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Note: This document is from the archive of the Africa Policy E-Journal, published
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Africa: Multilateral Debt, 2
Any links to other sites in this file from 1996 are not clickable,
given the difficulty in maintaining up-to-date links in old files.
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Africa: Multilateral Debt, 2
Date distributed (ymd): 960126
Multilateral Debt Reduction: A Proposed Framework
A Position Paper of the Canadian Coalition for Global Economic
Democracy
For more information:
Inter-Church Coalition on Africa
129 St. Clair Ave. W
Toronto, Ontario M4V 1N5 Canada
Phone: 416-927-2124 Fax: 416-927-7554
E-mail: [email protected]
January 12, 1996
(continued from part 1)
2) The facility should be used to finance up-front
cancellation or reduction of debt stock of eligible countries
Background: NGOs and debt experts internationally have argued
that only serious up-front debt reduction or outright
cancellation along with a commitment to maintain aid levels
will offer any hope of economic, social and environmental
recovery for the poorest countries. All previous attempts at
serious debt relief have not had a significant impact on the
overall debt stocks of the poorest countries. For every dollar
that was forgiven since 1989 three more have been added.
Why the status quo is no longer possible: Critics of proposals
for further debt relief argue that the current mechanisms are
sufficient to deal with the debt problems of a relatively
small number of countries. The Naples Terms for bilateral debt
relief are supposed to reduce the debt burden of the poorest
countries. There are also facilities within the Bank and IMF
itself to assist highly indebted poor countries. However, as
the Uganda case illustrates, the Naples terms had very little
impact on the overall debt servicing burden of the country
because of restrictive conditions attached to the Naples
Terms, and most importantly, because a significant portion of
Uganda's debt is to multilateral institutions. The shortcoming
of mechanisms within the IMF and Bank such as the ESAF fund of
the IMF and the IDA Debt Reduction Facility is that they come
with very stringent conditionalities.
Far more disturbing is the increasing use of aid that is being
diverted to service multilateral debts. In 1994 alone, over
two thirds of all IDA funds went straight back to the Bank in
the form of debt repayments. IDA is financed through the aid
budgets of donor countries. Moreover, bilateral aid is
increasingly being transferred straight into the coffers of
the World Bank and IMF. The use of aid funds have simply gone
to service debts while the country's overall debt stock
continues to rise.
With the serious decline in many donor countries aid
programmes, and the decision of the US Congress to reduce
drastically cut its existing commitment to IDA as well as
threatening to reduce substantially its commitment to the next
replenishment, could mean that virtually all future aid funds
will be involved in a massive Bank/IMF debt recycling exercise
and not for poverty reduction.
Debt relief proposals that only recycle existing debt will
never enable poor countries to escape from the debt trap and
will increasingly draw on aid resources that are supposed to
fund health, education and poverty reduction. The leaked World
Bank proposal, while it would involve a measure of debt
reduction for eligible countries, spreads this reduction over
a period of many years. Only an up-front cancellation or debt
reduction will allow poor countries to set realistic poverty
reduction and development goals.
3) That the multilateral debt facility be funded primarily
from existing resources within the Bank and IMF
A $12 billion MDF could be funded from existing sources as
follows:
Source**Amount Available***Suggested Amount for Debt Reduction
(US$ bn)
World Bank's Retained earnings**15.5***1.8
Loan loss provisions************ 3.7***1.8
IBRD/IDA Cumulative Translation
Adjustment (profits from
currency fluctuations)********** 7.8***3.8
IMF Gold Sale*******************40.0***4.6
TOTAL***************************67.0**12.0
Background: Funding for the facility should not come from
bilateral aid flows. In fact one of the primary goals of
reducing multilateral debt obligations should be to
substantially lower and eventually eliminate the use of
bilateral and IDA funds to service multilateral debt. The sale
of IMF gold should not be used to finance the Enhanced
Structural Adjustment Facility.
