IMF/World Bank Spring Meetings 1999

If the main course is the G8 Summit in Cologne in June, and the series of proposals on debt relief from the G8 earlier this year were the hors d'oeuvres, there was little room on the menu for the spring meetings of the International Monetary Fund (IMF) and the World Bank in Washington last month. Perhaps that was why the outcome of the meeting offered little to digest, beyond a few soundbites.

However, it was apparent in Washington that the debate has moved on, and it is increasingly focusing on the cost of current initiatives, and where the funding for improvements to the Heavily Indebted Poor Countries (HIPC) Initiative will come from. The IMF's share of debt relief is likely to be boosted by the sale of IMF gold, although despite widespread coverage of this in the press, there was no reference to this in the communiqués of either the G-7 Finance Ministers or the Interim Committee. The sale of IMF gold, like all other major decisions on the future shape of debt relief will wait until the Cologne summit.

In fact, most of the exciting news had already broken in the three months preceding the meetings, as five of the G8 creditors issued their individual proposals. These included proposals for total write off of aid debt, increased relief on commercial credit debt, a lowering of the debt sustainability thresholds, and a shortening of the track record necessary from six years to three. Italy and Japan made their positions clearer during the week, and these were couched more in terms of their own national commitments to debt relief. Italy, however, added its voice to those calling for the HIPC timetable to be reduced to three years from its current six.

So far all that is on the table are proposals. HIPC continues to limp on, but IMF and World Bank staff are allocating increased efforts to the initiative, and they are now suggesting that 15 countries may reach decision points in 1999, compared with an estimate of just 9 made in August 1998.

On debt, the two main developments emerging from the meetings were:

1. An agreement to reach a consensus on a reformed Heavily Indebted Poor Countries Initiative at the G8 summit in Cologne in June 1999. This could bring up to 40 countries into the initiative, twice as many as had been envisaged as recently as August 1998.

2. A call on all bilateral creditors to make future official development assistance primarily in the form of grants to HIPCs to ensure they do not face new debt problems in the future.

This second commitment is becoming something of a weary ritual to summit-watchers. The recommendation was made at the G8 summit in Birmingham in May 1998, and features in almost all the G7 proposals. In fact, UNCTAD first made the recommendation in a resolution in 1979.

The HIPC Reform process

Much of the debate was defined by a paper prepared by the Staff of the IMF and World Bank called HIPC Initiative: Perspectives on the Current Framework and Options for Change. This shows that the estimated cost of the existing HIPC programme had increased due to the deteriorating economic situation in developing countries. This downturn has led both to the inclusion of new countries as eligible, an increase in the debt relief needed by these and revisions in the estimates of the debt stocks of certain countries. ^[1] The cost of the programme is measured in net present value, an estimate of the value today of a future stream of payments. Global market interest rates feature in this calculation and the fact that they have fallen over recent months has also led to an increase in the cost estimate of the initiative.

The list of 23 potential beneficiaries pencilled in last summer ^[2] has now risen to 29, with the addition of Cameroon, Chad, Republic of Congo, Guinea, Malawi and Sierra Leone. The estimated cost in August 1998 was $9.4 billion in (1998) net present value terms (excluding Liberia, Somalia and Sudan). The recent paper estimates the cost under the current framework 30 per cent higher, at $12.5 billion ^[3]. Among the various creditors that have to finance the initiative, these revisions mean that the estimated cost of the current scheme has risen for $2 billion to $2.4 billion for the World Bank, $800 million to $1.2 billion for the IMF, and from $4.1 billion to $5.2 billion for the Paris Club.

The paper also looks at the implications of the various G7 proposals. These will all increase the number of countries and the amount of relief available. The more generous—three year track record and lowering of debt sustainability target—will bring in another 10 countries: Angola, Benin, Central African Republic, Ghana, Honduras, Kenya, Laos, Senegal, Togo and Yemen. An informal estimate of the cost of reducing the sustainability ratio to 150 per cent (but keeping the timetable at six years) would increase the total cost to $22.4 billion. The cost will rise further if the six-year policy track record is reduced to three.

The result of the paper (as its authors almost certainly intended) has been to shift the debate in the various committees on to the cost of debt relief, and the possible methods of funding. The World Bank, and also non-G7 governments such as the Netherlands, called on G7 countries to match their rhetoric with pledges of funding.

