The Australian Government is committed to providing targeted debt relief to poor countries as a way of assisting them in poverty reduction.
Countries with unsustainable debt levels have cut expenditure in social sector activities and infrastructure, which has led to increased poverty and worsened development outcomes. Debt relief frees up developing countries' own resources to spend on health, education and infrastructure such as roads.
Australia has a longstanding commitment to the Heavily Indebted Poor Countries (HIPC) Initiative. Australia committed $148 million to this initiative.
Australia has also contributed $176.2 million for the first thirteen years of the Multilateral Debt Relief Initiative (MDRI). Under the MDRI, all debts owed the International Monetary Fund (IMF) and the concessional lending arms of the World Bank and the African Development Bank will be forgiven for countries that complete the HIPC Initiative.
Australia has also committed an additional $27 million to fund our share of arrears clearance at the concessionary arm of the World Bank, the International Development Association (IDA). IDA recently developed a systematic approach to help eligible countries clear their arrears to the Bank, which allows these countries to become eligible for debt relief under the HIPC Initiative and the MDRI.
To qualify for debt relief under the HIPC Initiative and the MDRI, countries must demonstrate good economic management and implement sound development plans to reduce poverty. The World Bank has found there to be increased spending on health and education in countries benefiting from the HIPC Initiative.
In addition to supporting the HIPC and MDRI, Australia has provided 100 percent debt forgiveness to those HIPC qualified countries that owe money directly to Australia. Under this commitment, Australia forgave debts owed by Ethiopia and Nicaragua in 2004.
For countries not covered by the HIPC Initiative, but identified as having a genuine financial need for debt rescheduling or forgiveness, Australia contributes through its membership of the Paris Club of bilateral creditors. Through this mechanism, Australia has participated in debt rescheduling for Iraq and Egypt. Australia has also recently agreed to a Debt-to Health Swap with Indonesia.
The HIPC, MDRI and bilateral debt relief have greatly assisted developing countries to bring their debts that they incurred during the 1970s and 1980s to manageable levels. But there is a need to prevent against such a debt crisis occurring in the future. Towards this, Australia has also strongly supported the development of a debt sustainability framework by the World Bank and the IMF. This framework was introduced in 2005 and now guides more responsible lending practices by international financial institutions and more responsible borrowing practices by low income countries. Australia's aid program also helps strengthen macro-economic management capacities of our partner countries, including debt management.
Debt relief is a very good way to provide aid and is recognised by the Development Assistance Committee of the OECD as Official Development Assistance.