IFIs foot dragging on key debt issues

1 April 2008

By Nancy Dubosse, Afrodad

The World Bank and IMF are struggling to catch up to global debates on ‘odious’ debts and responsible financing; have failed to take action on vulture funds; and have been dragging their feet on debt relief programmes for Haiti and Liberia.

The World Bank released a draft report on ‘odious’ debt (defined as loans knowingly given to a despotic power to repress and not benefit its people) in September 2007 (see Update 57). While the report conceded that there is “factual analysis of the irregular transactions and the consideration that the lender knew of the use of the funds”, there was no agreement that this was a useful way to classify sovereign debt nor were there any recommendations for what to do about odious debts.

Debt campaigners were asked by the Bank to respond to the paper. It was not clear what purposes their response would serve, and so the two sides have been in dialogue over how to take the process forward. A roundtable discussion is planned for the WB-IMF spring meetings in April in Washington.

While debates over odious debts have looked back at lenders’ past practices, the question remains how to prevent such behaviour in the future. Brussels-based network Eurodad has contributed towards this end by creating a Charter on responsible financing, which attempts to move away from institution- or sector-specific responses to concerns over responsible lending and fair resolution of debt crises towards “internationally recognised legal standards for responsible lending and borrowing”.

In addition to technical and legal terms and conditions, the charter addresses the protection of human rights and the environment, public consent and transparency, procurement, and repayment difficulties or disputes. On the thorny issue of human rights, the charter stipulates that activities financed must not violate rights as set out in the treaties to which either borrowers or lenders are signatories. Similarly, financing must not contravene internationally accepted minimum standards on social, labour and environmental protection. These include the Bank’s safeguard policies, the IFC’s performance standards, and the ILO’s core labour standards.

This is a key distinction of the Eurodad charter from G20 discussions on their own responsible lending charter. The G20 charter, largely driven by rich country fears about the growth of lending by China and India, has reportedly been opposed by Brazil, China and South Africa. A revised text is to be discussed at ththe next G20 meeting in Brazil in November.

Eurodad has called on individual governments or agencies to voluntarily adopt the charter, and for debate on the issues raised by the charter to take place as part of the UN Financing for Development process which next meets in Doha in November.

The African Network on Debt and Development (Afrodad) has launched the Fair and Transparent Debt Arbitration Campaign, which aims to gather and disseminate evidence on cases of illegitimate and odious debt throughout the world, with a view to the establishment of a transparent arbitration mechanism. Afrodad has already compiled ten dossiers, including Nigeria, Cameroon/Chad, Argentina, and the Philippines. Afrodad is organising national meetings in Nigeria and the Democratic Republic of Congo in April 2008 to inform both local civil society groups and parliamentarians.

Vulture watching

To date, eleven countries which are graduates of the Highly Indebted Poor Countries (HIPC) initiative have been targeted by so-called ‘vulture funds’ (currently Uganda, Nicaragua, Sierra Leone, Niger, and Zambia are being targeted). These companies buy up ‘bad’ debt at a discount, and then attempt to recover the full amount, often by suing through the courts. The commodification of public debt, particularly from countries that have been party to debt relief discussions, gives an opportunity for vulture funds to be free-riders, as they are profiting from the fiscal space created by debt relief and from loans given for development purposes.

In January, Belgium set a precedent by passing a resolution to “safeguard development cooperation and debt relief from the actions taken by vulture funds”. The legislation translates into clauses being inserted into future bilateral agreements preventing these funds from taking advantage and urges the IFIs to ensure that debt relief initiatives are binding for all parties. The funds themselves have admitted their vulnerability to decisive regulatory action. Debt Advisory International, a complany that manages several vulture funds said “the implications of outlawing the sale of sovereign debts to third parties for conversion or collection is that it will kill the secondary market for these claims as it will eliminate the buyers of last resort.”

In 2001, the IMF released a briefing on private sector involvement in international finance entitled Resolving and preventing financial crises. The brief concedes that vulture funds create a disincentive for creditor nations to participate in debt restructuring by providing an additional avenue through which to recoup part of their lending. As an organisation that has the ears of the world on macroeconomic stability and public financial management, the IMF should be able to adopt a concrete policy proposal on the issue of vulture funds, particularly with respect to their activities in HIPC countries.

For its part, the World Bank has failed so far to respond to debt campaigners’ call for the expansion of the International Development Association’s (IDA) debt reduction facility. The facility enables countries going through HIPC to buy back their commercial debts at a discount, preventing vulture funds from getting hold of them.

HIPC updates: Haiti and Liberia

The link between external debt and development has never been more pronounced than in the case of Haiti. Debt relief of $1.2 billion ($464 million of which is owed to the World Bank) has finally been granted conditional upon completion of the HIPC programme. The cost of not meeting the conditions of debt relief by the 2009 deadline is estimated at $44 million. From a development perspective, the key issue is the opportunity cost of delayed debt relief and current debt servicing while Haiti is going through the HIPC programme. According to the Banque de la Republique d’Haiti, the $1.2 billion to be given as debt relief amounts to over a quarter of Haitian GDP.

Liberia has $4.7 billion in external debt, of which $1.6 billion is owed to multilateral institutions. In March, after several delays, the IMF finally granted Liberia decision point status and committed $952 million in financing. Liberia is currently under an IMF Staff-Monitored Programme to strengthen its public financial management systems. It took Liberia two years to get to this point, and it can not hope to be relieved of its debt burden until it has implemented a Poverty Reduction and Growth Facility (PRGF) arrangement for one year.

In January, the IMF changed its rules for when poor countries can begin the HIPC debt cancellation process, after criticism of the time it took to agree Liberia’s arrears clearance. Previously, countries were required to have an IMF programme to qualify for HIPC, but they could only start such a programme once arrears had been cleared. Now, countries will be able to obtain IMF approval of their economic policies through Staff-Monitored Programmes, in addition to an IMF lending programme, and arrears clearance can be arranged simultaneously. While this does not solve the problem of lengthy delays or the unfair conditions that are attached to debt cancellation, it will at least stop countries like Liberia from facing even longer waits before entering the HIPC debt cancellation process.