Oxfam International

Outcome of IMF/World Bank September 1999 Annual Meetings:Poverty Reduction and Debt relief

 Jubilee 2000 Coalition

 

Summary

At the 1999 Annual Meetings of the World Bank and IMF, governments agreed fundamental and positive changes to the way that the IMF and World Bank operate in poor countries, both in terms of how they deliver debt relief and how they work on broad policies. Now Bank/Fund programmes cannot go ahead unless they are transparently designed to address poverty reduction. Without the public pressure exerted by NGOs, religious groups and the Jubilee 2000 movement, these changes would not have occurred.

The enhanced HIPC framework provides deeper and quicker debt relief within this new and more transparent mode of policy making. Now all countries that receive debt relief will receive a level to get them to 150% (previous level a range from 200% to 250%) debt to export ratio or a fiscal ratio of 250% (previous level 280%) debt to revenue. Debt relief will be calculated no longer on projections but on actual need. There will also be much more interim relief than before. The IMF's previous role as “gatekeeper” to debt relief is significantly weakened as now the IMF program is developed after a consultative poverty strategy by the government and civil society. This is a positive step forward, providing more debt relief to more countries, with a strong and transparent link to poverty reduction.

Governments are to lead the process, in consultation with all stakeholders, including civil society. Debates over policies are to occur publicly with clear rationale for policy choices and trade-offs. This could have important implications in improving the quality of programs and the support within countries for them. But these moves will only be positive if other donors and the UN system actively support governments and civil society in conducting these democratic discussions.

However, when combined with existing aid, the enhanced HIPC framework still does not provide sufficient resources for all countries to address the 2015 international development targets. A fully reformed HIPC should ensure that debtor governments pay less than 10% of their revenue in debt service; this will require creditor governments to cancel 100% of bilateral debt, and the multilaterals to move further on debt reduction.

Another issue that came up at this year's Annual Meetings was a proposal to amend the IMF's Articles to include the liberalisation of capital movements as part of the Fund's mandate. This discussion was put on hold as a subject that needed 'more discussion'. Oxfam is not convinced that the net effect of capital account liberalisation is positive for developing countries. We also believe the opening of the capital account was a contributory factor in the crisis in Asia. The IMF Board should not agree to extend the mandate of the Fund to include the liberalisation of capital movements.

