Debt Relief Initiatives

Introduction:

The accumulation of sovereign debt has been one of the most unfortunate outcomes of the lending activities of the bilateral and multilateral institutions. The international financial system has not been able to tackle this problem effectively. Numerous initiatives have been undertaken but the impact of debt relief has become quite a controversial topic. There have been success stories, but the situation of the SILICs, more than half of which are part of the Sub-Saharan Africa, are not showing any signs of improvement. Why has this been the case?

In this paper, I attempt to highlight the different programs and proposals undertaken by bilateral and multilateral donors in order to rescue debtors from their woes. How successful or unsuccessful were these initiatives will be discussed. What were the strengths and the weaknesses of these initiatives will also be talked about. In the conclusion, I will make an effort to present my personal opinion about the effectiveness of these programs. Also I will discuss the limitations faced by the creditors and the debtors in making debt relief a triumphant endeavor.

Debt Relief.

“Borrowers sometimes find themselves unable to service their debts on the contractually agreed terms….creditors recognize this and have little recourse but to accept some losses.”

Debt relief provided to debtors can be of several types. It can either mean partial or total forgiveness, or it can mean the slowing down or a complete stop of the debt growth. Debt relief has been pushed onto the agenda of the bilateral and multilateral donors such as the IMF and the World Bank after a realization that aid has failed to achieve its desired affects in a lot of poor countries which still remain heavily indebted after a long history of aid disbursements, grants and loans. Ultimately quite a few initiatives have been launched to counter these disappointing effects.

(I) Paris club initiatives

As early as 1970, the group of bilateral creditors formed the Paris Club and started the process of writing off debts. The first initiative put forward was the Toronto terms which provided a debt relief of 33% but it was obvious that in order to rescue the debt ridden countries, a lot more generous proposals need to be made. The London term, offered a 50% reduction in debt stock in 1991. Next came the Naples term in 1994, offering 67%. Cologne term, which was based on even softer terms proposed a 90% reduction. But by the mid 1990s, it had become fairly obvious, that the initiatives, despite being very generous were not achieving the desired results.

(II) Non Paris Club Initiatives.

In 1985, during the IMF World Bank meeting in Seoul, the US secretary of State proposed the first ever systematic solution for the internal