What debt relief means for Africa

This weekend, G-8 finance ministers agreed to cancel $40 billion in debt held by some of the world's poorest nations.

By , Staff writer of The Christian Science Monitor

It's one of the biggest write-offs of debt ever. And it could spark major improvements in the lives of the world's poorest people.

This weekend's $40 billion debt cancellation agreeded to by rich-nation finance ministers will, for instance, enable Zambia to hire 7,000 new teachers. Likewise, Tanzania will no longer spend 12 percent of its annual budget on servicing its debts. Instead, it could build new hospitals and roads.

In all, 18 nations - 14 of them in Africa - with 296 million people will be debt-free. Eventually, a total of 38 nations with 552 million people may get full debt relief.

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For all the impressive figures, though, the deal strikes a middle ground. For some it's too small: At most, it cancels less than one-sixth of Africa's $295 billion debt - and leaves out crucial countries like Nigeria.

For others, it's too risky: By erasing bad debts - and allowing struggling nations to apply for new loans - it could spark a new cycle of dependency.

Either way, it does provide a respite from poverty's pressures. And it may help countries lift themselves up through better education, stronger agriculture, and expanded trade. "In theory, it primes the pump," says Stephen Hayes of the Corporate Council on Africa in Washington.

But who pays? Consider three things:

• First: In the short term, it's not all that expensive. The US will pitch in up to $1.75 billion over 10 years. That's its share of a pledge by rich nations to cover $16.7 billion in debt repayments the 18 countries would have made.

• Second: One of the larger bills - some $6 billion - will be paid by the International Monetary Fund (IMF). It's one of the global institutions to whom poor nations owe debt. And under the deal, it's supposed to cover those debts from its own "existing resources."

• Third: Crunch time will reportedly come after 2008, when the US and other G-8 nations (Britain, Canada, France, Germany, Italy, Japan, and Russia) will have to pony up billions to cover the amount owed to two other big lending institutions: The World Bank and the African Development Bank. The G-8 ministers promised to "cover the full costs" of the loans.

But one of the dangers, experts say, is that rich nations won't fully replenish global lenders' coffers, which could trim the size of future loans. In theory, however, poor countries won't need to borrow so much, because the debt deal will boost their economies.

As for the poor nations, the deal is expected to save them a total of about $1.5 billion in debt payments each year. They're supposed to spend this on education, healthcare, agriculture, and infrastructure. According to the CIA World Factbook, the 18 governments' total spending was $23.5 billion in 2004. So the $1.5 billion represents a sizable, though not enormous, amount of freed-up cash.

In Tanzania, a previous debt-relief deal helped end school fees, enabling 1.5 million extra children to attend classes, says DATA, a debt-relief group in Washington.

The deal was generally well received in Africa. "We greatly appreciate the initiative," said Ugandan official James Nsaba Buturo. It means "we can have more money ... directed to education, health, infrastructure, and social sectors," said Mozambique Prime Minister Luisa Diogo.

Yet there's concern in Africa about a major missing nation: Nigeria. Unlike the initial 18 nations, Nigeria doesn't pass muster for cutting corruption and better transparency. But as West Africa's anchor country, it's key to regional stability. A recent US intelligence assessment warned it could face "outright collapse" in the next 15 years. It's the world's seventh-largest oil producer, yet has $36 billion in debt.

The G-8 ministers acknowledged Nigeria's need for debt relief. But they've got to do more than that, argues Francis Kornegay of the Center for Policy Studies in Johannesburg: "If you're talking about stabilizing Africa, you've got to focus on countries like Nigeria, Sudan, Congo, and Angola, which pull regional weight." None of those was included in initial rounds, mostly because they're considered too corrupt.

Also, many Africans worry the G-8 focus on Africa will distract from African solutions to the continent's problems. "There's a serious concern it might eclipse NEPAD," and other indigenous institutions, says Mr. Kornegay, referring to the New Partnership for Africa's Development, a South-Africa-backed program that aims to boost good governance.

Another key concern is that the deal is not innovative enough. "There have got to be mechanisms so the same thing doesn't happen over and over," says Mr. Hayes, referring to the aid and lending paradigms that have dominated development work for decades. "I don't think Africa develops without a middle class," he says, and that will emerge only through trade and entrepreneurship.

But that's where issues like easing trade barriers come in, he says. Now, with the major debt deal out of the way, trade and other topics are likely to come to the fore in the run-up to the July summit of G-8 leaders in Scotland, where poverty and global warming will top the agenda.

Wire service material was used in this report.

DEBT FACTS

• Between 1970 and 2002, Africa received $540 billion in loans.

• In that same period, Africa paid back $550 billion in principal and interest.

• In 2002, Africa had $295 billion in debt.

Source: United Nations Conference on Trade and Development

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