[stop-imf] Drop the Debt report excerpts
Robert Weissman
rob@milan.essential.org
Wed, 11 Apr 2001 11:21:02 -0400 (EDT)
Excerpts from the Drop the Debt report follow. Full text at
http://www.dropthedebt.org/home.html.
Remember, the methodological approach of the Drop the Debt auditors --
they hired independent accountants to do an analysis -- is *very*
conservative. Most importantly, they accepted the IMF and Bank's continued
valuation of the debts owed them by poor countries at face value, even
though other creditors do not do this, in recognition of the fact that
they are not likely ever to be repaid in full.
--
Robert Weissman <rob@essential.org>
Essential Information
P.O. Box 19405, Washington, DC 20036, USA
Tel: 1-202-387-8030
Fax: 1-202-234-5176
www.essential.org
Excerpts from:
Reality Check: the need for deeper debt cancellation and the fight against
HIV/AIDS
A report by Drop the Debt
Incorporating independent studies by accountants Chantrey Vellacott DFK
and Subhrendu Chatterji
5. The independent view. How the World Bank and IMF can afford to do more
This report has set out clearly:
The present HIPC initiative is severely
limited in the depth of debt cancellation it delivers;
There is an urgent need for deeper debt
cancellation in order to address the developing
emergency in HIV/AIDS and to begin the
task of meeting the 2015 poverty reduction targets, as
well as to ensure that countries do not
return to unsustainable debt burdens in the near future;
The particular need is clear for deeper
cancellation by the World Bank and IMF, as the biggest
single lenders to the poorest countries.
Given this reality, the logical next step is for
the World Bank and IMF to follow the lead of the G7 countries and cancel
100 per cent of the remaining debts they are
owed by the poorest countries, as the centerpiece of a broader New Deal on
Debt. However, the most familiar objection to
this step is that the institutions cannot afford to do so - or that if
they did,
the impact on the institutions would be so great
as to jeopardize their ability to function effectively. James Wolfensohn,
President of the World Bank, has implied that
asking his institution to match the G7's commitment to 100 per cent
cancellation would effectively shut down the
Bank.
Drop the Debt has never believed this would be
the case. The cost of 100 per cent cancellation by these institutions
appears
transparently modest and affordable to
institutions that are extremely well endowed and supported by some of the
most
secure financial backers in the world. However,
many observers have commented that the only way to settle the issue
would be to invite an independent firm of
accountants to address the question of how much debt cancellation could be
afforded by the institutions without impacting
on their ability to function. That is why Drop the Debt commissioned the
London accountancy firm, Chantrey Vellacott DFK,
to provide an independent, expert view on the issue.
Chantrey Vellacott was one of a number of
accountancy firms and consultants with whom the project was discussed.
However, in addition to the quality and
suitability of Chantrey Vellacott to this role, it was also apparent that
few of the
biggest firms would be able to carry out the
work because of their close ties with the World Bank and IMF themselves.
One of the big five accounting firms, where
partners were especially keen to carry out the work, eventually concluded
that
it could not proceed because of a 'conflict of
client interest'.
Chantrey Vellacott is one of the top twenty UK
accountancy practices, with 55 partners and 250 staff. It is the lead
member
of DFK International, an international
organization of independent accounting practices operating in around 70
countries,
with a worldwide fee income of around $350
million per annum. The firm undertook the project for a commercial fee.
Chantrey Vellacott were given the following
terms of reference:
a) What financial capacity do the World Bank and
IMF have to finance deeper cancellation of debts they are owed by heavily
indebted and poor countries without impacting
adversely on other developing countries?
b) How much of the remaining debts owed by HIPCs
to the World Bank and IMF could be cancelled through these means?
In order to gain a second opinion, with a
particular focus on the World Bank, Drop the Debt also commissioned an
independent consultant, Subhrendu Chatterji. The
two worked independently of each other. Neither Chantrey Vellacott nor
Subhrendu Chatterji had access to any World Bank
or IMF information other than that in the public domain. Subhrendu
Chatterji submitted a series of questions to the
World Bank which remained unanswered three weeks later. Despite this,
both were able to complete reports as requested,
Subhrendu Chatterji on 27 March and Chantrey Vellacott on 5 April 2001.
They are published in full as annexes to this
report.
