[stop-imf] IMF/Bank foot dragging on key debt issues

[robert weissman]

  http://www.brettonwoodsproject.org/art-561011



  IFIs foot dragging on key debt issues

April 1, 2008


      By Nancy Dubosse, Afrodad

The World Bank and IMF are struggling to catch up to global debates on
'odious' debts and responsible financing; have failed to take action on
vulture funds; and have been dragging their feet on debt relief
programmes for Haiti and Liberia.

The World Bank released a draft report on 'odious' debt (defined as
loans knowingly given to a despotic power to repress and not benefit its
people) in September 2007 (see Update 57
<http://www.brettonwoodsproject.org/art-557160>). While the report
conceded that there is "factual analysis of the irregular transactions
and the consideration that the lender knew of the use of the funds",
there was no agreement that this was a useful way to classify sovereign
debt nor were there any recommendations for what to do about odious debts.

Debt campaigners were asked by the Bank to respond to the paper. It was
not clear what purposes their response would serve, and so the two sides
have been in dialogue over how to take the process forward. A roundtable
discussion is planned for the WB-IMF spring meetings in April in Washington.

While debates over odious debts have looked back at lenders' past
practices, the question remains how to prevent such behaviour in the
future. Brussels-based network Eurodad has contributed towards this end
by creating a Charter on responsible financing, which attempts to move
away from institution- or sector-specific responses to concerns over
responsible lending and fair resolution of debt crises towards
"internationally recognised legal standards for responsible lending and
borrowing".

In addition to technical and legal terms and conditions, the charter
addresses the protection of human rights and the environment, public
consent and transparency, procurement, and repayment difficulties or
disputes. On the thorny issue of human rights, the charter stipulates
that activities financed must not violate rights as set out in the
treaties to which either borrowers or lenders are signatories.
Similarly, financing must not contravene internationally accepted
minimum standards on social, labour and environmental protection. These
include the Bank's safeguard policies, the IFC's performance standards,
and the ILO's core labour standards.

This is a key distinction of the Eurodad charter from G20 discussions on
their own responsible lending charter. The G20 charter, largely driven
by rich country fears about the growth of lending by China and India,
has reportedly been opposed by Brazil, China and South Africa. A revised
text is to be discussed at ththe next G20 meeting in Brazil in November.

Eurodad has called on individual governments or agencies to voluntarily
adopt the charter, and for debate on the issues raised by the charter to
take place as part of the UN Financing for Development process which
next meets in Doha in November.

The African Network on Debt and Development (Afrodad) has launched the
Fair and Transparent Debt Arbitration Campaign, which aims to gather and
disseminate evidence on cases of illegitimate and odious debt throughout
the world, with a view to the establishment of a transparent arbitration
mechanism. Afrodad has already compiled ten dossiers, including Nigeria,
Cameroon/Chad, Argentina, and the Philippines. Afrodad is organising
national meetings in Nigeria and the Democratic Republic of Congo in
April 2008 to inform both local civil society groups and parliamentarians.


    Vulture watching

To date, eleven countries which are graduates of the Highly Indebted
Poor Countries (HIPC) initiative have been targeted by so-called
'vulture funds' (currently Uganda, Nicaragua, Sierra Leone, Niger, and
Zambia are being targeted). These companies buy up 'bad' debt at a
discount, and then attempt to recover the full amount, often by suing
through the courts. The commodification of public debt, particularly
from countries that have been party to debt relief discussions, gives an
opportunity for vulture funds to be free-riders, as they are profiting
from the fiscal space created by debt relief and from loans given for
development purposes.

In January, Belgium set a precedent by passing a resolution to
"safeguard development cooperation and debt relief from the actions
taken by vulture funds". The legislation translates into clauses being
inserted into future bilateral agreements preventing these funds from
taking advantage and urges the IFIs to ensure that debt relief
initiatives are binding for all parties. The funds themselves have
admitted their vulnerability to decisive regulatory action. Debt
Advisory International, a complany that manages several vulture funds
said "the implications of outlawing the sale of sovereign debts to third
parties for conversion or collection is that it will kill the secondary
market for these claims as it will eliminate the buyers of last resort."

In 2001, the IMF released a briefing on private sector involvement in
international finance entitled Resolving and preventing financial
crises. The brief concedes that vulture funds create a disincentive for
creditor nations to participate in debt restructuring by providing an
additional avenue through which to recoup part of their lending. As an
organisation that has the ears of the world on macroeconomic stability
and public financial management, the IMF should be able to adopt a
concrete policy proposal on the issue of vulture funds, particularly
with respect to their activities in HIPC countries.

For its part, the World Bank has failed so far to respond to debt
campaigners' call for the expansion of the International Development
Association's (IDA) debt reduction facility. The facility enables
countries going through HIPC to buy back their commercial debts at a
discount, preventing vulture funds from getting hold of them.


    HIPC updates: Haiti and Liberia

The link between external debt and development has never been more
pronounced than in the case of Haiti. Debt relief of $1.2 billion ($464
million of which is owed to the World Bank) has finally been granted
conditional upon completion of the HIPC programme. The cost of not
meeting the conditions of debt relief by the 2009 deadline is estimated
at $44 million. From a development perspective, the key issue is the
opportunity cost of delayed debt relief and current debt servicing while
Haiti is going through the HIPC programme. According to the Banque de la
Republique d'Haiti, the $1.2 billion to be given as debt relief amounts
to over a quarter of Haitian GDP.

Liberia has $4.7 billion in external debt, of which $1.6 billion is owed
to multilateral institutions. In March, after several delays, the IMF
finally granted Liberia decision point status and committed $952 million
in financing. Liberia is currently under an IMF Staff-Monitored
Programme to strengthen its public financial management systems. It took
Liberia two years to get to this point, and it can not hope to be
relieved of its debt burden until it has implemented a Poverty Reduction
and Growth Facility (PRGF) arrangement for one year.

In January, the IMF changed its rules for when poor countries can begin
the HIPC debt cancellation process, after criticism of the time it took
to agree Liberia's arrears clearance. Previously, countries were
required to have an IMF programme to qualify for HIPC, but they could
only start such a programme once arrears had been cleared. Now,
countries will be able to obtain IMF approval of their economic policies
through Staff-Monitored Programmes, in addition to an IMF lending
programme, and arrears clearance can be arranged simultaneously. While
this does not solve the problem of lengthy delays or the unfair
conditions that are attached to debt cancellation, it will at least stop
countries like Liberia from facing even longer waits before entering the
HIPC debt cancellation process.