The World Bank and IMF have produced a new framework for debt sustainability. It aims to guide borrowing decisions of low-income countries matching their need for funds with their ability to service debts. Civil society groups have welcomed the intention to move to a country-specific decision-making process, but expressed doubts on the detail of the proposals. They point out that the approach relies heavily on subjective World Bank analytical tools and that the Bank and Fund have often been wildly overoptimistic in their previous projections.
Under the new plan the Bank and Fund would assess countries’ projected debt-burden indicators, including in the face of plausible shocks, for example the recent rise in oil prices. If countries are seen to be at risk of “debt distress”, then creditors would be urged to provide highly concessional loans or grants. Recognising that some shocks are inevitable, the Bank/Fund paper says “donors and creditors may also wish to develop instruments and mechanisms to ease the impact of such shocks in a timely and coordinated manner”.
NGOs applaud the proposal to abandon the previous standard debt-to-exports threshold and take the potential impacts of shocks more seriously. But there are concerns that the ways that these judgements will be made in practice may reinforce the power of World Bank and IMF staff to judge countries against what they see as “the right policies”. Barbara Kalima, coordinator of AFRODAD, said the framework did not assess whether national parliaments were strong enough to scrutinize governments’ use of foreign loans or to curb irresponsible foreign borrowing. Henry Northover of CAFOD welcomed the framework’s country-specific approach, its broader and more flexible set of indicators, and the prominence it gave to reaching the Millennium Development Goals.
systematic over-optimism
But Northover criticized the framework’s reliance on the Bank’s Country Policy and Institutional Assessment (CPIA). The CPIA consists of 20 criteria on which countries are judged by Bank staff, which are then aggregated to produce an overall ranking. Barry Herman, until recently a senior official of the UN Financing for Development Office, agrees in a paper for the G-24 that: “there are a number of rather curious features in the current CPIA methodology that should cast doubt on the meaning of the results”. At a meeting with NGOs in Washington World Bank vice president Gobind Nankani acknowledged that the CPIA incorporated a mix of evidence-based and subjective components.
A paper by Juergen Kaiser of the German Jubilee campaign commends the Bank/Fund paper for admitting the “systematic over-optimism” of previous IFI debt sustainability calculations. Growth projections have on average been five percentage points ahead of reality, leading to excessive borrowing and artificially reducing the need for debt relief. He points out that this relief “would have come at the expense of (among others) the IMF and the World bank, i.e. the same institutions, which have actually made the projections.” As well as this ongoing conflict of interest this paper also points out that the Bank and Fund proposals only cover low-income countries outside the Heavily Indebted Poor Countries (HIPC) initiative. He points out that unless the new analytical approach to debt sustainability enables countries to obtain significant further debt relief it will do little good. Countries such as Bolivia are at serious risk of a new, largely multilateral, debt problem because of the non-concessional loans they have recently taken on.
Discussions are underway about how to incorporate the analysis into Fund work on surveillance and conditionality and into Bank lending operations. There is a need to identify where to source the grants needed to help meet the MDGs, and how to help countries deal with shocks. Bank and Fund staff will produce a paper on how to deal with the Heavily Indebted Poor Countries which will not receive debt relief by the time the HIPC initiative is due to expire at the end of this year. This will be sent to the Bank and Fund boards in June, with final proposals due by the annual meetings in early October.
NGOs will continue to press the point that debt deals for countries are currently at the mercy of subjective judgements and political factors. At a recent talk in London Bank president Wolfensohn acknowledged that Iraq is being treated very differently from less strategic countries. He quipped that national leaders have been asking him if they can have an invasion to enable them to benefit from debt write-offs.