The verdict of the accountancy firm
Chantrey Vellacott conclude that if their
proposals were adopted, the World Bank and IMF would be able to cancel 100
per
cent of the debts owed to them by the Heavily
Indebted Poor Countries, "without (in our view) jeopardizing the ability
of
the World Bank and IMF to carry out their
overall functions". They add that their proposals "are unlikely to have a
detrimental effect on the ability of these
organizations to carry out their objectives" and that in fact, "a case
could probably
be made for going further, depending on the
political commitment to helping the HIPC countries."
The cost of canceling 100 per cent
Both independent reports seek to define the cost
of canceling 100 per cent of the outstanding debts from the HIPCs to the
institutions they analyze. Chantrey Vellacott
approach this on the basis of the overall funds needed to cancel the stock
of
debt, while Chatterji looks instead at the cost
of covering the foregone debt service of cancelled debt - the approach
taken by
multilateral creditors under the HIPC
initiative.
Under the latter approach, Chatterji finds that
the annual cost of canceling the World Bank's debts could be as shown in
table 10.
Table 10: Annual cost of HIPC initiative
and Drop the Debt's proposals for the World
Bank
The 14 'pipeline' countries yet to reach
decision point in the HIPC initiative include Ghana, whose new government
last
month decided to accept HIPC debt cancellation.
Chatterji says it is unclear how much of the
current HIPC initiative cost has been effectively funded, but notes that
"the
political commitment has been made by the
international community under the agreements reached in 1999 at the
Cologne
G-8 summit, and at subsequent meetings of the
World Bank and the IMF, to deliver all the relief due under the current
enhanced HIPC framework." The cost, therefore,
of the Drop the Debt proposal to increase the World Bank's cancellation to
100 per cent on the same basis as the G7, is
$353 million per year, based on the period from 2001-09 that Chatterji
examines.
While Chatterji does not focus on the IMF,
similar research and calculations done previously by Drop the Debt
indicate
that the cost of 100 per cent cancellation by
the IMF - in addition to the current HIPC terms - for the 22 decision
point
countries would be around $287 million per year,
with the 14 'pipeline' countries costing approximately a further $81
million. Thus, the anticipated total extra cost
to the IMF of going beyond HIPC and delivering 100 per cent is around $368
million per year. On this basis, the total
additional cost to the World Bank and IMF of Drop the Debt's proposal is
$721
million per year - $502 million for the 22
countries currently at decision point and $219 million for the 14
countries
expected to enter
the initiative.
Chantrey Vellacott focus on the cost of dealing
with the overall stock of HIPC debt to the World Bank and IMF, and do not
distinguish between that which is already
committed under the existing HIPC terms and that which would be
additional.
They find that the total value of HIPC debts is
$38.7 billion.
In the context of the cost of deeper
cancellation, it should be noted that neither expert - nor Drop the Debt
in this report -
has addressed the question of whether the IMF
and World Bank are right to value their outstanding HIPC debts the way
they
do. There is a strong argument that the World
Bank and IMF should recognize that the true value of the debt they are
owed
by the poorest countries is much lower than its
face value. Private and official bilateral lenders - including the United
States
government - generally make proper provision for
debts that are not effectively being serviced, and so the cost of
canceling
them is very much lower than its face value. The
United States recently valued HIPC debt it was owed at around 10 per
cent of its face value. The IMF and World Bank
only avoid this prudent provision by acting as preferred creditors - and
even
then, they can only ensure debts are repaid by
advancing new loans to cover old repayments.
This argument is valid, but it has not been
taken up in this report because we have deliberately sought, and we have
asked
the independent experts, to tackle the
objections to cancellation of deeper debt cancellation in their own terms.
Nevertheless, in the broader context, many
observers would argue that much less is actually needed in order to cancel
the
debts to the World Bank and IMF. However, our
independent experts find that even if such funds are required, they are
available within the structures of the
institutions themselves.
Available resources within the World Bank and
IMF
Chantrey Vellacott put forward four 'Cases for
Serious Consideration' in the light of their examination of the World Bank
and IMF, addressing the World Bank's
non-concessional lending arm, the International Bank for Reconstruction
and
Development (IBRD); the concessional window, the
International Development Association (IDA); and the IMF itself:
1. "The IBRD to make an immediate contribution
of a further $2.8 billion to HIPC debt cancellation, representing the
increase in the IBRD's reserves over the last
four years."
