Low-Income Country Debt Cancellation: H.R. 2634 and S. 2166
Low-Income Country Debt Cancellation:
H.R. 2634 and S. 2166
August 25, 2008
Jonathan Sanford and Martin A. Weiss
Specialists in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Low-Income Country Debt Cancellation:
H.R. 2534 and S. 2166
In recent decades, the rapid growth in poor country debt has emerged as a
foreign policy concern. There have been many efforts to help reduce poor country
debt. In 1988, a group of major creditor nations, known as the Paris Club, agreed for
the first time to cancel debts owed to them instead of refinancing them on easier
terms as they had done previously. In 1996, the International Monetary Fund (IMF),
the World Bank, and the regional development banks agreed to allow a portion of
debts owed to them by a select group of countries to be cancelled. This effort is
known as the Debt Relief Initiative for Heavily Indebted Poor Countries (HIPC). At
the Gleneagles Summit of the Group of Eight (G8) nations in July 2005, the HIPC
effort was expanded to provide 100% cancellation of all multilateral debt for
countries that have completed the HIPC program. This expanded effort is known as
the Multilateral Debt Relief Initiative (MDRI).
Some analysts believe that existing multilateral debt relief initiatives are
insufficient. They want debt relief for more countries than are currently eligible. To
this end, Members of the 110th Congress introduced the Jubilee Act for Responsible
Lending and Expanded Debt Cancellation of 2008 (H.R. 2634/S. 2166). The bill has
been approved by the House of Representatives and reported favorably by the Senate
Foreign Relations Committee.
The act seeks to expand HIPC/MDRI debt relief to an additional 24 countries,
which are eligible to receive 100% of their World Bank assistance from the
International Development Association (IDA), the World Bank’s low-income lending
facility. So-called “blend” countries, those eligible to receive World Bank assistance
from the concessional and market-rate windows of the World Bank, would not be
eligible for Jubilee debt relief. The act directs the Secretary of the Treasury to
undertake negotiations with other bilateral creditors and with the multilateral
agencies in order to provide complete debt relief for the 24 countries.
Proponents of the legislation argue that on equity and policy grounds, a strong
case can be made that the so-called Jubilee countries should have access to the same
level of debt relief as provided to the equally-poor HIPC countries. Critics counter
that the proposed legislation raises several policy concerns. First, even if the United
States approves the proposal, multilateral debt relief would require the assent and
collaboration of other donor nations, many of whom have expressed little interest in
a new round of multilateral debt relief. The proponents of the legislation want the
international financial institutions (IFIs) to absorb the cost of additional debt relief
from existing resources. It is not clear if other major countries would agree to such
a plan. Also, the IFIs’ capacity to maintain the present size of their programs might
be constrained if debt relief were funded out of existing resources. Lastly, many
analysts question the ability of debt relief — absent broader social, economic, and
governance changes in the poor countries — to achieve poverty reduction and
growth. The proponents argue, nonetheless, that it is unfair and wrong that one group
of very poor countries should have their debts forgiven totally while another very
similar group must repay in full. This report will be updated as events warrant.
Background: The HIPC and MDRI Programs............................1
The Jubilee Act Proposal........................................3
Content of the Legislation.......................................3
Framework for Responsible Lending...........................5
Estimated Cost of the Jubilee Act.....................................9
Theory of Debt Cancellation........................................13
Debt Overhang: Theory........................................13
Debt Overhang: Evidence......................................14
Funding Jubilee Debt Relief....................................18
List of Tables
Table 1. Jubilee Act Beneficiaries: Debt and Debt Service (2004)............8
Table 2. Debt Owed to IFIs, 2007....................................11
Table 3. Potential U.S. Bilateral Costs, 2007 ..........................12
Low-Income Country Debt Cancellation:
H.R. 2634 and S. 2166
The bills titled the “Jubilee Act for Responsible Lending and Expanded Debt
Cancellation” (H.R. 2634 and S. 2166) seek to provide 100% debt relief to the many
poor countries that did not qualify previously for debt relief through the World
Bank’s HIPC (Heavily Indebted Poor Country) program. This legislation builds on
more than a decade of debt relief efforts at the international financial institutions
(IFIs) that aim to benefit the poorest countries.
This report discusses previous efforts to cancel debt owed by low-income
countries. It summarizes the Jubilee debt reduction proposal and provides an
overview of House and Senate action. It assesses the likely cost of a possible Jubilee
debt reduction program. Finally, the report examines some possible implementation
and policy issues.
Background: The HIPC and MDRI Programs
Since 1996, the World Bank and IMF have coordinated an effort by multilateral
and bilateral official creditors to reduce the foreign debt of the nations categorized
as heavily indebted poor countries (HIPCs). In 2005, the G8 countries agreed during
their summit meeting in Scotland on a Multilateral Debt Reduction Initiative (MDRI)
which aims to augment the HIPC program.1
For much of their history, the IFIs have served as lenders of last resort to
countries suffering from financial crisis. Thus, the IFIs argued that since they
provided assistance to countries unable to borrow from anyone else, they should
receive preferred creditor status. This means that the World Bank and the IMF would
be paid first in the event that borrowers ran into financial difficulties, and that debts
owed to them would not be reduced under any circumstances. If they forgive debt
owed to them by their borrower countries, the IFI’s argued, they would have less
money available in the future to help other countries needing IFI aid. It would also
set a bad example, they said, as it would give debtors the impression that they could
borrow money from the IFIs without a commitment to pay it back. The latter is
called the “moral hazard” argument against debt relief. From this perspective, debt
relief should be a last recourse and should include a requirement that debtor countries
1 More information on the 2005 debt relief agreement is available in CRS Report RS22534,
The Multilateral Debt Relief Initiative; and CRS Report RL33073,Debt Relief for Heavily
Indebted Poor Countries: Issues for Congress, both by Martin A. Weiss.
adopt reforms and new policies to reduce the likelihood that they will need more debt
relief in the future.2
Despite initial reservations, and at the G8’s request, the World Bank and the
IMF created the Heavily Indebted Poor Countries (HIPC) debt relief program in 1996
to reduce some multilateral debt in conjunction with bilateral debt forgiveness.
