[stop-imf] Assessing the G8 Debt Proposal & Its Implications

[Robert Weissman]

http://www.50years.org/cms/updates/story/270
Assessing the G8 Debt Proposal & Its Implications

THIS IS PART ONE OF THE REPORT

Sep 21, 2005

By Soren Ambrose
Solidarity Africa Network in Action (Nairobi, Kenya) & 50 Years Is
Enough: U.S. Network for Global Economic Justice (Washington, DC, USA)
August/September 2005

This report is in two parts. The first is a close reading of the G8 debt
plan and some of the interpretations and proposals about the plan that
have emerged since July. The second is an analysis of its implications.

Preface: The Solidarity Africa Network in Action Position on Debt &
Externally-Imposed Conditions - Solidarity Africa Network in Action
calls for 100% multilateral and bilateral debt cancellation without
externally imposed conditions. The Network advocates for the active
participation of people in designing and implementing economic and other
kinds of policies that affect them. We believe that this requires the
elimination of the debts used to constrain public space for
decision-making, and the eradication of the influence of international
financial institutions (IFIs) on policy-making. The Network recognizes
debt as a tool of control and domination and its resolution as a moral
and human rights imperative.


    PART ONE: WHAT IS THE G8 TRYING TO SAY?

The G8=92s proposal for debt cancellation, announced at the end of a
Finance Ministers=92 meeting on June 11th and reaffirmed in the summit
communiqu=E9 of July 8th, could be the most significant development in
international debt policy in the last ten years.a Leaks from the IMF and
World Bank now indicate that those institutions, along with non-G8
European governments, are bending the rules of interpretation to try to
retain the power they hold over Southern countries=92 economic policies.
These efforts are opposed by the U.S. and U.K. governments; the conflict
over how the plan will be implemented is likely to be addressed, and
possibly resolved, at the IMF/World Bank annual meetings on September
24-25 in Washington.

Civil society organizations have themselves had notably different
interpretations of the G8 Finance Ministers=92 statement and its
implications. This report will attempt to clarify what the G8 has said
and committed to, and look at some of the implications of the statement
for debt campaigners. It will also attempt to analyze the reasons for
the varying interpretations.

Two caveats on the analysis of the G8 statement: 1) The G8 (and its
predecessor, the G7) has a history of not acting on its statements, so
we should not confuse the words on paper with deeds not yet done =96
though we should also consider the impact of the words alone; 2) The G8
controls between 50 and 60 percent of the voting power on both the IMF
and World Bank boards; its determinations generally become policy at
those institutions. Nonetheless, what we have now is still a proposal,
which will be discussed at the IMF/World Bank annual meetings in
Washington, DC in late September. Fundamental proposals such as this one
require an 85% majority to pass, so it could, technically, be blocked,
and in fact a group of non-G8 European countries is threatening to do
exactly that at the IMF. Indeed, it appears that one of the key
strategies of those leading the rearguard actions to subvert the G8
proposal at the World Bank is to define any number of consequences of
the proposal as ones constituting =93fundamental change=94 to the
International Development Association (IDA), the Bank=92s division lending
to low-income countries.


      Summary of G8 Proposal

The G8 has proposed 100% cancellation of IMF, World Bank, and African
Development Bank debt for those countries that have completed the HIPC
program (the Heavily Indebted Poor Countries debt scheme devised and
administered by the IMF and World Bank since 1996). The total number of
such countries at the time the proposal was made was 18: Benin, Bolivia,
Burkina Faso, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Mali,
Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania,
Uganda, and Zamiba. Fourteen of them are in Africa and four in Latin
America and the Caribbean (for the latter group, the proposal is flawed
for not including debts to the Inter-American Development Bank). Another
ten countries (Burundi, Cameroon, Chad, Congo-Kinshasa, Gambia,
Guinea-Conakry, Guinea-Bissau, Malawi, Sierra Leone, S=E3o Tom=E9 &
Principe) are currently progressing through the HIPC program and would,
according to the U.K. government and others, receive the same offer once
they completed it. Ten additional countries (Central African Republic,
Comoros, Congo-Brazzaville, C=F4te d=92Ivoire, Laos, Liberia, Myanmar/Burma=
,
Somalia, Sudan, Togo) are eligible to enter the HIPC program but have
not yet done so. If they do, and they complete the program=92s
requirements, they would also get their multilateral debts cancelled.