IMMEDIATE BENEFIT: $2.8 billion
Chantrey Vellacott find that the release of this
amount from the IBRD's reserves would not jeopardise the Bank's 'triple A'
credit rating 'nor adversely affect its ongoing
operations in any material way'. This judgement is formed on the basis
that
such a step would leave the key ratios affected
only as follows:
The 'equity capital to loans ratio',
which has stood at a little over 20 per cent in recent years,
would fall to around 19 per cent, which
remains a prudent level;
The 'reserves to loan ratio', which the
Bank targets to keep with the range of 13 to 15 per cent,
would fall to 12.9 per cent based on June
2000 data, which would not seriously jeopardise the
operational target on an ongoing basis;
The 'loans to issued and committed
capital, reserves and surplus ratio', which the IBRD is
obliged to keep below 100 per cent, would
remain well below 60 per cent;
The 'interest coverage ratio', which has
average 1.22 over the last five years, would be around
1.25, which Chantrey Vellacott describe
as 'prudent'.
2. "The IBRD to publicly commit itself to an
annual contribution of 1/3 of its annual net income to HIPC Debt
cancellation; on current figures this would
produce around two thirds of a billion dollars per year".
ONGOING BENEFIT: $667 million per annum
This proposal draws on the precedent set for the
funding of the current terms of the HIPC initiative, whereby IBRD net
income is used to cover the foregone debt
service to IDA.
The allocation of net income is determined once
each year by the Board of Governors of the IBRD, based on
recommendations from their Executive Directors.
Decisions on net income are made by a simple majority of the eligible
votes on the Board of Governors. The G7
countries cast 45 per cent of the votes on the Board of the IBRD and 50
per cent
on the Board of IDA. The United States governor
on the Board is Paul O'Neill, US Treasury Secretary.
In August 2000, the IBRD allocated $1,280
million of the $1,991 million net income to reserves and $635 million to
special projects, including $250 million for the
current HIPC initiative.
3. "The IDA to seek no further reimbursement
from the HIPC Debt Initiative Trust Fund in respect of the proposed
write-off of $8 billion HIPC Debt by the IDA,
which $8 billion has already been provided for in the IDA's accounts. In
order to maintain IDA lending in the future, IDA
member contributions would have to increase by some $300 million per
annum or approximately 8 per cent of current
contributions."
IMMEDIATE BENEFIT: $8 billion (in reduced cost
of cancellation)
Chantrey Vellacott note that the IDA's reserves
have already been debited for the $8 billion anticipated cost of the
existing
HIPC initiative, with no formal assurance of
where that money will come from. As it stands, IDA has 'taken the hit' for
the cost of the HIPC initiative, just as many
other creditors have had to do, and it still has reserves of $1 billion on
which
to draw.
In practice, IDA expects to be reimbursed for
the full $8 billion as it becomes due for release to cover HIPC debt
payments.
This reimbursement is intended to come from the
IBRD's net income until 2005, and thereafter from the contributions
made by donors to IDA's three-yearly
replenishment.
If IDA's members wish to ensure that IDA
continues to disburse funds at the same rate, Chantrey Vellacott says,
they can
contribute slightly more to the replenishment
process than they otherwise would have done. About $300 million each year
would be needed in order to cover the $8 billion
over time. This would represent no more than about 8 per cent of a typical
replenishment.
Chantrey Vellacott say that if this proposal
were adopted, the IDA could simply continue functioning from the entirely
viable situation it is in now, while the total
$38 billion owed to the World Bank and IMF by HIPCs would be effectively
reduced by the same $8 billion.
4. "The IMF to contribute a further $350 million
per annum to HIPC debt cancellation, representing a notional figure of
$200 million per annum being the income earning
capacity of its general reserves, together with a further $150 million
p.a. to be derived from a repeat of the exercise
carried out by the IMF in the year to 30 April 2000 in connection with the
sale and repurchase at market value of some 1/8
of its gold reserves."
ONGOING BENEFIT: $350 million per annum
Chantrey Vellacott note that one of the most
obvious ways to deal with the IMF's outstanding debt is to repeat the
revaluation of part of the gold stocks that are
kept on the IMF's books at a historic low value. This has a clear
precedent,
and it would have no direct negative impact on
any country or group of countries. In fact, there is good reason to
believe
more of these gold stocks can be utilised in the
future. However, there may be political difficulties in agreeing further
action on the IMF's gold, although there is no
evidence to connect the last revaluation with any discernable impact on
gold
prices.