Poverty Reduction and Transparency

  1. While media attention during the 1999 Annual Meetings focused on debt relief, the international pressure for debt relief triggered fundamental changes in how the World Bank, IMF and donors worked. So while important changes have been agreed for improving HIPC, the HIPC reforms have provided the impetus for agreeing fundamental reforms to the way the IMF and World Bank will operate in a way that prioritizes poverty reduction and human development. These changes will begin with HIPC countries and then shift to all IDA countries, also eventually affecting middle income borrowing countries. The fact of these shifts is a recognition that the current system has not made enough progress to reduce poverty and has been too closed. The IMF and World Bank have now agreed to provide assistance to countries within a framework whereby countries will, through a process of consultation with civil society, the private sector and external donors, develop their own poverty reduction strategies. This could become a turning point in the way these institutions and the wider aid community support development. Poverty reduction is intended to be `front and centre' of all IMF/World Bank operations, including macro-economic policies. The process is intended to be government driven, with plans on how to reach the 2015 international development targets. Governments will have to develop plans and budgets for how they will take action towards attaining the 2015 targets.
  2. Much of the success of this new system depends on active support of the UN system and bilateral donors. The UN system offers potential for supporting movement towards policies that support human development and more government ownership. However, in the past this support has been more for national governments than civil society and the UN has not often actively supported dialogue with civil society on policy issues. Bilaterals need to ensure that they are not excessively burdening governments with their own requirements and all these parties must do all they can to invest in capacity building for a wide range of civil society groups to engage in shaping the poverty strategies.
  3. One very positive aspect of these changes is that the public can get information on how the government budget is allocated and what proportion of resources are going to basic services. The medium term expenditure framework will be publicly discussed. Governments will no longer be able to hide behind the IMF and World Bank and conversely, the Fund and Bank will no longer be able to blame recalcitrant governments without evidence when policies do not work.
  4. The exact details of these programs are still being worked out but what seems to be clear is that the IMF will defer to the Bank on poverty issues while the Fund will have the upper hand on fiscal and monetary policy. But all Bank-Fund teams will be jointly led or led by the Bank. The Fund not always leading these “missions” was previously unheard of. There will clearly have to be different approaches for different country cases. One positive trend has been World Bank consultation in Country Assistance Strategies, which have increasingly involved civil society in policy discussions. But despite the World Bank prioritising poverty reduction a number of years ago, internal Bank studies have found gaps in how the Bank has dealt with poverty in adjustment lending. On the part of the Fund, it resisted the development of HIPC, and fought speedy implementation and improvements to the framework. The IMF has been under criticism for many years over the design of adjustment programmes in poor countries; programmes which have failed to make the necessary in-roads into poverty reduction. For these institutions, particularly the IMF, to change in the ways agreed, will take substantial time and will be fraught with challenges. However, a good sign is that there is support at the highest level of the Fund for these shifts towards more transparency and poverty. Perhaps most importantly, the debt relief campaigning and Jubilee 2000 movement have shown technocrats in these institutions that they are accountable to the public to deliver.
  5. How are these changes intended to work? It is proposed that a Government-led national process take place, resulting in a government led poverty strategy. With respect to IMF/World Bank and Government relations, a tripartite agreement will be developed. This is called the Poverty Reduction Strategy Paper (PRSP), and will replace the current Policy Framework Paper (PFP). Unlike the PFP in which the World Bank has played a minor role, it is intended that both the IMF and World Bank will jointly own the PRSP. The Boards of the Bank and Fund have agreed that the development of the PRSP should be participatory, with close involvement of civil society, and with transparency in the choice of goals, formulation of policies and monitoring of implementation. The Bank, Fund and the government are all required to be open about trade-offs between policy choices and discuss these with civil society.
  6. According to the IMF/World Bank, the PRSP would require medium and long-term goals for poverty reduction and social development, coupled with outcome indicators. It would include a three-year macro-economic framework, which is consistent with poverty reduction and social goals. It would also include structural reforms and priorities and sectoral strategies (over three years), along with funding needs, both domestic and external. Also included is the development of 'anti-poverty' and other social policies, linked to an analysis of the social impact of macro and structural policies, along with funding needs.
  7. HIPC governments would lead in developing poverty strategies and in conducting consultations with civil society and other stakeholders. Out of this, the Bank and Fund would prepare their PRSP. In cases where the government does not have a poverty strategy, these processes may overlap.
  8. Overall, the PRSP is intended to ensure consistency between a country's macro-economic, structural and social policies and the goals of poverty reduction and social development. Under the framework of the PRSP, the IMF and World Bank will then set out their own independent agreements with government. These include the World Bank Country Assistance Strategy (CAS) and IMF Poverty Reduction and Growth Facility (PRGF), which is the “new ESAF.” As such, this approach will start with HIPCs first and then move on to all countries which have IMF ESAF and World Bank IDA programmes, less than 40 in number, ranging from Armenia to Zambia, but with around 22 countries in sub-Saharan Africa. At a wider level the broad emphasis of these new approaches may also begin to apply to middle income countries with World Bank/IMF programmes. These more powerful borrowers, such as Brazil and India, have already expressed their disapproval of this process, citing it as an infringement of their sovereignty. If the HIPC and IDA countries feel the same way, they are not saying so publicly.

Challenges and Opportunities for Civil Society

  1. These changes could mean that civil society becomes truly engaged in the design of national policy. It could mean that the existing economic paradigm would be debated openly in poor countries, with the potential impacts on the poor, both positive and negative, discussed and addressed.
  2. Clearly there are difficulties with this new approach. Some governments may not want to open up and may want to continue a closed system with the Bank and Fund. After the Annual Meetings, some civil society groups described the changes as more IMF/World Bank empty promises and the dangerous entry of the IMF into social development. But while acknowledging the rich diversity of civil society views, it is important to distinguish the different goals of different organizations in civil society. Some of the groups most critical of the recent changes are focused not on reform but on closing down the Bank and the Fund. They believe that the Bank and Fund have done so much damage that engaging with them in the proposed new scheme would only lead to more co-optation.
  3. Oxfam believes that the Bank and Fund have been unaccountable for too long and not focused on what we see as the real goal of sustainable human development and poverty reduction. We believe that poor people need not only better material conditions, but the right to have voice to change their societies. Oxfam's view is that the changes proposed at this year's Annual Meetings offer tremendous potential of focusing on poverty reduction and including the views of poor people. Dismissing these changes means dismissing the power of civil society to put pressure to bring about these changes. Despite the challenges and potential risks, Oxfam believes it would be a tremendous mistake to not engage in these processes.
  4. Donor governments and the Boards of the Bank and Fund are clear that the Fund must defer to the Bank on the poverty issues and that all debates must be out in the open. Finally, powerful governments and the Boards of the Bank and the Fund are aware that Jubilee 2000 and civil society organisations around the world are watching these developments and will raise havoc if these changes are not implemented seriously. At last year's global meeting of Jubilee 2000 in Rome, the branches of the Jubilee movement present issued the “Rome Declaration.”

