Countries of Latin America need debt relief too

The largest development bank in Latin America is dodging its responsibility to cancel the debts of impoverished countries. Rather than keep pace with the rest of the world and finally commit to 100% debt relief, the Inter-American Development Bank (IDB) is only willing to begin "analyzing the implications of different options that could lead to a proposal."

The World Bank and IMF fought off calls to cancel the debt for years, untilbut last summer the G8 group of wealthy countries finally agreed that international financial institutions needed to join creditor countries and give the full cancellation.

This is helping countries in Africa, but it doesn't mean as much for four Highly Indebted Poor Countries (HIPCs) of Latin America and the Caribbean that are eligible for debt relief, since their main creditor, the IDB, is refusing to participate.

The IDB is a large creditor for HIPCs such as Honduras, Nicaragua and Guyana. These countries pay 60% of their debts to the IDB. The poorest country in South America, Bolivia, owes the IDB US$1.6 billion and pays it more than $100 million a year.

The debts of Bolivia, Honduras, Guyana, Haiti and Nicaragua come to US$3.5 billion, but that hefty amount isn't really the problem. The impact on the IDB's finances could be reduced by writing off the debt comes due, and much of the payments are interest charges.

These five countries are expected to pay US$322 million to the IDB next year, $111 million of it interest charges. Cancelling the debt would reduce the IDB's profit ($762 million last year - down from $2.4 billion two years ago) but would not even require dipping into the $14 billion the IDB has set aside for a rainy day.

Desperately in need of development funds, these impoverished countries have better uses for the almost million dollars a day they are supposed to give the IDB. More than 3 million Bolivians live in absolute poverty. Last year their government spent $38 per person on health care, and $39 per person on debt service.

It is doubly disturbing to see IDB reluctance at this stage, because the debt relief program itself is limited. Haiti is not included in debt relief efforts, and neither is Ecuador, where 40% of people live on less than $2 a day. Ecuador is scheduled to pay more than US$200 million to the IDB this year, more than the amount it gets in foreign aid.

The IDB also has powerful member countries that are opposed to debt relief for their poor neighbours. Brazil and Mexico want wealthier nations to bear the costs of cancelling the debts, rather than have the IDB "take a haircut," as bankers say, and write them off.

Therefore, the IDB is anxious about the cost of debt cancellation. Other financial institutions are too, of course, but unlike the IDB they've found ways to deal with it.

The IMF is covering debts of the most impoverished countries with its own resources, with rich countries kicking in to a fund for the less-severe cases. It cancelled the debts of 18 countries in January, and the World Bank followed suit is developing a similar plan, to take effect in July 1. The presidents of Honduras, Nicaragua, Guyana and Bolivia have asked for IDB debt cancellation by December 31, 2006. At this time of writing (early November 2006) this was unlikely to happen, but the SJC continues to press for cancellation as soon as possible.

Yet Luis Alberto Moreno, the president of the IDB, will probably not talk much about debt relief, if at all, when he speaks at a conference in Montreal on June 8. At the IDB annual meeting in April he almost entirely avoided the subject in his speeches. Since taking office in October, he has preferred to promote trade and investment, without mentioning the lack of either when a country's economy is essentially bankrupt and indebted to its eyeballs.

When he comes to Canada, perhaps Mr. Moreno will explain why the IDB has been so reluctant to commit to full and immediate debt cancellation.