Rethinking Bretton Woods | Fri, Mar 11, 2005
The current momentum around debt relief and development issues in general offers an opportunity that all those concerned with achieving further debt cancellation for the poorest countries cannot afford to miss. The first two months of 2005 have been filled with rapidly-changing news. Although at the time of writing this article, at least four debt relief proposals from the U.S., the UK, Japan and France are actively being debated, the tension between the UK and U.S. proposals drives the debate. This article provides a brief update on the current momentum around debt cancellation and spotlights key features of what is known about the UK and the U.S. debt relief proposals. In doing so, it offers some guidance on how to interpret developments around the important debt debate in the coming months.
In Birmingham, 1998, the Group of Seven promised to cancel debts to the poorest countries in the amount of 100 billion dollars through the Enhanced Heavily Indebted Poor Countries Initiative (HIPC). HIPC was set up to relieve up to two-thirds debt stock for 42 countries though, in the end, only 38 became eligible. By January of this year, fifteen countries had completed the process, irrevocably committing debt stock reduction for them. Twelve other countries are past the completion point where they start receiving debt service reductions. The remaining eleven countries have not reached the starting point of the initiative. Only those that remained eligible last year will be given two more years to qualify for debt relief. The others will be shut out.
Where it has taken place, debt relief has been useful in freeing up resources for improved social expenditures. However, the initiative's declared goal of putting countries on a sustainable debt path was largely overstated. Trade losses and othershocks, very common in the HIPC economies, cancelled out the many of the debt relief gains. Moreover, two years after that memorable G8 announcement, the Argentine crisis, occurring in a relatively prosperous emerging market, highlighted the narrowness of the HIPC scope in terms of providing a comprehensive solution to the debt problem. In spite of all these problems, after HIPC was launched, the debt issue fell off the creditors' agenda. In fact, the situation reached a low where the HIPC countries problems were not even taken up at World Bank/IMF meetings.
The emergence of a so-called Review of Debt Sustainability represented an attempt to address the question of why HIPC countries were unable to maintain sustainability after having received debt relief. But the ""forward looking"" nature of the review (looking only at debt sustainability in the future) appeared geared to protect the creditors from a much-feared potential re-opening of the debate on the flaws marring the design of HIPC.
Last year, while the U.S. chaired the G8, the debt question received an unexpected push due to two factors. First, the U.S. sought substantial debt reduction for post- war Iraq, a middle-income country that traditionally would not have qualified for Paris Club debt stock reduction. Second, the U.S., in line with its objective during the International Development Association (IDA) Replenishment of 2001, was seeking to further raise the percentage of grants for the Replenishment being negotiated last year. Since an increase in the percentage of grants could help reduce the debt levels of IDA borrowers, the U.S. government developed a position that was sympathetic to further debt cancellation as long as it was delivered in this way. As a result, the G8 meeting in Georgia, in the U.S., saw the reemergence of the momentum around further debt cancellation.
On top of this, civil society groups, mainly in the UK but joined by others around the world, began campaigning with their sights on the 2005 G8 meeting. The UK is again hosting this meeting and will chair the EU at the end of the year. In this sense, important first meetings to watch will be the G7 Finance Ministers in mid-April and in early June. Momentum on debt this year is also fed by the occurrence of an evaluation of implementation of the Financing for Development Conference (June 27-28) and the first evaluation of progress towards the Millennium Development Goals (September 14-16).
Key Features of Debt Relief Proposals
How Much Debt? It is important to clarify from the outset that when officials talk about 100 percent debt cancellation, they are referring to debts owed by poor countries to the multilateral financial institutions. In principle, thus, the discussion does not address their bilateral debts (although for HIPC countries cancellation of all these debts has already been committed) nor does it cover debts to private and to domestic creditors. This is not to minimize the importance of what is at stake. The debt owed to multilateral financial institutions by these countries is an important share of their debt, especially given that successive debt relief initiatives have reduced bilateral debt, and private debt is typically low because these countries have little access to private financial markets. The UK proposes that donor countries share the burden of paying the debt service corresponding to the multilateral debt of the beneficiary countries until 2015. The proposal also provides that, after 2015, a country-by-country review will be carried out to find out if more debt relief needs to be provided. The U.S. proposes a switch from loans to grants in the assistance to beneficiary countries. Over time, these countries would, thus, see their debt reduced as new inflows of no interest money are used to refinance old debts.
