- The Washington Times - Thursday, January 6, 2005

The world’s wealthiest countries are considering freezing or forgiving debt payments of nations battered by the Indian Ocean tsunami, welcome relief for some but possibly an unnecessary step for others.

A moratorium or cancellation would allow governments in hard-pressed nations to redirect a portion of their national budgets to relief and rebuilding.

“We must ensure that countries affected by the tsunami are not prevented from paying for essential reconstruction because they are having to fund the servicing of their debts. So, for afflicted countries that request it, we and other governments are proposing an immediate moratorium on debt repayments,” British Finance Minister Gordon Brown said yesterday in Scotland.

Sri Lanka formally asked for help with its debt, but other nations are wary of relief that comes with conditions often attached by Western benefactors.

“We didn’t ask for a debt moratorium — they offered it to us,” Jusuf Anwar, Indonesia’s finance minister, said Tuesday.

Leaders meeting at an international summit in Jakarta, Indonesia, yesterday said they welcomed debt-relief proposals for nations hit by the tsunami “to augment their national capacity to carry out the rehabilitation and reconstruction efforts.”

But the declaration by 26 countries did not bind them to any action, and several are shying away from more ambitious proposals by Mr. Brown and others to forgive — rather than freeze payments on — large portions of debt owed to rich nations.

Australia, which has pledged $765 million to aid tsunami victims in Indonesia, said hard-hit nations would be better helped with aid for specific reconstruction projects.

“Our view is that Indonesia is likely to benefit substantially more by direct and active programs,” Australian Foreign Minister Alexander Downer said.

The Paris Club, an informal group of 19 creditor nations, is scheduled to meet Wednesday, and finance ministers from the Group of Seven wealthy industrial nations plan to meet in early February. At the meetings, those countries are likely to discuss terms for a moratorium or forgiveness on debts owed them.

The Bush administration is in discussions with G-7 colleagues about the best way to proceed on national debts but appears to accept the idea of a moratorium during the crisis.

“We have a little bit of time to talk about the best way to deal with that,” said Tony Fratto, a Treasury Department spokesman.

Debt forgiveness has been widely backed for dozens of the world’s heavily indebted poor countries, such as Uganda and Nicaragua, but such programs are typically tied to strict conditions and monitored by the International Monetary Fund.

“Debt cancellation is one of the best, if not the best, forms of aid. It is a predictable, [one-time] form of assistance,” said Neil Watkins, co-coordinator of Jubilee USA, an alliance of faith-based and community organizations that favors debt relief.

Western nations seem to be competing to increase aid and appear generous in the aftermath of the tsunami.

Poorer, heavily indebted Somalia and Sri Lanka are considered candidates for forgiveness, but middle-income countries, such as Indonesia and Thailand, are less likely to get — or want — such relief. One nation, India, has refused all forms of outside aid since the tsunami.

“In terms of not accepting foreign assistance, we feel we have all the resources to cope,” said Shyam Saran, India’s foreign secretary.

Indonesia is the largest debtor among the nations hit by the tsunami, owing the equivalent of 70 percent of its economic output to lenders, including wealthy nations, development and commercial banks. It would pay the Paris Club about $3 billion in principal repayments this year without a moratorium.

The affected countries combined owe about $272 billion in external debt.

Debt forgiveness can relieve financial burdens on governments, but it does not guarantee that the money freed up will be well spent.

Debt forgiveness also can send the wrong signal to financial markets, indicating that a country cannot meet its financial obligations and making it harder and more expensive to borrow in the future.

“It may make the budgetary and overall economic conditions slightly better, but what really matters are the specific policies countries put in place, quite independent of the level of debt,” said Ian Vasquez, director of the project on global economic liberty at the Cato Institute, a libertarian think tank.

Despite damage from the natural disaster, the region’s largest economies are not expected to suffer.

“The impact of the tsunami on the GDP has been negligible. There could be a small impact on the fiscal deficit on the expenditure side,” Y.V. Reddy, governor of the Reserve Bank of India, said in Bombay.

Standard & Poor’s said financial losses from the tsunami should be manageable.

“In Indonesia, the coastal areas of the Aceh province were worst affected; the province is in the northern part of Sumatra and is of relatively low economic significance to the national economy,” the ratings agency said.

This article is based in part on wire service reports.

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