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Ottawa, February 2, 2005
2005-008

Canada Proposes 100 Per Cent Debt Relief for World’s Poorest Countries

Related documents:

• Backgrounder - Beyond HIPC
• Backgrounder - Canada's Aid to Africa

Minister of Finance Ralph Goodale today announced a debt relief proposal that will ease the burden of debt for the world’s poorest countries by substantially increasing both the amount of relief available and the number of nations eligible for international debt relief assistance. He also called on other donor countries to support this Canadian initiative and provide similar debt relief for developing nations.

"The Canadian proposal will provide low-income nations with the opportunity to invest in the future of their people, and not the debt obligations of their past," said Minister Goodale. "A permanent debt relief solution may finally be within our reach."

Under this initiative Canada will contribute approximately $172 million over the next five years to the International Development Association of the World Bank and the African Development Fund. This relief will be immediately open to the 15 countries that have completed the Heavily Indebted Poor Countries Initiative, a multilateral debt reduction strategy, as well as 4 other nations participating in the World Bank Poverty Reduction Support Credit program. A further 37 countries are potentially eligible for benefits. Strong governance and human rights considerations are built into this proposal, as is a link to the achievement of the Millennium Development Goals in 2015. This contribution represents 4 per cent of all debt payments to these institutions, or Canada’s traditional share of global multilateral assistance.

In addition, Canada will consider how best to finance further relief of debts owed to the International Monetary Fund (IMF) by eligible countries. Canada calls on donors to agree on the need to provide further IMF debt relief and to identify the best way to finance this cost.

"Canada’s proposal focuses on relieving the immediate burden of debt by reducing debt-servicing obligations, and provides deeper relief than existing initiatives by effectively paying 100 per cent of debt-servicing payments coming due between now and 2015," said Minister Goodale. "Canada is also willing to explore various options to finance further debt relief through the IMF. However, if these options negatively affect the Fund’s financial position or disrupt world gold markets, Canada calls upon donor countries to pay for 100 per cent debt-service relief on IMF claims directly."

Today’s announcement was made in advance of the February 4-5 meetings of the G-7 Finance Ministers and Central Bank Governors, which is expected to include further discussions on international debt relief. It also comes in advance of the final report of the Commission for Africa, created by British Prime Minister Tony Blair to recommend innovative approaches to help Africa meet its development goals. Minister Goodale is a member of the Commission for Africa, along with UK Chancellor of the Exchequer Gordon Brown and South African Finance Minister Trevor Manuel.

"While we’ve seen recent progress in providing debt relief to countries working to overcome poverty, the debt burdens for these countries are still far too high," said Minister Goodale. "Debt relief was one of the key issues raised on my trip last summer to Africa and is clearly a high concern for Canadians. With this announcement, Canada and other nations can do their part to help eliminate this hardship by immediately freeing resources that countries can direct towards poverty reduction."

See the attached backgrounders for more details. Further information on previous Canadian debt relief can be found in Helping the Poorest - An Update on Canada’s Debt Relief Efforts available on the Department of Finance Web site.

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Backgrounder: Beyond HIPC

The existing international debt strategy, the Heavily Indebted Poor Countries (HIPC) Initiative, has provided significant debt relief for the poorest countries. However, many poor countries, including some that have emerged from the HIPC process, continue to have their poverty spending constrained by high debt-servicing burdens, particularly obligations to the international financial institutions (IFIs).

Several G-7 countries have put forward proposals aimed at addressing the debt situations of poor countries. However, there has been no consensus on the best way forward. To help foster a consensus, Canada has advocated that additional efforts be based on four principles. Debt relief should (1) provide additional resources; (2) ensure equity of treatment for other low-income countries (LICs); (3) maintain the financial integrity of the IFIs; and (4) provide the proper incentives for good governance and economic reform.

"Beyond HIPC": The Canadian Proposal

To meet the immediate needs of poor countries, Canada proposes that developed countries provide 100 per cent multilateral debt-service relief on payments falling due to the International Development Association (IDA) and the African Development Fund (AfDF)^[1]. Furthermore, if various options to finance further International Monetary Fund (IMF) debt relief through internal IMF resources negatively affect the IMF’s financial position and/or disrupt world gold markets, Canada calls on donors to pay for further IMF debt relief directly. The benefits would be available until 2015 to all countries that have completed the HIPC process and to other low-income (IDA-only)^[2] countries that have the ability to use these savings for development. The Canadian proposal satisfies the principles that we have advocated and provides poor countries with immediate fiscal space to implement their poverty reduction strategies.