“Creditor governments, international financial institutions and commercial banks, which are chiefly responsible for the debt crisis, should not set the conditions for debt cancellation. Civil society in the South must play a significant and influential role in a transparent and participatory process which will define and then monitor the use of resources released by debt for the benefit of the impoverished.”

  1. In Oxfam's view, these civil society movements have proven the potential for civil society to bring about change -- in their countries with their governments; within international institutions and with other donors. So while there are huge challenges, this change could be a major opportunity to make international institutions and governments more accountable, and towards equity, democracy and pro-poor growth. The crucial point is that the international community is now accountable to these new commitments.

Poverty Reduction and Growth Facility (PRGF) – The New ESAF

  1. ESAF has been re-named the PRGF. The challenge will be to ensure that more than the name is changed. The key threat is that the new package may only mean 'ESAF plus' - where additional social conditionality and welfare measures are merely added on to existing macro-economic reforms. Poverty is not the IMF's area of expertise. It will be the World Bank that will lead in these new reforms, not the IMF, since it is the agency responsible for poverty reduction. But although the Bank leads on poverty, it is not clear how this relates to the IMF lead role in macro-policy design. The World Bank must deal with questions of distribution, regional inequality, ethnic and gender dimensions of poverty and social impact. One danger in the past is that both the World Bank and IMF have equated poverty reduction as being equivalent to economic growth, with little attention given to the distributional issues. Despite progress in the World Bank towards addressing poverty reduction, a recent World Bank review of adjustment lending showed that the majority of their loans were assumed to benefit the poor but had little detailed analysis on what the differential effects would be on poor people. The World Bank clearly still needs to improve in its track record on poverty reduction. In order for these reforms to result in real benefits for poor people, the World Bank and IMF must change quickly, and undertake this change in an open way. In addition, other donors and the UN system must also participate in the system to ensure that poverty issues are discussed in a genuinely open way.
  2. The new approaches offer major opportunities to properly integrate macro-economic policies into poverty reduction goals. For instance, macro-economic reforms will have to be discussed openly, with a clear analysis of the trade-offs between various policy options for broad based growth and poverty reduction and re-design of polices or compensatory measures developed where necessary. Debates in countries could mean that inflation levels, budget deficits, privatisation, trade issues, market reform, labour issues, land reform, health and education financing etc. - a wide range of issues - will be debated in terms of their impact on poverty reduction; their impact on the poor. The IMF/World Bank have agreed to address negative impacts - and intend to do this through re-design or through compensatory measures.

For the first time, it could be that policy design will not be done in Washington or by a few Ministry of Finance officials, but openly in the country concerned. For too long the approach has actually been backwards, with poverty reduction coming as an afterthought to harsh structural adjustment programming by the IMF and World Bank. The Bank has often attached “social funds” to adjustment programs, claiming that these often politicised and disconnected programs are successfully addressing poverty even while the overall adjustment policies do not. Senior staff of both institutions now acknowledge the failures of this approach, and the pressure is now on them to get this right. They are more aware than ever before of the power of civil society organisations, South and North, to put pressure on these institutions. The changes mean that neither institution will be able to say that a country is doing well if growth is high, but poverty remains unchanged, worsens or is being reduced too slowly. They will now have to measure the success of their programmes against poverty reduction and impact on vulnerable groups. This could become a major victory.

