Sachs denounces IMF and HIPC; calls for debt write-off, IMF to getout

[Robert Weissman <rob@essential.org>]

Below is testimony from Jeffrey Sachs on international debt issues, given
to the U.S. House Banking Committee yesterday (June 15). 

While not commenting his written testimony on the Leach Bill, which would
give money to the IMF/World Bank's HIPC initiative if the President
certified it was making certain changes, Sachs did say that the two most
important elements of the Leach Bill -- reducing the period during which
countries should undergo structural adjustment from six to three years,
and lowering their debt payment target to 150 percent of export earnings
-- were totally inadequate.

"It would be a huge mistake to continue with the same strategy, with a
mere fiddling of the targets," he said. "News reports suggest that the G-8
might agree to ease the repayment conditions by dropping the
debt-to-export ratio to 150 percent rather than the current 200 percent,
or by reducing the waiting period from six years to three years. Both of
these changes would be completely inadequate to the real challenges. We
should leave open the possibility for each of the HIPCs that the debt
cancellation could be complete (i.e. cancellation of 100-percent of the
official debts falling due), if economic and social circumstances warrant
it, and if the debtor country itself rises to the occasion by promoting
dramatic changes in economic and social policies."

Robert Weissman
Essential Information			|   Internet:	rob@essential.org

 
---------------------------------
HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES
                            Hearing on Debt Reduction
                              Tuesday, June 15, 1999

                                Jeffrey D. Sachs

A serious debt relief proposal for the Highly Indebted Poor Countries
(HIPCs) should have the following components:

1. Realistic institutional mechanisms for coordinated relief by the major
creditors

2. Reliable mechanisms for linking creditor actions with debtor policies.

3. Realistic targets and timetable for debt reduction

4. Funding mechanisms to achieve the necessary relief

The current HIPC Initiative, launched in 1996, fails on all four criteria.
First, there is no reliable mechanism for bringing all major creditors
together. The "creditor dance" continues among the major creditors -- the
IMF, World Bank, Bilateral donors, regional development banks -- as to who
will pay the bill. Second, the current mechanisms of IMF-World Bank
conditionality do not succeed in linking creditor actions with appropriate
programs of long-term sustainable development. Third, the targets for debt
reduction are derisory. Bankrupt countries are kept in debt bondage for
years. Even the "end point" is simply a continued state of effective
insolvency. Fourth, all decisions on funding the initiative have been
woefully inadequate.

News reports out of Europe on the eve of the Cologne Summit are both
encouraging and discouraging with respect to the prospects for debt relief
for the HIPCs. The encouraging news is that the G-8 countries are ready to
recognize the failings of the HIPC Initiative, and therefore to launch
bolder measures. The discouraging news is that they reportedly plan to
keep the same basic framework (or non-framework) in place, despite its
obvious and profound shortcomings. The approach likely to emerge this week
from Cologne will need substantial strengthening if it is to have any
chance of real success.

Let me briefly consider each of the four components of the debt strategy
in turn. I will argue that realism calls for very deep writedowns, indeed
complete forgiveness, for many of the HIPCs. The call of worldwide Jubilee
2000 movement for such deep writeoffs, and a "shift from ‘sustainable
debts’ to ‘sustainable development’" is fully justified and achievable.
The Appendix contains a more detailed demonstration of the feasibility of
financing comprehensive debt relief, at a scale far beyond the modest
goals of the G-8.

 

Institutional mechanisms for debt relief

The current strategy is based on a series of disjointed negotiations
between the indebted country and its major creditors: the bilateral
donors, the IMF, the World Bank, and the regional development banks. There
is no overall coordination in this process, except a loosely connected set
of guidelines prepared in general by the International Monetary Fund.

There is a very strong case for a consolidated action, in which all major
creditor groups -- acting in one process -- confirm their participation in
a major debt reduction program, and then establish a clear and bold
timetable for a deep writedown of debts. This comprehensive approach would
be analogous to the normal workings of a bankruptcy process, in which all
creditors are brought under one "tent," the bankrupcty court, and in which
a settlement involves the simultaneous adjustment of debt for all creditor
classes.