Objections: The three main arguments that are used by the
Bank, IMF and donor countries against using existing Bank/IMF
resources is that any multilateral debt reduction will a)
affect the creditworthiness of the Bank and IMF; b) create a
"moral hazard" problem and c) the "no free lunch" argument.
a) The multilaterals fear that debt reduction will affect
their creditworthiness. The argument is that the triple A
rating of the World Bank would be impaired and thus increase
the costs of borrowing in financial markets, which in turn
would raise the costs of the loans to developing countries.
The response to this concern is that the effect of a debt
reduction would be limited, as the low cost of multilateral
borrowing is based more on the financial backing (the callable
capital) of the major developed countries. Moreover, the Bank
has built up significant reserves and loan loss provisions
which could be used without risk to finance multilateral debt
reduction.
In fact, it can be argued that continuing to maintain so many
badly performing loans in the portfolio of the Bank only harms
its credibility and that using some of the Bank's loan loss
provisions to deal with this bad debt would serve to improve
the credit rating of the Bank. As for the IMF, since it does
not borrow from commercial markets but from member countries,
the credit rating argument carries no weight. The IMF could
easily finance a debt reduction with very little impact on its
overall operations.
It should be borne in mind that the role of the Bank and IMF
as "preferred creditors" should not be taken to mean that they
should behave like "exempt creditors" having no
responsibilities for their own miscalculations or to bankrupt
debtors. This is even more important given that the IMF's and
World Bank's preferred creditor status is increasingly being
maintained through the use of aid funds.
Most importantly, it is the impact of this debt overhang on
the poorest countries which should be the most important
consideration. The fact that this debt burden is more
concessional does little to alleviate the human suffering
cause by prolonging the crisis.
b) the second argument against multilateral debt reduction is
the problem of "moral hazard." It is argued that reducing
debts for countries which have borrowed excessively will
encourage governments to overborrow in the future, while
others will be tempted not to repay.
This is essentially a loanshark's argument. The analogy is not
that far-fetched if one considers how, in the 1980s, the Bank
and IMF stepped in to rescue commercial banks, in the process
becoming the "lenders of last resort."
The same "moral hazard" warning was issued when commercial
debt was going to be reduced in the 1980s, and experience has
shown that there was little basis for this fear. In fact, many
Northern banks emerged much stronger after writing off large
portions of Latin America's debts in the 1980s.
The real "moral hazard" may lie with the multilateral
creditors: if they are protected from debt reduction, they
avoid bearing the costs of their past poor lending decisions
which will encourage irresponsible lending in the future. The
IMF's decision to lend to sub-Saharan Africa in the 1980s on
the basis of the analysis that the problem was one of
short-term liquidity turned out to be deeply flawed. In
addition, the World Bank should bear some liability for the
projects that by its own accounts have been deemed to be
failures. One need only mention in passing here the Wapenhans
Report that cited a 37% failure rate of Bank projects. Another
area that should be addressed is the issue of odious debts.
There are several instances of World Bank and IMF knowingly
lending to corrupt regimes which should be factored into any
discussion of multilateral debt reduction.
c) Some Bank staff have argued that "there is no free lunch"
with any debt relief proposal. In other words, every dollar
applied to debt reduction from the Bank means one less dollar
spent on development projects.
This argument applies only if one restricts the funding of any
debt relief proposal to the use of current IDA resources.
However, if other sources of funding are considered such as
the sale of IMF gold and the use of loan loss provisions then
the funds would be additional, i.e. they would free up
additional resources and not require the re-allocation of
existing aid flows.
d) Finally, many within the IMF and some donor countries,
including Canada, have argued that a replenished or
"super-ESAF" is the best way of dealing with the debt problems
of the poorest countries. We are opposed to this proposal for
a number of reasons.