  1. The changes therefore offer major opportunities to civil society in developing countries, and to their partners in the North, to address this new agenda and to hold both institutions, and national governments, to account. This will not be easy. The real proof of the sincerity of both institutions to alter their policies and programmes, will be in their actions. The same applies to Governments that have IMF/World Bank programmes. It will therefore be vitally important that civil society, South and North, closely engage in the design of these new approaches, and in their implementation, and provide the necessary scrutiny and monitoring. This will continue to involve providing the necessary policy and advocacy inputs, but also necessary campaigning and public mobilisation, so that the institutions do not relax their efforts at reform. Many of the HIPC countries will require the development of PRSPs extremely quickly, so that they can move through the HIPC process. This will be a major challenge for civil society in such countries to engage and provide necessary inputs to ensure that national policies are developed in a pro-poor way. But the necessity of preparing a poverty strategy should not be a conditionality to hold up debt relief. The agreement is that entry into the HIPC initiative (decision point) will require a plan for a poverty strategy but not the actual exercise, although it is required to reach the completion point. The Nordic countries, the Dutch, the Swiss and the Germans are keen that countries get debt relief as soon as possible. However, the US is pushing for HIPC countries to have their poverty strategy in place for at least a year before reaching the completion point. This move could potentially delay debt relief and serve as another conditionality. However, it is not evident that any other major donor is supporting the US on this point.

Debt

  1. As part of the overall changes described above with the PRSP and PRGF, the Development and Interim Committees (comprised of Ministers of Finance and Development) agreed on an enhanced Heavily Indebted Poor Countries (HIPC) debt relief framework. The new framework will provide deeper debt relief to more countries, now increased from 29 to 36 (see Annex 2). It is planned that 19 countries will reach Decision Point before the end of 2000 [1], and the 9 countries which have already been addressed by the original framework, will also be re-assessed in order to receive the increased benefits or to determine eligibility [2]. This leaves 8 countries that will have Decision Points in 2001 or later [3] and 5 countries [4] that are not eligible at all.
  2. The enhanced HIPC framework endorses what was agreed by the G7 at their Cologne summit. Debt relief will be more closely linked to poverty reduction. Debt sustainability criteria have been improved so that increased debt relief is provided at a level of 150% debt to export ratio for all eligible countries (unless the country qualifies for the fiscal criteria). One major improvement is that the Bank and Fund Boards will no longer quibble about setting exact debt sustainability ratios for each country. These improvements have also meant that a number of countries that were not eligible for debt relief under the original HIPC, such as Senegal or Honduras, will now be eligible.

