Action! on IMF and debt (fwd)

[Robert Weissman <rob@essential.org>]

The House of Representatives is expected to vote next week on the Foreign
Operations Approprations Bill, which includes $3.5 billion in funding for
the IMF, but NOT the $14.5 billion requested by the administration.

It is likely that Democratic Representative David Obey or other IMF
backers will introduce an amendment to add the $14.5 billion. We want
representatives to VOTE NO on this expected amendment.

Our allies in the House will also attempt to present several amendments
which would limit the power of the Fund. Information on one proposal, to
be introduced by Representative McKinney, follows. We'll provide more
information on other amendments -- and more updates on developments in
Congress -- in the next few days.

Robert Weissman
Essential Information			|   Internet:	rob@essential.org

----

September 14, 1998

Action Alert

ISSUE:

Support the McKinney Amendment to Provide Real Debt Relief for Poor 
Countries

Congresswoman Cynthia McKinney plans to introduce an amendment to the 
Foreign Operations Appropriations bill that would condition new funding for 
the International Monetary Fund (IMF) to changes in IMF debt relief policy.  
This amendment would provide highly indebted poor countries with genuine 
hope of managing their debt burdens and meeting the needs of their people.  

The McKinney amendment stipulates that in order for the IMF to receive new 
money from the U.S., the IMF must change its policy with respect to debt 
service.  The amendment calls for a cap on debt service of 10% of a 
countrys annual export earnings, and calls on the IMF to refrain from any 
agreement or loan which requires a country, including countries 
participating in the HIPC debt relief program, to spend more than 10% of 
exports on debt service payments.  This cap would still be more than double 
the level of debt service that was required of Germany after World War II, 
but would still cut the debt service of poor countries like Mozambique by 
more than half, allowing them to spend money on desperately needed public 
services like health care.

ACTION:

Contact your Representative this week and urge him/her to support Rep. 
McKinney's amendment to relieve the debt service burden of the poorest 
countries.  (The Foreign Operations Appropriations bill is expected to be 
voted on in the House of Representatives next week.)  Specifically, ask 
members of Congress to:

Vote for the McKinney Amendment to the Foreign Operations Appropriations 
bill that will provide genuine relief from onerous debt service requirements 
and free up resources for important spending in social services, human 
development, and infrastructure. 

Capitol Switchboard:  202-225-3121
Write:	The Honorable ___________, U.S. House of Representatives,
Washington, DC  20515

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Talking points: the Case for Targeting the IMF on Debt Relief

The IMF is one of the most important institutions in the world in shaping 
policies concerning the unpayable external debt of poor countries.  

The IMF has tremendous influence over poor countries economic policies, 
including debt relief.  This is because the IMF (and World Bank) have 
preferred creditor status, and must have their debts repaid first.  
(Therefore, half of the debt service of poor countries goes to the IMF and 
the World Bank.)  The IMFs "seal of approval" over countries economic 
policies and debt service is also important in catalyzing new aid flows from 
other creditors.   

The IMF has been using the HIPC initiative as a way of financing its ESAF 
program.  The IMF should not receive a capital expansion until it recognizes 
its role in providing debt relief to poor countries and changes its stance 
on debt relief.  

The IMFs participation in HIPC has been grudging and stingy.  It refuses to 
commit substantial resources to debt relief until its Enhanced Structural 
Adjustment Facility (ESAF) is fully financed and self-sustaining.  The IMF 
is essentially holding debt relief hostage to a self-sustaining ESAF, a 
program which has been unsuccessful and which goes beyond the IMFs mandate. 
 To date, the IMF has also been the major blocking agent in individual 
countries negotiations for debt relief within HIPC.

Despite having significant reserves which could be used for debt relief, the 
IMF has pledged to contribute only SDR 180 million (about $250 million) in 
HIPC debt relief.  The 20 unsustainable or possibly stressed HIPC countries 
owe over $5 billion to the IMF.  This amounts to less than 5% debt relief.  

The IMF has significant resources and reserves it could use toward debt 
relief.  For example, the IMF has about $37 billion in gold, a portion of 
which could be sold and the proceeds used to finance debt relief.  The IMF 
could also use the ESAF Reserve Account. The ESAF Reserve account is set up 
to cover losses that may arise from defaults or arrears on ESAF loans.   
Currently, creditor countries to ESAF demand an unreasonable 100 percent 
collateral coverage for their ESAF loans. If the rich creditor countries did 
not demand full coverage, but settled for a still generous 25 percent, then 
the IMF would have an extra SDR 675 million (over $1 billion) to use for 
debt relief.  The Special Disbursement Account (SDA) similarly contains 
excess reserves from an old loan facility of the IMF.

The IMF bears a responsibility for the debt crisis of developing countries, 
and should provide debt relief as a way of recognizing that responsibility.  


