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note on ESAF
This is useful information, posted on Bread's change-imf list. The
document comes from the Bretton Woods Project.
Robert Weissman
Essential Information | Internet: rob@essential.org
<flushboth></color><bigger><bigger>HOW THE ENHANCED STRUCTURAL ADJUSTMENT
FACILITY IS FINANCED<bold></flushboth>
<flushboth></bold><color><param>0100,0100,0100</param><smaller><smaller>The
Enhanced Structural Adjustment Facility was established as a temporary
fund in 1987. Funds are mostly provided by bilateral donors who pay into
either the Loan Account or the Subsidy account. Contributions to the Loan
Account are returned eventually to the lenders with interest at market
rates. Donations (which are not returned) to the Subsidy Account are used
to subsidise the rate of interest that is charged to the developing
country borrowers on the loans made from the Loan Account. </flushboth>
<flushboth>ESAF funds were due to run out in 1992 when the fund was
replenished. It was envisaged that this money would last until 1996.
However, ESAF funds have been committed and disbursed much more slowly
than was anticipated because countries have been slow to seek ESAF funding
and because poor programme implementation has often delayed disbursement.
This has meant that the ESAF could continue beyond 1996 without needing
additional funding.</flushboth>
<flushboth></color><bigger><bigger>A SELF-SUSTAINING
ESAF<bold></flushboth>
<flushboth></bold><color><param>0100,0100,0100</param><smaller><smaller>The
ESAF has a third account called the Reserve Account. Payments made on
loans and additional income earned on the ESAF funds are paid into this
account. It is from this account that contributors to the Loan Account are
repaid. The IMF calculates that by about 2003 or 2004 there will be
sufficient money left in the Reserve Account to enable the IMF to
establish ESAF on a permanent basis without requiring future bilateral
contributions. In the meantime the IMF is seeking resources to replenish
ESAF. Because many of the key donors (including the UK) made it clear that
they would not contribute more bilateral funds to ESAF the IMF has been
forced to look for alternative funding sources.</flushboth>
<flushboth>It is important to be aware that if ESAF becomes self-financing
then the opportunity for parliamentary oversight of ESAF and the IMF’s
activities in developing countries will be greatly diminished.</flushboth>
<flushboth></color><bigger><bigger>GOLD SALES FOR ESAF<bold></flushboth>
<flushboth></bold><color><param>0100,0100,0100</param><smaller><smaller>The
question of how the IMF would finance the HIPC Debt Initiative arose at
the same time as the question of how it would finance ESAF. Whilst donor
support for the HIPC Initiative has been strong, disappointment with the
impact of ESAF has led to concerns from donors and waning interest.
</flushboth>
<flushboth>However, the ESAF is very important for the IMF. Although ESAF
provides only a relatively small amount of money to developing countries
it contributes an enormous amount of work for Fund staff. Moreover,
without a fund from which to provide loans to the poorest developing
countries the Fund’s influence in these countries would be greatly
diminished. Thus, it has been an IMF priority to ensure that ESAF is
replenished - more of a priority than finding funds for the HIPC
Initiative. </flushboth>
<flushboth>In the light of this, although there is no reason why these two
financing issues should be connected, it has been judicious for the IMF to
insist that the two are linked in order to ensure there is a commitment
from the Executive Board to continue supporting ESAF.</flushboth>
<flushboth></color><bigger><bigger>ESAF PROGRAMMES HAVE NOT CONTRIBUTED TO
POVERTY ERADICATION</flushboth>
<flushboth><color><param>0100,0100,0100</param><smaller><smaller>Two
reviews of ESAF (an internal staff review completed in 1997 and an
external evaluation completed in 1998) have demonstrated that ESAF
programmes have not contributed significantly to economic development and
poverty eradication. Growth rates have been very low and insufficient to
compensate for population growth; investment rates have fallen
dramatically; spending on social services per person has declined;
inequality is increasing; as many countries have experienced worsening
inflation as those who have experienced a decline in inflation rates; more
money is spent on debt servicing but debt burdens are still growing; and a
large proportion of ESAF programmes break down or experience lengthy
interruptions.</flushboth>
<flushboth>Influential Harvard economist, Jeffrey Sachs, has argued
against replenishing ESAF on the basis that the IMF “is a monetary
institution designed for short term balance of payments. It knows next to
nothing about real long term development issues and it's done a miserable
job, if we only care to look at the record...If the results were
dramatically good after 20 years of structural adjustment programs in
Africa [that] would be one thing, but basically the results are dreadful
compared to what the continent needs and what it could achieve”; and, “the
IMF is saying now that it is concerned about social policy, but it's not a
social policy institution shouldn't be, can't be, and is completely
miscast the way it is right now.“</flushboth>
<flushboth></color><bigger><bigger>DELINKING MONEY FOR THE HIPC INITIATIVE
FROM ESAF<bold></flushboth>
<flushboth></bold><color><param>0100,0100,0100</param><smaller><smaller>The
current IMF proposal for gold sales calls for half the proceeds to be used
for ESAF, with the other half to be used to bolster ESAF. It is an
important matter of principal that the IMF contributes to IMF debt
reduction from its own resources. However, NGOs across the globe are very
concerned that resources for debt relief should not be used to finance
ESAF. The HIPC Trust Fund and the ESAF accounts are not institutionally
linked and there is no technical reason why finance for debt relief should
be linked to ESAF. Moreover, if the issues of HIPC financing and ESAF
financing are delinked, then a smaller amount of gold need be sold to
finance the HIPC Initiative.</flushboth>
<flushboth>Before any new money is given for ESAF, proper consideration
should be given to the usefulness of ESAF and the role of the IMF in the
poorest countries. Particularly since it is ESAF loans that are being
forgiven under the HIPC Initiative.</flushboth>
<flushboth></color><bigger><bigger>HIPC DEBT RELIEF WILL HELP
ESAF<bold></flushboth>
<flushboth></bold><color><param>0100,0100,0100</param><smaller><smaller>Even
if the money from gold sales does not help to finance the ESAF, it will
benefit from HIPC debt reduction. This is because at the moment some of
the IMF’s non-performing loans are ESAF loans. This means that the IMF is
not receiving loan payments and interest from some borrower countries so
there is less money in the ESAF accounts to lend on to other borrowers, ie
as more debts build up to ESAF the more IMF lending is constrained.
</flushboth>
<flushboth>Money from the HIPC Trust Fund will be paid to ESAF to cancel
debts owed by the HIPCs. In effect then, because the ESAF loans have
effectively been repaid, this money is freed up for future lending. At the
same time, the remaining outstanding loans to ESAF become viable, ie
governments are more likely to be able to repay them. In effect then, the
ESAF will gain considerably from the HIPC Initiative even if the ESAF is
not directly refinanced.</flushboth>
Angela Wood, Bretton Woods
Project, July 1999
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