[stop-imf] Clips: Pakistan, Argentina, O'Neill on debt relief

[Robert Weissman]

This summary is prepared by the External Affairs Department of the World Bank.
All material is taken directly from published and copyright wire service stories
and newspaper articles.

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Excerpted Headlines for Tuesday, October 30, 2001:
- U.S. BACKS BILLIONS OF NEW AID FOR PAKISTAN.
- ARGENTINA SEEKS SUPPORT FOR DEBT PLAN.
- O'NEILL SAYS AFRICA NEEDS GRANTS MORE THAN DEBT RELIEF.

U.S. BACKS BILLIONS OF NEW AID FOR PAKISTAN.

The US said yesterday it would support billions of dollars worth of new
loans to Pakistan for the coming year and support generous terms for Paris
Club debt restructuring, reports Reuters.  "We intend to support
negotiation of a new three-year $2 billion program with the IMF for
Pakistan," US State Department spokesman Richard Boucher is quoted as
saying.  "In addition, we'll also support a range of important products
and programs financed through the World Bank and the ADB that could total
$2 billion in the next year."

"There's a lot of money in the pipeline," Agence France-Presse also quotes
Boucher as saying.  Noting that Washington was targeting Pakistan's
mountainous debt, offering economic aid and backing support from
international financial organizations, Boucher said, "All these programs
totaled up, you get well over one billion from the US government. You can
get several billion dollars coming from the international aid
organizations."

In related news, the Washington Post (E1) reports that with many U.S.
clothing and fabric companies canceling orders from Pakistan because of
instability there, the Bush administration is seeking authority from
Congress to sharply reduce duties on imports of Pakistani textiles and
apparel, administration officials said yesterday. But it isn't clear how
far the U.S. administration can go in helping Pakistan, a crucial ally in
the war against terrorism, because the U.S. textile industry and its
powerful allies in Congress are deeply resistant to moves that might
increase competition from low-cost imports and threaten jobs in the United
States.

The initiative is aimed at resolving a potentially explosive problem that
pits the administration's foreign policy goals against its trade
objectives. On the one hand, U.S. officials are anxious to show the
Pakistani government and public that Washington will reward Islamabad for
its support and will help minimize the damage to the Pakistani economy
stemming from the war in neighboring Afghanistan. On the other hand, the
White House badly wants to secure congressional approval of authority to
negotiate broad new trade agreements -- and by opening the door too wide
to textile imports, it could lose desperately needed votes from
textile-state lawmakers.

The U.S. administration has already agreed to provide various forms of
financial aid to Pakistan, including a partial rescheduling of the debt
that nation owes to the United States, and the administration is also
backing plans by the International Monetary Fund and the World Bank to
lend hundreds of millions of dollars aimed at easing the nation's economic
woes. But those acts of largess could go for naught if the United States
is perceived as standing idly by while Pakistan's textile and apparel
industry -- the nation's biggest industrial sector -- goes down the tubes.

"It's a volatile region, of course, and the stability of the region is
very important," While House spokesman Ari Fleischer said, reports the
Wall Street Journal (A4). "And that's always foremost in the minds of the
planners."

Reuters says Boucher noted that signing a new pact with the IMF would make
the nation eligible for Paris Club debt rescheduling of part of its $12.2
billion debt to Paris Club countries, adding, "The US will support
generous terms for this rescheduling to ease Pakistan's external debt
burden."

Pakistan is seeking an unprecedented debt rescheduling agreement with the
Paris Club that would extend help on terms usually reserved for much
poorer countries, notes the Financial Times (p.4).  If approved, Pakistan
would see the maturity of its government debt extended for up to 40 years
and its interest payments reduced.  That would cut debt servicing costs
from more than 60 percent of budget revenues to close to 50 percent.

The deal is part of a package being pursued by foreign governments to
reward Pakistan for its support of the international coalition [against
terrorism], the story says.  Large bilateral creditors, including the US,
are said to have ruled out writing off debt outright, but are seriously
considering the current proposal.

It would mimic a more generous rescheduling Paris Club agreement known as
the "Naples terms"-usually reserved for very poor countries with no access
to global capital markets.  US officials are understood to have stressed
that this would be a one-off deal, discouraging other governments from
asking for similar treatment but leaving creditors open to accusations of
political bias in their dealings with heavily indebted countries.

Pakistani Finance Minister Shaukat Aziz said General Pervez Musharraf was
supporting the international coalition as a matter of principle.  "There
is no quid pro quo," Aziz is quoted as saying.  "The president took the
decision without a shopping list.  But our friends and allies appreciate
the challenges we face and we have been able to convince them of the
impact [the military campaign] has had on us."

