Debt relief for post-war rebuilding

Liberia scores big, but the Congo and Côte d’Ivoire are still waiting
From Africa Renewal: 
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Liberian President Ellen Johnson-SirleafLiberian President Ellen Johnson-Sirleaf: Debt relief now makes it easier to spend more money on children’s education.
Photograph: Associated Press/ George Osodi

In another major stride in Liberia’s post-war rehabilitation, the country eliminated some $1.2 bn in foreign debt in April. President Ellen Johnson-Sirleaf hailed the development: “The successful resolution of this inherited debt, which had ballooned through interest and penalty charges during a period when my country was wracked by civil war, is an important step on our road to recovery.”

Unlike previous measures, which reduced Liberia’s debt to public lenders, this operation retired almost all obligations to private creditors. Because they had little expectation of actually being repaid, the commercial lenders agreed to discount the value of the outstanding loans by a staggering 97 per cent. Liberia was thus able to “buy back” the debt for just $38 mn. In reality, Liberia itself did not pay a cent, since all the money was contributed by the World Bank and donor governments.

As of June 2007, Liberia’s debt stood at $4.9 bn, equivalent to seven times the country’s annual national income. The new deal, on top of other write-offs, brings the total Liberia still owes down to $1.7 bn. Most of this remaining obligation will start to diminish further in 2010, when Liberia is expected to qualify for debt cancellation under the Heavily Indebted Poor Countries (HIPC) initiative of the World Bank and International Monetary Fund (IMF).

For Liberia — like other African countries emerging from war — debt relief can provide a vital financial boost, enabling a shift of scarce revenues from debt payments to reconstruction and combating poverty. Eliminating a high debt burden can also encourage domestic and foreign investors to finance new ventures.

Debtors in the queue

Many countries rebuilding from war have received some debt relief. In an analysis of 16 post-conflict African countries published in May 2009 by researchers of the African Development Bank, debt relief accounted for nearly a quarter of all financial assistance to those countries in 2003.

In late May, IMF Managing Director Dominique Strauss-Kahn visited Côte d’Ivoire, where discussions focused on the global economic crisis, progress towards democratic elections in November and the economic reforms needed for the country to qualify for HIPC relief on its total debt of $14 bn.

Mr. Strauss-Kahn also went to the Democratic Republic of the Congo (DRC). He cited differences that may delay major relief on the country’s $10 bn debt. Specifically, the IMF head urged the DRC to adopt a “clear debt sustainability framework” and to modify aspects of its wide-ranging agreement with China. Under that deal, the Congolese authorities agreed to supply China with copper and cobalt in exchange for $9 bn to develop mining and build infrastructure (see page 16). The IMF and other creditors have expressed concern that if the Congolese government acts as a financial guarantor and the deal runs into trouble because of the slump in world mineral prices, the DRC may be saddled with massive new debt, wiping out any gains from relief on its current obligations.

Slow and cumbersome

As the discussions between the IMF and Congolese government indicate, post-war debt relief is not without strings. Africa’s creditors generally demonstrate little confidence in the performance of debtor governments, especially in states undermined by conflict. This has often resulted in prolonged negotiations and the stipulation of exacting policy conditions that governments must meet in order to obtain debt cancellation.

Not only has the HIPC process been “slow and cumbersome,” noted a study by the Helsinki-based World Institute for Development Economics Research, an affiliate of the UN University, but it has been “largely disconnected from efforts by the African Union and the UN to achieve workable and lasting peace agreements.”

Gradually, there has been growing international recognition that African governments struggling with reconstruction do not have unlimited time. To consolidate a stable peace, they must move rapidly to improve living conditions.

For Liberia’s people, the end of their country’s debilitating debt burden is finally in sight. But as President Johnson-Sirleaf noted in April, the real challenges still lie ahead. “We always say Liberia is not a poor country; it’s just a country that’s been poorly managed.” By developing the country’s minerals, forests, fisheries and agriculture, she said, Liberians can get back to work. “We know that we have primary responsibility for our development.”