This offer exceeded the expectations of many observing the process, as
it went well beyond the formal proposal made by the U.K., which did not
include IMF debt, and would only have paid off ten years of debt
servicing rather than cancelled debt stock. But criticism focused on the
relatively small number of countries included and the plan=92s grounding
in the HIPC program as its organizing framework. HIPC has long been
viewed by many civil society organizations as little more than a way to
bribe countries to stay on the IMF/World Bank debt treadmill. Completion
of the program requires a commitment to three to six years of
devastating structural adjustment programs and close monitoring by the
IMF. In recent years the World Bank and many donor countries have
acknowledged HIPC=92s failure to serve its stated purpose of making
countries=92 debts =93sustainable.=94 If HIPC rules are not altered, very f=
ew
additional countries will be added to the 38 now eligible. The U.K.'s
Make Poverty History (MPH) campaign has estimated that at least 62
countries require debt cancellation if they are to have any chance of
meeting the UN Millennium Development Goals.

The good news is that there are no conditions or requirements other than
completing the HIPC program. For the 18 countries that have completed
the HIPC program, that means, in essence, unconditional debt
cancellation; for the 10 countries already involved in HIPC, it means no
additional conditions beyond what they have already agreed to. The IMF
and World Bank are now (August 2005) scrambling to find ways to change
the G8=92s plan; they want to make the cancellation =93 revocable=94 if
countries do not continue to meet IMF/World Bank rules. They are using
references to =93good governance=94 and other seemingly innocuous hortatory
phrases in the G8 document to re-insert themselves into the process
after the G8, at long last, seemed to have taken explicit steps to sever
the fate of some indebted countries from the long reach of the IMF and
World Bank.

For the 18 countries that already meet the HIPC criteria, this proposal,
if implemented fully, would mean more money left for national budgets,
which often devote between 25 and 50 percent of revenues to debt
payments. Should countries remain resolute in not taking out future
IMF/World Bank policy-based loans, it would also mean liberation from
debts the institutions have manipulated to impose economic policies that
have devastated these countries for up to 25 years. This new concession
by the G8 could be the beginning of policy sovereignty and economic
democracy for these countries.

But for many countries in need of comprehensive debt cancellation, this
plan offers nothing. Some analysts have concluded that the plan would
cancel about 10% of the debt that needs to be eliminated, according to
MPH statistics. This figure has little real-world meaning, however: for
the countries in question, it is either 100% of multilateral debt or
zero. And the potential benefits of the plan cannot be measured solely
by percentages or dollar amounts, since the political benefits of being
freed from foreign domination are not reducible to numbers.


      The Actual Statement

The G8 Finance Ministers=92 communiqu=E9 of June 11th comes in two parts. I=
t
should be remembered that the meeting at which it was issued was not
planned solely to discuss debt, but to discuss broader questions of
development. The first part of the communiqu=E9 is a general statement on
the broader subject at hand, including vague assertions that ideas like
a global tax on airplane fuel to fund development will be considered.
The second part is the actual proposal on debt; it differs in tone from
most such communiqu=E9s in that it talks of =93commitments=94 and outlines =
a
program in some specificity.

The debt proposal should therefore be seen as distinct from the main
part of the communiqu=E9, which is filled with disconcerting tributes to
the power of liberalization, privatization, and market forces. The
second section is, in fact, referred to in the general statement (point
7) as an annex. After disingenuously patting themselves on the back for
the dubious success of the HIPC program, they write: =93However we
recognise that more still needs to be done and we have agreed the
attached proposal. We call upon all shareholders to support these
proposals which we will put to the Annual Meetings of the IMF, World
Bank and African Development Bank.=94

Below we look at the complete text of the proposal, which runs to just
one page, and offer some interpretative commentary, section by section:

The official text is highlighted in red:

G8 Proposals for HIPC debt cancellation

Donors agree to complete the process of debt relief for the Heavily
Indebted Poor Countries by providing additional development resources
which will provide significant support for countries' efforts to reach
the goals of the Millennium Declaration (MDGs), while ensuring that the
financing capacity of the IFIs is not reduced. This will lead to 100 per
cent debt cancellation of outstanding obligations of HIPCs to the IMF,
World Bank and African Development Bank.

