Debt Reduction

12/08/2009 //

For developing countries with pressing investment needs, a certain level of debt is both normal and natural. If loans are used for investments that are sound in socio-economic terms, an increase in a country’s debt burden may accelerate economic and social development. Foreign capital, including loans, has played an important role in the industrialisation of many of the world’s rich countries and in the development process in many middle-income countries.

Nonetheless, an unsustainable debt burden is a serious problem for many poor countries. The roots of the problem are complex and are partly related to external conditions such as falling or unstable commodity prices. However, factors such as an undiversified business sector, inadequate economic policies and poor governance in the developing countries themselves have also contributed greatly to the debt problems. Unmanageable debt leads to major balance of payments problems, ties up future income, creates an unstable investment climate and drains scarce administrative resources. Most of the poor countries with major debt problems are in Africa. For these countries, debt is a serious barrier to economic and social development.

A number of international initiatives have therefore been implemented to alleviate the debt burden of developing countries, and Norway is playing an active part here. These initiatives and Norway’s contributions are described in the government’s Plan of Action for Debt Relief and Development, which was launched in spring 2004. Some of the main points are described below.

Most of the developing countries’ debts to Norway are being cancelled. Norway was the first country to announce that it would grant 100 per cent debt reduction for the poorest countries, and is the only country that grants debt relief without taking any funding from the development co-operation budget.

Furthermore, Norway played a central role in the establishment of the Initiative for Heavily Indebted Poor Countries (HIPC). Norway is working to ensure that the debt relief offered through HIPC is as comprehensive as possible, and that it is not implemented at the expense of other development efforts. Norway also wishes to ensure that the rich countries compensate for debt reduction from multilateral development institutions so that debt relief does not result in reduced development assistance. So far, we have been largely successful in this.

The HIPC initiative will reduce the debt burden of about 40 of the poorest countries by approximately two thirds. The total amount of debt relief will be very large, perhaps as much as USD 50 billion. These funds can instead be used for poverty reduction, health and education. After receiving full debt relief, countries that benefit from HIPC are expected to spend 2 per cent of their GNP on debt servicing and 8 per cent on the social sector.

Source: By the Norwegian Ministry of Foreign Affairs   |   Share on your network   |   print