Even without a great stretch from current institutional arrangements, a
much improved process could proceed in the following manner. All creditors
of the HIPCs would place their claims within a single HIPC Trust Fund. A
Steering Committee of creditors -- including the IMF, World Bank, regional
development banks, and donor governments -- would be formed to approve
financial workouts with the HIPCs, with votes in proportion to the size of
the claims placed with the Trust Fund. As in a standard bankruptcy
workout, each of the HIPC governments would be invited to make their own
proposals to the Steering Committee for the reorganization and partial
cancellation of their debts. These proposals would be vetted by the
creditors, including no doubt the IMF and World Bank. The specific relief
plans would depend on the financial, economic, and social conditions of
the individual countries. The Steering Committee would vote to approve or
reject the plans, with a qualified majority (perhaps two-thirds of the
creditor votes) used as needed for approval.

 

Institutional mechanisms for linking debt relief and debtor reforms

The current approach is built around IMF-World Bank structural adjustment
programs, especially the IMF’s own Extended Structural Adjustment Facility
(ESAF), a concessional lending mechanism. This process puts the IMF at the
center of the process, essentially deciding on the level of necessary
relief, and on the conditions that should attach to the relief. In
principle, the U.S. Government and other IMF members can monitor the IMF
staff decisions through the IMF Executive Board. In practice, because of
the low policy salience of most of these countries, the key decisions in
fact reside with the IMF staff.

This process has been a complete failure. The IMF is institutionally
ill-prepared to lead a long-term development effort and to make core
decisions regarding long-term development strategy. The current process
gives very little motivation to individual countries to prepare their own
strategies, and even less to the coordinated actions of governments within
a region, since the IMF and World Bank lend almost exclusively to
individual countries and not to regional organizations. The results, quite
systematically, are that the IMF overestimates by a large extent the
realistic debt servicing capacity of the country; the IMF intervenes
relentlessly into the most nitty-gritty details of governance, with a
severe loss of legitimacy of local politics; and the IMF misjudges the
real priority issues facing the country.

For these reasons, the IMF should be taken out of the lead of the debt
reduction process in the poorest countries. The IMF should return to its
core role as a monetary institution, and largely get out of the business
of long-term development finance. Funds that would have gone to the ESAF
program would better be used for outright debt relief, or transferred to
other agencies (International Development Agency of the World Bank,
UNICEF, UNDP, WHO, etc.) with a more appropriate role in long-term
development.

In practice this means three steps. First, the ESAF itself should be
phased out. Real development aid should go through other channels. Second,
decisions over the extent of debt relief should be made by the various
creditors sitting as a group, not by the IMF as the formal or informal
single judge of debt viability. Third, development strategies should be
prepared by the debtor countries themselves, with collaboration but not
micro-management by the international agencies. There should be a much
larger role for the World Health Organization and the United Nations
Development Programme than in the recent past. These development plans
should be presented to the creditors for approval as part of the debt
reduction process, as outlined in the previous section.

 

Realistic targets and timetable for debt reduction

The 1996 HIPC Initiative used completely unrealistic guidelines for the
extent and timing of debt reduction operations. Roughly speaking, there
was a six-year waiting period before relief was achieved: three years
under an IMF-World Bank program until a "decision point" was reached, and
another three years until a "completion point" was reached. As a result,
only two countries out of the original 41 on the HIPC list -- Uganda and
Bolivia -- have actually achieved any outright relief under the HIPC
Initiative. All the rest are somewhere in line waiting for relief, or have
been eliminated from consideration.

Even worse than the timetable were the targets. The idea was that debt
relief, when it arrived, would be enough to reduce debt to a "sustainable"
level, with the present value of debt at around 200 percent of exports.
The debt-to-export ratio was patently foolish from the start, a
construction of the IMF and G-7 finance ministries, not a reflection of
the economic realities of the debtor countries. The targets did not
reflect real ability to pay, since they ignored the budgetary capacities
of the debtor governments (who must pay the debt) as well as the social
conditions within the country. Many of the HIPC countries, at least half
in overall number, should pay nothing at all on their existing debts, so
severe are the social and health crises confronting these countries.

It would be a huge mistake to continue with the same strategy, with a mere
fiddling of the targets. News reports suggest that the G-8 might agree to
ease the repayment conditions by dropping the debt-to-export ratio to 150
percent rather than the current 200 percent, or by reducing the waiting
period from six years to three years. Both of these changes would be
completely inadequate to the real challenges. We should leave open the
possibility for each of the HIPCs that the debt cancellation could be
complete (i.e. cancellation of 100-percent of the official debts falling
due), if economic and social circumstances warrant it, and if the debtor
country itself rises to the occasion by promoting dramatic changes in
economic and social policies. Bureaucratic targets that would limit debt
relief arbitrarily to limits such as 150-percent-of-exports, are
unrealistic, analytically unsound, and demoralizing for the countries were
are trying to help.

