The Paris Club’s Cancellation of $1.26 Billion for Liberia Helps Combat National Debt

Sources:
The Wall Street Journal: Paris Club Agrees To 100% Debt Relief For Liberia
The Wall Street Journal: Liberia Cuts Foreign Debt By $1.2 Billion
BBC News: Liberia Hails $1.2bn Debt Pardon By Paris Club
The Paris Club Website

The Paris Club announced this week that it would help Liberia with its debt, agreeing to forgive $1.26 billion of the money the West African country owes to creditors within the organization. This comes as an enormous help to the Liberian government, which has been trying in recent years to get national debt under control. At the end of June 2007 the country owed around $4.9 billion to creditors. This amount of debt was eight times Liberia’s gross domestic product, making it the highest debt-to-GDP ratio among all developing countries according to the World Bank. Much of Liberia’s debt is the aftermath of a fourteen-year span of civil wars from 1989 to 2003.

The Paris Club is an organization of nineteen creditor countries that is dedicated to helping debtor countries establish and secure their economies. Several creditor countries formed the Paris Club in 1956, when Argentina decided to meet its public creditors in Paris to try and find a solution to their national debt. Since its establishment, the Paris Club has worked with 87 debtor countries to relieve $543 billion of debt.

Augustine Ngafuan, Liberia’s Finance Minister, reported that a large portion of the country’s budget had been allocated to paying off its debt. This $1.26 billon relief should free up funds for the country to use on social and developmental programs. The Paris Club stated that the debt cancellation was due to Liberia’s continued dedication to reducing the country’s poverty and the implementation of an economic strategy for sustainable growth. Ngafuan indicated that after the debt relief, Liberia would not borrow money again because the country is able to operate on a balanced budget and has not borrowed money from creditor countries since 2006.

This is not the first time Liberia has been able to cut its debt dramatically. In April of 2009, the country paid off $1.2 billion in debt by reaching a deal with commercial creditors. Commercial creditors accepted to receiving three cents for every dollar they were owed by the African country. This recent debt relief by the Paris Club should be another step in the right direction for Liberia by helping it further its economic and social development.

Discussion:
1.Should the Paris Club have agreed to relieve $1.26 billion of Liberia’s debt? Why do these creditor countries agree to forgive developing countries debt?
2.Should more developed countries be taking steps like debt forgiveness to help less developed countries like Liberian build sustainable economies? What are the advantages and disadvantages of this?