According to the IMF and the World Bank, the goal of the HIPC program was to help
the poorest and most indebted countries meet their “current and future external debt
service obligations in full, without recourse to debt rescheduling or the accumulation
of arrears, and without compromising growth.”3
In 1999, the program was expanded to provide deeper, faster, and broader debt
relief. Initially, the HIPC program determined that a debt service-to-exports ratio of
250% was sustainable. Moreover, it took a minimum of six years for borrowers to
qualify for debt relief. Critics charged that this ratio was too high and the time-frame
to qualify for debt relief was too long. When the program was redesigned in 1999,
the debt service-to-exports ratio was reduced to 150%, and the time period was
shortened. It was also anticipated that the debt service ratio (the share of export
revenue needed to service foreign debt) for HIPC beneficiaries would be in the range
of 15 to 20%. The HIPC program was also modified to include a greater focus on
poverty reduction efforts. Countries receiving debt relief were now explicitly
required to use money freed up by debt relief for poverty reduction.
HIPC debt relief is provided in stages, based on each country’s performance
against a defined set of economic targets and requirements. HIPC-eligible countries
must successfully implement IMF-prescribed reforms for three years before reaching
the “decision point,” which makes them eligible to receive intermediate debt relief.
Following a further track record of good economic policy, a country reaches
“completion point” where the remaining debt relief is granted.
In June 2005, G8 finance ministers proposed the Multilateral Debt Relief
Initiative (MDRI) to provide financing for the World Bank to be able to completely
forgive all of the HIPC countries bilateral and multilateral debts once they completed
the HIPC program. The eventual MDRI agreement was a compromise agreement
between the United States and European countries.4 U.S. officials had reportedly
argued that the cost of multilateral debt relief could be borne by the institutions and
did not require donors to contribute any new assistance. Other creditors believed the
institutions should be compensated for their debt forgiveness to avoid diverting
2 Rutsel Silvestre J. Martha, “Preferred Creditor Status under International Law: The Case
of the International Monetary Fund.” International and Comparative Law Quarterly.
3 Anthony R. Boote and Kamau Thugge, “Debt Relief for Low-Income Countries: The HIPC
Initiative,” International Monetary Fund, Washington, D.C., 1999
4 Elizabeth Becker and Richard W. Stevenson, “U.S. and Britain Agree on Debt Relief for
Poor Nations,” New York Times, June 10, 2005.
potential resources that could be lent to the poorest countries.5 Any debt relief, they
argued, should be additional to existing multilateral assistance. The compromise
plan entailed the multilateral development banks receiving new money from creditor
nations to offset their debt reductions while the IMF would absorb the cost of debt
relief using internal resources.
The Jubilee Act Proposal
The Jubilee debt cancellation act would require the Secretary of the Treasury to
seek new arrangements with the Paris Club of Official Creditors (an informal group
of the wealthiest countries that would cancel 100% of the bilateral and multilateral
debt owed by two dozen poor countries that were not eligible to receive debt relief
from the HIPC program and are not covered by the MDRI.6 The act would also
require the United States to seek changes in the framework for international lending
to poor countries and limitations on the conditions countries would have to meet in
order to receive debt cancellation.
The original Jubilee Act was introduced in June 2007 by Representative Maxine
Waters and several others. The House Financial Services Committee held hearings
on the bill in November 2007. It subsequently marked up and reported the bill
favorably in April 2008 (H.Rept. 110-575) with several amendments in the form of
a substitute. The House of Representatives debated and passed the bill (283-182) on
April 16, 2008, after approving the committee substitute amendment and three
amendments proposed from the floor. A companion bill, S. 2166 was introduced in
November 2007 by Senator Robert Casey, Jr. The Senate Foreign Relations
Committee held hearings on the bill in April 2008. It marked up and reported the bill
favorably, with several amendments, in June and a report was filed (S.Rept. 110-438)
in August 2008. S. 2166 was placed on the Senate calendar on August 1, 2008.
As introduced in the House and Senate, H.R. 2634 and S. 2166 were almost
identical. Each had four sections. The House added two additional sections at the
end of H.R. 2634. The Senate added a new Section 3, renumbering the rest of S.
2166, and it added two new sections at the end of the bill. The new Section 6 is very
similar to the comparably numbered section in the House bill. The new Section 7
addresses a different issue. Because of renumbering, the section designations for
other topics are different in the House and Senate bills.
Content of the Legislation
Findings. Sections 1 and 2 contain both bill’s short title and findings. The
findings section presents information and arguments that seek to justify the need for
6 Additional information on the Paris Club is available in CRS Report RS21482, The Paris
Club and International Debt Relief, by Martin A. Weiss.
the legislation. The House passed the bill without making any changes in the
findings. The Senate Foreign Relations Committee edited and condensed the
findings, removing controversial language or assertions and emphasizing areas of
Debt Cancellation. Section 3 of the original language of H.R. 2634 and S.
2166 directed the Secretary of the Treasury to seek agreement among the other
members of the Paris Club and the IFIs for the 100% cancellation of all multilateral
and bilateral debts owed by 24 poor countries that previously had not received debt
relief from the HIPC or MDRI programs. Multilateral debt cancellation was to be
financed, “to the extent possible,” the bill said from the ongoing operations,
procedures, and accounts of each international financial institution. Aid levels
should not be reduced, the bills said, when countries received reductions or
cancellations in their debt.
H.R. 2634 and S. 2166 would require that countries receiving relief under the
Jubilee plan should (1) allocate the savings from debt cancellation towards
poverty-reducing expenditures; (2) engage civil society in the allocation of these
expenditures; (3) develop and implement effective policy reforms to ensure that
savings from debt cancellation are redirected to poverty reduction efforts and that any
future borrowing be conducted in a responsible fashion; and (4) produce a publicly
available annual report disclosing how the savings from debt cancellation were used.
The Jubilee debt cancellation plan would encourage debt relief recipients to
allocate at least 20% of their national budget to such social services as basic health
care, education, and clean water for all people in the country. It also seeks agreement
among the IFIs and donors to assure that the external financing needs of low-income
countries will be met primarily through grants rather than new lending and that
countries receiving debt cancellation will not have their future levels of aid cut
proportionally (as is the current arrangement under MDRI).
