Mr. Wolfensohn's Statement during his visit to Ethiopia

by
James D. Wolfensohn
President
The World Bank

Addis Ababa, January 27, 1998

At the end of a three day visit to the second poorest country in the world, President of the World Bank James Wolfensohn spelt out the institution's commitment to alleviating debt in the poorest countries.

Asked at a Press conference in Ethiopia what the Bank was going to do to "solve" the debt problem in Africa which the Archbishop of Canterbury among others had painted as a moral issue, Mr. Wolfensohn explained the thinking behind his practical response to the problem, the Highly Indebted Poor Countries initiative, HIPC.

Only a week ago in Addis Ababa, the Archbishop delivered a speech in which he characterized Africa as being in the "chains" of a new form of "slavery", the burden of debt.

Said Mr. Wolfensohn, "I have said to a number of clerics of all religions that when people talk about the Bank on a moral basis, I am not prepared to agree that any church has moral superiority over the Bank. I am coming to the issue on what I believe is the basis of an extremely sound moral principle and I have 10,000 people who work with me who do not feel immoral. In fact they feel quite moral: we get up every morning to try to see how we can do the best job we can to alleviate poverty. We don't get up to see how we can put people in chains.

"So when I hear the moral view it distresses me because it's getting us on ground that I'm not prepared to concede. That's the first point, which I hope is clear."

Mr. Wolfensohn's "second point" tackled debt as quite separate from any moral perspective. "The issue of debt is a quite different and difficult issue. It was so difficult that together with the (International Monetary) Fund, we were able to get going 15 months ago an initiative called HIPC which was designed to do something that had never been done before which was to relieve the debt of multilaterals, and of bilateral and private creditors from countries that were highly indebted. This was on the very simple basis that the Archbishop of Canterbury and the Pope have both pointed out: that if someone is so much in debt that the repayments and the interest that they have to give back is more than they get, there is no way they can move forward. I couldn't agree more with the economics. The question is how to deal with it. And, without any moral persuasion we came up with HIPC.

"We came up with this as a practical thing. The design of HIPC is to try and see how quickly and efficiently we can relieve the debt of the highly indebted countries. That amount is about US$120 billion in Net Present Value terms in the case of African highly indebted countries of which the Bank and the International Development Association account for about 10%."

Mr. Wolfensohn said the objective was not to wipe out all debt, as "marvelous" an idea as that might seem. Africa owed $230 billion, he pointed out. And the total debt of developing countries was $2 trillion.

"Now take a place like the World Bank: We have a balance sheet of $150 billion but the only thing we own in that is $25 billion of capital. We have equity, our shareholders, and we borrow from the markets from small people and big people another $125 billion. It's a misconception that some governments have given us $150 billion. They haven't. They originally put in $10 billion, we've added retained earnings and so we have $25 billion. So the limit of what the Bank could do, if we were to go out of business, would be to give $25 billion in debt forgiveness. We have, in fact, gone to $2.5 billion, which is 10% of our capital. If our shareholders wanted us to go to $10 billion for example, we'd have to halve the size of the Bank because our leverage comes from our capital. That would be a perfectly rational decision if the shareholders wanted us to do it, but we'd be surprised if they did, because it would halve our institutional capacity.

"So what I am suggesting is that we get back to look at how we can most effectively use HIPC and by the year 2000 try and get through as many African countries as we can that have decent policies and that can get them back to a level of debt where they can function well. That's what we're trying to do. We think that is entirely moral. I think it is entirely realistic and if anyone suggests anything else then don't talk to me, talk to our owners. What you're seeing from our owners is that the level of overseas development assistance is not increasing, it is diminishing. Now with God's help, maybe in the year 2000, everyone will become enlightened, but until that day I can only work from the basis of realism and I think what we have invented in the last 15 months is a lot more realistic than anything that was done beforehand. And I regard it as totally moral. In fact I'm very proud of it."