COMMENT: The proposal is defined as an extension of the HIPC program.
This is unfortunate, as it maintains the link between debt cancellation
and the program=92s insistence on strict adherence to =93structural
adjustment=94 policies for at least 3 years, as gauged by the IMF. To the
degree that the new plan validates HIPC and, if implemented, encourages
the 20 countries that could yet qualify for cancellation to follow HIPC
rules more faithfully, this is a major drawback. The final sentence
above, however, is encouragingly precise in stating that 100% of IMF,
World Bank, and AfDB debt will be cancelled for eligible countries. This
represents the first acceptance by the G7/G8 of the call for 100%
multilateral debt cancellation that has been pushed since the Jubilee
campaigns of the mid and late 1990s. The insistence on using the HIPC
framework means the list of countries will be limited to 38, barring
changes in eligibility criteria. A recently- leaked document from the
World Bank, however, lists the following countries as ones which could
qualify for HIPC in the next year: Haiti, Nepal, Kyrgyzstan, Eritrea,
Sri Lanka, Bangladesh, Bhutan, and Tonga.

What is unexpectedly good here is that completion of the HIPC program is
the sole criterion for qualifying for debt cancellation. Unless
=93governance=94 standards (see below) are formulated into conditions =96
which the anti-cancellation forces at the institutions are now arguing
for -- this means most countries will get debt cancelled without having
to meet any additional economic policy conditions. For the 18 countries
that have completed HIPC, there are no conditions left to fulfill, and
for those who have already started the HIPC program and hope to qualify,
there are no conditions beyond those they have already agreed to and
started implementing.

Additional donor contributions will be allocated to all IDA and AfDF
recipients based on existing IDA and AfDF performance-based allocation
systems. Such action will further assist their efforts to achieve the
MDGs and ensure that assistance is based on country performance. We ask
the World Bank and IMF to report to us on improvements on transparency
on all sides and on the drive against corruption so as to ensure that
all resources are used for poverty reduction. We believe that good
governance, accountability and transparency are crucial to releasing the
benefits of the debt cancellation. We commit to ensure this is
reaffirmed in future bilateral and multilateral assistance to these
countries.

COMMENT: The first sentence basically means that the money donated by
wealthy countries to compensate the institutions for the repayments they
will forego is to be distributed to all of the countries funded by the
respective institution (rather than just the countries getting debt
cancelled). It also states that the controversial systems in place for
determining allocations (the Country Performance and Institutional
Assessment [CPIA] at the World Bank/IDA and its analog at the AfDB) will
be used to allot the funds. [IDA is the International Development
Association, the part of the World Bank that makes low-interest loans to
the most impoverished countries; the African Development Fund (AfDF) is
the African Development Bank=92s equivalent of IDA.] While the fact that
some countries not included in the plan would see their IDA funds
boosted can be seen as positive (if one overlooks the fact that those
funds are part of conditioned loans), the reliance on the perverse CPIA,
while expected, is not good news.

The remainder of the paragraph is not entirely clear. It requests that
the international financial institutions report to the G8 on
transparency and corruption issues, though it appears that this refers
to all recipients of IDA and AfDF funds =96 not just the 18 countries
benefiting from the proposal. Given the G8 summit communiqu=E9=92s attentio=
n
to the problem of rich countries tolerating, and even abetting,
corporate corruption in developing countries, the reference to =93on all
sides=94 may even refer to wealthy countries and international
institutions as well as developing countries. The last sentence suggests
that future loans and grants =96 to the 18? to all developing countries? =
=96
will be conditioned on demonstrating corruption and democratic reforms.
These sorts of rules, unfortunately, can become just as onerous as the
customary economic requirements.

Key elements:

=A7 Additional donor contributions will be allocated to all IDA and AfDF
recipients based on existing IDA and AfDF performance-based allocation
systems.

=A7 100 per cent IDA, AfDF and IMF debt stock relief for Completion Point
HIPCs.

COMMENT: This second point is crucial: the British proposal would have
simply made debt service payments, and only for ten years. Debt stock
cancellation means the debt is wiped out.

=A7 For IDA and AfDF debt, 100 per cent stock cancellation will be
delivered by relieving post-Completion Point HIPCs that are on track
with their programmes of repayment obligations and adjusting their gross
assistance flows by the amount forgiven.

