by Bodo Ellmers, Tiago Stichelmans and Mathieu Vervynckt
This year’s Annual Meeting of the IMF and World Bank took place against the backdrop of continued sluggish growth in developed and developing countries alike. The impact of the commodity price crash weighs heavily on many developing countries and has caused a significant fall in global trade. While the IMF warns that both private and public debt levels remain dangerously high, that the anticipated deleveraging did not happen, the main response of the Bretton Woods Institutions (BWIs) is new lending facilities that create new debts.
Debt levels up – payment capacity down
Setting the tone for the Annual Meetings, the IMF announced in its Fiscal Monitor that global debt rose in 2015 to the record level of US$152 trillion, representing 225% of global GDP. In the aftermath of the global financial crisis, advanced economies continue to have higher debt levels than developed countries. However, the impact of collapsing commodity prices is increasingly felt by the latter. Many of the world’s poorest countries suffered massive revenue losses and face increased borrowing needs, while at the same time their capacity to sustain current debt levels has been reduced. Sustaining current private and public debt levels would become particularly difficult when interest rates start to rise again. This scenario implies that the risk of a major new debt crisis - the second one within a decade - are high and growing.
More lending facilities – more debt
For the time being, many of the IMF’s most important member states – the major shareholders – can continue to borrow at negative interest rates. Consequently, IMF Managing Director Christine Lagarde announced ahead of the Annual Meetings that IMF borrowers should benefit too. She announced that “interest rates on concessional lending will continue to be set at zero for as long as and whenever global interest rates are low”. The extension of the zero-interest policy for many of the IMF facilities was perhaps the most tangible policy decision taken at these meetings.
Meanwhile, the G24 group of major developing countries and emerging economies made a renewed attempt to add a new lending facility to the IMF global financial safety net (GFSN) that would help commodity-dependent countries to smooth over the impact of price fluctuations. But this did not find consensus. Instead, the BWIs’ member states welcomed a new facility that was set up to provide finance to a second group of highly vulnerable developing countries: those affected by the refugee crisis. The World Bank Group’s “Global Concessional Financing Facility” is expected to provide US$ 7.5bn over the next five years - by blending just $1.5bn in grants with $6bn in loans – and will consequently add to the debt burden of already distressed countries.
More partnerships - more contingent liabilities
Thus, instead of promoting deleveraging, both BWIs’ responses rely on actions that create more debt, including by leveraging more private capital to finance infrastructure through guarantees and other means. The World Bank’s Development Committee welcomed the Global Infrastructure Connectivity Alliance, endorsing an initiative developed by the more exclusive club of G20 members earlier this year. This alliance will develop regional infrastructure plans for bankable infrastructure projects. It adds another layer to the already congested range of initiatives to promote infrastructure investments, notably in the form of Public Private Partnerships (PPPs).
With this, the World Bank is continuing its leading role in promoting PPPs. In addition to producing policy papers on PPPs for the G20, the WBG already created the PPP unit and the Global Infrastructure Facility in 2014; hosted the Global Infrastructure Forum earlier this year; and recently signed the “Joint Declaration of Aspirations on Actions to Support Infrastructure Investment” with 10 other multilateral development banks. This was with the objective of investing a minimum of $350 billion in 2016-18 in infrastructure development, with the aim of attracting and partnering with private investors in particular.
During the annual meetings, CSOs repeated their concerns about the increased promotion of PPPs, building on Eurodad’s research which found that PPPs often worsen the fiscal problems against which they are offered as solutions. In a side-event organised on this particular topic, we highlighted that one of the main reasons why governments go for the PPP option instead of the public borrowing one is because perverse accounting measures allow them to keep the PPP projects off balance sheet. The IMF somewhat seconded this critique as a new IMF working paper has found substantial fiscal risks caused by PPPs. In spite of such warnings, the World Bank stated during the side-event that it would not necessarily disapprove a PPP project if the government decides to keep it off-balance sheet.CSOs renewed their call that the true costs of PPPs need to be disclosed.
Disagreement going forward
Otherwise, the IMF Committee (IMFC) communiqué reflects ongoing disagreement between IMF Member States as well as academia on how to overcome the current growth and development stalemate, as it mixes old-school calls for structural reforms and adjustments with calls for fiscal policy flexibility and the promotion of high-quality investments, while ensuring at the same time sustainable debt levels.
The term “inequality” made it into both communiques this year - the IMFC’s and the World Bank’s Development Communique, but their transformation from rhetoric into compelling redistributional policies remain at an infant stage. The hypocrisy that an increasingly progressive IMF rhetoric is not met by reformed practices in actual operations has been noted by external observers as well as by Eurodad’s latest research on conditionality that has been launched at the Annual Meetings.
One key area of dissent remains the question of how the IMF’s lending facilities should be funded. While all stated that the IMF needs to be adequately resourced to provide an effective GFSN, the G24 members advocated for the quota-based approach. Here, member States make compulsory contributions, according to their quota. Currently, the IMF has to top up the limited quota-based resources with borrowed money, which creates dependence on certain countries and the risk that loans to the IMF might not always be available in sufficient volume when a crisis hits. As the necessary majority for increased quota-resources could not be reached, the IMFC welcomed new borrowing arrangements with 26 countries worth US$360 billion.
An SDG-based approach to debt sustainability?
Debt sustainability has been a big issue at these Annual Meetings, also because the joint IMF and World Bank Debt Sustainability Framework is currently under review. Civil society organisations (CSOs) have demanded for decades that debt sustainability assessments should first and foremost assess to what extent debt prevents the meeting of basic needs and development goals. They renewed this call at these Annual Meetings, through a joint CSO submission endorsed by 31 organisations and networks, and at a side event co-organised by Eurodad. At the annual CSO Town Hall event, Christine Lagarde seconded the call that the new DSF needs to take the sustainable development goals into account. It remains to be seen how this new approach will be operationalised. Mark Flanagan, the Head of the IMF’s Debt Policy Division, flagged at our event that many stakeholders expect the reformed DSF to pay more attention to debt-service to revenue ratios (instead of the conventional debt-to-GDP ratios), and to the contingent liabilities coming from, for example, shaky private banks or PPPs.
Limited progress was made on the question how heavily indebted countries can reach sustainable debt levels without sacrificing their growth and development to austerity policies. CSOs recalled at the Civil Society Policy Forum that further progress towards human rights-based sovereign debt workout resolution mechanisms is needed. Such progress, however, continues to face political blockades at the IMF. In the absence of effective institutions for sustainable solutions to debt problems, the challenge to deleverage without jeopardising growth and development will remain difficult to master for the Bretton Woods Institutions.