What Are the Benefits?

If fully implemented, eligible countries would receive 100 per cent cancellation of their debt-service obligations to the IMF, IDA and the AfDF, the largest multilateral creditors of poor countries. Such relief will be available on existing claims through to 2015. Canada will pay its share (4 per cent) of these costs for IDA and the AfDF and will strongly encourage other donors to agree to pay their shares. If a multilateral arrangement to cover the costs of including the IMF is agreed, Canada will also pay its share (4 per cent) of this cost.

Who Will Benefit?

This initiative will be immediately open to all 15 countries^[3] that have already completed the HIPC Initiative and those 4 low-income IDA-only non-HIPCs^[4] with a World Bank Poverty Reduction Support Credit (PRSC) program. An active PRSC^[5] demonstrates the capability of absorbing direct budget support within a robust public expenditure management system. This will help to ensure that the resources freed through the additional debt relief support development and poverty reduction.

Going forward, a further 37 countries (22 HIPCs and 15 IDA-only non-HIPCs) may eventually become eligible for the initiative. For the HIPCs, access to additional debt relief will automatically coincide with completion of the HIPC Initiative. All other IDA-only non-HIPCs will be granted access to debt relief under the new initiative when they can demonstrate they have sufficiently robust public expenditure management systems, through the adoption of a PRSC program.

Eligibility for relief is maintained until 2015 so long as countries are performing well under an IMF-supported program (or non-borrowing program) and have acceptable human rights records. Countries graduating above the low-income threshold would be phased out of the initiative.

How Much Will This Cost?

The direct cost to Canada of providing 100 per cent debt-service relief on IDA and AfDF claims is expected to be roughly $172 million over the next five years (roughly $25 million for 2005). Costs would increase if multilateral arrangements for IMF debts were completed.

What’s Different?

Unlike the HIPC Initiative, the Canadian proposal focuses on relieving the immediate burden of debt by reducing debt-servicing obligations. The new proposal provides deeper relief than the HIPC Initiative by effectively cancelling 100 per cent of the debt-service payments coming due. The new proposal is also more inclusive. It expands the list of eligibility to include both HIPC and other poor countries.

The United Kingdom has put forward a similar proposal. However, the UK plans to use the proceeds from IMF gold sales or revaluation to pay for the IMF’s cost. Canada is willing to explore these options, but should they result in a deterioration of the IMF’s financial position and/or disrupt world gold markets, Canada calls upon other countries to pay for further IMF debt relief directly through contributions to the Poverty Reduction and Growth Facility.^[6]

How the New Canadian Proposal Compares to the Canadian Debt Initiative (CDI)

The CDI affects bilateral debts owed to Canada. The CDI provides a standstill on debt payments owed by eligible HIPCs to Canada and 100 per cent debt stock cancellation for these same countries when they complete the HIPC process. These benefits still exist for eligible countries.

The new Canadian proposal affects debts owed to multilateral institutions by poor countries. Eligible countries will have their debt-servicing costs to multilateral institutions reduced. These benefits are additional to Canada’s current bilateral debt relief efforts under the CDI. Moreover, the benefits under the new Canadian proposal are available to a wider range of countries.

Backgrounder: Canada’s Aid to Africa

Most Canadians are aware of the incredible challenges facing sub-Saharan Africa. They know of its deep poverty—half of all Africans live on less than $1 a day. They have seen the campaigns to help children—52 million African children are not in school. They are aware of the need to help victims of AIDS—more than 30 million people are HIV-positive, 60 per cent of whom are women. They know that conflict is still endemic—one in five people is affected by conflict.

Yet there are positive signs of momentum in Africa. Democracy is taking hold: 19 of 48 sub-Saharan countries are electoral democracies, whereas 20 years ago none were. Many new political leaders share a vision of the common good of their people. Economic growth exceeded 5 per cent in 23 African countries in 2001, and there is evidence of a new entrepreneurship. Organizations addressing a wide range of social, environmental, cultural and human rights are emerging and beginning to hold their governments to account.

