Debt aftershocks to shake Haiti’s recovery?

IMF and World Bank debts provoke outcry

12 February 2010

An IMF loan to Haiti in response to the devastating earthquake in early January has been criticised for exacerbating the country’s debt burden and endangering recovery.

The IMF approved the loan of $102 million at the end of January, which, although interest-free and subject to a five and a half year grace period, adds to Haiti’s existing $166 million debt to the Fund. IMF lending had already been augmented due to the impacts of the food and fuel crises, and the 2008 hurricanes. The loan runs counter to earlier warnings from the IMF that Haiti remains at high risk of debt distress and that “new borrowing policies must remain cautious.”

In reaction to the financial crisis, the IMF made loans to all of its poorest borrowers, including Haiti, interest-free from 2009 to 2012. However, when Haiti’s payments resume, the IMF expects they will equate to 2.8 per cent of government revenues by 2014, in a country with an 80 per cent poverty rate.

The debts imposed by the IFIs and the major world powers have contributed to destroying Haiti

Civil society network Jubilee South expressed its “demand that the resources allocated for relief and reconstruction do not create more debt, or conditionalities.”

For its part, the World Bank made a grant of $100 million towards reconstruction and recovery, the cost of which could exceed $1 billion – 15 per cent of Haiti’s GDP – according to its preliminary estimates. The Haitian Prime Minister Jean-Max Bellerive voiced concern that the cost could be four times as much.

The Bank also announced it would suspend repayment demands for Haiti’s $39 million debt for five years. This amount is outstanding after almost half a billion dollars owed to the Bank’s International Development Association was cancelled last year as part of the Multilateral Debt Relief Initiative (MDRI, see Update 49).

Prior to the earthquake, Haiti’s total external debt stood at $1.25 billion, half what it was before a previous cancellation in 2009.

Dithering on debt cancellation

Facing fierce criticism from civil society that debt and conditionality had exacerbated Haiti’s vulnerability by limiting the state’s capacity to prepare for disasters, the Bank and IMF joined a growing chorus advocating further debt cancellation. Bilateral creditors including the G7 countries and Venezuela announced they would cancel their share of the Haitian debt. Bowing to campaigners’ pressure, the G7 finance ministers stated, “The debt to multilateral institutions should be forgiven and we’ll work with these institutions and other partners to make this happen as soon as possible.” Details remained vague however, and the IMF’s director of external relations referred to debt relief for Haiti as a “medium-term issue.” It is unclear whether cancellation will be financed from existing internal resources or with aid money from donors.

Camille Chalmers of the civil society network, Haitian Advocacy Platform for Development, said, “The debts imposed by the IFIs and the major world powers have contributed to destroying our country. It’s the equivalent of an earthquake which has lasted from late in 1983 when we signed the first stand-by agreement with the IMF. These loans have caused earthquakes, aftershocks and tremors which have undermined our institutions and our capacity to respond to a crisis of this magnitude.”

New global debt crisis

According to research by Benjamin Leo, a former US Treasury official, the World Bank’s lending to the most indebted countries remains almost as high as before it introduced the Debt Sustainability Framework in 2004 (see Update 67). In a November 2009 paper for US thinktank Center for Global Development, Leo argues that the international financial institutions determine a country’s borrowing capacity on the basis of inadequate and volatile ratings. He warns that unsustainable debt has been further exacerbated by the IMF’s emergency loans in response to the financial crisis. Leo calls for donors to “re-examine … the system for determining the appropriate grant/loan mix”, cautioning that without corrective action the international community could be forced into a further round of systematic debt cancellation.

Nick Dearden, director of UK NGO the Jubilee Debt Campaign (JDC), concurred: “Haiti would not be in this position if it wasn’t for the serious flaws in the HIPC [Heavily Indebted Poor Countries] and MDRI debt cancellation schemes which mean that a country is guaranteed to run up a new debt while it completes the debt cancellation process. In the case of Haiti, this is another example of recycling odious debts – run up by the Duvalier regime.”

Meanwhile Iceland may resist pressure to rapidly repay its creditors, despite the UK and Netherlands blocking EU crisis funds, on which IMF disbursements depend, until repayment terms are agreed. Public outcry has led the president to set a referendum in early March on the repayment terms, an unprecedented move.

The rising debt crisis will strengthen calls for a proper arbitration mechanism for debts that compromise development or are illegitimate (see Update 67).