[stop-imf] Troubling details on IMF debt cancellation
robert weissman
rob@essential.org
Thu, 08 Dec 2005 14:54:38 -0500
From: =09neil@jubileeusa.org
Today, the IMF announced the specifics of how it will implement the G8
debt deal. Cancellation will begin in January, sooner than the World
Bank which will start in June.
The troubling new information below is that even the 18 completion point
countries must go through =93one more test=94 including on what the IMF
considers sound economic policy before they will get 100% debt
cancellation. Details below:
http://www.imf.org/external/np/exr/mdri/eng/mdrians.htm#q01
Multilateral Debt Relief Initiative =97
Questions and Answers
Last Updated: December 08, 2005
*1) The IMF Board has approved the debt relief initiative, but
apparently there are still some steps to be taken. What remains to be
done? *
The Executive Board endorsed the implementation modalities for this
initiative on November 7, 2005, and adopted the requisite decisions to
implement it on November 23, 2005.
However, the decisions on the legal framework for the MDRI will only
become effective if the 43 members^1
<http://www.imf.org/external/np/exr/mdri/eng/mdrians.htm#ft1#ft1> who
contributed to the PRGF Trust Subsidy Account consent, because debt
relief under the MDRI will be financed in part with resources
transferred from that account. Obtaining these consents might take some
time.
Fund staff will shortly prepare an assessment of whether eligible
countries who are now in a position to qualify (the 18
post-completion-point HIPCs, as well as two non-HIPCs) effectively
qualify for MDRI relief. As requested by the Executive Board, the
assessment will be based on the countries=92 current performance in the
areas of macroeconomic policies, poverty reduction, and public
expenditure management. The Board is expected to decide on qualification
by end-December (subject to the effectiveness of the legal framework for
the MDRI), with delivery of debt relief expected to start in early
January 2006. Corrective actions will be proposed for members whose
performance needs to improve before they can qualify for MDRI relief.
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*2) How many countries will get debt relief from the IMF and when can
they expect to receive their relief? In other words, when will these
countries stop paying debt service to the IMF? *
Twenty countries currently are eligible for MDRI relief:
* 18 countries that are already past completion point under the HIPC
Initiative;^2
<http://www.imf.org/external/np/exr/mdri/eng/mdrians.htm#ft2#ft2>
* and two non-HIPCs that are below the $380 per capita income
threshold for eligibility and have debt outstanding to the Fund
(Cambodia and Tajikistan).
Other HIPCs will qualify for MDRI debt relief once they reach the
completion point under the HIPC Initiative:
* 10 countries have begun to receive assistance under the HIPC
Initiative (they have reached the decision point) but have not yet
completed the process.^3
<http://www.imf.org/external/np/exr/mdri/eng/mdrians.htm#ft3#ft3>
These countries will receive MDRI relief once they reach
completion point under the HIPC Initiative.
* Other members are potentially eligible for HIPC assistance under
the extended sunset clause of the Initiative. That list is
currently being established on the basis of end-2004 debt data.^4
<http://www.imf.org/external/np/exr/mdri/eng/mdrians.htm#ft4#ft4>
The target date to start implementation of MDRI is January 3, 2006. For
eligible countries to receive MDRI debt relief, the Board must decide
that they qualify for such relief (a decision on the 20 currently
eligible countries is expected by end 2005, assuming the legal framework
for the MDRI is in effect by that time). Eligible countries have to
remain current on their obligations to the Fund to receive debt relief
under the MDRI. In particular, they need to continue to repay the Fund
until they qualify for MDRI debt relief.
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*3) Will countries that have already reached the completion point under
the HIPC Initiative receive relief automatically? Will they be cleared
in groups or individually? *
Countries that have already reached the completion point will be among
the first assessed for qualification for MDRI debt relief. Fund staff,
in collaboration with World Bank staff, will assess these countries
individually for Board consideration by end-2005. With respect to
eligible members that meet the qualification criteria, staff will
recommend approval of MDRI relief. Corrective actions will be proposed
for members whose performance needs to improve to meet the qualification
criteria.
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*4) Will the Fund initiate the process of offering relief, or will
eligible countries have to take specific actions? How long would the
process be for each country?*
Eligible members will have to request grant assistance from the Fund,
acting as trustee of the MDRI Trusts. In addition, HIPC members will
also have to request a modification of the HIPC assistance delivery
schedule to provide for immediate repayment of their qualifying debt
obligations to the Fund. These requests should be made before the Board
meeting on members=92 qualification under the MDRI Trusts.