As originally proposed in the House and Senate versions of the Jubilee Act,
countries would be eligible for debt relief if: (1) They are eligible for financing from
the International Development Association (IDA) but not the World Bank (i.e. IDA-
only); (2) They have transparent and effective budget execution and public financial
management systems; (3) They do not have an excessive level of military
expenditures; (4) They have not repeatedly provided support for acts of international
terrorism, as determined by the Secretary of State; (5) They are cooperating on
international narcotics control matters; (6) They do not engage in a pattern of gross
violations of internationally recognized human rights; and (7) They do not engage
in, or allow entities in their jurisdictions to engage in the proliferation of weapons of
mass destruction, related materials and components, or associated delivery systems.
The House Financial Services Committee added a new subsection to the bill
making it clear that, while the Jubilee Act directed the Secretary of the Treasury to
seek a new debt relief plan, it did not authorize the Secretary to agree to U.S.
participation in such a plan without future congressional assent.
The House Committee also added language (in Section 4 of the House bill)
requiring that the Secretary of the Treasury seek an agreement among the IFIs and the
Paris Club creditor countries that countries could receive debt relief only if they met
certain additional tests. The governments of recipient countries would need to (1)
take steps to assure that the savings from debt relief are used to improve
infrastructure, improve education and social services, reduce mortality and redress
environmental degradation; (2) make policy decisions through transparent and
participatory processes; (3) adopt an integrated development strategy emphasizing
poverty reduction through economic growth and employing monitorable goals;(4)
implement transparent policy making and budget procedures, good governance and
effective anti-corruption measures; (5) broaden public participation and popular
understanding of the principles and goals of poverty reduction, particularly through
economic growth and good governance; (6) promote the participation of citizens and
non-governmental organizations in the government’s economic policy choices; and
(7) produce an annual report disclosing how the savings from debt cancellation were
used and make the report publicly available and easily accessible to all.
The House of Representatives added two additional eligibility requirements
during its consideration of H.R. 2634 on April 16. The first, a floor amendment
proposed by Representative Dana Rohrabacher, said that countries could receive debt
relief only if their governments were chosen by, and they permit, free and fair
elections. The second, a floor amendment introduced by Representative Mario
Diaz-Balart, said that countries would not be eligible for debt cancellation if they
have business interests with Iran.
The Senate Foreign Relations Committee did not add the House amendments
regarding eligibility to the Senate version (S. 2166) of the Jubilee debt cancellation
bill. However, the Committee did add, to the criteria that countries had to meet in
order to be eligible for debt cancellation, a stipulation that their governments must
have demonstrated democratic governance and transparency in decision making.
The Senate Committee also struck from the bill the language which sought to
ensure that aid levels from the IFIs and bilateral donors would not be reduced when
countries received debt cancellation. The House left this provision of the bill
unchanged. At the urging of the United States, the G-8 countries had agreed
previously that foreign aid levels to poor countries would be reduced correspondingly
when their debt service payments were reduced through debt cancellation.7
Framework for Responsible Lending. H.R. 2634 and S. 2166 require the
Secretary of the Treasury to seek agreement among the IFIs and the Paris Club
countries on a new framework for transparent and responsible international lending
to low-income countries. The new framework should assure that official lenders are
more transparent in their credit operations and that affected communities and civil
society have opportunities to participate in loan decisions. It should also seek to
insure that all creditors (public and private) contribute to preserving the gains of debt
relief for poor debtor countries.
The House and Senate bills originally directed the Secretary to seek agreements
that would prevent certain kinds of private investors (“vulture funds”) from buying
7 Se CRS Report RS22534, The Multilateral Debt Relief Initiative.
poor countries’ international debt obligations a deeply discounted market value and
then seeking to recover the original value through legal or other processes. The
House Financial Services Committee dropped the language about “vulture funds”
from H.R. 2634 on grounds that these would be the subject of future legislation. The
Senate Foreign Relations substituted, for the original language in S. 2166, a
stipulation that the United States should work with other governments to discourage,
rather than to prevent, vulture fund activity in poor debtor countries. The Senate
Committee added additional language to the bill directing the Secretary to work with
other countries to secure commitments from non-Paris Club creditors that they would
not sell debt owed to them by poor countries to other creditors who did not intend to
provide debt relief.
The House and Senate bills originally directed the General Accountability
Office (GAO) to perform audits of the debt portfolios of countries with questionable
loans in which there were allegations that odious, onerous or illegal debt was
subscribed in order to facilitate corruption or activities that were not in the interest
of the people of those countries. The Senate Foreign Relations Committee changed
from “shall” to “should” the directive that GAO audit loans made by the IFIs and the
U.S. Government. It also replaced most references to odious debt with references to
sustainable debt, shifting the focus to a concern whether the debts were sustainable
at the time they were incurred. The Senate Committee left unchanged the directive
that these audits should investigate the process by which the loans were contracted,
how the funds were used, whether any international or U.S. laws were violated and
whether the debts were odious or onerous.
Harmful Conditionality. Original language in H.R. 2634 and S. 2166
directed the Secretary of the Treasury to seek agreement among the IFIs and the Paris
Club creditor countries that debt cancellation in the future would not be premised on
countries adopting what the legislation called “harmful” economic or policy
conditionality. The legislation mentioned, in particular, requirements that countries
impose user fees for primary health or education programs, that they raise the price
that low-income households must pay for basic public services such as education,
health care, drinking water or sanitation, that they limit workers’ ability to exercise
effectively internationally recognized worker rights (as recognized under U.S. law,)
that they adopt polices which degrade the environment or that they limit their
budgetary expenditures (particularly in the context of an agreement with the IMF) for
essential healthcare or education expenses or adopt hiring or wage bill ceilings. The
bills required the Secretary to file a report annually, during the next four years,
detailing the steps taken to accomplish the purposes of that section of the legislation.
The House Financial Services Committee replaced the concept of “harmful”
conditionality with a directive that the Secretary seek agreement among the IFIs and
Paris Club creditors that there should be no conditions on countries’ access to debt
cancellation other than the procedural and governance factors noted above. The
Senate Foreign Relations Committee deleted any references in S. 2166 to specific
practices or policies. Instead, it directed the Secretary to seek agreement that there
should be no conditionality for debt cancellation that would “significantly increase
the cost of public services for low-income households” or that deepen poverty or
degrade the environment.
