Central African Republic pays off old debts

The Central African Republic has just paid off old debts to the World Bank - with a grant from the World Bank! This apparently pointless exercise is just one of the hoops the country has to jump through in order to get debt cancellation in future.

The Central African Republic (CAR) has a population of just four million people, who have an average income of just $0.85 per person per day. The country has also been labouring under a debt burden of more than $1 billion: a paltry amount for rich countries, but huge for a country of its size and poverty. CAR, a former French colony, was subject to decades of brutal rule before independence in 1960, and has had a long history of undemocratic and corrupt rule since. Since 2002, in a period of instability and civil strife, the country went into arrears on debt repayments to the World Bank and other donors.

Whilst there are still serious problems in CAR, the current government was elected, and has introduced a new constitution, ratified by a referendum. It is now trying to re-establish economic links with the international community.

The rich world has demanded that all arrears on debt be cleared before cancellation of any remaining debt is considered. In a slightly complicated move, the French government therefore gave a loan to CAR to pay off arrears to the World Bank; the Bank then instantly gave a grant to the CAR to repay this loan. The grant also included a further $12 million to pay future debt service. The result is an accounting clear-up, with the World Bank paying money to itself, which has not cost the CAR anything. However, it remains to be seen whether diverting aid funds to this operation will mean that less aid is given to other African countries. Moreover, if the debts arose through loans given to corrupt and undemocratic regimes, they should not anyway be considered legitimate claims on the current government in any case.

This highlights a wider concern about the demands of rich country creditors for repayment of old illegitimate debts, demands which they are also making, for instance, on Liberia. Whilst it seems likely that all such arrears clearances will be similarly paid for by grants from donors, this does raise the question of whether regularising donors' accounts in this way is really the best use of aid money: no operations of this kind should be at the expense of aid to the poorest countries.

This payment clears the way for the Central African Republic to join the Heavily Indebted Poor Countries (HIPC) initiative, although probably not until mid-2007. This scheme does eventually offer substantial debt cancellation - not least because of the extra debt cancellation deal agreed after huge campaigner pressure at the 2005 G8 - but only after impoverished countries spend many years complying with the undemocratic, onerous and often harmful conditions imposed by creditors.