For How Many? The beneficiaries of the UK proposal are countries that have finished HIPC plus those that have not but, by end 2004, were deemed to have robust public expenditure management systems. The UK considers these to be all other low-income countries that receive World Bank program loans (about 21 countries). The beneficiaries of the U.S. proposal would be all HIPC-eligible countries, that is, around 42. Under none of these proposals are the debts of middle income countries even potentially at stake.
Under Which Conditions? A crucial issue driving the debt movement has been the need to democratize economic policymaking. Over the years, mounting debt levels were used by international financial institutions and donors as a justification for imposing strict and intrusive economic policy conditions on the recipients of debt refinancing schemes. Under these programs, debts continued to grow while countries experienced erratic growth rates, deeper poverty and wider inequality. The question of attached conditions to debt relief, thus, is not a minor one.
None of the proposals under debate seem to offer a significant expansion in the policy space for beneficiary countries. In the UK proposal, qualifying countries are those receiving program loans from the financial institutions, and therefore remaining subject to their conditions. Moreover, since the proposal does not involve reduction of debt stock (but only debt service), the balance of power between debtor and creditor remains intact. In the U.S. proposal, grant conditions seem to resemble loan conditions. The U.S. government conceives downsizing the IMF low-income countries facility (which could have created at least some policy space for affected countries); and proposes a Policy Monitoring Arrangement. In terms of conditionalities, this would work just like an IMF program, though without the financing. While the program is offered as one to be provided ""upon demand"" to interested low income countries, so are current programs with the IMF. Yet, in virtue of an unwritten rule of international finance, no bilateral or private lender lends to a country unless it can show that it has an on-track program with the IMF.
With What Resources? This issue has, allegedly, triggered the most heated discussions among the creditors and held up agreement. The UK proposes that each donor country pay a share of beneficiary countries' debt service to the World Bank and the African Development Bank with bilateral grants. It asks countries to agree to either revalue or sell some of the IMF gold to provide resources to be used to service debt to the IMF. The problem with this proposal is that some countries cannot afford or will not agree to pay their share.
The U.S. proposes that an increasing percentage of grants be provided by the multilateral financial institutions themselves. In the case of IDA, relief would be financed out of its own resources, as it stops receiving interest payments on new grants. In the case of the IMF, money from its low-income countries facility would be used to finance its share. Of course, if contributions remain constant, the institution's resources would be depleted over time.
As far as the IMF facility is concerned, the U.S. plans to whither it. Given the relatively low level of concessionality exhibited by this facility, not much harm would be done to the debt sustainability levels of countries that would no longer be able to borrow from it. As far as IDA is concerned, the U.S. proposes that donors ramp up their funding for the next Replenishments. Given the U.S. record with financing IDA, there is reason to fear that increased contributions might not be forthcoming. If that is the case, poor countries will either be penalized by higher interest on their loans or by reduced or curtailed access to IDA funds.
Both proposals seemed to have ignored other sources that could be used to finance debt cancellation. For instance, the World Bank could use its loan loss provisions with no significant damage to its financial ratings. The revaluation or sales of IMF gold can be done on a larger scale than the UK proposal currently envisions and used to finance debt relief beyond the IMF's share.
The Center of Concern will continue to carry out advocacy, coalition-building and popular education on the developing countries debt problem, calling for cancellation of unpayable and odious debts, for all countries, with no harmful conditions attached. Towards this just goal, all potential financing modalities should be considered in-depth, and the debate around them should not be allowed to deflect attention from the need for debt cancellation itself. The Center continues to believe that, over the long term, only the establishment of a rules-based, independent framework for managing sovereign debt disputes can bring a structural shift in the way debts are generated and managed. To stay updated about debt campaigning opportunities please check out the websites of Jubilee USA , and CIDSE. The Rethinking Bretton Woods listserv circulates relevant information on these initiatives.
Aldo Caliari is Coordinator, Rethinking Bretton Woods Project, Center of Concern.