The Senate Committee also struck out the requirement that Treasury report
annually on the implementation of the legislation. Instead, it required that Treasury
file a report, by the end of December 2009, showing the extent to which previous
rounds of debt cancellation were accompanied by conditionality requiring countries
to adopt user fees on primary education or health care, increases in the cost of basic
public services to low-income people, or the adoption of caps or limitations on
government spending for education and health care or hiring or wage bill ceilings.
Experts disagree about the extent to which multilateral and bilateral debt cancellation
in the past has been predicated on countries adopting economic or policy conditions
of that sort.
Other Matters. The House Financial Services Committee added a new
Section 5 to H.R. 2634 expressing a Sense of Congress that the United States should
pay off its $596 million in arrears (overdue payments) to IDA and the regional
development banks. It also said the United States should become current on all its
commitments to fund debt reduction through the HIPC and MDRI programs. The
Senate Foreign Relations Committee added a new Section 3 to S. 2166 stating a
similar Sense of Congress recommitting the United States to fund its existing arrears
to the multilateral banks. It also expressed a Sense of Congress that the provision of
debt cancellation to a low-income country should not be followed by a reduction in
the level of U.S. development aid. It said the United States should encourage other
creditors not to make such reductions in their levels of aid to those countries.
During its consideration of H.R. 2634 on April 16, 2008, the House approved
an amendment by Representative Alcee Hastings of Florida (new Section 6)
expressing the Sense of Congress that the Secretary of the Treasury should seek the
immediate and complete cancellation of all Haiti’s debts to the IFIs or an immediate
suspension of debt repayment obligations. The Senate Foreign Relations Committee
added a corresponding Section 6 to S. 2166, urging a similar cancellation of Haiti’s
debts or debt service payments to the IFIs.
The Senate Committee also added a new Section 7 to S. 2166. This directed the
Secretary of the Treasury to submit a report to Congress by the end of June 2009,
discussing the feasibility of adding a new loan facility to the IMF. The new facility
would be intended to provide temporary financing to help low-income countries
cover their debt service obligations in situations where their economies have been
struck by economic shocks beyond their control. The bill mentioned, for example,
natural disasters and sharp spikes in commodity process. It said that a facility of this
sort would minimize the need for additional debt relief in the future.
There are 24 countries that only receive IDA assistance, but for various reasons
are not included in the HIPC or MDRI debt reduction plans. Most often they were
not included because their debt burden was considered to be sustainable at the time
the list of HIPCs was compiled and they therefore were not deemed to need debt
cancellation. They include Angola, Bangladesh, Burma, Cambodia, Cape Verde,
Djibouti, Georgia, Kiribati, Kenya, Kyrgyz Republic, Lesotho, Maldives, Moldova,
Mongolia, Nigeria, Solomon Islands, Somalia, Tajikistan, Timor-Leste, Tonga,
Republic of Yemen, Vanuatu, Vietnam, and Zimbabwe. Supporters of the legislation
expect nine of the 24 countries would immediately qualify for debt relief: Georgia,
Cape Verde, Samoa, Vietnam, Kenya, Mongolia, Lesotho, Moldova, and Vanuatu.8
Table 1 shows the total long-term debt of each of these countries, plus the
amount each owes to the IMF. (For technical reasons, debt owed to the IMF is not
considered long-term debt.) It also shows the share of each country’s export income
that is used for total debt service (TDS). This includes payments of both principal
and interest. In some instances, the latter data were not available.9
Table 1. Jubilee Act Beneficiaries: Debt and Debt Service (2004)
(Millions of U.S. Dollars)
Term DebtCreditorsCreditorsCreditors Service
Angola 8,630 3,055 379 5,196 0 15
Bangladesh 19,171 3,906 14,722 543 231 5
Burma 5,646 3,508 1,285 853 0 4
Cambodia 3,016 2,066 950 0 97 8
Dj ibouti 415 114 245 56 21 NA
Georgi a 1,434 596 835 3 266 11
K e nya 5,978 2,226 3,426 326 103 9
Lesotho 726 92 563 71 38 5
Maldives 305 34 185 86 0 5
Moldova 753 262 449 42 126 12
Mongolia 1,306 497 809 0 44 3
Nige ria 31,303 26,098 2,964 2,241 4,586 8
Sol o mo n 155 39 112 4 0 NA
Soma lia 1,949 1,119 793 37 174 NA
T a j i ki stan 744 249 485 10 122 7
V a nuatu 81 9 72 0 0 NA
V i etnam 15,411 9,249 4,697 1,465 277 NA
Yeme n 4,800 2,538 2,185 77 376 4
Zi mb abwe 3,558 1,471 1,610 477 293 NA
(Timor-Leste and Kiribati are not included because data were unavailable.)
Source: World Bank. Global Development Finance, 2006
8 Frequently Asked Questions on the Jubilee Act: How Much Will it Cost?, Jubilee USA
Network, April 16, 2008. Available at [http://www.jubileeusa.org/jubilee-act.html].
9 Data in Table 1 are from 2004, the last year for which across-the-board data for all
countries was available.
As Table 1 indicates, Nigeria, Bangladesh and Vietnam would be the largest
beneficiaries of Jubilee debt cancellation. Burma, Kenya, Yemen, Zimbabwe and
Cambodia would also benefit substantially. None of the countries listed in Table 1
have debt service ratios as high as the 15 to 20% levels that were an objective of the
1999 Enhanced HIPC debt cancellation program.10 As noted before, it was on
account of their comparatively lower debt service ratios that these countries were not
originally included in the HIPC program.
The per capita income and poverty levels of the countries shown in Table 1 are
comparable, however, to most of the countries that were beneficiaries of the HIPC
program. In fact, several of these countries have per capita income levels that are
lower than countries in the HIPC group.
In 2005, the focus of attention shifted, with the advent of the MDRI, from debt
sustainability to 100% debt cancellation for the countries of the HIPC group. On that
basis, many questioned why one group of very poor countries should have their
foreign debts eliminated while the countries of similar group received no debt
cancellation at all. The Jubilee debt cancellation bill is a reflection of that concern.
Estimated Cost of the Jubilee Act
The additional countries that would be eligible for Jubilee debt relief owe the
United States a little over $2.2 billion. The Jubilee USA Network (see note 7 above)
estimates that to cancel the bilateral U.S. debt covered in the proposal would cost
approximately $957 million, depending on which countries “opt in” to the agreement
and the discount rate applied in determining the net present value of the debt that is
forgiven. This is in line with official U.S. estimates. According to the U.S.
