The Use of Rwanda's External Debt (1990-1994)
The Responsibility of Donors and Creditors
by Michel Chossudovsky and Pierre Galand
Global Research, March 30, 2004
Ten years after the 1994 Genocide
, the role of financial institutions has to be fully understood. Development aid and foreign loans were channelled towards financing the military and paramilitary. The donors turned a
blind eye. This report examines the role of multilateral and bilateral donors including Western governments and the Bretton Woods institutions.
The mission was composed of Belgian Economist and Senator Pierre Galand (Mission head) and Canadian Economist Professor Michel Chossudovsky. The report, was based on field work conducted in Rwanda in 1996. The mandate of the mission was to identify the role of international financial institutions, donors and creditors in relation to the genocide
and ethnic massacres of 1994.
The mission was set up at the request of the Rwandan authorities, formally under UNDP auspices (PROJET RWA/95/005 RÉHABILITATION DES CAPACITÉS DE GESTION DE L'ÉCONOMIE (CAGE).
Please note that the original text of this report is in French and that the English text contained herein is an unofficial translation, which has not be checked by the authors. In analyzing and quoting this document, please always refer to the French original. http://globalresearch.ca/articles/CHO403F.html
1.1 The aim of this report is to study the profile of Rwanda=s foreign debt acquired during the period between 1990 and 1994 so as to advise the Rwandan Government on methods of negotiation with the donors.
1.2 The process of debt acquisition during the 1990-1994 period was an exception compared to the previous debts. The debts of the former government (1990-1994) were mainly used to finance the armed forces and civilian militia.
1.3 The mission noted the increase in the debt load during the period immediately prior to the genocidal killings and massacres. This showed the importance for the Rwandan authorities of establishing methods of negotiation specially related to debt contracted between 1990-1994.
1.4 Mindful of the circumstances experienced by Rwanda as a
result of the genocidal killings and massacres of 1994 and the difficulties related to the reconstruction of the country, the approach taken is therefore aimed at the reduction and conversion of foreign debt to relaunch lasting economic development.
1.5 The motive for such an approach was clearly stated by the Rwandan Government, and taken over by participants of the donors Round Table held in Geneva on 21 and 22 June 1996.
1.6 At this meeting, M. G. Livi, spokesperson for the EU made the following proposals:
On one hand, we have observed that according to any criteria - World Bank Atlas, Index of UNDP Human Development, eyewitness of anyone visiting Kigali, - we are talking about an exceptionally poor country, if not the worlds most poorest. In doesn=t even take into account the tragedies lived by the Rwandan people during the last two or twenty years. On the other hand, this same country is faced with a
financial crisis, with no prospect of recovery, a
crises which runs the risk of making futile any long-term rehabilitation and development strategy. Note that I am saying no perspective. Because most of the debt in question is towards the international financial institutions, save some very recent and very general initiatives which will surely not get anywhere by the end of the century. - There is still no possibility of talking about the rescheduling of Rwanda's multilateral debt. We simply cannot be blinded to this issue which risk compromising all the efforts made for the development of Rwanda.
1.7 Similarly, the IMF spokesman concluded his intervention as follows:
"Finally, the international approach for assisting Rwanda in the period ahead would also need to address the external debt service problem, which, as mentioned earlier, appears to be unsustainable unless exceptional external assistance is forthcoming."
1.8 During the same meeting, the World Bank representative concluded his intervention by describing the weight of Rwanda=s foreign debt.
"We agree that pushing the debt repayment problem to other years is not a
long term solution".
1.9 The approach taken by the World Bank was stated in a
letter to Mr. Pierre Galand sent on the 9th of September 1996. The letter was sent on behalf of President Wolfersohn, by the World Bank's Vice President, Mr. Ishrat Husain. He stated:
"I would certainly agree with you that the conventional instruments that the World Bank has (and indeed other multilateral agencies have) are inadequate the challenge of reconstruction in such a
1.10 Chapter II of this report shows a
detailed analysis of the follow up documents of the Technical Committee for SAP in order to untangle the developments of the Defense Ministry budget, It also analyses correspondence between government and foreign creditor representatives concerning security expenditures. Chapter III analyses the purchasing of arms and weapons by the former regime, the use of various external financial sources, negotiations within the protocol and agreement of loans. The fourth chapter highlights the financing of military expenditure spent by the former regime following the genocidal killings of 1994, and the embargo imposed by the United Nations on arms sales. Chapter V presents the conclusions and recommendations.