Increased debt relief provided

  1. Uganda, for instance, will now see debt service relief increase from $40m a year, to $80m. This will mean increased financing of Uganda's program for Universal Primary Education, more funding for health care, water supplies and rural roads. In Mozambique, debt servicing will be reduced from the current level under HIPC of $71m to between $48-62m, depending on how much debt relief is provided earlier on. Honduras, which was previously not eligible for HIPC debt relief, even following the impact of Hurricane Mitch, will now be eligible. This deal will therefore have a real impact of the lives of poor people in many countries.
  2. At the same time, the framework includes major new efforts to ensure that debt relief is directed at clear poverty reduction plans, through the PRSP. Countries that meet the new, more flexible, debt sustainability criteria will move through the debt relief process in step with the development and implementation of clear poverty reduction plans.
  3. Countries will be expected to have a viable and comprehensive poverty reduction strategy in place prior to Decision Point. If this is not possible (as has already been indicated in the case of Honduras), then what is required is a clear plan detailing how this will be achieved. The intention is that as long as governments have a clear commitment to poverty reduction and civil society consultation, the Decision Point will not be delayed. One danger of this is that governments that are opposed to civil society consultation may argue that lack of civil society capacity precludes any proper consultation. If the process is not seen as participatory then the World Bank and IMF could delay debt relief at the completion point. It is therefore vital for civil society to engage in this process so as to shape the long-term policy discussions.
  4. The Completion Point is now to be `floating', whereby it is not set within a fixed time period. In order to reach the Completion Point, the point at which the major portion of HIPC debt relief starts to be provided, the country will have to demonstrate that the poverty reduction strategy is being implemented to defined levels, and where macro-economic stability has been reached. In the period between Decision and Completion Points, the enhanced HIPC framework will provide increased interim assistance in order to partially reduce debt servicing, such that more resources can be freed up for poverty reduction. The levels of interim assistance are not fully clear. Countries that have already made progress through HIPC, such as Uganda, Bolivia, Guyana and Mozambique will be re-assessed for retroactive action in order to benefit from the new framework.
  5. Civil society organisations, particularly those within the Jubilee 2000 movement, NGOs, religious bodies, trade unions, and celebrities have all worked closely together with supportive governments such as Norway, the Netherlands and the UK to bring about these changes. Without such visible public pressure, politicians in the G7 and other countries would not have given HIPC reform the impetus required; and without strong advocacy from a wide range of NGOs and other actors, policy makers would not have been pushed into improving mechanisms with such strong linkages to poverty reduction. For the first time, through the HIPC Review consultation, the Boards of the World Bank and IMF received statements from civil society. The sheer volume of these documents, coupled with intense media coverage, gave a sense of how many people around the world were watching decision-makers on this issue. This also led to an acknowledgement that the existing system had been too closed and insufficiently focused on the needs of poor people.
  6. At the same time, it must be remembered that this deal only goes halfway to achieving debt sustainability for many of these countries. A country like Mali will still spend as much on debt as on health and education, under this new initiative, and in fact its average annual debt service will actually increase to $91m, over the next five years, from an annual average of $76m between 1993-Yet a quarter of Mali's children will die before the age of five, one of the highest child death rates in the world. A country like Zambia will still be paying as much on debt as on health and education, and this is in a country where over half a million children are out of school, where life expectancy may be reduced from 43 to 33 years due to the impact of HIV/AIDS. In Zambia more teachers died of AIDS than passed through teacher training last year. Given the enormous development needs of such countries, and the difficulty with which the UN and 2015 international development targets will be met, more debt relief will be required than that which is offered by the enhanced framework. This is a challenge for further HIPC improvement, but also a challenge to HIPC governments to prioritise poverty reduction and to give the needs of the poor a higher priority. HIPC governments will have to give poverty reduction the highest priority, and lead the process of tackling it. At the same time new efforts at transparency will expose HIPC governments that are not committed to poverty reduction.
  7. These concerns were recognised by the UK Prime Minister, Tony Blair, in Cologne, who promised to do more to improve what had been agreed by the G7. Directly following the IMF/World Bank Annual meetings, the US President, Bill Clinton, pledged to support 100% cancellation of US bilateral debt, prompting the UK Chancellor to agree to do the same on a case-by-case basis. Paul Martin, the Canadian Finance Minister, has also pointed out Canada's agreement to provide 100% cancellation. While these are not firm actions as yet, they make way for a trend towards complete 100% bilateral debt cancellation for HIPC countries, and potentially increased multilateral debt relief. There still remain challenges to make sure that the agreed framework is fully funded, and that agreements in principle follow through with finance. Civil society will need to ensure that aid financing is maintained and not diverted to debt relief.
  8. While the IMF has agreed off-market gold sales to fund its contribution towards HIPC, it is important that these resources are used to fund HIPC only, and not the PRGF - this 'new' facility is not yet proven and while ESAF has had a name change, it has failed to provide the equitable growth required in HIPC countries in order to address poverty reduction goals. However, it is vital that the IMF does cover its share of HIPC costs, and the proposed sales are an appropriate mechanism. Given that the US has a key voting share in the IMF, such sales cannot go ahead without Congressional approval. NGOs must lobby to ensure that the proceeds from IMF gold sales go into HIPC debt relief only, ideally using proceeds from sales rather than merely interest. Clearly on the debt relief agenda there is considerable work still to be done.

Global Financial Architecture

Global financial architecture featured less at the 1999 Annual Meetings, partly because of the belief that the global financial crisis is now over and recovery in Asia is well under way, but also because of the prominence of the debt issue and the changes in the functions of the Bank and Fund.

Standards and Transparency.

  1. A large part of the 'architecture' debate is devoted to improving standards and transparency in developing countries - i.e. improvements in the provision of macroeconomic information and international standards for financial systems. While better information and standards can only be a 'good thing', the focus is almost exclusively on improvements in developing countries (rather than in international capital markets) and the space devoted to this issue detracts attention from other reforms.

Capital Account Opening.

