asmall amount of money to do it up,and then telling them which shopsthey go to buy new furniture.’Kirsty Wright – World DevelopmentMovement

Bangladesh is an illustration of thesituation that many countries findthemselves in, suffering theconsequences of debilitating debtwhile being subject to arbitraryassessment by rich countries overtheir suitability for debt relief. Ithas been proven in countries likeMalawi that debt relief has asignificant impact on a country'sability to finance the essentialinvestments in its public servicesand its future prosperity. As a result,the lives of millions of people indeveloping countries have beengreatly improved. However thefailure of the internationalcommunity to extend these benefitsto all who needs them meansmillions of others continue to liveuneducated, in poor health and withpoor life prospects. Debt relief is anessential tool for overcoming these

challenges and an important meansfor allowing developing countries toshake off the shackles of the pastand determine their own future.While debt relief is the main tool toprevent debt standing in the way ofdevelopment, a great deal more isrequired. The adoption of aninternational agreement onresponsible financing, together withthe establishment of a sovereigndebt tribunal, will ensure thatdeveloping countries are no longersubjected to irresponsible andillegitimate lending which harmstheir development, and that anyexisting debts of this nature can besettled in a fair and transparentmanner which aknowledges creditorco‐responsibility.Therefore Jubilee Scotland andJubilee Debt Campaign call for:• The full cancellation of all unjust,illegitimate and unpayable debts,without externally imposedconditions and without attributingthis to aid budgets• Open and accountable use of theproceeds of debt cancellation,which respects the demands ofunions, debt campaigners and othercitizens organisations and civilsociety for increased investment inpublic services• A fair, open and comprehensivemechanism for addressing debtcrisis, which takes into account theorigins, nature and impact of debtand acknowledges creditor co‐responsibility.• An International agreement,ensuring that future financing fordeveloping countries is fair,transparent, respects human rightsand the environment, and thatrepayment difficulties or disputesare recolved fairly and efficiently.

Jubilee Scotland is a coalition ofconcerned individuals andorganisations who work together inScotland for the cancellation of allunpayable and illegitimate poor‐country debt. We work to achievethis by educating people in Scotlandabout global debt, and by enablingthem to put pressure on decisionmakers to reverse the policies thatreinforce global debt slavery.www.jubileescotland.org.ukmail@jubileescotland.org.uk41 George IV Bridge,Edinburgh, EH1 1ELTel: 0131 225 4321

What is NeededAbout Us

KENYAKenya is another country who hasfailed to qualify for debt relief astheir debt is deemed to be‘affordable’. This is despite owingover $7 billion to rich countries inexternal debt, which along with itseven larger domestic public debtmeans that it is forced tocontinually retain money that wouldbe spent on public services in orderto pay its debt obligations. This isdespite over 5 million Kenyanchildren not going to school andover 10% of the population beingregarded as undernourished –situations which debt relief wouldgo a significant way to rectifying.

Bangladesh Civil Society Protests in Dhaka against the impact of debt on the country's developmentPhotograph courtesy of Equity Bangladesh