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*5) Does the Fund decision affect IDA and AfDF? Can the IMF proceed to
offer debt relief to countries even if the IDA and AfDF have not
approved their packages?*
While the staffs of the Fund and the World Bank will cooperate in the
assessment of eligible countries, the decision to grant debt relief is
ultimately the responsibility of each institution. Fund decisions will
not affect IDA or AfDF decisions, and vice versa. The Fund aims to start
delivering debt relief by January 2006.
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*6) Will the same countries be eligible for debt relief from IDA and the
IMF?*
Unlike IDA and the AfDB, the IMF is expected to use its own resources to
provide debt relief under the MDRI. Fund resources are expected to be
used in an evenhanded manner across the membership. They will be used to
provide debt relief to all members at or below the per capita income
threshold of $380=97thus including the two non-HIPCs, Cambodia and
Tajikistan. HIPCs above the income threshold will receive debt relief
from bilateral contributions currently administered by the IMF.
Since the resources used by IDA to provide debt relief are not subject
to the same requirement of uniformity of treatment as the IMF resources,
Cambodia and Tajikistan are not expected to receive debt relief from
IDA. However, they may benefit from the increased resources being
allocated by IDA to all low-income countries in the context of the MDRI.
The implementation modalities of the MDRI in IDA and the AfDB are not
yet finalized.
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*7) How much debt relief will the countries receive in total? And how
much will come from the IMF? How will the Fund finance it?*
The costs to the IMF are estimated at SDR 3.4 billion at
end-2005=97equivalent to about US$4.8 billion. However, the ultimate cost
will depend on when eligible countries qualify for debt relief.
The Fund would finance this cost through three main sources (rounded):
* SDR 0.3 billion (US$0.4 billion) from the Umbrella Account
(members=92 own resources held in Trust by the Fund, consisting of
amounts disbursed from the PRGF-HIPC Trust for the benefit of a
country, and investment earnings);
* SDR 1.9 billion (US$2.7 billion) from the Special Disbursement
Account (the vehicle for receiving and investing profits from the
sale of the IMF=92s gold, and for making transfers to other accounts
for special purposes authorized in the Articles, in particular for
financial assistance to low-income countries); and
* SDR 1.1 billion (US$1.6 billion) from the PRGF Subsidy Account
(which holds bilateral contributions and contributions from the
IMF=92s own resources to subsidize the rate of interest on PRGF
loans to borrowers at 0.5 percent a year).
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*8) How does this affect IMF finances, in particular with regard to
other support for low income countries, such as the PRGF? Does this mean
that in the future you will only provide grants? If not, why not?*
Concessional PRGF lending depends on the availability of subsidies in
the PRGF Subsidy Account, some of which will be tranferred to finance
debt relief under the MDRI. Donors have agreed to provide the additional
resources necessary so that the Fund=92s financial capacity is not
undermined by this initiative. The Fund will continue to support low
income countries through its available instruments, including
loans=97rather than through grants=97under the PRGF and newly approved
Exogenous Shocks Facility (ESF), and through the nonfinancial Policy
Support Instrument.
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*9) What is the basis for the cut-off point of $380 on income in order
to qualify for debt relief?*
The principle of uniformity of treatment applies to all use of the
Fund=92s resources, including the resources held in the Special
Disbursement Account (SDA), whose use is envisaged under the MDRI. This
principle does not require that members be treated identically, but that
Fund decisions that differentiate among members be based on the
consistent application of relevant criteria.
One of the criteria that is relevant for countries=92 use of SDA resources
is per capita income. A US$380 per capita income cutoff fits closely the
financial arrangements contemplated under the initial G-8 proposal
(which covered 35 HIPC countries) while ensuring uniformity of
treatment. It also matches the level that is widely associated with a
poverty line (an income of about one dollar per day). SDA resources will
be used to provide debt relief under the MDRI to member countries below
that income cutoff (including HIPCs and non-HIPCs). A pool of funds
originally contributed by 43 member countries and held in the PRGF
Subsidy Account will be used in large part to provide MDRI debt relief
to HIPCs that have per capita incomes above that threshold.
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*10) Will Cambodia and Tajikistan be eligible for debt relief from IDA
as well? Why?*
Cambodia and Tajikistan are non-HIPCs, and therefore were not targeted
under the initial G-8 proposal. They are eligible for debt relief from
the Fund under the MDRI because their per capita income falls below
$380=97the threshold for eligibility for debt relief from the Fund=92s own
resources. Cambodia and Tajikistan will not be eligible for debt relief
from IDA. However, they may benefit from the increased resources being
allocated by IDA to all low-income countries.
