Q&A: The pros and cons of debt relief

BBC News Online looks at the debate on debt relief and some of the thorny issues involved.

Why is debt relief so contentious?

Campaigners like Oxfam and Jubilee Research (which ran the "Drop the Debt" campaign) have long urged lenders to write off debt owed by poor countries.

They argue that heavily indebted countries are forced to spend more on servicing their debt than feeding or educating their children.

Multilateral lenders like the International Monetary Fund (IMF) and the World Bank are not against debt relief, but prefer to tie it to certain conditions.

Western governments are also becoming more open to debt relief and have agreed to increase the amount they write off.

However, there are concerns that debt relief might be seen as a perverse reward for countries that lack financial discipline.

"What about the good guys?" says Charles Harvey, a fellow of the Institute of Development Studies in Sussex, UK.

"Why should they keep paying if we let off the bad guys?"

Why are the World Bank and the IMF more cautious about writing off debts?

They are reluctant to cancel debt if the country in question does not have good governance or a credible government.

Countries like Somalia and Liberia are heavily indebted but will not qualify for debt relief from the World Bank anytime soon.

In addition, the World Bank and the IMF like to have a commitment from the country to re-allocate the money saved to areas such as healthcare and education.

Often countries are also expected to initiate programmes of economic reform, such as cutting budget deficits.

Egypt receives the most aid in Africa

How do lenders decide which countries to give debt relief to?

The World Bank administers debt relief through its heavily indebted poor countries (HIPC) initiative, set up in 1997.

"HIPC is a financial operation that is designed to bring the countries down to an easily manageable debt level," says Tony Gaeta, a senior operations officer at HIPC.

Currently, about 37 countries are eligible for debt relief, but about 10 of them - such as Liberia - don't meet the World Bank conditions.

The aim of the programme is to help any country with debt that is worth more than one-and-a-half times their annual export revenues.

HPIC provides relief to enable these countries to reduce their debt below this level - which is believed to be sustainable.

In 1999, the G8 leaders meeting in Cologne promised to write off $100bn in debt.

Japan is the top international donor

So why does the World Bank still attract criticism?

Oxfam argues that the HIPC process can take too long and impose too many complex conditions.

Marlene Barrett, an education campaign manager at Oxfam, also says that more needs to be done on "working out what a sustainable amount of debt is".

The charity maintains that even HIPC countries are still spending more on debt than healthcare, for example.

Ms Barrett adds that the World Bank often risks using inflated projections of a country's export revenues.

For example, after Uganda completed the HIPC programme, its coffee exports were hit by a downturn in the market.

This increased its debt costs to above the one-and-a-half times threshold - or in other words to unsustainable levels.

However, the World Bank has recently proposed using one-off, top-up payments to counter any sudden dips in a country's export revenues.

How does the lending system for poor countries work?

Currently, a three-pronged system exists.

• The IMF is like a credit co-operative, where member countries pay a subscription according to the size of their GDP.

  That money is then available for a member to borrow if it has problems.

• The World Bank has two lending arms - the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA).

  The IBRD borrows money in the financial markets and then lends it to middle-income countries and creditworthy poorer countries at a relatively low commercial rate.

  The IDA, which gets its funding from international donors such as governments, lends to the really poor countries.

  It only charges borrowers about three-quarters of a percent, which means the loans are almost like grants.

  Effectively only about $7 in every $100 is charged at a commercial rate.

• Bilateral donors include countries that lend directly to other countries.

  Unlike the banks, bilateral donors have more freedom to offer debt relief to their borrowers.

  Most donor countries belong to both the IMF and the World Bank.

The European Union is the biggest lender to Africa

Are grants better than loans?

The US government argues that the IDA should make more use of grants - where countries do not have to repay the money at all - rather than loans.

But the UK opposes this plan because it believes that grants would "seriously undermine the IDA's future financial viability".

Although IDA loans are cheap, the borrowers do pay back about 25%, which is then re-lent to other countries.