II THE BUDGET OF MINISTRY OF DEFENSE
2.1 The Structural Adjustment Program (SAP) negotiated with the donors was put into practice while the country was still at war. The measures taken by the Bretton Woods institutions were obviously inappropriate.
2.2 On September 17 1990, before the outbreak of hostilities, the first devaluation was decided. This decision took place in Washington during a
meeting between the IMF and a
mission led by the Rwandan Finance Minister, Mr. Benoit Ntigurirwa. The main measures taken were applied only after the outbreak of the war. Following an IMF recommendation the Rwandan Franc was devalued (to 67%) in November 1990, merely six weeks following the outbreak. The usual formulations were made; liberalization of the market, currency devaluation, withdrawal of agricultural subventions, eventual elimination of the Equalization Fund, (used to buy coffee from planters), privatization of companies and public services, dismissal of officials..... Despite the beginning of war, none of the measures set up with the SAP were either reviewed or modified.
2.3 Inflation grew and real income slumped. The price of fuel and other necessities shot up. Inflation grew from 1% in 1989 until 19.2% in 1991. There was a
deterioration of the balance of payments and negative economic growth. Foreign debt increased by 34.3 % between 1989 and 1992
2.4 Following the "green light" given by the IMF in November 1990, the army suddenly swelled from 5,000 to 40,000 men, thus supposing external financing despite budgetary austerity. Juvenile delinquents, resulting from an impoverished society were enrolled by the thousands into civilian militia, responsible for the genocidal killings and massacres.
2.5 External funds enabled the regime to acquire military material to organize and supply the militia with equipment. Besides the purchase of weapons, these imports included a
steady flow of agro-foodstuffs, clothing, fuel, alcoholic beverages, etc, destined for members of the Armed Forces, the militia and their families
Inflated military expenditures
2.6 The austerity measures demanded by the donors under the Structural Adjustment Program (SAP) affected exclusively non-military expenditures while the military expenditures took up a
growing proportion of the State income and foreign loans (see table No. 2.1).
2.7 These cuts weighed on expenditures for education, health, infrastructure and production support. Economic reform resulted in the collapse of public services, famine, (hitting many areas since 1992), the shooting up of unemployment and an unstable social climate.
2.8 Developments of the budget structure is confirmed in a
confidential letter from the Finance Minister to President Habyarimana relating to the 1991 National Defense Ministry budget estimate:
"the military expenditures brought about by the war contributed largely to the budget deficit. Military expenditures went up from 3.4 billion FRW in 1989 to 7.9 billion FRW in 1990 and from 12.7 billion FRW in 1991. Or an increase of respectively 132% and 274%.
The ratio of military goods and services on the total of goods and services went from 28% in 1989, to 60% in 1990 and 71 % in 1991. At the same time civil goods and services went from 4.013 billion RWF in 1989 to 3,900 billion FRW, or dropped from 2.8% following a
devaluation of 66.7%
The ratio of total actual military expenditures went from 14% in 1989, to 26% in 1990 to 38% in 1991. This shows that other main administration services did not have the means and had a
very difficult time functioning.
Compared to total income, regular military expenditures used 14% of income. With the war military expenditures represented 37% in 1990 and 51% in 1991 of total state income".
Balance of payments and imports of military equipment
2.9 In 1991, military expenditures had already soaked up around 51% of state earnings and 71% as total expenditure goods and services. Since 1990, these military expenditures have been reflected in the structure as the trade balance. (25.1 million USD in 1990 and 37.6 million USD in 1991). In 1992, 1993 and 1994, while the importation of military material was increasing, non-military imports were on an ever decreasing scale. Moreover, many so-called non-military imports were actually disguised military imports.
