[stop-imf] 50 Years analysis of debt situation

Thu, 03 Feb 2005 13:08:33 -0500

As the article below discusses, the finance ministers of the G7
countries (US, UK, Canada, Italy, France, Japan, Germany) are meeting in
London this weekend, with discussion of the various proposals for
substantial debt cancellation that have been circulating since last
June's G8 Summit high on the agenda. The number of different leaks and
speculations in press reports this week suggests that there might
actually be some movement at the meetings. The UK plan continues to get
the most attention, especially with the Canadian government announcing
today it would follow the same course of action. But from our point of
view, the US plan continues to be preferable, since it would absolutely
cancel 100% of about 40 countries' debts. The UK plan would only promise
to make payments on ten years of debt servicing, and only for 15-25
countries (depending on how liberally the proposal is interpreted). The
UK plan requires contributions of new money from the G7 governments,
which is unlikely to be forthcoming from the three largest donors to the
IMF & WB -- the U.S., Japan, and Germany. The US plan, on the other
hand, would "finance" the cancellation from IMF/WB resources, including
IMF gold and WB reserve accounts. The consequent weakening of the
institutions makes the US plan even more attractive.

But this report (and others) also suggests that the US plan carries a
"poison pill" that threatens to actually make things worse rather than
better: "Taylor also said he expects discussion on the U.S.-backed
proposal for a new kind of International Monetary Fund facility--a
program monitoring arrangement--that would keep the IMF engaged with
countries, helping to design economic policy and benchmarking progress,
but countries would not have to borrow." Unpacking the polite language,
this new facility would apparently formalize the IMF's "gatekeeper" role
-- in which, by custom, the IMF decides when a country can get any aid,
credit, investment, or loans, from ANY source, by giving the country's
economic program its "seal of approval." That signal usually takes the
form of releasing an installment of a loan that is part of a formal IMF
agreement. It is this function which is the IMF's greatest source of
power. The unofficial nature of this role has allowed the occasional
minor deviation, usually for political reasons. Creating the new
facility would likely put an end to such exceptions, and would add to
the IMF's leverage over countries, extending it to those that do not get
IMF loans. It is not hard to imagine that donors and investors will
insist that countries participate in this facility as a condition for
getting any financial flows. The IMF's influence would grow even as it
finds it necessary to lend less money.

It is thus possible that two of the greatest benefits of the US plan,
the increase in flexibility and policy sovereignty for countries no
longer in thrall to the IMF and the diminution of the IMF's power
through the reduction in its available resources, would be eliminated,
and in fact reversed. It would then be difficult to gauge if countries
would do better to get the immediate benefit of debt cancellation
(increased resources) at the cost of seeing their sovereignty further
eroded and the IMF's power increased. But these would in practice be
entirely separate decisions -- the first being whether to support a
proposal like the US plan if it includes the poison pill, and the second
whether a given country should accept the cancellation. By the time the
second decision would be made, the political implications of the program
will be clearer, and there would likely be little reason to reject debt
cancellation. But if the new IMF facility becomes a reality, and its
utilization a general expectation of developing countries, the thought
of what might have been accomplished will be tantalizing, and depressing.

Soren Ambrose - 50 Years Is Enough Network - Washington, DC USA

*U.S. Debt Relief 'Most Doable' Approach
Taylor Says; G-7 Likely to Keep Forex Stance*
*/2 February 2005 =96 Bureau of National Affairs (BNA)
/*
The U.S. proposal for debt forgiveness for poor countries is "the most
doable" and "sound financially and economically," Treasury
Undersecretary John Taylor said Feb. 1, speaking ahead of the Group of
Seven meeting of finance ministers and central bankers, where debt
relief and development are expected to figure prominently on the agenda.

Taylor also reiterated Treasury Secretary John Snow's remarks that the
ministerial, taking place Feb. 4-5 in London, is expected to retain the
language on foreign exchange policy that was crafted last February in
Boca Raton, Fla.

That communique said exchange rate volatility and disorderly movements
"are undesirable for economic growth" and also spoke to the desirability
of more flexible exchange rates around the world.

China, which will participate in part of the ministerial--as it did for
the first time last fall in Washington--is taking steps that are
"consistent" with moving to a more flexible exchange rate policy, Taylor
said, but the matter of setting timelines for achieving that "is not
what we're hearing and we can understand why."

On the issue of debt relief, Taylor said the United States is hoping for
discussion and is "willing to talk." The matter will not necessarily get
settled at the Feb. 4-5 meeting in London though hopefully it will
advance. A progress report on debt relief and grant financing will be
discussed, he said.