Canada is helping to nurture this African momentum for change, turning disadvantage into a renewed sense of optimism.

How is Canada Helping Africa?

Canada has worked tirelessly at the international level to keep Africa high on the agenda. Even as we responded unhesitatingly to global events—most recently to the tsunami disaster, the crisis in Haiti and hurricanes in the Caribbean, as well as in years past to events in Afghanistan, Iraq and the Balkans—Africa has remained a priority throughout.

It was Canada’s leadership that ensured a response to African leaders at the G8 Kananaskis Summit in 2002. This summit set in motion a new way of interacting with Africa—a new partnership—that continues to this day. There has also been progress in peace and security led by Canada, including efforts to introduce a global ban on landmines and limit trade in conflict diamonds. Canada strongly supports the Education For All "fast-track" initiative to assist countries with good education strategies.

Canada has made significant increases in aid to Africa in the past few years, starting with the $500-million Canada Fund for Africa announced in Budget 2001. Budget 2003 committed the Government to double international assistance by 2010, ensuring that 50 per cent of all increases are directed to Africa. Support for Africa is central to Canada’s international assistance effort, which reflects values that all Canadians cherish: compassion, social justice, generosity and peace. Today Canada supports Africa with over $1 billion in assistance annually.

Debt Relief

Canada played a leadership role in 1996 and 1999 when the international community created and later enhanced the Heavily Indebted Poor Countries (HIPC) Initiative. For the first time a process was set up, with Canada’s urging, to ensure all creditors would provide comparable debt relief and that the proceeds of debt relief would be directed to social priorities.

To date 27 countries are benefiting from the HIPC Initiative. For these countries, the initiative will provide US$54 billion in debt relief once complete. The combined efforts of the global community will reduce the total debt stocks of poor indebted countries by over two-thirds, freeing up resources for social priorities; since 1999 the debt-servicing burden has fallen by more than a third while social spending has risen by 44 per cent in benefiting countries. The impact is something in which Canada had, and continues to have, a major role and where all Canadians can be proud.

Highlights of Canada’s Contributions

• Canada has taken steps to ensure the success of the HIPC Initiative by helping multilateral creditors provide much-needed debt relief. These creditors, including the multilateral development banks, are responsible for approximately half of the costs of the HIPC Initiative. Canada has provided $312 million in support so that the world’s poorest and most indebted countries receive the full debt relief that they require.

• Canada has gone beyond what it is required to do under the HIPC Initiative. In 1999, with the Canadian Debt Initiative (CDI), Canada was the first country to promise 100 per cent forgiveness for certain HIPCs. In 2000, then Minister of Finance Paul Martin expanded the offer to include all HIPCs. In January 2001, Minister Martin announced Canada would immediately stop collecting debt-service payments from reforming HIPC countries and committed to 100 per cent debt forgiveness as countries complete the process. These actions will see Canada forgive virtually all of its claims on HIPCs—more than $1 billion. To date Canada has provided $590 million in debt relief to African countries under the CDI (see Annex 1).

• Since the CDI was introduced, most donor countries have followed Canada’s lead and forgiven their bilateral debts. However, multilateral debts remain a burden, especially when debt servicing to these creditors is compared to resources available for social programs. This is why on February 2, 2005, Canada announced its intent to go further—to build on its past leadership and work towards a permanent debt relief solution.

Better Health in Africa

The scale and scope of the health challenges facing Africa are huge. Yet African countries and donors are responding to this challenge with much-needed health reforms. The introduction in 1999 of country-owned Poverty Reduction Strategy Papers helps individual countries devise their own integrated plan, and provides a focus for donor countries organizing and prioritizing their aid programs.

Complementing this country-led approach are a number of global health initiatives that have provided greater focus to address key diseases. The Global Fund to Fight AIDS, Tuberculosis and Malaria is one of the most important in Africa, an innovative public-private partnership that considers the recipients’ own needs and processes. Canada played a major role in the establishment of this initiative, and is represented on its Executive Board.

Highlights of Canada’s Contributions

• In May 2004, Prime Minister Paul Martin announced an additional $170 million for the global fight against HIV/AIDS. This includes support for the African AIDS Vaccine Programme and the International AIDS Vaccine Initiative in their efforts to develop a preventive vaccine for HIV/AIDS. Canada is also the largest donor to the World Health Organization’s "3 by 5" initiative, with a $100-million contribution. The total Canadian commitment to HIV/AIDS is $600 million so far.

