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Back to Subjects - Economics

To Forgive or Not to Forgive

To Forgive or Not to Forgive Debt is a substantial problem facing many countries in the world today. Some of the more economically stable countries are able to pay off their debt through strategic budget planning. However, there are many countries that constantly struggle to solve their debt problems. In response of this issue, the IMF and the World Bank have designed a framework to provide special assistance for heavily indebted poor countries that pursue IMF and World Bank supported adjustment and reform programs. This framework has been called the Heavily Indebted Poor Countries Initiative; it is also known as the HIPC Initiative. In this paper, I will explain the advantages and disadvantages of the HIPC Initiative. My main objective will be to explain why I think it is an appropriate obligation for the IMF and World Bank to make. To do this, I will describe the initiatives of the World Bank and IMF along with the reasons for its creation, its successes and challenges, economic advantages and disadvantages of the debt relief program, and finally some biblical perspective on debt forgiveness. First, it is important to look at what the HIPC Initiative is. The HIPC Initiative is a comprehensive approach to debt reduction for poor countries that requires the participation of all creditors. Its goal is to ensure that no poor country faces a debt burden it cannot manage. Central to the HIPC Initiative is each country’s continued effort toward macroeconomic adjustment and structural and social policy reforms. In addition, the initiative focuses on ensuring additional finance for social sector programs, primarily basic health and education. Following a comprehensive review of the HIPC Initiative, a number of modifications were approved in September 1999 to provide faster, deeper and broader debt relief and strengthen the links between debt relief, poverty reduction and social policies. The Initiative is not a universal remedy. Even if all the external debts of these countries were forgiven, most would still depend on significant levels of concessional external assistance; their receipts of such assistance have been much larger than their debt-service payments for many years. So, why was the HIPC Initiative created? It has been well recognized that the external debt situation for a number of low-income countries, mostly in Africa, has become extremely difficult. For these countries, even full use of traditional mechanisms of rescheduling and debt reduction – together with continued provision of concessional financing and pursuit of sound economic policies – may not be sufficient to attain sustainable external debt levels within a reasonable period of time and without additional external support. In September 1996, the IMF and the World Bank launched a program to address this situation. The HIPC Initiative is designed to provide exceptional assistance to eligible countries following sound economic policies to help them reduce their external debt burden to sustainable levels. Since 1996, the HIPC Initiative has had several successes in its development. A total of 23 countries reached their decision point under the enhanced HIPC Initiative by September 2001. The decision point is the phase in the Initiative process where a debt sustainability analysis will be carried out to determine the current external debt situation of the country. A total of $20.7 billion of debt relief in net present value terms ($33.9 billion in nominal debt service relief) has been committed to the 23 decision point countries under the HIPC Initiative. Combined with traditional debt relief and likely additional bilateral debt forgiveness, the HIPC Initiative will reduce the debt stock of the 23 countries by almost two-thirds from $54 billion in net present value terms to roughly $20 billion (International Monetary Fund, 2000). Despite these optimistic progressions, there have been several challenges to keeping the HIPC Initiative an appropriate decision. One question that comes to mind is how do you keep giving away money to pay off these incredibly high debts when financial resources are limited? You can not just keeping wiping out debt forever or else you may run out of resources and go into debt yourself. Another challenge is how you keep these indebt countries from making the same mistakes again in the future. It is the World Bank and IMF’s goal to establish well thought out financial plans to make sure these countries will not fall into debt again. However, they can not guarantee this because they will not be able to “hold their hand” forever. Now that the successes and challenges have been identified, we shall look at the advantages and disadvantages of the debt relief program. First of all, a debt relief program is obviously going to help out the country in debt. However, one advantage is how this could also help out the more developed nations. For instance, by relieving a country’s debt, it becomes more economically stable and opens up the market for that nation which allows other countries to do more