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*11) Is there any conditionality attached? Will countries that have
reached the completion point under HIPC have to meet new conditions?*
Countries benefiting from MDRI debt relief should have demonstrated
sound policies and satisfactory standards of governance. Two basic
principles will guide the assessment of eligible countries: (i)
conditionality for debt relief under the MDRI should be consistent
across members; and (ii) conditionality should not go beyond that of the
HIPC initiative, in line with what the G-8 initially envisaged. Taken
together, these two principles suggest that:
* an eligible HIPC that has already reached its completion point
would qualify for MDRI relief if its performance in three key
areas has not substantially deteriorated since completion point.
These are: (i) macroeconomic performance; (ii) implementation of a
poverty reduction strategy; and (iii) public expenditure
management systems;
* Countries that have not yet reached completion point will qualify
automatically for MDRI debt relief when they reach completion point;
* Eligible non-HIPC countries will need to have a record of
satisfactory performance in the three areas mentioned above.
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*12) There are still many extremely poor countries that are not
receiving 100% debt cancellation. Why?*
The objective of the G-8 proposal, on which the MDRI was modeled, was to
complete the process of debt relief for HIPCs by providing additional
resources to help these countries reach the U.N. Millennium Development
Goals (MDGs), which target a halving of poverty by 2015. The proposal
has been adapted in the Fund to meet the requirement, specific to the
Fund, of evenhanded access to the institution=92s own resources. Per
capita income was chosen as the relevant criterion of eligibility for
debt relief from the Fund=92s own resources. Current resources allow to
provide relief to members with per capita income at or below $380.
Additional resources would be needed to provide relief to a larger group
of beneficiaries.
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*13) How do we know that the money saved on debt service is being used
for poverty-reducing measures and helping countries to reach the MDGs?*
Countries that qualify for MDRI relief will have demonstrated sound
policies and adequate governance before receiving this relief, providing
comfort that the resources freed by debt relief will be used
productively to help them advance toward the MDGs.
The Executive Board called on the staffs of the Fund and the World Bank
to cooperate and coordinate in the implementation of the MDRI, including
in monitoring and reporting on MDG-related spending after provision of
debt relief. IMF Directors requested that a progress report on the
implementation of the MDRI be presented to the Board before the 2006
Spring and Annual Meetings. Subsequently, MDRI status reports will be
prepared in conjunction with the regular joint Bank-Fund HIPC Initiative
status reports.
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*14) How much closer to reaching the MDGs will the debt relief put the
target countries?*
The MDRI will allow low-income members to allocate resources to
poverty-reducing and human development expenditures. It will therefore
help these countries meet the MDGs. The impact will differ from country
to country, depending on their level of indebtedness to the Fund, IDA,
and the AfDF, but also their capacity to absorb efficiently additional
expenditures.
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*15) Will the MDRI change the way the Fund deals with its low-income
members?*
IMF debt relief under the MDRI is part of an effort to strengthen the
Fund=92s role in supporting its low-income members. The Fund is fully
committed and equipped to continue advising and assisting members in the
design of macroeconomic stabilization policies and structural reforms,
in capacity building, and in providing financing when needed. The PRGF
remains the main instrument for the IMF to assist low-income countries
that need Fund financing. The IMF has introduced two new instruments
that will help respond to the needs of its members: the Policy Support
Instrument and the Exogenous Shocks Facility.
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^1 The 43 contributors are Argentina, Australia, Austria, Bangladesh,
Belgium, Botswana, Canada, Chile, China, Czech Republic, Denmark, Egypt,
Finland, France, Germany, Greece, Iceland, India, Indonesia, Iran,
Ireland, Italy, Japan, Korea, Luxembourg, Malaysia, Malta, Morocco,
Netherlands, Norway, Pakistan, Portugal, Saudi Arabia, Singapore, Spain,
Sweden, Switzerland, Thailand, Tunisia, Turkey, United Kingdom, United
States and Uruguay.
^2 These countries are Benin, Bolivia, Burkina Faso, Ethiopia, Ghana,
Guyana, Honduras, Madagascar, Mali, Mauritania, Mozambique, Nicaragua,
Niger, Rwanda, Senegal, Tanzania, Uganda and Zambia.
^3 These countries are Burundi, Cameroon, Chad, Democratic Republic of
Congo, The Gambia, Guinea, Guinea-Bissau, Malawi, Sao Tome and Principe
and Sierra Leone.
^4 More information on countries eligible under the sunset clause can be
found in the HIPC progress report of August 2005 =96
http://www.imf.org/external/np/pp/eng/2005/081905.pdf.
Neil Watkins
National Coordinator
Jubilee USA Network
(202) 783-0129
www.jubileeusa.org <http://www.jubileeusa.org/>