2.10 Imported merchandise and fuel sold on the local market was also used to generate counter-part funds to finance the military system.
2.11 On the other hand, as of 1990, export earnings were decreasing constantly. This was mainly due to the drop in the price of coffee which resulted in a
fall in production. State services were in complete confusion, companies were going bankrupt, public services were collapsing, interest rates were shooting up; there was a
freeze on purchase price of coffee, (in Rwandan francs) regardless of inflation (recommended by the IMF).
2.12 Fully aware of the situation, the donors covered a
Afinancial gap@ owing to inflated military expenditures. According to figures from the Technical Committee for SAP Follow-up (CSTP), 96% of the Rwandan budget deficit was covered by foreign aid.
2.13 Furthermore foreign financing helped alleviate the increasing imbalance on the balance of payments owing to the imports destined for the Armed Forces and the militia.
2.14 The precarious state of public finance was confirmed in a
governmental note which was widely circulated and titled "The 1991 budgetary problems and the SAP objective pertaining to public finance".
"The SAP withheld the financial GAP foreseen at 13,111 million FRW of counter-part funds originating from the SAC (World Bank Structural Adjustment Credit) and contribution of donors participating in the SPA (Special Program for Africa - (France, Switzerland, Canada) and other donors (Austria, FAD, Belgium and The United States)".
V CONCLUSIONS AND RECOMMENDATIONS
5.1 Our study confirms that the planning and implementation of the genocidal killings and massacres required substantial financial commitments. Not counting the huge expenditures of the Armed forces and the militia, the expenditures on military equipment, machetes and other equipment add up to more than 112 million dollars. This analysis, together with the various documents and invoices confirm the setting up by the former regime of a
systematic procedure for the misappropriation of funds. Military expenditures were financed by foreign debt.
5.2 The donors on the one hand demanded total restitution of public funding for civilian expenditure while at the same time establishing budgetary goals to be reached for security expenditures.
5.3 Not only were the donors aware of what was going on but the World Bank and the IMF even gave technical support to the authorities through the SAP follow-up committee to establish budget objectives for the National Defense Ministry.
5.4 In other words, through intervening with loans and donations, the donors covered the National Defense=s budgetary deficit, and by doing so financed the war and, finally the civilian militia.
5.5 The mission was able to confirm that there was negligence on the part of the donors first of all concerning the management of the State budget and secondly on the follow-up procedures, verification and auditing of loan agreements.
5.6 The situation is particularly serious in that some of the quick disbursing loans were used under Aeligible importation provisions@, for importing huge quantities of machetes. No action was taken by the supervising and auditing missions to stop these imports.
5.7 This is where the question of responsibility comes in. Do the donors not have responsibility towards the victims of the genocidal killings and the massacres?
5.8 This responsibility not only brings up the formal legitimacy of foreign debt contracted by the former regime between 1990 and 1994 and the question of it=s cancellation, but it also obliges the donors and the International Community to contribute to a
reparation programme aiming to bring compensation to families of victims and survivors and the economic and social reconstruction of the country.
5.9 By the end of 1995, Rwanda=s foreign debt was around one billion dollars, which is unbearably heavy. Our mission is of the opinion that all the debt contracted during the 1990-1994 period has to be treated in a
very special way so that the present government can be released from the commitments contracted by for the former authorities, responsible for the genocide
5.10 Since most of these debts are multilateral, steps have to be taken going beyond the usual procedures concerning multilateral debt restructuring.
5.11 It must be understood that in this same view, the solutions proposed by the Group of Seven (G7) for the least developed countries, following the Lyon Summit in June 1996 and the meetings in Washington in September 1996 of the Bretton Woods institutions, are completely inappropriate to the situation in Rwanda.
5.12 The foreign debt load is so heavy that all the proposals made for special treatment (with conditionality) and new capital in form of loans and donations, are at this time insufficient to secure the debt service.
5.13 The new loans will be of no use to the reconstruction of the country without complete and unconditional cancellation of the 1990-94 loans. On the contrary, they will help maintain the country in its present state and make the debt load even heavier.
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