In a separate report, AFP notes that Pakistan's central bank warned
yesterday that growth for the 2001-2002 fiscal year could be as low as 2.5
percent because of the impact of the conflict in neighboring Afghanistan.
The State Bank of Pakistan, in its annual report, said it had based its
forecast on a World Bank report which predicted that the current global
crisis would cut growth rates in developing economies by an average of
between 0.5 and 0.75 percentage points. Pakistan today pushed for an early
end to the US military strikes against Afghanistan even as Washington
considered new steps to force Osama bin Laden and his Taliban protectors
from mountain strongholds into the open, notes Reuters in a separate
report.  "We would like it to be concluded sooner than later," Aziz told a
gathering of about 800 business leaders at World Economic Forum's East
Asia Summit.  "No government can be imposed by the outside world on
Afghanistan. The people of Afghanistan have to decide what the political
future of the government will be," he added.

Meanwhile, complicating efforts to lay plans for a new regime in
Afghanistan, Iran said it would oppose any move to allow exiled former
King Mohammad Zahir Shah to return to his homeland even in a symbolic
role, reports the Wall Street Journal Europe (p.9).  Iranian Foreign
Minister Kamal Kharazi set out Tehran's views in conversations with three
EU foreign ministers over the past two weeks, diplomats said as the 15 EU
foreign ministers met yesterday to discuss the diplomatic maneuvering
underway to help form a coalition government to replace the Taliban regime
in Afghanistan.

"Their solution of choice would not be the return of the king," EU High
Representative for Foreign Policy Javier Solana.  "But that doesn't
necessarily mean they would be opposed to a return if that were the
consensus."  Still, French political scientist Dominique Moisi said that
convincing Iran to accept the exiled king would not be so easy.  "This
makes things much more complicated," he said, noting that the king "is
pretty much the only symbol of legitimacy who holds out much hope of
bringing the nation together."
                                                                                

ARGENTINA SEEKS SUPPORT FOR DEBT PLAN. Argentina was yesterday scrambling
to build international support for its planned debt restructuring, details
of which are expected in the coming days, the Financial Times (p.10)
reports.  A flurry of activity over the weekend heightened worries among
investors that a default on at least part of Argentina's $132 billion in
debt could be in the works.

An IMF mission was in Buenos Aires over the weekend for secret
consultations, the story says.  Officials confirmed that Finance Secretary
Daniel Marx, who is crafting the debt restructuring, also spoke by
telephone with several international finance officials, including US
Treasury Undersecretary John Taylor and officials from the US Federal
Reserve.

Argentine Economy Minister Domingo Cavallo meanwhile met with Federal
Reserve Bank of New York President William McDonough, and the government
has consulted with firms specializing inthe intricacies of renegotiating
foreign debt, and hired Merrill Lynch Chairman Jacob Frenkel, former
governor of the Bank of Israel, to advise on the debt operation.

Cavallo said late on Sunday that the operation was aimed at lowering the
country's onerous interest payments, but he insisted that the plan would
not adversely affect investors or local bank depositors.  "The plan is
ready and has consensus," he is quoted as saying.  "But before announcing
it, we need to reach some agreements with the IMF and the banks." Le
Figaro (France, p.I) also reports.

As part of its latest $8 billion loan to the country in August, the Fund
set aside $3 billion for use in a "voluntary and market-based operation to
increase the viability of Argentina's debt profile," notes the story.  
Argentina is seeking to increase that amount with extra funds from the
World Bank and the IDB to coax investors to trade in high-yielding bonds
for new ones bearing lower interest rates.  The government hopes to save
between $3 billion and $4 billion in interest payments, giving the country
much-needed breathing space.

Hoping to force Argentina's long debt crisis to an endgame, Cavallo
appears to be laying the groundwork for the country to default on its
debt, says the Wall Street Journal (p. A17).  At the same time, he is
pressing the IMF and other lenders to underwrite a separate strategy that
wouldn't involve a forced debt restructuring. But IMF and World Bank
spokesmen declined to comment yesterday, as did officials at Argentina's
economy ministry.

An IDB spokesman meanwhile said the bank was in "constant discussions"
with the government, and that IDB President Enrique Iglesias has said
officially that the bank would like to help.

The strategy is a high-stakes game of dare for Argentina, whose teetering
debt load makes up about one-quarter of all emerging-market bonds, the
WSJE says.  A default on its roughly $95 billion in bonds would easily be
the biggest-ever bond restructuring by a developing nation, and could send
shudders throughout Latin America and other regions.