Gold Sales

The UK Chancellor Gordon Brown proposed that the IMF should sell 10 million ounces of gold to pay for the HIPC initiative, however he expected the IMF to agree on sales of “above 5 million ounces” in October. Japan effectively gave the go-ahead for sales of IMF gold, and there is no major opposition amongst the G7. However, the Germany government seemed to show reduced enthusiasm for the policy in comparison with its earlier statements in January of this year.

The US Congress is also still to be totally convinced of the policy, and might yet try to prevent it becoming a reality. However, Congress is more concerned about funding unsuccessful IMF bail-outs and ESAF programmes than it is debt relief, and the likelihood is that, providing the sale of gold is purely to finance enhanced debt relief, Congress is unlikely to produce substantial opposition.

The World Bank and the IMF

The key concession made by these institutions was to admit that HIPC countries will see only small falls (if any) in their debt service payments. President of the World Bank James Wolfensohn denied that the HIPC initiative had failed, however. He urged G7 countries to increase their funding of the initiative, and adopted what campaigner saw as unhelpful proposals for funding the World Bank's cooperation. He suggested that the Bank could draw on IDA funds (the concessional lending arm of the World Bank), knowing that G-7 governments would not find this acceptable.

The Bank also has its own proposal for tackling the timetable for debt relief. They have suggested “a floating tranche”. The debtor country would have to agree a set of policy reforms, and would be able to pursue these according to its own timetable. Interim debt relief would be available and the completion point would come when agreed reforms had been enacted. This would introduce a degree of flexibility and ownership for the debtor country.

The IMF is vehemently against this idea. Together with the US administration, they will resist the shortening of the time frame for debt relief from its current baseline of six years. Michel Camdessus, the IMF Managing Director, seemed to welcome the enlargement of HIPC, however, suggesting that this increased the scope for IMF influence. He sees an opportunity of further increasing IMF influence over debtor nations through structural adjustment.

Conclusion

The Jubilee 2000 Coalition has succeeded in bringing the debt issue to the negotiating table. Anthony Gaeta, spokesperson for the World Bank, commented that Jubilee 2000 "has managed to put a relatively arcane issue - that of international finance and development - on the negotiating table throughout the world. The pledges Clinton and Brown have made would not have happened without Jubilee 2000. It's one of the most effective global lobbying campaigns I have ever seen."

There may be genuine desire amongst the key leaders of the G8 to bring about poverty reduction in debtor countries. There is also clear recognition that HIPC in its current form is not providing a lasting exit from unsustainable debt, and that debt service payments often fall only marginally after HIPC, if at all. However there is a conviction amongst creditors that the debt is all legitimate and that it is a justified lever of influence over debtor governments. They believe that IMF structural adjustment and strict conditionality must be inseparable from debt relief, and therefore they are looking to introduce social safety nets within ESAF programmes as a means of ensuring improvements for the poor.

The calls for significant change in the delivery of debt relief are coming up hard against the accounting practices of individual governments and the financial institutions. A comment in the communiqué from the G24 (the middle-income nations) identified this problem and pointed the way to the future:

“Ministers are aware that implementing these improvements will increase the cost of providing debt relief and that funding sources currently under consideration—the intended sale of a portion of the IMF's gold holdings and the transfer of balances from the SCA-2 Account—will provide only a small proportion of the required resources. They emphasise the necessity of appropriate burden-sharing and of finding sufficient alternative financing mechanisms to provide additional relief.”

The G8 should begin to look for alternative financing mechanisms rather than simply finding more money. This means that they must begin to change their own accounting practices, and - perhaps what is less palatable - those of the IMF and World Bank. Only then are they likely to have the freedom to act in a way that will end the tragic absurdity of the modern debt crisis. Those who doubt the urgency of this should contemplate the following fact, highlighted during the Spring Meetings by the World Bank's chief economist, Joseph Stiglitz. Per capita income in sub-Saharan Africa actually fell from 1965 to 1997. Thirty two years of history, including IMF structural adjustment, have failed to raise living standards for the average citizen in sub Saharan Africa.

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Footnotes

^[1] The expected cost of relief for Nicaragua, Zambia and Republic of Congo has increased following revisions of their estimated stocks.

^[2] Bolivia, Burkina Faso, Burundi, Congo (Kinshasa), Cote d'Ivoire, Ethiopia, Guinea Bissau, Guyana, Madagascar, Mali, Mauritania, Mozambique, Myanmar, Nicaragua, Niger, Rwanda,Sao Tome and Principe, Tanzania, Uganda, Zambia. Liberia, Somalia, Sudan were also included with the proviso that information for these countries is very poor.

^[3] This rises to a tentative US$ 19 billion if Liberia, Somalia and Sudan are included.