Introduction
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Lusaka Stn.
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Central Bank
Zambia's Debt
Problems
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Debt Relief
Debt Effects
Comm. Debt
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The Central Bank of Zambia

Debt Relief

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Following the debt crisis of the 1980s, increased global awareness of the impact of external debt on economic development and poverty reduction in the very poorest countries, and the realisation that external debt can have a detrimental effect on creditor countries as well, has caused considerable pressure to be put forward to relieve or restructure the debt. These have included a number of different measures, some more popular than others.

Debt restructuring

The involves restructuring the debt so that it becomes more concessional. For example, the Toronto terms of the Paris Club, a grouping of bilateral donors, gave the creditor countries the option of partial cancellation of non-concessional official debt, reducing interest rates or rescheduling the debt by prolonging the payback period.

Debt forgiveness and rescheduling

The Brady Plan for reducing commercial debt was a plan whereby Less Developed Countries (LDCs) were partially forgiven their commercial debt if they borrowed more funds from the IMF or World Bank to repay the remaining commercial debt but with stringent conditions imposed on the debtor countries.

Debt for equity swaps:

Where the commercial debt of a LDC could be bought by a private company in a market place and exchanged for shares in a local state owned asset such as telecommunications.

Debt for nature swap:

Where the commercial debt is purchased by NGOs, restructured and then any discounts used for environmental projects. In 1987 the World Wildlife Fund made such an arrangement to inject money into wildlife conservation.

Debt cancellation

The Jubilee 2000 campaign advocated that the external debt of the LDCs should simply be cancelled.

Zambia experienced several forms of debt relief. However in the mid 1990s, despite considerable debt forgiveness from donors such as the grouping of bilateral donors known as the Paris Club, servicing Zambia's debt accounted for 80% of the balance of payment support that it received from its donors. The burden of external debt continued.

In 1999, The Paris Club agreed to write off 67% of the debt and reschedule the remaining 33% on more concessional terms.

The HIPC Initiative

In 1996, the World Bank and the IMF launched the Heavily Indebted Poor Countries (HIPC) Initiative to create a framework for all creditors, including multilateral creditors, to provide debt relief to the world's poorest and most heavily indebted countries. To be considered for HIPC Initiative assistance, a country must:

• face an unsustainable debt burden, beyond traditionally available debt-relief mechanisms;
• establish a track record of reform and sound policies through IMF and World Bank supported programs; and
• have developed a Poverty Reduction Strategy Paper (PRSP) through a broad-based participatory process.

This consists of two stages:

The Decision Point

The first step is to carry out a debt sustainability analysis to determine the debt relief needs of the country and a Poverty Reduction Strategy Paper (PRSP). Once the IMF and World Bank formally decide a country has made sufficient progress in meeting the criteria for debt relief the international community commits to reducing debt to the sustainability threshold.

The Completion Point

In order to receive the full reduction in debt available, however, the country must establish a further track record of good performance under IMF and World Bank supported programs. The length of this second period depends on (i) the satisfactory implementation of key policy reforms agreed at the decision point, (ii) the maintenance of macroeconomic stability, and (iii) the adoption and implementation for at least one year of the PRSP. Once a country has met these criteria, lenders are expected to provide the full relief committed at the decision point.

Despite being the 17th country to reach completion point, by the start of 2003 Zambia had received only 5% of the debt service reduction committed to it. Repayments on an external debt of $6.5 billion continue to be a debilitating drain on the economy.

G8 Debt Relief Proposals

At their meeting in Gleneagles, UK in 2005, G8 leaders proposed that the 18 countries, including Zambia, which have reached Completion Point within the HIPC initiative will receive 100% debt cancellation. This will cover $40bn (£22bn) of debts owed to the World Bank, the African Development Bank and the IMF, and the funds will be provided by the G8 and the IMF. Aid charities have said that this will cost rich countries $1.2bn a year for the next three years, an expenditure of only $0.10 cents per person per week in developed countries, and represents around $0.50 cents per head to the 18 developing countries concerned. Indeed, it represents less than 1% of the annual shortfall from the 0.7% of GNI (Gross National Income) promised by rich countries to the developing world in 1970.

Next issue - The Debt Boomerang >>

Related Glossary Items:
Debt Servicing
Debt for Equity Swap
Debt for Nature Swap
Debt Service Ratio
Soft Loan
Hard Loan
IMF

Related Issues:
The Debt Boomerang
Origins of Commercial Debt
The Workings of the IMF
The Structural Adjustment Policies of the IMF
The Extent of Zambia's Debt
Is Zambia's Debt a Problem

Related Theories:
Interpreting the Balance of Payments
The World Bank