Global Policy Forum

IMF and World Bank Determined to Fail

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By Mara Vanderslice and Marie Clarke

Jubilee USA Network
September 5, 2002
A leaked copy of the International Monetary Fund (IMF) and International Development Association (IDA) report on debt in impoverished countries shows that their current debt relief program continues to fail. The Status of Implementation of the Heavily Indebted Poor Country Initiative (HIPC) report will be discussed at the IMF board meeting, Friday September. 6th. The report shows that the institutions refuse to resolve the debt crisis for impoverished nations, failing to learn from mistakes acknowledged in their Spring report earlier this year.

The HIPC initiative has failed in its goal to bring countries to a sustainable level of debt at the completion point of the initiative. The current report concedes that this reality still holds true, and predicts that of the six countries who have completed the program:


· Burkina Faso will need "topping up"

· Mauritania will need additional Paris Club Assistance

· Bolivia, Mozambique and Tanzania could be unsustainable as long as until 2010

· Uganda does not have additional funds planned, but will be required to work more closely with IMF staff as there is no estimated time when Uganda will be sustainable.

Of the twenty countries next in line, half are also expected to have unsustainable debt at the conclusion of the HIPC Initiative.

Debt Relief Proves Effective

Jubilee USA Network was pleased to see that the HIPC report shows that the debt relief given so far will reduce debt stock by $40 billion or two-thirds of the total debt held by impoverished countries. The report also confirmed that debt relief works, and that there would be an increase in social expenditures to a level four times that spent on debt service.

Debt cancellation is providing startling results. Jubilee has documented the successes of debt cancellation in Uganda where school enrollment more than doubled, in Mozambique with the vaccination of a half million children and in Honduras where children can attend school for an additional three years. Debt relief has also provided resources for HIV/AIDS programs in dozens of countries.

World Bank and IMF Dismiss Proposals for Deeper Relief

Jubilee USA Network and other non-governmental organizations have called for significant action by the IMF and World Bank to address the failures of the current initiative. Some of these proposals for deeper and broader debt cancellation were addressed in the Status of Implementation Report. The report dismisses the following viable alternatives for deeper and broader debt relief:

Meeting the Millennial Development Goals (MDG):

Some have argued that it will take increased debt relief to meet the Millennial Development Goals of halving poverty by 2015. The UN Financing for Development recommendations suggest that decisions on levels of debt relief take into consideration what is needed to meet the MDGs in each country.

The Bank and Fund agree that it will take large external financing in order to achieve MDG, but suggest that it would be more appropriate to increase foreign aid to help countries reach the MDG than increase debt relief. Aid, they argue, is more flexible and timely. The Bank and Fund argue that the HIPC countries, thanks to IMF strict conditions, are now prepared for increased foreign investment.

However, Jubilee recognizes that it will take both complete debt cancellation and an increase in foreign aid to get close to these goals. Relying only on foreign investment is an unrealistic strategy.

Countries should pay no more than 5-10% of annual government revenues:

The IMF and World Bank misunderstand and misrepresent the proposal in their report. This proposal has been introduced as bipartisan legislation in both the House and Senate of the US Congress. It calls for the debt stock of impoverished countries to be reduced to the point that the debt service is not more than 10% of annual government revenues, or 5% if the country suffers from an acute health crisis, like AIDS, which most HIPCs do.

The Bank and Fund report understands the proposed legislation to be only addressing debt service and argues this would be a fundamental change in the initiative that is based on debt stock reduction. This is simply a misrepresentation of the proposal.

The IMF and Bank respond to this proposal saying that it will lead to greater debt relief and thus greater cost to the creditors who do not have a track record of coming up with the funds. They also argue that basing debt relief on internal revenues will give little or no incentive to countries to increase or diversify their exports or improve their revenue collection.

Jubilee USA Network pledges to continue to call on all creditors to put up the necessary funds for complete cancellation. The Bank and the Fund have used the "moral hazard" argument in regards to any amount of debt relief. Jubilee believes that this proposal is no more a case of moral hazard than the current program that attaches debt sustainability to a debt/export ratio.

Debt relief for more countries:

In response to the critique that more countries should receive debt relief, the report's only rebuttal is that this approach would cost too much, threatening the institutions' ability to lend to other impoverished nations.

Jubilee USA Network believes that it is the creditors responsibility to finance debt cancellation for all of the most impoverished nations as a practical first step in fighting extreme poverty and rampant AIDS crisis that threatens our global security.

The IMF and World Bank "Solutions" to HIPC failure:

· "Topping Up" – The concept of adding a bit more relief at the end of the program to help the countries reach sustainability addresses the symptoms not the core problem of the debt/export ratio that defines HIPC. As long as an arbitrary debt to export ration of 150% is used to define debt reduction levels, the program will continue to face problems as external shocks and falling commodity prices propel countries out of "sustainability" time and time again.

· Clarify How Limited the Relief Really Is – The report clarifies that debt relief "topping up" should not necessarily be to the 150% debt/export ration that defines sustainability for the Bank and Fund, but to bring debt to the level estimated during the decision point. The reasoning was that the 150% figure is seen by the Bank and Fund as providing an extra safety cushion—making countries a little too sustainable?

· Blame the Victims – The Bank and Fund believe that the ultimate answer is to increase HIPCs adherence to adjustment programs. Specifically that they need to diversify their production and get away from commodity dependence. This is ironic considering it was the IMF that encouraged many countries to focus their production and exports on single crops like coffee. When the market flooded the prices crashed and the countries' sustainability burned. The IMF's current conditions for debt relief and new lending make it difficult for countries to support the new industries needed to diversify.

· Grant More, Then Grant Less – The IMF and World Bank argue that creditors should provide adequate external financing in concessional lending, granting and aid in the short term, but that in the long term the international community should help countries to regain their creditworthiness by reducing granting.

· Extend the Sunset Clause – This is nothing new. Almost every time the boards meet they plan to extend the Sunset on the HIPC Initiative. These extensions are required as numerous countries face delays or "interruptions" in reaching the completion point because of strict IMF policy demands.

· More Strings Attached! -- Historically the Sunset Clause within HIPC increased the pressure on countries to accelerate their compliance with adjustment conditionalities for fear that the debt relief program would expire before they were eligible. These same IMF conditions continue to be at the core of HIPC and the single biggest obstacle for countries completing the program. Adherence to unrealistic timetables for reforms has led to numerous delays and suspensions of interim debt relief.

· Evaluate Less – while it is clear that this program has failed, the World Bank and IMF plan to evaluate the HIPC program less – proposing annual reviews instead of bi-annual reviews. If countries were coming through the HIPC program smoothly, annual reviews might be sufficient, but with all the delays and interruptions, more supervision is needed, not less.

Conclusion

Jubilee USA Network finds these recommendations to be superficial and predicts that they will not be able to redeem this failure of the HIPC program. Jubilee considers the action of the World Bank and IMF boards to be irresponsible considering that these large foreign debts are costing lives of the poorest people all over the developing world, and debt relief has so far proven highly effective.

Nations in Sub-Saharan Africa paid out $14.6 billion to creditors last year, despite the HIPC relief. This is much more than the $10 billion needed to stem the tide against HIV/AIDS and much more than the poorest countries can or should continue to pay.

Until deeper cancellation is provided, the debt of impoverished countries will only be paid at the cost of lives, health, education and hope for millions around the world.

Jubilee USA Network calls for immediate action by creditors to provide 100% debt cancellation for impoverished countries without requiring harmful conditions.


More Information on Debt Relief

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FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.