Department of the Treasury, the cost of forgiving additional U.S. bilateral debts
covered under the Jubilee Bill would be approximately $700 million to $1 billion.11
The Federal Credit Reform Act of 1990 says that Congress must appropriate a sum
equal to the net present value of the debt before the U.S. Government can write off
any obligations owed to it by countries, institutions or individuals. Table 2 shows
the amounts that the potential beneficiaries of the Jubilee Act owe to the IMF and
World Bank. Table 3 shows the amounts that they owe to the U.S. Government and
the likely budgetary cost of cancelling those debts.
To cover the multilateral costs of Jubilee debt relief, the proposed Jubilee Act
states that “to the extent possible, financing the debt cancellation [should come] from
the ongoing operations, procedures, and accounts of the institution, without
undermining the financial integrity of the institutions.” (H.R. 2634, Section 3.) It is
unclear, however, given that IDA-only borrowers account for a substantial share of
multilateral development bank (MDB) operations, with over $30 billion in
outstanding debt, whether adequate funds are available from internal sources to fund
10 Except perhaps for Angola, where debt to private creditors comprises a significant share
of the total.
11 E-mail exchange between authors and the Department of the Treasury, April 18, 2008.
debt cancellation without additional contributions by donor countries.12 The IBRD
general reserve currently contains about $37 billion in paid equity and retained
earnings. Proponents claim that the World Bank could transfer $10 billion to IDA
from its general reserve to fund debt cancellation.13 They also say the World Bank
could transfer an additional $3.9 billion by 2020 by increasing its allocation to IDA
from IBRD net income by $300 million annually. Furthermore, they argue that the
International Finance Corporation (IFC) could similarly transfer $5.9 billion from
reserves and net income through 2020 for this purpose. Also, they say the
International Monetary Fund could sell some of its stockpile of gold to fund
additional cancellation of debt owed to IDA by potentially eligible poor countries.
As discussed below, there are reasons to question whether internal resources of this
magnitude will be available.
12 These figures on IBRD assets are drawn from the World Bank Annual Report, 2007.
13 See, for example: Thomas Chupein, World Bank Group Resources & Debt Cancellation.
Briefing note 6, June 2008. A joint publication of the American Friends Service Committee
and the Jubilee USA Network. Available at [http://www.jubileeusa.org].
Table 2. Debt Owed to IFIs, 2007
Millions of U.S. Dollars
Countries that are not HIPCs, but are IDA-only
Bangladesh 500.4 10,098.2
Dj ibouti 17.4 147.1
Georgi a 236.8 876.2
K e nya 213.1 2,931.9
Mongolia 26.8 328.8
V i etnam 176.8 4254
Zi mb a b w e a 138.9 977
Sub-T otal 1,927.6 27,889
HIPC Opt-out Countriesb
Sub-T otal 282.6 3,133.9
Source: IMF and World Bank websites, October 2007. Includes IDA and IBRD.
a. Zimbabwe is currently considered a “notional blend” country by IDA, so it is unclear if
it would meet the IDA-only requirement at this time. However, if Zimbabwe re-engages with
the donor community in the future, it is likely to be reclassified as IDA-only.
b. These countries may have been eligible for HIPC, but declined to participate. Sri Lanka’s
debt ratios since have fallen below the thresholds for HIPC eligibility. They would be a
potential beneficiaries under the Jubilee Act.
Table 3. Potential U.S. Bilateral Costs, 2007
To Forgive Bilateral Debt Owed the U.S. Government
(Millions of U.S. Dollars)
Countries that are not HIPCs, but are IDA-only
CountryUS CreditEst. Budget Cost toa
Bangladesh 250.9 177.1
Cambodia 425.6 64.7
T a j i ki stan 16.3 5.1
Zi mb a b w e b 188.9 16.3
Sub-T otal 1,943.4 761.2
HIPC Opt-out Countriesb
Sub-T otal 563.4 376.3
Source: Foreign Credit Reporting System data as of 6/30/07.
a. Actual costs would vary depending on the timing of debt forgiveness. It is also unlikely that all
countries would be eligible for debt relief in the first year.
b. See Notes to Table 2.
According to the World Bank’s 2007 annual report, IDA-only countries
represent $51.3 billion of $102.5 billion of outstanding IDA credits.14 This balance
is after IDA’s write-off of $32.6 billion of development credits to 22 IDA-only
countries that have completed the HIPC/MDRI process. Debt burdens for all
HIPC/MDRI countries have declined dramatically. The World Bank estimates that
overall debt burdens will decrease from $105 billion prior to the HIPC program’s
introduction to an estimated $8 billion once the MDRI program is completed.
The 24 countries covered by the Jubilee debt relief legislation were not
beneficiaries of the HIPC program. According to the World Bank 2007 Annual
Report, IDA has approved $34.27 billion in loans to these countries, of which $26.11
billion has been disbursed and $8.1 billion is awaiting disbursement. Several
prospective loans are under consideration for these countries and may be approved
before the end of the 110th Congress. The Jubilee debt relief bill has no cutoff or
effective date beyond which loans will not be included in the loan cancellation plan.
Thus, loans that have not yet been approved may be eligible for debt cancellation by
the time the debt cancellation program proposed by Jubilee Act becomes effective.
Theory of Debt Cancellation
Debt Overhang: Theory
From an economic perspective, debt relief is grounded in the “debt overhang”
theory, which holds that the accumulation of a large stock of unpayable debt will
inhibit development by disuading potential lenders and investors. The theory had its
origins in the debt experience of Latin America in the 1980s. It was formulated in
light of the positive economic growth that several heavily indebted countries
experienced following a 1989 debt relief initiative known as the “Brady Plan,” named
after then-U.S. Treasury Secretary Nicholas Brady.15 Under the Brady Plan,
substantial amounts of debt owed to private creditors was cancelled, with the backing
and assistance of the multilateral agencies, and growth in the region revived.
The theory suggests that if investors expect a country’s debt level to impair its
ability to repay its loans, they will not invest out of a concern that the government may
resort to distortionary measures, such as expanding the money supply (which
promotes inflation) or raising taxes on their profits to finance debt payments.16 Even
if the debt is not being serviced, the theory suggests that it is still an impediment to
economic growth because of the overhang of debt discourages new private investment.