IMF structural adjustment loans have added more debt to countries without 
putting them on a sustainable path to development.  Many IMF borrowing 
countries have become "IMF addicts", acquiring more IMF loans rather than 
exiting from IMF borrowing after a few years. While the IMF was conceived to 
provide short term financial assistance to countries, many of the poorest 
countries have been borrowing from the IMF since the 1980s.  Rather than 
creating the conditions for locally led development, countries have 
struggled under IMF conditionality, acquiring unsustainable debt burdens and 
little economic growth.  In fact, a 1997 internal IMF report of its ESAF 
program found that ESAF countries per capita income fell further behind the 
rest of the developing world.

The IMF responsibility for the debt crisis also includes its loans to 
corrupt leaders, often with the knowledge that the money was benefiting 
well-connected officials.

 The IMF loaned to undemocratic regimes such as Zaires Mobutu Sese Seko and 
Kenyas Daniel arap Moi, despite knowledge that these loans were directly 
benefiting political elites and were siphoned away from initiatives that 
would have helped local people.  In the current Indonesia bailout program, 
press reports say that the IMF cannot account for how $3 billion of its 
loans to Suharto were spent.  Now the citizens of these countries are paying 
back these loans.  

The US Congress is one of the few institutions that the IMF pay attention 
to, and therefore can play an important role in pushing for reform in IMF 
debt relief practices.  

The US is the IMFs largest donor and IMF funding requests are debated by 
the US Congress, unlike in most other countries where IMF funding is rubber 
stamped by the finance ministry.  Since IMF funding requests do not come up 
every year, Congress has an important opportunity to debate IMF debt relief 
policies that should not be missed.

In 1989, the US Congress called on the IMF to contribute resources to debt 
relief.  The IMF ignored this directive, and only pledged to contribute to 
debt relief in late 1996.  

The IMF has historically proved intransigent to reforms unless its funding 
is on the line. This $18 billion request in new IMF funding is an especially 
powerful opportunity to link an expansion of the IMFs capital base to 
meaningful changes by the IMF in the debt relief that it offers to poor 
countries. 
 -----

BACKGROUND:

More than 40 poor countries are struggling under an enormous-- and often 
unpayable -- burden of foreign debt.  According to the World Bank, the 41 
heavily indebted poor countries (33 of which are in Africa) owed $217 
billion to foreign creditors in 1996.  The bulk of this debt is owed to 
wealthy governments and to multilateral lending institutions such as the 
World Bank, the IMF, and the African Development Bank.  To repay this debt, 
governments shift scarce financial resources away from the necessary 
investments in human, social, and physical infrastructure including schools, 
health services, roads, agriculture, and other areas that lay the foundation 
for sustainable development.  Huge debt burdens also discourage private 
investors, who fear that debt might lead to more taxation or inflation.  All 
of this serves to prevent these countries from getting on a path of 
sustainable, equitable economic growth.

This year, the Clinton Administration has requested $37 million for debt 
reduction through the Paris Club (a periodic meeting of creditor nations) as 
part of the Highly Indebted Poor Countries (HIPC) Initiative.  The HIPC 
Initiative addresses all debts that countries owe, that is, not merely to 
the US but to a variety of governments, international institutions, and 
commercial banks.  

However, the HIPC initiative provides too little debt relief to too few 
countries.  Under HIPC, a country is expected to make annual debt payments 
worth 20-25% of the countrys export revenue.  This ratio is exorbitant and 
will not sufficiently relieve countries that are burdened by high levels of 
debt and poverty.  This ratio also stands in stark contrast to the treatment 
that countries such as Germany received after World War II.  In recognition 
of the Germanys need to rebuild its economy and country, the German 
government was required to service debts worth only 3.5% of exports.  It was 
concessions such as this that enabled Germany to put its political past 
behind and rebuild its war-torn economy.  Todays indebted, impoverished 
nations merit similar treatment.

The International Monetary Fund has been one of the main obstacles to a more 
effective HIPC Initiative.  It has provided few resources to the program and 
has argued against a shorter waiting period and against more generous terms 
of debt relief.  This year, the Clinton Administration is asking Congress to 
approve a dramatic expansion in the IMFs resources, including a $14.5 
billion increase in the IMFs general lending resources.  In the past, the 
US Congressional debate over IMF funding has been one of the few points of 
leverage to push for reform of the IMF, including debt relief policy.

The FY99 Foreign Operations Appropriations legislation, which provides for 
U.S. foreign aid spending -- including IMF funding and debt relief -- is 
scheduled for a vote next week. When the bill come to the House floor, 
Members need to support the McKinney amendment to condition new money for 
the IMF on a reduction of debt service requirements to 10%. 

For more information:  contact Robert Naiman at the Preamble Center for 
Public Policy Washington, DC; Tel:  202-265-3263; Fax:  202-265-3647; 
e-mail: naimanr@preamble.org; website: www.preamble.org