Debt Relief: Will it Help Liberia?

Published on 11th May 2009

Liberia has received some sort of debt relief – a good thing on facial value. What Kenya went through in January and February last year shows that we are not immune. We or another African country that finds itself embroiled in conflict or unable to service its debts for other genuine reason could meet the fate of this once model country in West Africa.

The World Bank announced last week that Liberia had reached an agreement with her creditors to buy back outstanding debt with a face value of USD 1.2 billion at a price of USD 38 million. The discount rate of 97% is impressive, and the deal is an important step towards the completion of Liberia’s HIPC debt relief process. However, the deal has some peculiarities the World Bank’s press release conveniently forgot to mention:

1. How can a poor country end up with a debt to GDP ratio of 700 % in the first place? Liberia had stopped to service its debt more than two decades ago, when the civil war broke out. Eventually a mountain of phantom debt piled up, comprising primarily unpaid interest, and penalty interest. Liberia has already been bankrupt for many years. What was overdue was not Liberia’s debt repayment, but an international insolvency regime that is able to assess and acknowledge the solvency of states in a timely manner.

2. The deal finally clears Liberia’s books, but it does not widen its fiscal space to finance development and fight poverty. The commercial debts cancelled now have not been serviced before, their cancellation
does not free up a single cent in Liberia’s public budget.

3. The debt claims concerned were originally commercial claims, owed
to private creditors. These claims had been traded on the secondary market and ultimately sold to the still to be tamed vulture funds .

They have been bought back with public monies from the International Development Association’s Debt Reduction Facility, from Germany, Norway, the United Kingdom, and the United States. Liberia did not pay a thing (although Liberia might receive less aid in future as a result of this operation.)

But is using public money to buy back commercial debt at a discount really a good idea, while commercial lenders still refuse to participate in the HIPC- Initiative? Should hedge funds be bailed out with donor country’s official development assistance? This is not exactly what aid is supposed to be spent on. At least, such a "development goal" does not appear too often in UN declarations nor official donor’s country strategy papers.

It is good to see that Liberia’s overdue debt relief process finally makes some progress, but this new debt deal can only show that a fundamental reform of the international debt regime is overdue. A simple quote from the World Bank’s own press release clearly shows how bizarre the current regime is: "In December 2007, the World Bank [sic] financed Liberia’s clearance of its overdue debt service payments.

Oduor Ong'wen
Country Director, Kenya
Southern and Eastern African Trade Information and Negotiations Institute


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