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Youthink! Issues - Debt Relief

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Debt Relief
A comprehensive approach to reduce the external debt of the world's poorest, most heavily indebted countries
© Ryan Rayburn | The World Bank

What is it?

Over the last several years, a worldwide movement has called for the cancellation of debts that poor countries owe to their creditors (developed country governments, commercial banks, and international financial institutions, such as the World Bank and the International Monetary Fund).

Why should I care?

Excessive debt has hindered poor countries' development. When countries spend all of their funds repaying debts, it is impossible for them to allocate money for essential services such as health and education. These countries can't earn their way out of debt and need help to start again.

How did countries accrue so much debt?

Much of the foreign debt owed by many low-income countries -- many of them commodity-exporting countries -- throughout the 1970s and 1980s left many nations with unsustainable debt burdens. In the 1970s and 1980s commodity prices were high, and many countries had borrowed money to fund domestic projects thinking that high commodity prices and earnings from exports would last and that eventually they would be able to repay their debt. But the oil-price shock and a global recession in the late 1970s and early 1980s caused commodity prices and exports to fall.  As a result, these countries found themselves with huge debt repayments.

What is the international community doing?

Significant progress has been made over the past decade in helping low-income countries achieve and maintain debt sustainability.

In 1996, the international community decided to give these countries a fresh start by forgiving a large portion of their debt. The World Bank, the IMF and other international lenders agreed to cancel significant amounts of the outstanding debt to countries that qualified for a program called the Highly Indebted Poor Countries (HIPC) initiative.

In return, these countries promised to reform their policies and institutions and put more money toward improving health, education and other social services, as well as to work to reach the Millennium Development Goals.

Leaders of the world’s richest countries (who are also the biggest donors), bilateral creditors and the international financial institutions are looking at ways to cancel this debt and at the same time, to fund debt relief.

How does the HIPC initiative work?

  • As of January 2012, 39 countries are participating in the HIPC Initiative.
  • Most of the 39 participating countries are in sub-Saharan Africa.
  • 32 countries are currently receiving irrevocable debt relief. These countries have achieved the reforms they agreed to at the decision point.
  • 4 countries are receiving interim debt relief. These countries are in the process of implementing the reforms they agreed to at the decision point.
  • The remaining 3 countries have not yet been able to qualify for debt relief because of social difficulties such as civil and cross-border conflict, governance problems, etc.

How have countries use the funds saved by HIPC debt relief?

Ghana built 509 new classroom blocks for basic education in all districts. Savings from HIPC funds also helped provide microcredit to about 43,000 farmers and fund 563 sanitation and 141 water projects. Senegal developed community-based health care services to create and strengthen basic community health services in rural areas.

What can I do?

If you live in a developed country, learn how much money your government gives through bilateral and multilateral assistance, and lobby your government to give more.

If you live in a developing country, learn how much money your government receives in development assistance and take action to ensure government funds are properly spent.

For more information: Debt Relief

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