An agreement reached by rich countries on Saturday would for the first time eliminate the entire principal on more than $40 billion in loans owed by 18 of the world's poorest nations, rather than just lowering payments or reworking terms.
Since 1996, wealthy nations have taken incremental steps to pare back the debt of the world's poorest countries, but still have left them trapped in a cycle of borrowing to pay off old loans, rather than using all of the new funds to invest in health, education, infrastructure or other economic-development initiatives.
?We believe that by removing a crippling debt burden, we'll help millions of Africans improve their lives and grow their economies," President Bush said yesterday during a meeting with five African leaders.
Three of the five African nations -- Ghana, Mozambique and Niger -- qualify for debt cancellation under a plan outlined Saturday by finance ministers from the Group of Eight industrialized nations.
They are among 18 of the world's poorest countries that would see their debt to the World Bank and other multilateral institutions eliminated.
Since 1996, 38 nations, called highly indebted poor countries (HIPC), have been working to lower their debts to the World Bank, African Development Bank, International Monetary Fund and other multilateral lenders.
Only the 18 nations, most in Africa, have fully qualified under World Bank and IMF terms; the remaining still have not seen debt restructured under the HIPC plan, according to the World Bank.
Initially, the debt initiative offered even fewer countries a chance at debt relief because of tight restrictions that left most nations unqualified. By 1999, the World Bank and the International Monetary Fund more than doubled proposed debt relief and made more countries eligible.
"Unfortunately, the HIPC Initiative has failed to provide a lasting solution to the poor-country debt crisis. Debt-service payments for HIPC countries have been reduced by less than one-third, and the ... African countries that have received debt relief under HIPC still spent over $2 billion on debt-service payments last year," U.S. Rep. Maxine Waters, California Democrat and members of the Congressional Black Caucus wrote to Mr. Bush last week.
Theoretically, the money freed up by debt relief or cancellation would be spent on health, education and economic development.
Mozambique, one of the first nations to qualify for relief and now eligible for cancellation under Saturday's agreement, has redirected funding to vaccinations.
According to World Bank figures, the country spent $543 million on health, education, HIV treatment and prevention, roads, sanitation and other projects in 1999, but is on a pace to spend $1.5 billion in 2005.
"The cancellation of this debt constitutes an important step toward the consolidation of an environment conducive to the social and economic development of Mozambique," Armando Emilio Guebuza, the country's president, said before his meeting with Mr. Bush.
Despite some success, much of the country's debt remained on the books under the old HIPC program, and debt-service payments were on a pace to rise from $18 million annually in 2000 to almost $81 million in 2007.
Critics charge that those old debts have been merely paid with new loans.
"For more than two decades, a system of 'defensive lending' has miraculously matched the dates and amounts of repayment and interest schedules to disbursements under 'new' loans to create a perpetual rollover of defaulted debt obligations," said Adam Lerrick, director of Carnegie Mellon University's Gailliot Center for Public Policy.
Mr. Lerrick, in a June paper, favored debt cancellation and a move away from loans and toward grants for poor nations. The critique is similar in some ways to Bush administration proposals that effectively would cancel old debts and, in the future, deliver aid in grants.
Bush administration proposals floated earlier this year would not cost additional funds, but are more focused on reforming the way the World Bank and other lenders operate.
There is still no agreement among wealthy nations on how to link a debt write-off with an increase in aid.
Group of Eight leaders are scheduled to meet next month in Scotland. France and Germany have proposed taxes on airline tickets in an attempt to boost aid to poor African countries. Hans Eichel, the German finance minister, said the tax "is now on the working program of the G8."
U.S. Treasury Secretary John W. Snow reiterated U.S. opposition to the proposal, but said the United States would not block the tax if other leaders choose to implement it.
"The United States would not participate in any global tax scheme to raise money," said Tony Fratto, spokesman for the U.S. Treasury Department. He said the agency would prefer the United States ask Congress for funds when it needs it.
Jen Haberkorn contributed to this report.
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