The timetable should allow for immediate cash flow relief for countries
that appeal to the creditor community for a standstill on debt servicing,
combined with a quick and comprehensive decision on the targets and
timetable for relief. For some countries, relief should come very quickly
indeed -- if justified by economic and social conditions; by a strong
adjustment program; and by credibility in the implementation of reforms.
For other countries, relief should come more gradually, and especially
should wait until the debtor country is able to demonstrate a coherent
program of adjustment, reform, and long-term development.

 

Funding mechanisms to achieve the necessary relief

The cruelest joke in the whole debate on debt relief is the claim of the
rich countries that they are "too poor" to heed the call of deep debt
cancellation. The World Bank says it would love to agree, but doesn’t have
the funds. The IMF says the same thing. The creditor country leaders, such
as President Clinton, claim that they would like to agree as well, but
can’t do it politically. All are mistaken. There is no technical or
political obstacle to facing reality in this case. This is spelled out in
the Appendix, with a summary in the following paragraphs.

The HIPCs owe about $128.75 billion in total to the IMF, World Bank,
international commercial banks, regional development banks, and
rich-country governments. The IMF is sitting on $27 billion of unrealized
capital gains on its gold reserves, since it values its gold at $47
dollars per ounce rather than the true market value of $262 per ounce. By
selling around a third of its gold reserves, it could achieve the $7.8
billion needed to write off the HIPC debts in their entirety, without even
touching the remaining balance sheet. In addition, the IMF balance sheet
already abounds with special reserve accounts designed to absorb loan
losses in an orderly way.

Similarly, the World Bank could readily absorb a full writedown of its
claims on the HIPCs out of its own resources. It would have to use special
reserve funds already set aside for loan losses, plus dip slightly into
its capital base, plus agree to slim down its future lending to the HIPCs
out of a special program known as IDA for low income countries. But with
debt relief, the HIPCs would no longer need these special IDA funds at the
same level. The commercial banks in total have claims of about $19
billion, a tiny fraction of their lending to developing countries. Most of
this is already written off in their balance sheets, so that a full
writeoff would be easily absorbed.

The easiest solution of all would be for the money owed to the rich
governments. The U.S. Government isn’t so foolish as to count its $6
billion of claims on the HIPCs at face value. These loans are already
carried on the books at around 10 percent of their face value, or around
$600 million. Thus, to cancel entirely the U.S. claims on the poorest
countries would require a budget outlay of just $600 million. The
situation is analogous for other creditor governments.

 

Dramatic challenges and dramatic opportunities for the poorest countries

Many poor countries have been making valiant efforts at economic reform
and recovery. But the deeper truth is that most of the countries are
facing a vertiginous crisis of health, population, and environmental
degradation that threatens to destroy the livelihoods, and maybe the
lives, of hundreds of millions of people. Sub-Saharan Africa has 20
million HIV/AIDs infected individuals, two thirds of the world’s total.
The still explosive epidemic is probably the worst since the Bubonic
Plague killed a third of the European population in the 14th century.
There is absolutely no money to address it. Malaria continues to kill at
least one million a year, and is spreading further as a result of growing
drug resistance of the malaria parasite. In countries such as Guinea
Bissau, Ivory Coast, Malawi, Nigeria, and Zambia, at least three out of
ten people die before the age of forty. Life expectancy is rarely much
above 50 in the HIPCs, and is often in the low 40s. A third or so of
children under 5 suffer from chronic malnutrition.

These are the deep problems that we must address in the years ahead. In a
key sense, the debt is a sideshow: it can’t be paid in any event, and
actually should not be paid given the enormity of the challenges facing
most of the HIPC countries. And yet a sideshow can distract critical time,
attention, and resources away from the areas where they are really needed.

There is strong reason to believe that most of the HIPCs are ready for a
decisive breakthrough in their own economic and social policies.
Throughout Africa, reform governments are being brought to power via the
ballot box. Nigeria’s newly elected President Obasanjo, South Africa’s new
elected leader Thabo Mbeki, Mauritius’ outstanding Prime Minister Navin
Ramgoolam, and Uganda’s dynamic and successful President Museveni, are
just some of the exciting new generation of African leadership. It is time
-- indeed, it is the unique time -- to join with these leaders and with
their societies, in a bold new quest for deliverance of the poorest of the
poor.

 

Jeffrey D. Sachs June 15, 1999