Official Development Assistance (ODA)
Part II. Recent Efforts through ODA
Chapter 1 Approaching New Challenges
Section 3 Efforts to Help Heavily Indebted Poor Countries28
1. Debt Relief Efforts to Date
Extending ODA loans is in line with Japan's principle of promoting self-help effort as the repayment obligation gives the recipient country the incentive to use the financial resources effectively. Many countries have made appropriate use of such loans to chart a successful development course. However, some poverty-stricken developing countries have failed to utilize the loans effectively due, typically, to failures in economic policies, political instability, or natural disasters and, as a consequence, they have generally fallen even more deeply into debt. Needless to say, neglecting the debt problems of these countries could have a destabilizing effect on the international economy at large. It is necessary for the international community to recognize this problem as a global economic and social issue, and further strengthen its efforts to address it.
The issue of debt has for some time been a major topic on the agenda for discussion in various UN forums and summits of the industrialized nations, and substantial debt relief has been already effected. As described below, Japan has implemented debt relief through several measures to date.
| (i) | In accordance with a resolution adopted in 1978 by the Trade Development Board (TDB) of the UN Conference on Trade and Development (UNCTAD), Japan has provided a cumulative total of ¥340 billion ($3 billion) in grant aid (debt relief grants) to 27 countries over the past 21 years for debt relief purposes, substantially writing off their debt in real terms. |
| (ii) | To provide debt relief to heavily indebted developing countries, Japan has worked actively within the international framework of the Paris Club. By FY1998, ¥940 billion in bilateral ODA debts had been rescheduled. |
| (iii) | Additionally, Japan has been at the forefront of substantial cooperation efforts, making a contribution of ¥8.4 billion (over $73 million) to the Debt Relief Trust Funds established to finance international financial institutions, such as the International Monetary Fund (IMF) and the World Bank, for the debt relief of HIPCs. |
Debt was also marked as an important issue at the Second Tokyo International Conference on African Development (TICAD II), held in October 1998. At the conference, Japan announced its intention to expand debt relief grants and to provide various types of training to improve the debt management capacities of African countries.
2. The Köln Debt Initiative and Japan's Position
The debt issue was one of the key issues on the agenda at the Köln Summit in June 1999. The summit focused on the debt issue and adopted the Köln Debt Initiative, an initiative aimed to improve and enhance the existing framework of HIPCs' Initiative to achieve "faster, broader, and deeper" debt relief for HIPCs.
In addition to the debt relief measures outlined above, in April 1999, Japan announced new proposals in a more comprehensive context of promoting development and extending debt relief to HIPCs. The proposals sought to improve and enhance the measures of debt relief under the original HIPCs Initiative, including a voluntary and additional increase in the debt reduction ratio for bilateral ODA debts from 67 percent to 100 percent. The agreement at the Köln Summit was in accord with these Japanese proposals.
The application and implementation of the Köln Debt Initiative is currently under consideration by the Paris Club and international financial institutions, and the final details were decided at the plenary meeting of the IMF/World Bank Development Committee at the end of September 1999.29 It is vital that future debt relief be implemented steadily within this framework.
Japan has worked actively toward the resolution of the debt problem, and will do so as well to implement the Köln Debt Initiative and other measures to address the debt issue, giving consideration to the following points:
| (i) | Given the fact that support for self-help efforts is central to Japanese aid policy, ownership and self-help should be fundamental conditions for the provision of debt relief. |
|
|
| (ii) | Adequate attention should be accorded to moral hazard risk. |
|
|
| (iii) | Funds freed up by actions of debt relief should be allocated to programs of poverty alleviation, education, health care, and other undertakings in social development. To that end, Japan will set limits on the scope of the end-uses of funds provided through grants for debt-relief purposes. |
| (iv) | Ensuring fair burden-sharing among creditor countries will be crucial. |
Putting over-emphasis on debt relief risks overlooking the need to maintain financial inflows to developing countries, which are crucial for their development. While measures of debt reduction are expected to alleviate the debt burden of developing countries in the short term, they are likely to impede the inflow of new money necessary for medium- to long-term development. For this reason, attention must be paid to the goal of striking an appropriate balance between debt relief and the new money option.
Moreover, to prevent the recurrence of debt-related problems and to find fundamental solutions, debtor countries need to improve their ability to follow fiscal discipline, to manage debts and to utilize borrowed funds effectively. For this purpose, Japan will continue to place emphasis on human resources development through technical cooperation. Japan will also appeal widely to the international community to give importance to improving the debtor countries debt management capacity. (Japan cosponsored a joint seminar on debt management in Kenya together with several international organizations this August as well as another seminar in Singapore from the end of November to the beginning of December.)
Chart 17 Debt Relief for Heavily-Indebted Poor Countries
(Overview of the Köln Summit Agreement)
Faster relief
Earlier debt relief measures will be provided for countries promoting economic structural reform, with international financial institutions front-loading their debt relief measures.
Deeper and broader relief
| (i) | Various options will be used to raise the level of debt reduction to 100% on ODA (yen loans) claims for qualifying countries. |
| (ii) | The level of debt reduction on non-ODA claims (EXIM Bank credits, government guaranteed commercial credits) will be raised to 90 percent or further, if needed. |
| (iii) | Debt sustainability targets will be lowered, allowing deeper debt relief and expanding the number of countries qualifying for debt relief. |
Effect of debt relief
The resources freed up by debt relief should be used in social development, such as poverty alleviation, education and medical care.
Financing measures (including fair burden-sharing)
Various mechanisms will be considered to secure adequate funding for the IFIs (International Financing Institutions) to reduce their claims (operating interest from the IMF's profit on gold reserve sales, optimal utilization of the financial resources of international development finance institutions, contributions to HIPC trust funds, etc.). In determining the appropriate size of contributions for a particular country, the level of the fiscal burden the country bears to effect ODA loan debt reduction will be taken into consideration under the principle of fair burden-sharing.
- HIPCs (Heavily Indebted Poor Countries) refer to the countries defined by the IMF and the World Bank in terms of the severity of their conditions of poverty and debt (namely, 1993 per-capita GNP of less than $695, with a cumulative debt as of 1993 in present value terms, at least 2.2 times the scale of exports or at least 80 percent the size of GNP). Forty-one countries have been assigned HIPC status (34 in the Middle East and Africa, four in Latin America, and three in Asia).
- In order to enhance Köln Debt Initiative, the meeting decided, in particular, to i) lower the debt sustainability thresholds, ii) provide increased debt reduction in NPV terms up to 90 percent or more for non-ODA loans, and iii) introduce flexibility to the length of the period up to "completion points", when early debt relief would be implemented by international financial institutions.