• Canada is the first country to implement the World Trade Organization’s decision in 2003 to make cheaper versions of patented medicines available to developing countries facing public health crises. This initiative will make it easier for developing countries to access generic drugs, including anti-retrovirals.

• Canada recently contributed $42 million to fill a critical funding gap faced by the Global Polio Eradication Initiative, putting it back on track towards eliminating polio by the end of 2005. Canada’s contributions to eradicating this disease are among the highest of all donor countries. This was recognized by the United Nations Foundation, which presented Canada with the "UN Foundation Award for Outstanding Leadership in Global Polio Eradication" last week.

Supporting Entrepreneurs: the Martin-Zedillo Report

The elimination of poverty requires a strong private sector, one that can contribute to economic growth, job creation and poor people’s incomes. This means ensuring that markets work for the poor, in particular rural farmers and female entrepreneurs.

Prime Minister Paul Martin, along with former Mexican President Ernesto Zedillo, put forward a vision and a plan for supporting entrepreneurs in developing countries. Unleashing Entrepreneurship, commonly referred to as the Martin-Zedillo report, emphasized that it is micro and small enterprises and family farms that form the backbone of the private sector in developing countries.

Nowhere is this more important to economic prosperity than in Africa. Canada is committed to implementing the recommendations of the report.

One way is through participation in the Commission for Africa. Launched by British Prime Minister Tony Blair in February 2004, the Commission aims to reemphasize support of donor countries for development in Africa in the lead-up to the G8 Summit in Gleneagles in July.

Minister of Finance Ralph Goodale, as one of the 17 Commissioners, undertook a wide range of consultations both in Africa and Canada. Highlights of these consultations included the need for better infrastructure in Africa, an environment which would allow firms to prosper, reforms to help Africa become more export-ready, and action to address the serious health burdens faced by the people of Africa.

The report of the Commission for Africa is due to be released in early March 2005.

Highlights of Canada’s Contribution

• Canada is committed to, and is working towards, an ambitious outcome for the World Trade Organization’s Doha Development round. In the interim, in 2003 Canada unilaterally announced duty-free and quota-free access to virtually all imports from the 48 countries that the UN has termed "least developed countries," 34 of which are in Africa. In addition, Canada has invested some $74 million since 2001 for trade-related technical assistance in Africa.

• Private sector development is also being supported through initiatives of the Canada Fund for Africa. Investments totalling $35 million are being made to promote the development of information and communication technologies to bridge the global digital divide. The Canada Investment Fund for Africa, with $100 million in public funds to be matched by the private sector, aims to stimulate African and foreign investment in the continent.

• In West Africa, the Canadian International Development Agency has employed a regional and strategic approach to support microfinance networks as well as the laws and regulations that govern savings and credit co-operatives.

• Recognizing the importance of infrastructure to enhance growth and access of the poor to services and markets, Canada is joining other donors and calling for a substantial increase to infrastructure by the International Development Association, the concessional arm of the World Bank. Canada was also successful in reaching an agreement to have half of these resources earmarked for African development.

Annex 1

Notes:

^[1] IDA and the AfDF are the concessional lending windows of the World Bank and the African Development Bank [Return]

^[2] IDA-only countries are those countries which have: (i) relative poverty, defined as gross national product (income) per person below an established threshold, currently US$865 per year, (ii) a lack of creditworthiness to borrow on market terms and therefore a need for concessional resources to finance the country’s development program and (iii) good policy performance, defined as the implementation of economic and social policies that promote growth and poverty reduction. [Return]

^[3] Current eligible HIPC Completion Point countries include: Benin, Burkina Faso, Bolivia, Ethiopia, Ghana, Guyana, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Senegal, Tanzania and Uganda. [Return]

^[4] Current eligible non-HIPC IDA-only PRSC countries include: Mongolia, Nepal, Sri Lanka and Vietnam. [Return]

^[5] This type of lending does not finance specific investments, but instead finances overall country budget execution. [Return]

^[6] Formerly the Enhanced Structural Adjustment Facility, the PRGF is the concessional lending window at the IMF. [Return]