business with them. When the market expands, that creates more demand for products sold in other countries like the United States. The United States will be able to export more to those countries in Brazil because they will be more financially stable to buy those exports. In addition, some argue that a total debt cancellation will help the attack on worldwide poverty. According to the Delechat (2001), “further reduction of debt service obligations would allow the HIPCs to make more poverty-related investments.” (p. 2). They believe the best way for the international community to support the poverty reduction strategies of low-income countries is by opening their markets to the exports for poor countries and by increasing new concessional flows. Looking at the debt relief program based on a Christian perspective, there are many examples in the Bible when debt forgiveness is encouraged. For instance, in Exodus 22: 25-27, it teaches us to have compassion for debtors who are in need. We are to be compassionate as God is compassionate to us for all we owe Him in life. Also, in Deuteronomy 15:1-11, we are given a command to cancel debts at the end of every seven years. We are to be forgiving to our “brothers” and not be hardhearted or tight-fisted. Leviticus 25: 1-43 teaches of the Sabbath and the year of Jubilee. God tells us to take time to rest and reflect on what the He has done for us. In our busy lives, we constantly struggle to manage our time. As Americans, we sometimes forget how fortunate we are to be living in this country. I often think of the much poorer countries and people that live in huts on the ground who constantly struggle with diseases and barely make enough to live on. I then begin to realize how blessed I truly really am and thank God for what He’s done for me. This is why I think having compassion and forgiveness to those who struggle a lot more than us is not only good for those countries, but is the morally and ethical thing to do in the eyes of God. Despite all the positive advantages that go into a debt relief program, there are also some important disadvantages to look at both logically and biblically. One argument made by Fantu Cheru (January, 2001), the United Nations (UN) High Commissioner for Human Rights, is that the HIPC is well intentioned but flawed. He says “the World Bank and IMF should not be given the exclusive role as overseers of poverty reduction programmers in poor counties. Other United Nations agencies should be brought into the process” (Cheru, January, 2001). This issue of giving the World Bank and IMF too much power over these indebt countries is a good example of how this debt relief program could be disadvantage. Another example of a disadvantage is the possible bad habits a country could get into while having their debt relieved. It’s very possible for the countries in Africa to become accustomed to the United States “bailing them out” of a debt crisis if this programs continues to go on. If the country relies too much on the US, then they will never be able to run for themselves as an independent country. We can tell them to use careful financial planning and budgeting. However, there may be a disincentive to use that if they get into the habit of relying on the economically stronger country. As a Biblical example, this is just like how God bails out the Israelites when they get into trouble, yet they still continue to disobey him. The Israelites disobeyed and turned their back on God, but when they got ran out of food or water they pleaded to God to help them out. This is where there should be a fine line between how far we should forgive others who are in need. Overall, despite the possible negative effects of the HIPC Initiative, the World Bank and IMF have continued to help out those countries in need. Countries that have no possible way of paying off their debt should not be ignored. I agree with the HIPC Initiative and believe it has the potential to do a lot of good for the economy as a whole. I believe it will help not only developing nations but the developed nations as well. It also has the potential to help reduce poverty in the world as Delechat describes. Also, on a Biblical perspective, I believe it clearly states that we are to forgive the debts of our neighbors. Therefore, this is why I think the HIPC Initiative is an appropriate obligation for the IMF and World Bank to have. Bibliography: Works Cited Cheru, Fantu. (January, 2001). The Highly Indebted Poor Countries (HIPC) Initiative: a human rights assessment of the Poverty Reduction Strategy Papers (PRSP). HIPC: well intentioned but flawed? (2001, October 15). Delechat, C. (2001). 100 Percent Debt Cancellation? A Response from the IMF and the World Bank. (2001, October 15). The Holy Bible – New International Version. Exodus 22: 25-27. Deuteronomy 15:1-11. Leviticus 25: 1-43. (2000, October 12). Forgiving Their Debtors. Wall Street Journal, p. A26. (2000, November 29). The Impact of Debt Reduction under the HIPC Initiative on External Debt Service and Social Expenditures. International Monetary Fund. (2001, October 15).

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