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At the Group of Seven meeting last week, Germany threw up a roadblock against a significant program of debt relief for the poorest countries. But this should not prevent the G7 from trying to develop a meaningful plan for easing the debt pressure on the underdeveloped nations.
One of the proposals for paying off part of the debts of the poorest countries is for the International Monetary Fund to sell some of its gold reserves and reinvest the money. These funds would be applied against the debts of the poor countries.
But Germany is opposed to such gold sales. Citing the challenge of introducing a single European currency, German Chancellor Helmut Kohl said he has serious doubts about whether it would be wise now to cut into the IMF's reserves.
It is disappointing the G7 was unable to make more progress on the debt relief issue. The prospects looked better this year because in April a joint IMF-World Bank development committee meeting went further than ever in recognizing the problem. As the Ottawa-based North-South Institute has noted, the IMF-World Bank meeting identified a group of about 20 highly indebted poor countries whose debts are "unsustainable."
Unfortunately, even the IMF and the Bank didn't go much beyond identifying the most hopeless cases. For instance, the committee backed away from recommending that some loans be recognized as bad debts and written off. Instead, the committee called for debt forgiveness by commercial creditors as well, so there could be a more general sharing of the forgiveness load. Precise action awaits the autumn meetings of the IMF and the Bank.
Canada, Britain and the U.S. have supported the idea of gold sales by the IMF, but they favor using only the interest earned on investment of the proceeds of any such sales to refinance rather than forgive debts.
Indeed, a program of debt relief should involve a mix of forgiveness (in the most extreme cases), partial relief, and refinancing. This should be coupled with economic reforms where required that encourage a more vibrant role for the private sector.
As the North-South Institute says, there needs to be a better show of political will, particularly by some members of the G7, to deal with the poor-country debt issue.
This information is provided by the Financial Post.
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