14 World Bank. Annual Report,2007.
15 Walter Molano, “From Bad Debts to Healthy Securities? The Theory and Financial
Techniques of the Brady Plan,” Business and the Contemporary World, VIII, 1997, No. 3-4.
16 Paul Krugman, “Financing vs. Forgiving a Debt Overhang.” Journal of Development
Economics, vol. 29, 1988, pp. 253-268; and Jeffrey Sachs, “The Debt Overhang of
Developing Countries,” in Guillermo A. Calvo and others, eds., Debt Stabilization and
Development, Essays in Memory of Carlos Dias Alejandro, Oxford, U.K.: Basil Blackwell,
When a large stock of external debt is present, creditors could continue lending
rates in hopes that this will spur economic growth and that the recipient country will
one day be able to repay its debts. Creditors are generally unwilling to make new
loans, however, when they are not being repaid for their prior loans. According to
debt overhang theory, it is better to forgive the debts, either entirely or to some
reduced “sustainable” level so that investor confidence will be restored. With this
renewal of confidence, the inflow of private investment will resume, economic growth
will resume and the country will be able to borrow additional money and service debt
at a higher level of national income.
Debt Overhang: Evidence
A 2002 study of 93 developing countries between 1969 and 1998, and a follow-
up study of 61 countries over the same time period, were cited as strong support for
the debt-overhang theory. The first study found that external debt began to have a
negative impact on growth when its net present value17 exceeded 160% to 170% of
exports and 35% to 40% of GDP. Study simulations suggest that doubling the average
stock of external debt in these countries would slow down annual per capita growth
by ½% to 1%. The second study found that doubling a country’s average external
debt level would reduce growth of both per capita physical capital and productivity
by almost 1%. The studies concluded that large debt stocks negatively affect growth
by slowing both the accumulation of physical capital and productivity, often at the
expense of investment.18
The question, however, is whether this theory — which grew out of the
experience of middle-income developing countries — is relevant also for poor
countries. Several studies suggest that it is not. They point to two key differences
between the Brady and HIPC countries.19 In contrast to the Brady countries, there
never was a significant amount of private investment in the HIPC countries, and the
HIPC countries have never suffered a negative net flow of resources because inflows
of foreign aid are typically more than sufficient to cover debt payments.20 Moreover,
debt relief that the HIPC countries have received has not been sufficient to allow them
access to private sector credit markets.
17 Net Present Value (NPV) of a country’s total debt is the discounted sum of all future
debt-service obligations (interest and principal). This measure takes into account the degree
of concessionality of a country’s debt stock. Whenever the interest rate on a loan is lower
than the market rate, the resulting NPV of debt is smaller than its face value.
18 Catherine Pattillo, Helene Poirson, and Luca Ricci, “External Debt and Growth,” IMF
Working Paper No. 02/69, April 1, 2002; and Catherine Pattillo, Helene Poirson, and Luca
Ricci, “What Are the Channels Through Which External Debt Affects Growth?,” IMF
Working Paper No. 04/15, January 1, 2004.
19 Countries receiving assistance through the Brady Plan were Argentina, Brazil, Bulgaria,
Costa Rica, the Dominican Republic, Ecuador, Ivory Coast, Jordan, Mexico, Nigeria,
Panama, Peru, the Philippines, Poland, Russia, Uruguay, Venezuela and Vietnam.
20 Serkan Arslanalp and Peter Blair Henry, “Helping the Poor to Help Themselves: Debt
Relief or Aid,” National Bureau of Economic Research Working Paper 10230, January
Experience suggests that official creditors behave differently than private
creditors when they are faced with debtors that do not pay. Rather than retrenching
or withdrawing, as private lenders might have done, the HIPC countries’ bilateral aid
donors continued to provide those countries with substantial amounts of aid during the
Bilateral creditors do not seem to be dissuaded from providing needy countries with
new assistance, as theory would predict, by the overhang of unpaid debt that those
countries already owed. In the case of the HIPC and MDRI programs, the goal of debt
cancellation is not one of encouraging foreign donors to provide more (because the
debt overhang is reduced) but rather one of reducing the amount that the poor
countries need to pay to service their debts. The resources to fund new development
activities comes from diversion of the debt service funds to other uses rather than from
new flows of official or private funds from abroad.
Debt cancellation can be effected relatively quickly, but the benefits of the debt
cancellation accrue to the recipient countries much more slowly. Debt cancellation
does not transfer new resources. Rather, it eliminates the requirement that countries
make debt service payments to retire their debt. The benefit of debt cancellation
accrues to the former debtor, not at the time the debt cancellation is announced, but
rather at the time the country would otherwise have had to make payments to service
its debt. The amount the recipient saves will depend less on the size of its debt than
on the terms and conditions of the loans themselves. Concessional-rate loans
accounted for much of the debt scheduled for cancellation through the HIPC and
MDRI programs, as is most of the debt that would be cancelled through the Jubilee
Act. The annual payments for concessional rate loans are relatively small compared
to the face value of the debt.21 Consequently, the amount the beneficiaries will be able
to spend for the poverty alleviation and social development activities mandated by the
Jubilee Act will be modest and distant in time from their present needs.
It is possible that many of the potential beneficiaries might not be able to qualify
for debt relief under the Jubilee debt cancellation plan. The Senate bill (S. 2166) says,
for example, that — in order to be eligible — countries must have “transparent and
effective” fiscal and budgetary mechanisms in place to ensure that the savings from
debt relief will go towards poverty reduction. They must also demonstrate democratic
governance and transparent decision-making. The House bill (H.R. 2634) requires
that countries make their policy decisions through transparent and participatory
procedures, they meet “good governance” standards, they have effective
anti-corruption measures in place, and they have democratically elected governments.
21 For IDA loans, for example, the payments are zero percent of the outstanding
balance during the first 10 years, 2% annually during the next ten years, and 4%
annually during the final twenty years of the repayment period. This means that 80%
of the benefit from debt cancellation will not accrue to the recipient until at least 20
years from the date the original loan was approved.
They must also promote the participation of citizens and non-governmental
organizations in the economic policy choices of government.
