August 3, 2005

World Bank report calls for changes to G8 debt plan

By Lesley Wroughton

WASHINGTON (Reuters) - The World Bank is calling for
substantial changes in the highly-touted debt relief proposal
for poor African countries agreed to at last month's Group of
Eight summit.

A World Bank staff report given to Reuters says the deal
reached by leaders of G-8 industrialized nations -- the United
States, Britain, Germany, France, Japan, Italy, Canada and
Russia -- lacks sufficient compensation to the bank's low
interest lending arm most affected by the debt relief plan.

The potential cost to the bank's International Development
Association (IDA) lending facility could be more than $50
billion, including commitments made under previous debt-relief
initiatives, according to the report.

Without some form of funding to make up for the losses, the
IDA would have its ability to continue lending to the world's
poorest nations severely undermined, said the report by World
Bank senior officials Geoffrey Lamb and Danny Leipziger.

"If IDA is fully compensated in a robust, certain way, the
institution would be able to maintain its role as the
cornerstone to global development efforts," said the report.

"If not, IDA risks undergoing a fairly rapid decline in its
financing capacity, an outcome clearly not consistent with the
intention of the framers of the G8 proposal."

The IDA is the world's largest lending facility for poor
countries, offering the most affordable loans along with grants
to governments in need.

The report is considered an initial posturing by the World
Bank on the G-8 initiative, which responded to years of
pressure from activists and the development community by
canceling 100 percent of the debt owed by 23 nations -- most of
them in Africa -- to the IDA, the IMF and the African
Development Bank.

Both the World Bank and the International Monetary Fund,
its sister global lending organization, are considering
implications of the G-8 deal in separate meetings starting this

According to the World Bank report, the deal would mean the
IDA loses between $27.1 billion to $42.8 billion in outstanding
loans, along with another $15.4 billion previously canceled
under a 1996 Heavily Indebted Poor Countries (HIPC) initiative.

The G-8 nations agreed to compensate the World Bank for its
losses over the next three years, but the deal lacked any
specifics for future funding for the IDA which the report said
raised doubts as to whether there would be proper compensation.

It noted the G-8 proposal offered no mechanism for
suspending debt relief if a debtor country deviated from
economic and social reforms prescribed by the World Bank and

Irrevocable debt cancellation amounted to "unconditional
budget support" for debtor countries over the 40-year term of
the loans, the bank report said.

An alternative, the report suggested, was to tie the amount
of debt relief given to the amount of contributions from donor
countries for the program.

Under such a proposal, debt relief could potentially be
suspended if a country's performance deteriorates, it said.
IDA's financing capacity also could be protected if donor
contributions fall short of commitments, the report noted.

It called for donor countries to pay the entire amount owed
to the IDA up front, or for debt relief to proceed at the same
pace as donor contributions.

The report also said the G-8 plan should be implemented in
fiscal year 2007, which begins on July 1, 2006, instead of
disrupting the budgets already completed and approved for the
current fiscal year.