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IMF Publishes « Modalities » for Debt Cancellation Under G8 Debt Plan

  • IFI

Predictably, the IMF has managed to take a fairly straightforward proposal – write off the remaining debt of countries that have jumped through all the hoops of the « Heavily Indebted Poor Countries » debt scheme of the IMF/WB – and turn it into a complex business that requires textual exegesis. By transforming the G8 plan into an IMF program with its own name and, most alarmingly, acronym (the Multilateral Debt Relief Initiative, MDRI), the IMF has begun the process of taking « ownership » of a concept, the usual forerunner to its debasement.

The IMF yesterday published two documents on its website — a factsheet and a « public information notice » — outlining how it intends to comply with the IMF board’s agreement at its annual meeting in September 2005 to cancel debt it claims from selected low-income countries. The agreement was the result of a proposal made by the G8 countries – a proposal that has been analyzed in some detail in a 50 Years Is Enough / Solidarity Africa report.

Some of the provisions in yesterday’s releases have been hinted at pretty clearly over the last few months, but others are fresh. In some places the two documents fail to give definitive answers; indeed, the public information notice appears to be an edited compilation of board minutes, reporting on different views from board directors and not always indicating how the discrepancies are to be resolved.

What follows, then, is a first attempt to make sense of these documents. This analysis may change as others offer their perspectives, or as more facts become known. What should be kept in mind is that these are only guidelines: while the IMF operates in a fairly robotic way, there can always be slippage in practice, especially to maintain the prerogatives of the Northern countries. It may be that IMF debt cancellation will still be made available as promised – at the beginning of 2006, to 18 (actually 20) countries, and with no new conditions. But these documents open up loopholes that could introduce delays and attempts to attach conditions. Any such developments can, should, and will be opposed by debt campaigners.

The IMF Prepares to Manipulate

The main thing to report is that the IMF says it must assess whether each qualifying country is eligible for debt cancellation. Yes, they’ve qualified, but no, not until we say so, again: they could, after all, have gone off the path of virtue since completing HIPC. The IMF appears to be positioning itself to use technicalities to deny, postpone, or condition the debt cancellation that has been promised. It takes advantage of some of the ambiguities in the language of the G8 proposal to arrogate to itself the right to judge each candidate country’s « macroeconomic performance, » poverty reduction programs, and public expenditure management. If any are found wanting, debt cancellation can be held up.

The G8 proposal stipulates only that countries which have completed the HIPC program should be « on track with their programme of repayment obligations » (i.e., they must keep paying the debt until the institutions say stop) in order to get their debts cancelled.

But there are those unfortunate ambiguities in the G8 proposal, most notably: « 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. »

While the G8 statement seems, rather out of character, to acknowledge that problems of transparency, governance, corruption, and accountability do not lie exclusively with the « debtor » countries but are inherent in the system run by the « creditors, » the IMF has chosen to see the request for a report on improvements in the system as a mandate to judge the exploited countries’ dedication to financial virtue.

At the same time, it is entirely possible that the IMF will not immediately attempt to make extensive use of the options it has created for itself. At times the factsheet suggests that the IMF will go into the process presuming a country will qualify; indeed it even says that countries yet to complete HIPC will qualify for debt cancellation « automatically » once they do. (In practice this will just raise the stakes for the IMF’s final review under HIPC.)

And the IMF itself wants us to believe that they’re not trying to delay any cancellation. The IMF’s press review details a Reuters article: « To satisfy some donor concerns about whether the debt relief will be well used, Mark Allen said the IMF will conduct a ‘spot check’ to ensure that recipients’ economic performances, budget systems and poverty reduction strategies are in order, Reuters reported. Where performances have deteriorated, Allen said the IMF will propose corrective measures. ‘Once the countries have taken those remedial measures, then the relief will be given,’ he said, adding: ‘We would hope those actions could be done
quickly. We`re not trying to hold this relief up.' »

Alarmingly, the factsheet countenances the imposition of « conditionalities, » though exactly what it means by this is unclear. While the G8 proposal left little room for new conditions, the IMF says that if its assessment of candidate countries finds deficiencies, it will recommend « corrective action » before approving debt cancellation. Such actions are most likely what is referred to by references to « conditionality. »

The IMF factsheet maintains that « 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. »

What is left most vague is what precisely is meant by these categories, and how they will be measured. It is probably safe to assume, however, that the IMF will use standards developed during a country’s last IMF program to judge its « macroeconomic performance » (Is it continuing to deregulate trade and investment? Is its commitment to privatization intact?) and the implementation of its « poverty reduction strategy » (a framework that is now a requirement for any low-income country to borrow from the IMF). Indeed, to an unfortunate but telling extent these two criteria are likely to overlap. The last criterion – management of public expenditures – will likely assume a wider scope of « governance » in general (Are government procurement rules being followed? Have pledges to eliminate « surplus » employees from government payrolls been kept? Are there signs of corruption in the awarding of government contracts?)

The public information notice says that for those countries that have already completed HIPC, « a minimum six-month track record of satisfactory macroeconomic performance and implementation of poverty reduction policies would be needed to qualify for debt relief. » If the country is still under an IMF program, the most recent review will be used. If not, the criteria are unstated, left up to the whim and interpretive capacity of the IMF.
It appears that the IMF is, once again, judge, jury, and police force.