The U.S. plan would provide 100 percent forgiveness for the debt that
the poorest countries--those in the Heavily Indebted Poor Countries
initiative--owe the World Bank and the African Development Bank and
Development Fund and ensure they receive only grants after that for a
number of years. It would maintain net transfers; that is, if a country
is paying $20 million in interest a year to the bank and receiving $100
million in loans annually from the bank's International Development
Association, the debt would be forgiven and the country would henceforth
receive $80 million a year, in grants, Taylor said by way of an
illustration.

*U.S. Cannot Back U.K.'s Aid Mechanism*

Taylor said Britain's proposal, championed by Chancellor of the
Exchequer Gordon Brown and recently endorsed by Germany, to create an
International Finance Facility is not something the United States can
support because of the nature of the financing mechanism.

"The United States has indicated the IFF does not work for us for budget
reasons" because of the way Congress appropriates funds, Taylor told
reporters. He said "that's fine" if other countries want to take part
"but the United States just cannot support that."

The IFF would seek to raise money for development on a multi-year basis
by issuing bonds. Britain has the chair of the Group of Eight--the G-7
plus Russia--and Brown will urge other countries to step up their
commitments, particularly to help Africa.

Taylor defended the U.S. record on development, saying U.S. aid has
increased "dramatically," rising from $10 billion a year to $19 billion,
while aid to Africa has increased from $1.1 billion in 2000 to $4.6
billion in 2004.

Taylor also said he expects discussion on the U.S.-backed proposal for a
new kind of International Monetary Fund facility--a program monitoring
arrangement--that would keep the IMF engaged with countries, helping to
design economic policy and benchmarking progress, but countries would
not have to borrow.

"We found a number of countries, some good performers, interested in
moving in this direction," he said.

In another development topic, asked if the United States could support
someone like Brown for the presidency of the World Bank--a position that
has always gone to an American--Taylor said the United States wants "the
best person" for the job, meaning someone with good leadership and
management skills, international experience, and the "commitment and
drive" to put forward policies that increase growth in the developing
world.

*Consulting on World Bank Post.*

"We're consulting with people around the world," Taylor said.

Taylor was also asked if he intends to stay on as Treasury undersecretary.

"I'm working at my job as hard as I can. We've got a good meeting ahead
of us =85 and I'll be going to the Middle East right after" the London
ministerial, he told reporters.

Previewing the overall agenda for the G-7 meeting, Taylor said this
would be his 16th meeting in four years and he noted the differences
between now and four years ago.

Emerging market economies "are now almost an engine of growth in the
world," in contrast to 2001 when there were financial crises in Turkey
and Argentina.

Secretary Snow will appeal to his counterparts to continue to focus on
fighting terrorist financing, another item that was not on the table
four years ago.

In contrast to the 2001 recession, the United States is now growing
"very satisfactorily," having expanded 4.4 percent last year, Taylor
noted. But other countries "aren't growing so rapidly," Germany in
particular, he said.

*Snow to Outline Bush Agenda*

Snow will talk about President Bush's second-term agenda, including
Social Security and tax reform, and, with respect to the Doha
Development Round, urge ministers to accelerate the process of "getting
good offers out there," achieving good progress in removing barriers to
financial services, Taylor said.

Besides China's participation for part of the meeting , there will be a
side meeting when the finance ministers of Brazil, South Africa, India
and China will join the G-7, which Taylor described as part of the
group's "continuing outreach" to emerging markets. There will also be a
meeting with Nelson Mandela.

Snow will hold bilateral meetings with his counterparts from Russia,
China, the European Union, India, Canada, France, Germany, and Japan,
Treasury announced.

Meanwhile, debt relief advocates wrote to Secretary Snow urging that the
United States support full forgiveness for the debt poor countries owe
the IMF, World Bank and other multilateral lenders. The letter attached
signatures of thousands of petitioners.

"We have been encouraged by the U.S. Treasury's support for up to 100
percent multilateral debt cancellation, which you announced at the
October 2004 annual meetings of the IMF/World Bank. But now it is time
to move beyond rhetoric and into action," Neil Watkins, the national
coordinator for Jubilee USA, wrote. "It is critical that you advocate
this weekend within the G-7 for a deal on full multilateral debt
cancellation, for all impoverished nations, without harmful conditions
attached."

Watkins said they are aware of remaining differences between the United
States, Britain, and the other G-7, particularly on how debt relief
should be financed. The network urges the phased market sales of IMF
gold as a mechanism it argues would generate $30 billion, enough to
cover IMF and World Bank debt cancellation.

Taylor, asked about the idea of selling IMF gold, said it was "not a
proposal we've taken a position on, one way or another."

By Diana I. Gregg