The proponents of the Jubilee Act say that nine countries (Georgia, Cape Verde,
Samoa, Vietnam, Kenya, Mongolia, Lesotho, Moldova and Vanuatu) are likely to
meet right away the requirement that they have “transparent and effective” fiscal and
budget mechanisms.22 It seems likely, though, that some of these countries and many
others on the 24-country list may not meet the other standards included in the
legislation. Many would likely need time and foreign aid before they can meet the
governance and procedural standards embodied in the House and Senate bills.
The original point of the HIPC program was a concern that too much of a
country’s scarce foreign exchange resources were being used to fund debt service and
not enough was available for development purposes. The MDRI and the proposed
Jubilee Act would require that countries spend their savings from debt cancellation
on programs aimed at the alleviation of poverty. For the most part, however, those
expenditures are made in the countries’ own currency and not in foreign exchange. In
effect, the money in a government’s budget that previously would have been used to
purchase the foreign exchange needed for debt service can be used instead for
domestic social or development programs. The HIPC and MDRI programs anticipate
that foreign aid levels will decline in pace with the reduction in the former debtor’s
debt service obligations. The “freed-up” foreign exchange, the money that would
have been used previously for debt payments, is now expected to be the source of
funding in lieu of development aid.
The Jubilee debt cancellation bill says nothing, however, about the way countries
should use their “freed-up” foreign exchange. Countries can chose to use that money
to fund the import cost related to new development activities if they wish, but there
is no obligation that they do so. The money could be used instead to fund the
purchase of consumer goods, luxury goods, arms or other things that are not basic to
the development process. There is no assurance under the current legislation that a
country’s expenditures for development-related imports will increase beyond the level
needed to supply the incidental requirements of the country’s enhanced domestic
Debt cancellation is seen by many as a relatively inexpensive way to provide
additional aid to needy countries. The money has already been contributed to the
recipient country. Only a small amount of new money is needed to cancel the
outstanding balance. The key word is “additional.” The World Bank’s Independent
Evaluation Group (IEG) reported in 2003 that aid flows to HIPC debt cancellation
recipients increased after the onset of the HIPC program but that aid levels overall had
22 Frequently Asked Questions on the Jubilee Act: How Much Will it Cost?, Jubilee USA
Network, April 16, 2008. Available at [http://www.jubileeusa.org/jubilee-act.html].
decreased.23 Consequently, IEG said, “there appears to have been redistribution from
non-HIPCs to HIPCs since 1998.” Aid to non-HIPC poor countries declined as the
existing resources were concentrated more on the HIPC beneficiaries. The fact that
the costs of funding debt relief are generally charged against the donor countries’
foreign aid budget compounds the problem.
If the new round of debt relief contemplated by the Jubilee debt cancellation bill
is accompanied by an increase in the overall levels of foreign aid, then other countries
will not see their aid levels fall when the countries in the group targeted by the Jubilee
legislation receive new debt relief. On the other hand, if aid levels do not increase in
proportion to the benefits the new beneficiaries from the Jubilee program, the gains
for the Jubilee beneficiaries will be matched by losses by the non-Jubilee countries
and the overall development effect of the Jubilee debt cancellation program could be
neutral at best.
The House and Senate Jubilee debt reduction bills both contain high standards
that countries must meet in order to qualify for assistance under the proposed
program. The question is whether this is a way of seeing that only “worthy” countries
receive debt relief or whether the standards are an integral tool in the development
process that is the goal of the legislation.
Some of the standards seem to be aimed at rewarding countries — for example,
those with democratically elected governments, no business contacts with Iran,
cooperative policies regarding international terrorism, drugs and mass weapons
proliferation — that have pursued what might be considered desirable goals. Those
goals may not have much connection to the development process itself. Other
standards in the legislation, however, do have such connections. These include the
requirements that countries make policy through transparent and participatory
procedures and that they have transparent policy and budgetary procedures, good
governance and effective anti-corruption procedures.
Many analysts believe that weak governance and a lack of institutional capacity
are greater barriers to growth in poor countries than is the overhang of unpaid debt.
Difficulty in managing debt is often a symptom, they believe, of deeper and more
fundamental economic and societal problems. Political leaders in developing
countries are often aware of these difficulties but find it difficult to mobilize the
support necessary to overcome entrenched resistance to change. The prospect that
their countries’ foreign debts may be cancelled if they undertake the needed reforms
may be an incentive that will capture the popular imagination and facilitate reform.
Debt cancellation by itself might have only limited positive effects if underlying
conditions in the governance and policy process are unchanged. However, if countries
are able to find the political will to institute the reforms that are necessary to qualify
for debt cancellation under the Jubilee Act, they will likely be able to make more
effective use of the resources freed by debt cancellation than they might otherwise
23 World Bank. An OED of the HIPC Initiative. Operations Evaluation Department (later
renamed the Independent Evaluation Group.) 2003.
have been. Indeed, some analysts believe that it is the process of making and
achieving those changes, rather than the proceeds from debt cancellation, that would
have the most positive developmental effects.
Funding Jubilee Debt Relief
The Jubilee Act does not authorize the United States to spend money to help
provide additional debt relief. Appropriations will be required, however, if the
program goes into effect and the United States agrees with others to cancel debts owed
to it by the proposed beneficiary countries. The Jubilee Act presumes that the
international financial institutions will use “internal resources” (money currently in
their financial reserves and anticipated future IFI income) to offset the cost of
cancelling the debt which is owed to them. There may be enough money available
from these sources to offset much of the cost of multilateral debt cancellation.
It is uncertain, however, that other IFI member countries will want to make debt
cancellation for this particular group of countries their highest priority and to dedicate
the IFIs’ internal resources to that goal. In that case, debt cancellation for those
countries will require either that the international agencies absorb the cost by
shrinking the size of their programs or that the United States and other donor countries
contribute money to offset that cost. IDA, for example, has typically funded about
40% of its new loans with money received from the repayment of earlier loans.24 If
those “reflows” are reduced, IDA will either need a new source of funding to make up
the difference or it will have to reduce its future level of assistance to recipient
Funding MDB debt cancellation for these 24 countries from MDB and IMF
“internal resources” may be difficult to achieve. There are competing claims for those
resources. Following a recommendation by the World Bank’s Development
Committee in 1999, for example, the IBRD’s member country governments have been
allocating a major share of the Bank’s net income each year towards expanding IBRD
reserves. Since then, the ratio of IBRD equity (paid in capital plus retained earnings)
to outstanding loans has increased from 23.9% to 40.8%. This means that the IBRD
has almost $41 dollars in reserves for every $100 of outstanding loans.25
It is conceivable that the Bank’s member countries may decide that IBRD net
income is sufficient and that a larger share of the IBRD’s net income could now be
allocated for other purposes, such as debt cancellation. Jubilee USA proposes that
the IBRD transfer an additional $300 million annually from its net income for the next
dozen years in order to fund debt relief for the 24 countries addressed in the Jubilee
bill. The World Bank has been doing this already. In the past three years, it allocated
$1.7 billion from its net income to help fund IDA and various debt relief initiatives.