Who Might be in for Trouble?

Before these releases were issues, there was speculation that one of the 18 countries slated to benefit immediately from debt cancellation, Mauritania, would be disqualified on the grounds that its army-led coup several months ago calls its governance and accountability into question. However, if the three standards above are the ones the IMF uses, and if it does not interpret them too liberally, the coup alone should not affect Mauritania’s eligibility (though it is possible that the post-coup government will be determined to have changed course in an unsatisfactory direction on these criteria). In general, the « international community » has taken a rather indulgent approach to the Mauritanian coup, since the government ejected had itself been installed by a coup 20 years ago, and had a poor track record on accountability, democracy, and human rights. The IMF may well follow suit.

Nicaragua has also been mentioned as a country with potential difficulties, due to not having maintained its record of payments to the IMF (though concerns on other criteria are also hinted at). One would have to assume that a country on the brink of having its full IMF debt cancelled would find a way to clear any arrears in time to avoid blocking the deal.

But if the IMF chooses, any of these countries could no doubt be accused of somehow going « off track » from the IMF’s definition of « sound economic policies. »

Timing – and Ambiguity

The IMF says it is working with the World Bank to assess the eligibility of 20 countries for immediate cancellation, and that it plans to make recommendations by the end of December.

The IMF factsheet also says, however, that this step depends on getting official consent from the 43 countries – including some countries which should be (but aren’t) getting cancellation themselves, like Bangladesh – which have donated to an IMF account that will be used as part of the financing for the MDRI. (Should any refuse, the public information notice says, the program will not be halted; instead the country will get a refund of its donation.) The IMF says it intends to begin implementing the cancellation on January 3. The World Bank will not begin until June/July, while the third institution in the deal, the African Development Bank, is supposed to be following the IMF’s timetable, but has not yet published its plans.

There has been much speculation about whether the debt cancellation would take effect immediately and in full. The public information notice tackles this question, but fails to answer it conclusively. « Many directors » are said to support making the cancellation « irrevocable and delivered up front » – an option the document says has the virtue of « closely align[ing] with the intention of the initiators of the MDRI [the G8 proposal] and the expectations of qualifying countries. » But « some directors » are reported to prefer « phased debt relief [… to] better ensure that freed-up resources are used productively in pursuit of the MDGs, » a process that would make multiple and arbitrary delays possible. Meanwhile, « some other directors » support « the use of ongoing conditionality, linked to the successful implementation of a Fund-supported program. »

The fact that the notice includes an extra sentence about how the first option would be implemented might suggest that it will be the approach endorsed, but it is hard to feel certain. The third option represents the worst-case scenario – the IMF using debt cancellation to make up and enforce new conditions – that many campaigners feared, and more than a few predicted. We do not know yet if this prospect has been eliminated. For countries that are told to take « corrective action » at the time of the IMF assessment, this last version will be the de facto reality; the open question is whether every country entering the MDRI will have to prepare for a new onslaught of demands.

A Bonus

One result of the IMF’s highly technical and somewhat legalistic ways is that two countries which have never been included in the HIPC lists are eligible for cancellation of their IMF debts – Tajikistan and Cambodia. (Hence the jump from 18 countries to 20.) This does not make them eligible for any World Bank cancellation. Of course, they will still have to pass the IMF’s new assessment in order to get that cancellation. The reasons for these additions are best explained in the public information notice.

Other Technicalities

The IMF doesn’t simply write off debt, of course. No, countries will have to formally « 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. » While such steps – to the extent they’re decipherable — need not block any countries from getting cancellation, it suggests that the mechanism being used, as several sources had maintained, will formally maintain a structure where countries must ask for assistance and have it granted them. Unless the IMF acts decisively to accomplish the cancellation « irrevocably and delivered up front, » it is likely that this process will have to be repeated every year or every three years for the entire period during which the debts would have been in repayment status.

Another question worrying some campaigners was that of the « cut-off date. » This is a device commonly used in debt cancellation negotiations; the Paris Club of bilateral creditors, for instance, usually says that only debts contracted before a certain date (usually the date an application for rescheduling was first made) can be cancelled, reduced, or rescheduled. This has resulted in situations where countries find the last ten years of debt accumulation unaffected by a debt deal.

This is one question that is answered definitively by the IMF releases: the processes outlined apply to « the stock of their debt to the Fund (including to the Fund as Trustee) disbursed as of end-2004 that remains outstanding when the country qualifies for debt relief. »

Be Very Worried

As it so often seems to be, the IMF is eager to convey its availability to countries that qualify for debt cancellation. In fact, both documents are at pains to make clear that the MDRI is part of the IMF’s commitment to increased support for low-income countries, a commitment it says is also evident in its new Policy Support Initiative (see critique). The end of the document assures us that « 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. » This apparent generosity should be read as a threat: step out of line, and there’s always another structural adjustment program waiting for you.

Soren Ambrose – Solidarity Africa Network in Action / 50 Years Is Enough Network