IMF, World Bank assailed for rejecting debt forgiveness

by Tim Shorrock

Washington, 12 Jul 2001 (IPS) - Champions of debt forgiveness are attacking the International Monetary Fund (IMF) and World Bank for rejecting calls to cancel their claims against the world’s poorest countries.

The two institutions, in a statement published Tuesday, said that celebrities Bono, Bob Geldof and the Jubilee 2000 campaign to forgive global debt have their hearts in the right place but misunderstand the realities of developmental finance. The Jubilee 2000 campaign has won strong support from Bono, the lead singer of the rock group U2, and Bob Geldof of the now-defunct Boomtown Rats.

“Supporters of 100% debt cancellation must be honest about the costs,” the two institutions argued. With total public external debt for low-income countries standing at some $460 billion, the world’s poorest debtors are increasingly dependent on funding from bilateral and multilateral lending agencies “on concessional terms,” they said.

“Total cancellation” of their debt, they concluded, “could imperil these funds.  It would also undermine the confidence of existing and potential investors whose funds are vital for the long-term development of the low-income countries.”

Hogwash, said the champions of debt forgiveness.

“That’s just the opposite of what happens in capital markets,” said Tim Atwater, a national coordinator for Jubilee 2000/USA, an umbrella group of religious, civic and labour organisations that supports debt relief. “Any time debt is cancelled, the private sector is more, not less, willing to repay loans.”

“The IMF and the World Bank don’t want to cancel the debt because they don’t want to give up any control of Third World economies,” he added, referring to the infamous structural adjustment programmes - now known as “poverty reduction” programmes - that developing countries must follow as a price for help from the IMF or its companion bank. These usually affect the poorest sectors of a country through user fees on such important social provisions as education and health care.

“Overall, the basic assumption here is that the assistance delivered by the IMF and World Bank is a good thing,” said Soren Ambrose, an analyst with Fifty Years is Enough, a Washington-based organisation opposed to the postwar institutions.  “There’s absolutely no (attention) to the attachments to the assistance, which is really the crux of the problem. Their motivation is never addressed.”

The debate between the unpopular lending institutions and their critics is being played out as leaders of the Group of Seven (G-7) industrial powers plan to discuss debt relief and other issues at a summit in Genoa, Italy, from 20-22 July.

Not much is expected from US President George W. Bush and other G-7 leaders, however. With the exception of Canada, the largest economic powers have rejected 100% debt cancellation and instead support a joint IMF-World Bank Heavily Indebted Poor Countries (HIPC) initiative, aimed at reducing debt to levels at which the poorest developing countries could be expected to keep up repayments.

Under HIPC, the two institutions have set up two separate funds to alleviate the debt of 41 countries, most of them in Africa.

Proponents of debt forgiveness see the programme as a poor substitute for cancellation, however, because the poorest countries are getting an average cut of just 27% in their annual debt service payments.

G-7 finance ministers meeting in Rome last week issued a statement supporting HIPC and said the G-7 heads of state would issue a broader statement on debt after their gathering in Genoa. Opponents of the IMF and World Bank programmes are planning demonstrations in the Italian city to protest the lack of action.

The IMF-World Bank report challenges the assumptions behind the debt cancellation movement and defends HIPC as the only legitimate alternative.  According to the report, by the end of June, 23 poor countries had reached agreement under HIPC for debt service relief of around $34 billion.

“The deep concerns of civil society in many countries helped to spur the international community to action in the HIPC Initiative,” the report said.  “Now, some debt relief campaigners are calling for a complete cancellation of all HIPC debts. Some are focusing their efforts on the international financial institutions. Is this really the best way to ensure that resources are available to attack poverty and promote development in the low-income countries?”

The HIPC initiative, the institutions argued, is making a crucial difference in “the lives of the poor” because “for the first time, debt relief is delivered within a framework that is transparent and comprehensive.” In addition, the relief “is delivered only to those countries which have demonstrated the commitment and capacity to use the resources effectively. These principles reflect the fact that debt relief comes at a cost.”

Eliminating their debt in one stroke would make it difficult for the poorest countries to receive development assistance in the future because donor agencies would have to write off loans, forcing them to raise interest rates on other lending programmes, the report said. That could put some lenders at risk and threaten IMF programmes for the poor, such as its Poverty Reduction and Growth Facility (PRGF), formerly the Enhanced Structural Adjustment Facility, which is funded by outside contributions and borrowing.

“For the Fund, total debt cancellation in the absence of full funding by bilateral donors would do serious damage by fundamentally changing its role as an anchor for the international financial system based on the revolving character of its resources,” the report said. “Debt cancellation would not only eliminate PRGF lending, but also impair the Fund’s financial integrity.”

That is a gross exaggeration of what would actually happen with a carefully organized debt cancellation program, critics said. If global institutions agreed on a 100% debt cancellation plan, said Ambrose, this would be clearly understood by potential donors and lenders, both in the private and public sector, as a “unique event, a grand gesture.”

“Everyone in the financial markets would understand the special circumstances,” Ambrose said. “This would give them (the least developed countries) a new footing.”

Finance ministers from countries involved in the HIPC initiative met in London in early June and called on the IMF and World Bank to address its flaws, specifically pointing to the need for “maximum flexibility” on conditions attached to debt relief. Countries represented in London included Chad, Congo, Gambia, Ghana, Guinea, Guinea-Bissau, Mali, Niger, Sao Tome & Principe, Sierra Leone, Togo, Uganda and Zambia.

During those meetings, the Ugandan finance minister told the Financial Times that his country’s debt was in “real danger of becoming unsustainable again” despite completing the HIPC process. The reason: the IMF and World Bank calculated that Uganda would repay its debt through export earnings, “but one of Uganda’s main exports, coffee, has recently seen drastic price falls.”

Atwater of Jubilee 2000/USA said it is hypocritical of the US and the European Union to reject debt cancellation. During the 1800s, the US government defaulted on many loans from England, while Europe never repaid US loans extended during World War II. “Some of those loans are still on the book,” he said. – SUNS4936

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