The IMF established the Structural Adjustment Facility (SAF)
in 1986 and the Enhanced Structural Adjustment Facility (ESAF)
in 1987. Their purpose was to extend concessional lending to
low income countries to relieve their debt burden. Loans are
available at 0.5% interest for 10 years with repayments
starting after 5 years. Funding for the ESAF is made available
through contributions of donor countries through their aid
budgets. While such a fund seems attractive the experience has
been otherwise. First, there are very stringent and
unrealistic conditionalities attached to these funds. For this
reason, a large portion of the ESAF funds have remained
unallocated. Secondly, they have done very little to reverse
the net flow of resources from the low and lower-middle income
countries. In effect, the ESAF has enabled the IMF to continue
lending and exercising its leverage over the poorest countries
while these countries are compelled to continue meeting its
debt service obligations to the IMF on non-concessional terms.
The IMF is not a development agency. Its original mandate was
to provide balance of payments support to countries facing
deficits and to regulate exchange controls. In light of the
continuing crisis facing the low income countries, the SAF and
ESAF have proven to be inappropriate mechanisms for dealing
with the debt crisis facing these countries.
The IMF should deal with the debt overhang of poorest
countries in a comprehensive and sustainable manner. It should
do so by contributing to a Multilateral Debt Reduction
facility using its own reserves, through the proceeds from IMF
gold sales rather than by the use of donor's aids budgets.
4) The conditions attached to debt cancellations would be an
agreement by donor and recipient governments to meet agreed
upon targets in social sector spending such as health and
education in negotiation with their civil societies
Background: Eligibility for debt relief through the World
Bank's proposed facility (as with all other kinds of debt
relief) continues to be that countries will have to have a
World Bank/IMF approved structural adjustment programme (SAP)
in place to be eligible. The continued imposition of these
structural adjustment conditionalities will increase the power
and control of the World Bank and IMF over the most
contentious aspects of their policy agenda. What is needed are
agreements among multilateral institutions, donor and
recipient government to providing debt relief that would have
a measurable impact on poverty reduction. The agreements must
also address the issue of self-determination and territorial
integrity of indigenous peoples. These agreements would
include commitments to increase levels of social sector
spending and reduce military expenditures. They could also
include commitments to environmental sustainability and the
adherence to internationally recognized labour standards. In
contrast, the implementation of SAPs means severe cutbacks in
social sector spending as well as precluding the emergence of
local alternatives and measures towards achieving food
security.
5) The eligibility criteria for multilateral debt
cancellation or reduction should be expanded to include the
following criteria:
* the relationship between levels of expenditure for debt
servicing and social sector needs;
* a degree of co-responsibility for loans that were made for
projects that have proven to be failures or loans that were
misappropriated.
Background: In the case of many highly indebted countries the
World Bank's measures of debt sustainability, while useful, is
not always an accurate measure of a country's debt servicing
abilities. The World Bank's measures involve considering the
net present value of debt stock to exports and the net present
value of debt service to GNP. The added measures suggested
above would provide a more accurate picture of a country's
debt service capacity and need for debt relief.
The second measure is needed to restore credibility to Bank's
and IMF's lending practices and to acknowledge the need to
share some responsibility for past lending mistakes. As
mentioned above the preferred creditor status of these
institutions should not be taken to mean they should be
treated as exempt creditors.
Multilateral debt relief is no longer a question of
feasibility but clearly a question of moral and political
will. To allow the current situation to persist while the
poorest countries and people starve in order to service their
debts constitutes one of the most serious moral scandals of
our times.
The Canadian Coalition for Global Economic Democracy
Canadian Council for International cooperation (CCIC), Centre
International de Solidarit Ouvriere (CISO), Cultural Survival
Canada, Friends of the Earth, Inter-Church Coalition on
Africa, International Debt Treaty Movement - Toronto, CUSO
Oxfam-Canada, Social Justice Committee of Montreal, Sierra
Club of Canada, World Wildlife Fund
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Africa Policy Information Center (APIC). APIC's primary
objective is to widen the policy debate in the United States
around African issues and the U.S. role in Africa, by
concentrating on providing accessible policy-relevant
information and analysis usable by a wide range of groups and
individuals. APIC is affiliated with the Washington Office on
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rights group supported organization that works with Congress
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