It also made similar transfers previously. It is not clear, though, that the Bank’s
member countries would agree that debt cancellation for these 24 countries is the
highest priority goal for which they want to make a long-term commitment of these
24 Jonathan E. Sanford, “IDA Grants and HIPC Debt Cancellation: Their Effectiveness and
Impact on IDA Resources,” World Development, September 2004.
resources. In the future, for example, there might be competing claims that substantial
amounts might be spent from the IBRD net income to meet pressing international
health or poverty-alleviation or environmental concerns. Countries may have different
views as to how these present and future claims should be weighed.
There may be less reason to believe that the World Bank’s member countries will
be willing to withdraw substantial sums from the Bank’s reserves to pay the cost of
debt cancellation for these 24 countries. As noted earlier, the Bank’s member
countries have made a concerted effort since 1999 to expand the size of the reserves.
The Development Committee26 believed the Bank needed larger reserves so it could
take on more risks in its loan program in order to enhance their development impact.
The Committee thought the IBRD should expand the size of its operations in some
countries, even if this meant that the share of its exposure in individual countries
would increase. The Committee thought the Bank should be more innovative and
more willing to lend money in the face of difficult and risky problems. It also thought
the Bank should expand its volume of lending to lower middle-income countries even
though these countries were often considered less creditworthy than are emerging
market borrowers. These initiatives all increase the risk factor in IBRD lending and
they still seem to be present concerns. If the size of its reserves were to shrink,
because money was allocated for other purposes, the Bank’s member countries would
likely need to decide whether its loan program should become more cautious or
whether it should go ahead with these activities even though its financial backstop had
Another effect of a reduction in the size of the IBRD’s reserves might be a
reduction in the size of the Bank’s annual income. The Bank invests its equity and
retained earnings in order to generate income to fund its operating costs. In 2007, the
IBRD earned about $1.2 billion from investments while its total net income for the
year (exclusive of mark-to-market adjustments on the value of its portfolio) was about
$1.7 billion27. If the Bank’s investment income diminishes as a result of the decline
in the size of its reserves, the IBRD would face difficult choices. It might need to
consider whether to reduce the amount it allocates annually from surplus revenue for
humanitarian and development aid, whether to reduce its administrative budget
further, or whether to increase its amount it charges its IBRD borrowers so as to
increase its revenue from loan operations. Each of these choices has pitfalls that the
member countries would need to discuss.
Jubilee USA has also proposed that debt cancellation might be funded through
the sale of gold by the IMF. IMF gold sales have always been a sensitive and
controversial topic. At present, the IMF member countries are proposing that a
26 The Development Committee is a forum of the World Bank and the IMF that facilitates
intergovernmental consensus-building on development issues. The Committee’s mandate
is to advise the Boards of Governors of the Bank and the Fund on critical development
issues and on the financial resources required to promote economic development in
27 The World Bank 2007 Annual Report, available at [http://web.worldbank.org
/ W BSIT E/ EX T E RNAL/ E X T ABOUT US/ E X T ANNREP/ 0,,menuPK : 139 7243~page PK :6
substantial amount of gold should be sold in order to create an endowment fund that
will pay the costs of the IMF’s research and surveillance activities. Because its
lending volume has substantially declined, the IMF does not currently have enough
income to cover its operating expenses. The member countries are proposing that the
IMF’s “public goods” activities should be funded independently through an
endowment. A proposal to approve IMF gold sales for this purpose is expected to
come to Congress in 2009.
It is unlikely that the IMF member countries will abandon the proposal that gold
be sold in order to underwrite the Fund’s administrative costs so that gold sales for
debt reduction can be the new priority. More likely, if the IMF were to propose that
gold be sold to pay for debt relief, it would be in addition to the existing plan. Careful
negotiations were necessary to secure agreement for the current gold sale plan. It is
not clear that gold producer countries, central banks and other holders of gold would
easily endorse a plan to roughly double the amount of gold the IMF could sell.
Likewise, it is not clear that Congress would easily endorse a larger gold sale plan.
There have been many proposals in the past that gold be sold by the IMF to help
finance IDA debt forgiveness.28 Institutionally and substantively, there has been
strong resistance among the members to that idea. Careful discussion would be needed
within the U.S. Government and among the IMF member countries to see if there is
sufficient support now for an expanded gold sale plan.
In the past, and as proposed in the Jubilee debt cancellation bill, poor countries
have had to meet specified conditions in order to qualify for debt cancellation. At the
decision point, however, once they have qualified, their debt payments are irrevocably
cancelled and they do not need to take additional steps (or maintain the reforms they
adopted to qualify) in order to retain the benefits of debt cancellation. Supporters say
this procedure is necessary in ensure stability and to assure countries that they can
program the money gained from debt cancellation without worry that their debt
cancellation will be taken away. Critics argue, however, that there is no assurance
under this procedure that the reforms adopted to qualify for debt relief will be
sustained. Many instances have been cited where adherence to the reforms has
deteriorated once debt cancellation has been achieved.
Those who share this latter concern might consider whether some form of
tranching might be employed to ensure that countries continue to meet the standards
that were required for debt cancellation once their debt cancellation program has been
approved. For example, countries’ debt payments for a five year period might be
forgiven on the understanding that, to have their debt payments for the next five years
similarly waived, they must continue to meet the terms they had to meet in order to
qualify for debt relief in the first place. Currently, the debt cancellation under the
HIPC program is an irrevokable action. Once a country qualifies for cancellation, it
no longer needs to make future payments on the forgiven loans even if it regresses on
its policy reforms or it equivocates on its promises.
28 See CRS Report RS22729, International Monetary Fund (IMF): Financial Reform and
the Possible Sale of IMF Gold, by Martin A. Weiss and Jonathan E. Sanford.