Separately, the New York Times (p. C4) reports some analysts argue that
the effort to restructure the debt, although necessary to reduce the
country's debt burden, could lead to a default.  Some major credit
agencies have said that even a voluntary restructuring of Argentina's debt
would lead them to give the debt a default rating.

In related news, USA Today (p. 2B), the Los Angeles Times (p. C3) and BBC
Online report Argentina's stocks and bonds fell dramatically Monday on
investors' growing skepticism that the country's ongoing efforts to avert
economic and political collapse would succeed.

The news comes as Harvard University Professor of Economic Development and
former IDB President Ricardo Hausmann writes in the Financial Times (p.16)
that the government has tried to find creative ways to reduce the debt
burden and gradually gain competitiveness. So far, it has not worked. This
week, they will unveil another debt swap, like the one offered this last
spring, designed to lower the interest burden, but this time offering
guarantees financed by the international financial institutions. The
strategy may have run out of time.

The workable alternative has two main ingredients, says Hausmann:  first,
de-dollarization of the foreign debt, the financial system and the
domestic contractual environment; second, a floating exchange anchored by
strict inflation targets.  Under this plan, Argentina would convert the
dollar-denominated assets and liabilities of the banking system and public
debt-excluding obligations to the IMF and multilateral banks-into Chilean
style inflation-indexed pesos, at today's exchange rate of one peso for
one dollar. All other contractual terms, including maturity and interest
rates, would remain the same. An independent entity (why not the IMF?)
would be designated to credibly calculate the price index to be used for
these purposes.
                                                                                
                                                                                
O'NEILL SAYS AFRICA NEEDS GRANTS MORE THAN DEBT RELIEF.  In a more than an
hour-long exchange with representatives at the African Growth and
Opportunity Act Forum in Washington yesterday, US Treasury Secretary Paul
O'Neill spelt out the basic rules of business investment for his audience,
and then had a healthy swipe at some of the sacred cows of development
economics, reports Dow Jones.

In particular, O'Neill brushed aside the plea of a delegate from Mauritius
that Africa urgently needs debt cancellation to free up funds for
infrastructure development which is essential for attracting private
investment.  The IMF and the World Bank have, for five years, encouraged
the world's poorest nations to enroll in the Heavily Indebted Poor
Countries (HIPC) debt relief initiative, which offers significant debt
forgiveness to those governments willing to undertake sweeping reforms in
return, the story says.

But O'Neill told delegates to the conference he didn't need to be further
convinced of the need for debt relief, adding that Bono of the Irish rock
band U2 is ensuring a steady flow of "several thousand" letters to the
Treasury department each week on the subject of debt relief for poor
nations.  "I don't need to be lobbied about the importance of debt relief,
and debt relief is going to be done, but that's not economic development,"
he said. "It may help to alleviate some of the pressures and sins of the
past, [but] it's not economic development."

Instead of wiping away the debts of poor African nations, O'Neill said the
focus should be on ensuring that such countries don't simply move on from
debt relief to a new addiction to borrowing for projects that simply don't
offer a return on investment.

O'Neill has said he wants the World Bank and its regional development
cousins to split their financing evenly between loans and grants to poor
countries, with the grants earmarked for social programs like health and
education that traditionally are difficult to fund with private sector
resources.

Only one delegate, an official from Malawi, tried to challenge the US
Treasury secretary on his attitude toward debt relief, citing the
"wonders" that debt relief has worked in his nation.  "We can still talk
about debt cancellation, although in your own words, it is not economic
development," the Malawi official said.  "I think for us in Africa it
is...a kind of fallback position for the development of our
infrastructure. Countries that have been granted HIPC relief-Malawi is
one-have already shown tremendous improvement in the building up of
infrastructure."

In addition to debt relief, several other delegates asked the Treasury
secretary to take the U.S. Customs Service to task over its administration
of access to US markets by African nations, which was expected to improve
under the new African Growth and Opportunity Act.  Several complained that
their exports were being hampered by the Customs Service, which is an arm
of the Treasury department, and O'Neill promised to investigate once he
was presented with more detailed evidence.

In related news, the Washington Times (p. A13) reports US President Bush
said yesterday the U.S. will support "responsible debt relief" for heavily
indebted African nations that use the funds for such infrastructure
improvements as education and health care.

Meanwhile, AllAfrica.com reports Bush has announced the creation of a
US$200m "support facility" that will give U.S. firms access to loans,
guarantees, and political risk insurance for investment projects in
sub-Saharan Africa. The new program will be handled by the Overseas
Private Investment Corporation (Opic).