COMMENT: The worrisome phrase here is =93on track with their programmes of
repayment obligations.=94 This suggests that one requirement to qualify
for debt cancellation will be that the country has not fallen behind in
debt servicing to any creditor since completing HIPC. None of the
proposal=92s first 18 beneficiaries are in danger of being excluded on
these grounds. Recent leaks from the IMF and World Bank suggest that
they would like to twist this phrase to mean that benefiting countries
should be subjected to on-going conditions. The World Bank, in
particular, in a PowerPoint presentation for the Board of Executive
Directors (=93G8 Debt Relief Proposal: Preliminary Estimates and Issues=94)
by Geoffrey Lamb, a World Bank Vice President, quotes the phrase =93
on-track with their programmes=94 and poses the question: =93Does this mean
conditionality?=94 [conditionality is the World Bank=92s obfuscating way of
saying conditions]. Lamb conveniently truncates the phrase so that the
term =93repayment obligations=94 is omitted. Those obligations, of course,
would be ended once the debt cancellation was effected, meaning no
occasion for additional conditions =96 but only if you have the patience
to read the whole sentence.

Also worrisome, for some, is the provision that aid flows from IDA and
AfDB for individual countries would be reduced by the amount of debt
cancellation. This gets into the =93additionality=94 debate which divided
Northern NGOs during the lobbying campaigns on this program. Some NGOs,
including most of the larger ones, insisted that debt cancellation
should not result in reduced aid flows, and in fact should mean a net
increase. Others in the North viewed elimination of debt with no
additional conditions as significantly more important than the
maintenance of aid flows, especially when those aid flows represent
highly-conditioned loans or grants from the international financial
institutions. The U.K. proposal to the G8 reflected the
pro-additionality position, while the U.S. proposal mandated a
proportional cut in aid for countries receiving debt cancellation. In
this and other regards, the U.S. position seems to have carried the day
in the final G8 proposal. Jubilee South and other Southern-based
progressive organizations, to the extent they involved themselves in the
debate, were generally aligned with the position downplaying the
importance of aid flows (see, for example, sign-on statement from
African Social Forum, Lusaka, December 2004).

Donors would provide additional contributions to IDA and AfDF, based on
agreed burden shares, to offset dollar for dollar the foregone principal
and interest repayments of the debt cancelled. Additional funds will be
made available immediately to cover the full costs during the IDA-14 and
AfDF-10 period. For the period after this, donors will commit to cover
the full costs for the duration of the cancelled loans, by making
contributions additional to regular replenishments of IDA and AfDF.

=A7 The costs of fully covering IMF debt stock relief, without undermining
the Fund=92s financing capacity, should be met by the use of existing IMF
resources. In situations where other existing and projected debt relief
obligations cannot be met from the use of existing IMF resources (e.g.
Somalia, Liberia, and Sudan), donors commit to provide the extra
resources necessary. We will invite voluntary contributions, including
from the oil-producing states, to a new trust fund to support poor
countries facing commodity price and other exogenous shocks

=A7 Globally and on this basis we are committed to meeting the full costs
to the IMF, World Bank and African Development Bank. We will provide on
a fair burden share basis resources to cover difficult-to-forecast
costs, in excess of existing resources, to the IMF, IDA and AfDF over
the next three years. Subject to further analysis by the institutions we
will provide up to $350-500 million for this purpose. We are also
committed, on a fair burden share basis, to cover the costs of countries
that may enter the HIPC process based on their end-2004 debt burdens. We
will also seek equivalent contributions from other donors to ensure all
costs are covered and we will not jeopardize the ability of these
institutions to meet their obligations. Utilize [sic] appropriate grant
financing as agreed to ensure that countries do not immediately
re-accumulate unsustainable external debts, and are eased into new
borrowing.

We call upon all shareholders to support these proposals which would be
put to the Annual Meetings of the IMF, World Bank and African
Development Bank by September. [end of statement]

COMMENT: The most important thing in this final section is the repeated
reference to =93 commitments=94 made by the G8 =96 unusually strong languag=
e
for this group, which usually prefers vague pledges. Nonetheless, the
fact that arrangements for the =93financing=94 of the debt cancellation are
left imprecise concerns some campaigners. This may not be unreasonable,
since, as noted, the G8 has a poor track record in keeping its promises.


