IMF debt deal ‘a victory’

23 January 2006

In December, the IMF board approved 100 per cent debt relief to 19 countries under the Multilateral Debt Relief Initiative (MDRI) amounting to $3.3 billion. The 19 countries that qualified included: Benin, Bolivia, Burkina Faso, Cambodia, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Mali, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tajikistan, Tanzania, Uganda and Zambia. For this group of countries, debt repayments to the IMF stopped in January.

Additional countries will be eligible for relief under the MDRI once they have reached the completion point of the Heavily Indebted Poor Country (HIPC) initiative. This includes ten countries which are currently in the middle of the HIPC process (Burundi, Chad, Democratic Republic of Congo, The Gambia, Guinea-Bissau, Malawi, São Tomé e Príncipe, Sierra Leone, Cameroon and Guinea) and countries which may still qualify for the HIPC programme under a ‘sunset clause’ which expires at the end of the year. A revised list of those countries which will qualify for relief under the ‘sunset clause’ (based on end 2004 debt levels) will be presented to the board in February.

Njoki Njehu, director of Solidarity Africa Network in Action, heralded “a victory for the people in the 19 countries that will finally get a chance to free themselves from the slavery of debt. However, there are dozens of other countries that need 100 per cent multilateral debt cancellation which are left out of this deal. We will continue to campaign for full justice for impoverished peoples oppressed by illegitimate debts.” Campaigners continue to oppose what they consider to be onerous economic conditions imposed on countries qualifying for the HIPC programme.

finally get a chance to free themselves from the slavery of debt

Eligible countries were required to pass a ‘health check’ ensuring that: macroeconomic performance had not “substantially deteriorated” since the completion of the HIPC programme; a Poverty Reduction Strategy was being implemented; and that public expenditure management systems were in place. Before the final announcement of the deal, there had been first concerns about pressure from several donor countries to impose additional conditions on countries before receiving debt relief, and then fears that as many as six countries would fail the Fund’s ‘health check’. These arguments did not win the day at the IMF board.

Mauritania was the only country to fall foul of the ‘health check’. While the Fund refused to publicly state its reasons for excluding Mauritania, leaked Fund documents argue that there had been a “substantial deterioration” in budget formulation and public expenditure tracking. Rumours are that the previous regime falsified information given to the IMF to satisfy conditions for reaching HIPC completion point. Current Mauritanian prime minister Sidi Mohammed Weld Bu Bakker, under a military junta which seized power in an August coup, has asked the Fund to reconsider the postponement. He said that “the Mauritanian people should not be held responsible for mistakes of a former ruling regime”. US congressman Bennie Thompson, in an end-year visit to Mauritania vowed to do “everything possible in order to have the Mauritanian debt” to the IMF and the World Bank cancelled. There will be a six-month probation period during which the IMF will monitor Mauritania’s economic policy.

The IMF is using its own resources for the debt write-off. This will be financed from three sources: the Poverty Reduction Growth Facility (PRGF)-HIPC trust, the account for income from the sale of IMF gold, and the PRGF subsidy account (which subsidises the rate of interest on loans to the poorest borrowers). To allow the IMF to lend all remaining PRGF funds at a concessional interest rate, donors needed to replace the funds taken from the PRGF subsidy account – IMF staff estimated that to require $285 million.

World Bank: less and later

The World Bank is not expected to deliver its share of the debt cancellation deal until July, citing concerns that starting debt cancellation before the start of the 2007 fiscal year would disrupt IDA allocations. The assessments of which countries will qualify for IDA debt cancellation will be included in a paper to be prepared before end March. The paper will also outline how donors will compensate IDA for losses it incurs under the debt cancellation plan.

Unfortunately, the cut-off date for debt included in the initiative has been set at end 2003. This means that only debt stocks contracted up until December 2003 will be eligible for cancellation by IDA. Conversely the IMF set its cut-off date at end 2004. The European Network on Debt and Development said this shows “that for donors it boils down to how much the plan is going to cost them rather than any real commitment to freeing up as many resources as possible for investment in the MDGs”.