Debt Relief for Five Latin American Countries

Sources: Miami Herald, Bank Pardons Billions in Debt; Bloomberg News, Bank to Forgive Latin America of $3.5 Billion; Inter-American Development Bank, Press Release.

The Board of Governors of the Inter-American Development Bank (IDB) reached an agreement on debt relief for Bolivia, Guyana, Haiti, Honduras, and Nicaragua on November 17. The debt pardon is aimed at helping the countries meet the United Nation’s Millennium Development Goals (MDG), aspirational standards aimed at decreasing global poverty by 2015. While the details of the agreement have not been fully outlined, the Board will meet again in January to decide on the specific terms of the forgiveness.

Currently, one of the issues that the group must resolve is when the loan forgiveness period will begin. A later cut-off date will result in a larger debt forgiveness package, and bank officials have estimated that establishing a December 2004 date will provide a net pardon worth $3.5 billion. This proposal would provide Bolivia with $768 million in debt relief, Guyana with $365 million, Haiti with $468 million, Honduras with $1.1 billion and Nicaragua with $808 million. An earlier loan forgiveness start date will result in approximately $2.1 billion in relief between the five countries. Under the terms of the program, in order to take advantage of the agreement, the countries will have to get the International Monetary Fund’s (IMF) approval for their particular economic program. Presently, Haiti is the only country that has not done so.

IDB officials said that there was initial resistance to the loan forgiveness in Latin America because of “concerns that the write-off would weaken the IDB’s ability to provide subsidized loans in the future.” This was particularly troublesome given the fact that the IDB is the biggest loan provider in the region. Initially, Latin American countries were looking to wealthier nations help pay for the debt relief, but in the end, the IDB decided that it was strong enough to take the financial hit. At the meeting in January, the IDB will discuss ways in which it can replenish its funds to continue to provide loans. Throughout the process, the United States was a strong advocate of the loan forgiveness and is pushing for the later cut-off date so that the net worth of the pardon is maximized.

Questions:

(1) What are some of the reasons that the United States was such a vocal advocate for the loan forgiveness? What role, if any, does the fact that Bolivia has been extremely critical of the U.S. government play in the U.S. administration’s choice to push for the financial pardons? In the same vein, did the recent election of left-wing Daniel Ortega in Nicaragua influence the decision of the U.S. government?

(2) What are the benefits of loan forgiveness? What are the downfalls? Is there a fear that the effect of the loan forgiveness will not “trickle-down” and help those who most need it? Would a better way to help these countries meet the MDGs be to spend the money on specific aid projects?

For more information on debt forgiveness see University of Iowa Center for International Finance and Development Briefing No. 1: Debt Forgiveness.