Japan's Official Development Assistance White Paper 2006

Main Text > Part II ODA DISBURSEMENTS IN FISCAL YEAR 2005 > Chapter 2 Details about Japan's ODA > Section 2. Measures for Each of the Priority Issues > 2. Sustainable Growth > (7) Debt-related Efforts

(7) Debt-related Efforts

Debt is one of the issues that hinder sustainable growth of developing countries. As long as these countries can maintain their repayment capacity by effectively using the received funds and thus ensuring future economic growth, the debt does not pose a problem. However, if a country has little repayment capacity and becomes overburdened with excess debt, it could be inhibited from sustainable development. Many developing countries have borrowed financial resources from overseas in order to secure funds for development. Due to the oil shock of the 1970s and the drop in primary commodity prices, the international balance of payments in developing countries deteriorated, and they ended up accumulating debts at an unsustainable level in light of their economic conditions.

    Such debt issues must be resolved by the indebted countries themselves by taking the initiative in managing the debt while putting forth reform and other efforts. However, at the same time, their excessive debt must not stand in the way of their development path. While taking the basic stance that it is necessary for developing countries to achieve medium- to long-term growth and regain their debt repayment capacities though their own efforts, Japan has been tackling with the debt issue within the international framework.

    Specifically, Japan provides debt relief measures in line with the Paris Club. While debt rescheduling23 used to be the most common form of debt relief within the Paris Club, debt cancellation measures have also been offered by the club since the late 1980s. Furthermore, in the past debt relief was not granted for debts owed to international financial institutions. However, with the agreement on the Heavily Indebted Poor Country (HIPC) Initiative24 at the Lyon Summit in 1996, debt cancellation measures were agreed upon to reduce the debt of HIPCs to a sustainable level by granting debt relief that also applies to international financial institutions and commercial creditors.

    "Debt Sustainability for the Poorest,"25 a statement which was released at the Sea Island Summit in 2004, reconfirmed that the leading industrialized nations would work to fully implement the HIPC Initiative and to ensure debt sustainability in the poorest countries.

    Moreover, at the Finance Ministers' Meeting in June 2005 and the Gleneagles Summit in July 2005, both of which took place in the UK, the G8 agreed on the proposal to reduce 100% of the debts that the HIPCs owe to the IMF, IDA, and African Development Fund (AfDF).

    In addressing the debt issue faced by the poorest countries, Japan has contributed approximately US$5.4 billion to the 29 countries for which it was decided to apply the Enhanced HIPC Initiative. Japan's contribution is around one fifth of the total amount (US$25.9 billion) of debt relief (in the form of debt cancellation) granted by the G7 countries, and is of the largest contribution offered for this initiative. Japan will continue to promptly and steadily put this initiative into implementation in the future.

    Japan had long offered debt relief to yen loans by providing grant aid (debt-relief grant). However, from the viewpoint of resolving the debt issue more promptly, reducing the burden on the indebted countries, and promoting transparency and efficiency of ODA, Japan began in FY2003 to provide debt relief to countries that have hitherto received the debt-relief grant by writing off their yen loans. In FY2005 under the Enhanced HIPC Initiative, Japan wrote off a total of approximately ¥139.5 billion worth of yen loans extended to four countries (approximately ¥17.5 billion to Madagascar; approximately ¥46.5 billion to Honduras; approximately ¥74 billion to Zambia; and approximately ¥1.5 billion to Rwanda). Furthermore, Japan has also begun to apply debt cancellation for commercial claims26 (about ¥7.4 billion to Bolivia). As a result, the total official claims that were written off in FY2005 were approximately ¥146.9 billion, with the cumulative total of debt cancellation since FY2003 amounting to ¥603.8 billion. Japan will conduct monitoring in cooperation with the international community based on the Poverty Reduction Strategy Paper (PRSP) to ensure that debt cancellation will contribute to poverty reduction and the overall social and economic development of the indebted countries.

    Among the low-income and middle-income countries other that HIPCs (hereinafter referred to as "non-HIPC countries"), there are also countries which owe heavy debts, and appropriate measures must be taken to make sure such debts do not stand in the way of their stable, medium- to long-term development. To address the debt issue faced by the non-HIPC countries, measures that match the situation of each indebted country are considered individually by focusing more on their debt sustainability under the Evian Approach.27 Based on the agreement of the Paris Club addressing non-HIPC countries, Japan applied debt relief measures to Serbia and Montenegro in May 2005; the Dominican Republic and Kyrgyz in September 2005; Iraq in November 2005; Gabon in December 2005; Nigeria in February 2006; and Kenya in March 2006.

    Japan and other creditor countries of the Paris Club have also taken steps to resolve the debt issue according to the needs of each country affected by the major earthquake off the coast of Sumatra and the tsunami in the Indian Ocean in December 2004 by such means as granting a moratorium on debt payments so that reconstruction assistance can be fully provided. As a result, Japan reached agreement on this moratorium with Indonesia in October 2005 and with Sri Lanka in December 2005.