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Debt and Conditionality: Multilateral Debt Relief Initiative and Opportunities for Expanding Policy Space

Source: Third World Network

THE Multilateral Debt Relief Initiative (MDRI) was introduced in September 2005 to operationalise the political outcome of deliberations at the G8 summit in Gleneagles in July 2005. The MDRI is to provide 100% cancellation of eligible debt stock owed by eligible countries to four multilateral financial institutions – the International Development Association (IDA), the concessional lending arm of the World Bank, the International Monetary Fund (IMF), the African Development Fund (ADF) and the Inter-American Development Bank (IDB)1 – and is separate from but linked operationally to the enhanced Heavily Indebted Poor Countries initiative (HIPC-I).

This debt reduction is additional to the debt relief granted under the HIPC-I and taken together, it is expected that an estimated 40 eligible countries have already been or will be relieved of a significant amount of debt stock in the near future. The World Bank and the IMF estimate that both the HIPC-I and the MDRI will clear a total of close to US$90 billion in debt owed by developing countries to bilateral and multilateral creditors (Eurodad, 2006; IDA and IMF, 2006: paras 27-32). Twenty-one countries have already had their eligible debt from the IDA and the IMF written off and nine other countries are expected to complete the process in the near future. A further 10 countries have met the eligibility criteria for HIPC and are potentially eligible for MDRI relief in the future.

A critical question arising from these recent developments in debt relief is whether – aside from relieving the debt overhang of indebted countries and therefore clearing fiscal space for more productive and redistributive expenditure – the cancellation of debt, particularly from the international financial institutions (IFIs), results in greater policy autonomy for the countries concerned.

A significant constraint on national policy space in developing countries in the past two decades has been the uncompromising debt burden shouldered by these countries and the policy prescriptions which accompany country attempts to: (a) reschedule debt owed to external creditors; and (b) mobilise additional external financial resources to meet their resource gaps. Indebted countries have had to implement stringent economic conditionalities – especially those set by the World Bank and the IMF – in their bid both to renegotiate debt and to secure resources necessary for generating economic growth and financing social expenditure.

However, the recent series of debt cancellations – under both the enhanced HIPC and the MDRI – may offer eligible countries opportunities for expanding domestic policy space, enabling countries greater freedom over their macroeconomic and development policies, including options which were prohibited under the restrictive conditionalities of the Bretton Woods institutions.

This paper examines the key aspects of the MDRI and considers the opportunities this framework and completion of the enhanced HIPC initiative create for indebted countries to expand their policy space. The paper concludes that the recent upfront and irrevocable cancellation of debt of the 21 post-‘completion point’ countries and the potential debt relief for the nine ‘decision point’ countries in the near future under the enhanced HIPC initiative and the MDRI will create opportunities for greater policy space in these countries. Specifically, the debt relief will facilitate the release of countries from the economic strictures of conditionality and debt which have crippled economies in developing countries due to the damaging effect of their economic policy prescriptions.

Cancellation of debt stock has not only enabled the freeing up of fiscal resources in a number of previously heavily indebted developing countries but has also afforded opportunities for expanded policy space for countries to develop national economic policies alternative to the Washington Consensus policy prescriptions which have accompanied financing from the Bretton Woods institutions.

It will also enable the diversification of external financing sources for these countries, enabling countries to seek resources with more favourable financing terms and the decoupling of financial resources with economic policy reforms. Countries should take advantage of this increased policy autonomy to develop more appropriate policies which will generate economic growth in favour of social and economic development.

After all, the objectives of debt relief are not only about increasing revenue flows to developing countries but also freeing countries from the economic and political coercion of debt, including redressing the asymmetrical relationship between debtor and creditor nations and debtor nations and international financial institutions. This recent debt cancellation may afford developing countries the opportunity to break out of the cycle of debt and conditionality and to engender genuine ‘country ownership’ of economic policies.

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