Chantrey Vellacott's second proposal on the IMF,
to take the income earning capacity of its reserves, would bring in
around $200 million every year. This might work
in a similar way to the transfer of IBRD net income - it is largely a
political choice for the IMF's members if they
view deeper debt cancellation as justified.
Chantrey Vellacott's four proposals all stand
independently of one another. Together, they are worth some $3 billion
immediately (or $11 billion accounting for the
reduced cost of IDA cancellation) and around $1 billion each year on an
ongoing basis. Chantrey Vellacott find that this
would allow the World Bank and IMF to write off all outstanding claims
on HIPCs over time.
A second opinion
While working separately from Chantrey Vellacott
and not commenting directly on their findings, Subhrendu Chatterji
reaches a similar conclusion on the use of a
prudent portion of reserves and an ongoing part of net income in order to
realise resources for debt cancellation. On the
use of reserves, he observes that "there is certainly no feeling in the
market
that the IBRD is currently undercapitalised.
Much depends on its future lending plans and there does not appear to be
an
excess of demand for IBRD loans at present."
However, he notes that there is clearly a limit to the amount that can be
derived from use of reserves in this way, so
"releasing existing equity capital can only play a minor part in an
overall
package of debt relief for the Bank."
On use of the IBRD's net income, Chatterji
confirms that this is a usable ongoing source and that "at least
theoretically,
the IBRD should be able to meet all the 100 per
cent. HIPC debt relief needs from net income after transfers to IDA, etc."
However, he acknowledges, relying entirely on
net income for this purpose "will negatively impact on its ability to grow
its loan portfolio." Nevertheless, he says, net
income "could form a key on-going component of an overall package of
sources of financing. Further assessment of
IBRD's earning prospects, projected demand for loans, etc., is required to
arrive
at an accurate estimate of the potential for
drawing on this source."
IDA reflows
As well as a small benefit that could be derived
from the IBRD's loan loss provisions, Chatterji offers one further way to
contribute substantially to the resources needed
for deeper cancellation. Because of the way IDA lends money over long
repayment periods (35-40 years) with an initial
ten-year grace period, IDA expects a substantial growth in its 'reflows' -
its
income from loans made earlier - in the next
20-25 years. Figure 6 shows the scale of that growth, rising to a peak in
2016-20 that is 236 per cent higher than it is
in 2001 - releasing an additional $2 billion every year. Total reflows to
IDA
between 2001 and 2025 will be around $70
billion. Chatterji proposes: "Assuming the donors continue their current
level
of contributions in future funding rounds, this
growth in reflows, which will be further enhanced by reflows from credits
provided over the next few years, could be used
to fund HIPC debt relief, whilst maintaining growth in lending to other
poorer countries."
Figure 6: Projected annual reflows to
IDA, 2001-25
This proposal adds further credibility to
Chantrey Vellacott's view that the $8 billion provided for in IDA's
accounts to deal
with the current HIPC initiative costs does not
need to be reimbursed from within the World Bank Group. The test of donor
countries' support for IDA will be in their
willingness to continue to fund it through the replenishments planned in
the
coming months and years.
The money is there
The evidence submitted to Drop the Debt by the
two independent experts commissioned to look at the question of how
resources can be used to fund deeper debt
cancellation by the World Bank and IMF is conclusive. With the prudent use
of a
small proportion of the IBRD's reserves and an
ongoing commitment from its net income, the realization of more funds
through the IMF, a 'top-up' to the IDA
replenishment by donors to ensure it does not suffer adversely as a result
of the cost
of the initial HIPC initiative and the future
use of IDA's greatly increased reflows, more than enough funds can be
realized
to cancel 100 per cent of the outstanding debts
owed by these poorest countries to the IMF and the World Bank. In
practice,
not all of these options are likely to be
needed; the institutions could choose from a menu of the possibilities put
forward
and still have enough to fund complete
cancellation for these countries.
A further benefit of this cancellation would be
that future lending from these institutions could be used much more
effectively for its supposed purpose - to reduce
poverty and stimulate development. Under the current HIPC initiative, it
is
clear that countries are being left with debt
burdens that remain on the dangerous edge of sustainability and that new
loans
are already being taken on in order to meet
future debt payments. The 100 per cent cancellation of these countries'
debts to
the World Bank and IMF would end that cycle of
waste, and allow future investment to be directed into the areas they
always should have been - stimulating the
infrastructure and the growth to help countries reach the international
poverty
reduction targets and tackle the even more
immediate emergency of HIV/AIDS and other key priorities.