  1. Despite the Asian crisis, the IMF has not shifted from its view that open capital flows are beneficial to global prosperity. The tone of IMF pronouncements on capital account issues have, however, become more cautious - stressing the importance of 'appropriate pace and sequencing' of liberalisation in line with the individual circumstances in the liberalising country. The Fund concedes that there may be a limited role for controls on capital inflows in some circumstances, but continues to oppose the use of controls on outflows, despite the relatively positive experience with this in Malaysia.
  2. The proposal to amend the IMF's Articles to include the liberalisation of capital movements as part of the Fund's mandate was put on hold for the autumn meetings as a subject that needed 'more discussion'. However, recent speeches by Michel Camdessus make it clear that the IMF hopes to press ahead with this in the near future. Given the lack of evidence that the net effect of capital account liberalisation is positive for developing countries, and that the opening of the capital account was a contributory factor in the crisis in Asia - the IMF Board should not agree to extending the mandate of the Fund to include the liberalisation of capital movements.

Involving the Private Sector.

  1. The IMF continued to stress the importance of effectively involving the private sector during crises in developing countries. This is one of the most controversial areas of the global architecture debate, and progress on reform has been very slow. Proposed changes fall into two main areas:
  2. First, the proposal for the introduction of 'collective action clauses' in international bond contracts which would facilitate debt restructuring in the event of a liquidity crisis. Progress on this has ground to a near halt. In order not to unduly raise the cost of borrowing for developing countries, the clauses would have to be introduced in all major markets. However, the G7 countries have little interest in introducing them. The IMF could take a lead on this by encouraging all member countries to incorporate collective action clauses in their international bond issues as soon as possible.
  3. The second set of proposals focus on how to better manage sovereign insolvencies in developing countries. Ecuador's decision to default on interest payments on its Brady bonds brought this issue to the forefront during the annual meetings. The IMF sanctioned Ecuador's payment standstill by agreeing to lend to the country while it was in arrears to private creditors. This marked a significant policy shift for the Fund and sent a clear signal to markets that it was serious about involving the private sector. The change provoked opposition from the private sector. The IMF does not want to see the establishment of any formal insolvency rules or international bankruptcy procedures, preferring to deal with each country on a case-by-case' basis.
  4. While the Ecuador case marks a welcome break from the traditional IMF policy, whereby official lending has gone to 'bail-out' private creditors, the implications for developing countries of a case-by-case approach could bring its own problems. An ad-hoc system for sanctioning sovereign defaults could result in a further concentration of foreign financing in the few large 'emerging market' countries considered too large, or too important, to fail. Smaller, less systemically significant, developing countries may have their access to foreign capital severely limited. Also, while there are serious questions over the motivation for some IMF lending, a case-by-case approach runs the risk of being subject to interests other than purely economic ones.
  5. There needs to be clear international insolvency guidelines which would provide for debt standstills and debtor-in-possession financing, combined with debt restructuring mechanisms. This would make it easier to reschedule loans in order to prevent financial crises, and to write-off bad debts in cases where unsustainable repayment levels threaten to undermine national poverty reduction efforts.

G20

  1. A new forum, the G20, was announced just before this year's annual meeting. The G20, which will supplement the work of the G7, will encourage international co-operation on financial and economic problems. It will focus on the future of the international financial system in the integrated global economy. Members are the G7 countries plus Argentina, Australia, Brazil, China, India, Mexico, Russia, Saudi Arabia, South Africa, S Korea, Turkey and representatives from the EU and the IMF/World Bank.

Footnotes

[1] Cameroon, Chad, Congo Rep., Ethiopia, Ghana, Guinea, Guinea-Bissau, Honduras, Lao PDR, Madagascar, Malawi, Mauritania, Nicaragua, Niger, Rwanda, Sierra Leone, Tanzania, Togo, Zambia (countries in bold are countries that may now qualify under the enhanced HIPC framework)

[2] Benin, Bolivia, Burkina Faso, Cote d'Ivoire, Guyana, Mali, Mozambique, Senegal, Uganda (countries in bold as above)

[3] Central African Republic, Burundi, Congo Dem Rep, Liberia, Myanmar, Sao Tome and Principe, Somalia, Sudan (bold as above)

[4] Angola, Equatorial Guinea, Kenya, Vietnam, Yemen


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