[stop-imf] IMF explains again why it can't cancel debt

[Robert Weissman]

A Second Letter to "Drop the Debt"
Replying to a letter from Mr. Adrian Lovett posted on the "Drop the Debt"
website
By Mr. Thomas C. Dawson
Director, External Relations Department
International Monetary Fund
http://www.imf.org/external/np/vc/2001/060701.htm

                 June 7, 2001


                 Mr. Adrian Lovett
                 Director
                 Drop the Debt
                 P.O. Box 5555
                 London SE1 0WG
                 United Kingdom


                Dear Mr. Lovett:

                Thank you for the opportunity to further clarify the IMF's
position on debt cancellation. I am pleased to respond to the points
                you raised in your letter of May 21.

                We believe that credit is an indispensable means of
financing development. Historically, international lending has helped
                many developing countries to raise the living standards of
their people substantially. The total debt cancellation espoused by
                Drop the Debt seems to assume that any debt is too much
for poor countries, and it would appear to preclude the use of loans
                for development. The HIPC Initiative has made very real
progress in meeting your stated aim of "removing the burden of
                unpayable debt", while maintaining a role for
properly-managed borrowing in the future.

                I am surprised that you see a "dramatic departure" in the
approach we are taking to debt sustainability. As you know, the
                HIPC Initiative is designed to remove debt as an obstacle
to poverty reduction. The level of debt is important, which is why
                the centerpiece of the Initiative is reducing debt
sharply. But the consensus in the international community has always been
                that debt reduction alone is not enough to ensure an
escape from poverty. As you rightly point out, our recent debt
                sustainability paper says this.

                Sustainability can only be achieved with consistent hard
work to ensure favorable economic conditions, work to which we and
                the countries receiving debt relief are committed. Most
important are sound growth-enhancing policies, without which any
                amount of debt reduction will do little to reduce poverty.
Even with total cancellation of debt, there will remain a risk that
                countries again get into financial trouble. As the debt
sustainability paper clearly indicates, most of the risk of future debt
                problems stems from a rapid accumulation of new borrowing
in countries growing more slowly than they could-and must, if
                they are to make headway in reducing poverty.

                You appear to agree that debt reduction alone is not
enough, by recognizing that a range of factors contribute to poverty. We
                believe your efforts on behalf of the world's poor would
be more effective if they focused on poverty reduction-which surely
                is the true goal, and one which we share-rather than being
concerned simply with debt. Debt reduction is only one means to
                that end, never the most powerful and sometimes
unnecessary. As far as the contribution of the international community is
                concerned, debt reduction is no more important than
increasing aid, lowering trade barriers, or working to maintain a healthy
                international economy.

                Our approach to equity among countries reflects the
overall aim of the HIPC Initiative: to ensure that all committed poor
                countries end up with debt no higher than they can
sustain. As things stand, the debt indicators of countries that benefit
from
                the Initiative will be better than those of poor countries
that do not. To us, it seems unfair to go further, to completely cancel
                the debts of some countries, while those which have
borrowed less in the past (but are equally poor) receive no relief. We
                would not presume to tell members of the Paris Club that
have opted to provide 100 percent debt cancellation how to spend
                their taxpayers' money, but neither can we take them as a
model, as you seem to suggest.

                We also differ on the ability of the IMF to fund debt
relief from its own resources. The IMF's financial integrity and its
                ability to serve its membership, including its low-income
members, would be compromised by the proposals you mention.
                Oxfam proposes funding further debt relief from the
Reserve Account of the PRGF Trust. At the very least, this would undo
                our efforts over many years to make our lending facility
for the poorest countries self-sustaining. And it would do no more
                than take money away from the broader group of poor
countries eligible for low-interest loans from the IMF to benefit the
                HIPCs.

                Nor can the IMF's gold be used to fund further debt
relief. IMF gold holdings serve as the anchor of the international
                monetary system, and further operations in gold would have
a negative impact on members' confidence in the Fund. The
                evidence that you asked for is not hard to find. Many of
our members have granted 100 percent debt relief to HIPCs on their
                bilateral loans. Even among these countries, there is
clearly no support for funding debt relief from further gold operations,
                which your accountants do say would be needed to cancel
HIPC debt to the IMF.

                I hope that these responses succeed in clarifying the
IMF's position. We recognize that Drop the Debt's remit is a very
                specific one, but I hope that your mandate will not
prevent you from taking a broader view of the ultimate goals that we
share.

                Sincerely yours,

                 Thomas C. Dawson


                Director, External Relations Department
                International Monetary Fund