Flexibility or seeds of new crisis?

IFIs debt framework revised

22 September 2009

By Gail Hurley, Eurodad

A flurry of papers by the IFIs, UNCTAD and NGOs raise concerns over renewed debt difficulties in poor countries just as the IFIs complete a review of the debt sustainability framework to allow more borrowing.

Debt is once again a ‘hot’ topic in international policy circles after falling off the political agenda in the wake of the G8 debt relief agreement in 2005. In March, the IMF reported that the debt-to-GDP ratios of 28 low-income countries exceeded 60 per cent, twice the threshold the IMF considers sustainable for countries with so-called weak policies. The United Nations Conference on Trade and Development (UNCTAD) went further, citing concerns in 49 least developed countries in a February report Yuefen Li, the head of the debt and development finance branch.

For the poorest countries, the largest sources of pressure on government revenues have included: volatile global commodity prices; declines in aid and migrant remittances; increasing costs of borrowing on international markets; and steep declines in taxes as export volumes drop because of recessions in rich countries. The shortfall in revenue is already being partially filled by a dramatic increase in the take-up of new official debt from the IFIs. Whereas official lenders had provided funding to developing countries equivalent to only 4 per cent of that provided by private sources in 2007, this ratio will have risen almost ten-fold to 37 per cent in 2009.

The IMF has extended finance to 50 countries since the outbreak of the global financial crisis, following five years in which repayments exceeded new disbursements. In July, the IMF announced an unprecedented increase in financial support to low-income countries (see page 8). The World Bank has nearly doubled lending in 2009 (see Update 66) and the ADB plans to increase lending by more than $10 billion in 2009-10. The G20 also announced an additional $250 billion in support for trade finance over the next two years (see Update 65), most of which will flow through export credit guarantee agencies (ECAs) which have played an important role in sovereign debt creation in the past.

DSF review completed

The World Bank and IMF, under orders from the April G20 summit, undertook a review of the debt sustainability framework (DSF) for low-income countries. The G20 wanted a more flexible instrument to facilitate the increase in borrowing from the official sector, throwing the ‘cautious’ approach that had been used previously into the bin. The World Bank and IMF completed their review at end July, and agreed to make the framework more flexible, raising limits on the amounts of debt the poorest countries can take on before they are deemed ‘in debt distress’.

They agreed to factor in migrant remittances, arguing that high levels of such flows increase foreign exchange within a country which in turn can be used to service foreign debt. The revised DSF will also exclude the debt owed by state-owned enterprises from calculations of countries’ overall levels of indebtedness if companies are deemed financially viable by the Bank and Fund. Lastly, governments will be able to appeal to the IFIs for ‘leniency’ with respect to public investment projects which are to be considered on a case-by-case basis to assess whether they will threaten so-called debt sustainability.

Of concern is that this very dull technical exercise gives international donors a vital get-out clause. Now that countries can take-on increased levels of non-concessional debt, donors may not put concessional finance on the table. Even before the onset of the global financial crisis, developed countries as a whole fell far short of their pledges to give 0.7 percent of national income as aid. These developments have the potential to build up future repayment difficulties for some of the poorest countries.

Given that developing countries were not responsible for the current global recession – the origins lie instead in developed countries and the greed of rich country banks and corporations – it is profoundly unjust that poor countries will in essence pay for the mistakes of the rich via new rounds of debt.

Instead of aggressive levels of new official debt, a September briefing from Eurodad calls for a temporary moratorium on external debt service payments to help release much-needed extra funds for investment in poverty reduction and infrastructure development. UNCTAD has also supported this call, and has calculated that a temporary debt moratorium would release about $26 billion for 49 low-income countries for 2009 and 2010 combined. The cost would be small to individual creditors in comparison to the fiscal stimulus plans already announced.  It should also be additional to, and not substitute for, pledges to increase official development aid.

Dealing with illegitimacy

In March UNCTAD announced a three year project on the issue of responsible lending and borrowing, and odious debt. The initiative, financed by the Norwegian government, will bring together representatives from the private sector, civil society, official bodies and governments to try to come up with some form of agreement on what constitutes an odious debt and responsible lending/borrowing practices. The first meeting will take place in Geneva in mid November.