      Recent Developments at the IMF & World Bank

The documents leaking out of the World Bank indicate that it will argue
that the G8 and other wealthy countries must make more substantial,
binding financial commitments if the program is to be implemented as
outlined. The most recent paper by Geoffrey Lamb at the World Bank (=93The
G8 Debt Relief Proposal: Assessment of Costs, Implementation Issues and
Financing Options,=94 co-authored with Danny Leipziger and dated September
6) in fact argues that the best solution would be for the donor
countries to provide cash now to cover full compensation for the debts
to be cancelled =96 funds that would have fallen due over the next 40
years. Failing that, the Bank suggests that the donor countries provide
legally-binding promissory notes. Anything less, argue Lamb and
Leipziger, would mean that the Bank=92s board should view the debt deal as
mandating a =93fundamental change=94 to IDA, a legal term that triggers a
requirement that the facility=92s articles of agreement be amended, a long
process that requires an 85% super-majority vote. That process would
make the deal vulnerable to the already-announced objections of non-G8
European countries such as Belgium and Norway to the program. Because
European countries are greatly over-represented in the board=92s voting
apportionments, this exposes the deal to the real prospect that it could
fail despite the G8=92s support =96 almost certainly an unprecedented
situation. The fact that certain members of the G8 =96 France, Japan, and
Germany in particular =96 have demonstrated uneasiness with the agreement
they made increases the risk.

The Lamb-Leipziger paper from the World Bank and proposals made by some
European directors at the IMF advocate that on-going conditions be
attached to the cancellation, in part to limit the amount of
cancellation that would have to be =93financed=94 (i.e., some countries
would disqualify themselves by failing to meet conditions). The greater
motivation for such proposals, however, is certainly the institutions=92
interest in perpetuating the power they wield over the economies of
Southern countries. The institutions; unflinchingly arrogant attachment
to controlling countries=92 economic policy-making, is, as always, remarkab=
le.

Until the World Bank has the full amount, dollar-for-dollar, that
cancellation will =93cost=94 it in its own accounts, it will continue to
wail that it cannot afford to cancel the debt. The Bank in fact has
entire departments devoted permanently to pressing donor countries for
more funding with the argument that it is under-funded.

The IMF and the World Bank are tremendously wealthy institutions.
Repeated studies have shown they can cancel the debt of over 20
countries outright with no effect on their programs. And would many
people argue that the positive impact of debt cancellation, so widely
hailed now by the leaders of the G8 countries, would not justify some
rearrangement of priorities =96 perhaps subsidizing one less oil pipeline
through the rainforests for the world=92s most profitable companies -- if
that were required?

Whether campaigns emphasize the illegitimacy of these debts or the fact
that they are the biggest obstacle to development in dozens of
countries, there should be no question that canceling them should be the
highest priority. Now that the U.S. and U.K. have been forced to adopt,
to some extent, this position, we must defend what is positive in the G8
proposal, including the commitment it makes to deal with the question of
resources. How the institutions and the governments that control them
want to balance their books is their business, not ours. We should not
take on the responsibility of locating funds to maintain the health of
an international financial system whose injustices we have exposed so well.

Some civil society advocates of =93 additionality=94 may object to this
perspective. It will be their burden to explain why getting more new
World Bank loans or grants is more important than having IMF, World
Bank, and African Development Bank debt eliminated.

More fundamentally, the G8 debt proposal has exposed the dedication of
the institutions=92 staff, and many of the donor countries, to continuing
to use the IMF and World Bank as instruments to perpetuate the unjust
global economic system, and the key role played by the manipulation of
international debt in making that possible. The desperation that
characterizes many of these maneuvers is a gauge of the significance of
the challenge posed by the G8 proposal to the status quo. The proposal
itself, for all its manifest shortcomings, is unprecedented, as it
represents the success of years of campaigning by civil society groups
-- campaigning that has finally forced the two governments most
identified with establishing and maintaining the structures of global
inequality, the United States and the United Kingdom, to call for a
break with the systematic crippling and domination of weaker countries=92
economies. It applies to far too few countries, and is cast as the
culmination of a heavily-conditioned HIPC program, but the precedent of
at last providing for the release of 18, and as many as 38, countries
from the cycle of debt domination is one that must be preserved and
expanded upon. It is the establishment of this precedent that the staffs
of the IMF and World Bank and the representatives of governments
accustomed to being seen as more generous and reasonable than the U.S.
and U.K. =96 the Scandinavians, the Dutch, the Belgians =96 are trying to
block. Never have we come so close to forcing this kind of break, and
never has the hypocrisy and lust for power that undergirds the system
been more vividly on display.