KAIROS Analysis of the Outcome  of the G-7 Finance Ministers’ and IMF & World Bank Annual Meetings, Oct. 1-3, 2004

This briefing provides an analysis of the outcome of the G7 Finance Ministers Meeting and the IMF/World Bank Annual Meetings in light of the four demands put forward by KAIROS and the Halifax Initiative.

One: The immediate and unconditional cancellation of 100% of the debts owed by all low-income countries to multilateral financial institutions;

On the positive side there appears to be an emerging agreement on writing off “up to 100%” of the multilateral debts owed by Heavily Indebted Poor Countries (HIPCs) that qualify by implementing Structural Adjustment Programs (SAPs) rigorously until they reach their HIPC completion point. However, the consensus is not total as Germany’s Finance Minister told reporters “I do not agree to proposals that the multilateral institutions should forgive debt.”

One unresolved debate concerns how to pay for this debt remission and the potential impacts on the future of the IMF and the World Bank.

Thus agreement on reaching the 100% threshold for multilateral debts may be reached some time in 2005 complementing the commitments already made to wipe out 100% of  some HIPCs bilateral debts. Our goal of including all low-income countries is not on the table although the British proposal would include some non-HIPCs.

The apparent Canadian “vigorous resistance” to the British proposal to revalue some of the IMF’s 103 million ounces of gold to cover part of the costs of multilateral debt relief may be a red herring or a stalling tactic intended to gain time while a more comprehensive deal is worked out. Finance Minister Goodale himself said that Canada’s objections to gold revaluation were largely “technical” and can be overcome.

If one looks back to the way the Fund revalued 12.9 million ounces in gold in 1999-2000 to finance the HIPC Trust Fund one finds there was no negative effect on the price of gold which actually rose from US$255 an ounce in mid-1999 to US$419.50 today (Oct. 4, 2004), a 64% increase. When the IMF announced it would revalue its gold reserves instead of selling gold on the open market in 1999, gold mining stocks rose in value.

[The mechanism by which the IMF revalued some of its gold in 1999 without selling any on the open market is illustrated by the following example. At the time the market price for gold was US$255 an ounce while the IMF gold was valued on its books at only US$46 an ounce. On the day before Mexico was to make a regular payment to the IMF it would buy some gold from the IMF at the world market price and then give it back to the Fund the next day in fulfillment of its loan contract. The physical stock of gold held by the IMF would remain the same but the book value of the amount it sold and then received back from Mexico would increase by the difference between the two prices. Over 1999 and 2000 the IMF gained US$3.9 billion by revaluing 12.9 million ounces. This amount was invested and the interest earned was used to fund HIPC debt relief.]

At today’s current prices the revaluation of a slightly larger amount, about 14 million ounces, would yield a net gain of about US$5.3 billion, enough to cover the cost of writing off outstanding debts to the IMF owed by HIPCs. Thus a revaluation of just enough IMF gold to cover only the IMF’s own debts need not upset world gold prices.

However, if a larger amount of IMF gold were sold on the open market, as some have advocated, to cover not just debts to the IMF but the costs of debt remission by other multilateral institutions, then arguably there might be some effect on the world price of gold. One suspects that the failure of G-7 Ministers to sign off on the revaluation of IMF gold on Oct. 1-3, has something to do with their lack of agreement on how to cover the costs of writing off other multilateral debts.

Two: That countries who receive debt cancellation be free to implement their own national development strategies with no strings attached.

The proposed write-off of HIPC debts to multilateral institutions is not unconditional. To qualify for eventual debt remission governments will still have to faithfully adhere to all the policy conditions laid down by the IMF until they reach their HIPC completion point.

It might appear that the US plan to fund debt relief through reductions to future lending by the World Bank’s International Development Association (IDA) and the IMF’s Poverty Reduction and Growth Facility (PRGF) might weaken the ability of the Bank and the Fund to impose conditions attached to IMF loans in the future. However, another part of the US proposals would in fact strengthen the capacity of the IMF to oversee the economic policies of sovereign nations. Treasury Secretary John Snow has proposed a “Policy Monitoring Arrangement” that would empower the IMF to signal its approval or disapproval of a country’s economic policies even when that country does not borrow any money from the Fund. This proposal was condemned outright by the Group of 24 developing countries.

Canada appears to have rejected the US proposal that would reduce future lending to the poorest countries by one dollar for every dollar of debt relief. Instead Minister Goodale’s official speech to the IMF said “We should take the steps needed to ensure that the future lending capacity of the Fund, in particular the self-sustaining PRGF, is not compromised.” This implicitly supports the continuation of IMF-imposed SAPS.

The German Finance Minister also clearly opposed the US proposal for grants to replace loans in future IDA assistance, insisting on protecting the financial position of the Bank and the Fund and in particular the IMF’s ability to “consult governments on the formation of their economic and financial policies,” which implies continued imposition of SAPs.

A confidential document from Britain’s international development ministry obtained by The Guardian questions conditionality in such areas as privatization and trade liberalization. Although this document was apparently not discussed at the Oct. 2004 meetings, its existence bodes well for a debate on conditionality when Britain chairs the G7 in 2005. 

Three: That credit on accessible terms be available to the world’s poorest countries.

The issue of how to pay for multilateral debt relief  has become intertwined with ongoing negotiations for the replenishment of the IDA, the World Bank facility for making low-cost loans to low-income countries. A US Treasury official confirmed as much in an interview with the Washington Post.

During the Oct. 1-3 meetings there was no consensus on putting up new money out of future Official Development Assistance budgets to pay for multilateral debt relief as had been proposed by UK Chancellor Gordon Brown. Neither was there any consensus on the US plan which would reduce future IDA lending by one dollar for each dollar of debt relief on IDA loans to a given country.

Other ideas that might result in raising new money for international development were either not discussed or were rejected out of hand. Agence France Press reports that a plan to place a very small tax on international financial transactions, as advocated by Presidents Jacques Chirac of France and Lula da Silva of Brazil at the United Nations in September, was rejected by some G7 nations, notably the United States. Similarly the British proposal for an International Financial Facility was not accepted. The IFF would involve selling bonds and using the revenues to increase development assistance in the short run while repaying the bondholders out of future aid budgets.

Four: Recognition that neither the people of Iraq, nor citizens of other countries formerly ruled by dictators, should be obliged to repay odious debts.

The issue of HIPC debt is still politically intertwined with the question of Iraqi debt.

France and Germany went into the weekend still insisting that a 50% reduction for Iraq is sufficient with the US holding out for a 90-95% reduction. Despite reports that differences have narrowed we won’t know the actual figure until a deal is struck in the Paris Club. This deal could come soon as Iraq has now paid up its arrears to the IMF and qualified for a new IMF loan worth US$437 million. Of most concern are the conditions that will apply. An IMF news release says Iraq must have “a prudent fiscal policy that aims to limit spending to provide the minimum adequate level of social support” and implement key structural reforms to transform Iraq into a market economy, including the restructuring of state enterprises.

Most telling was the response of UK Chancellor Gordon Brown and South African Finance Minister Trevor Manuel to a direct question concerning how Iraq’s debt is “odious”. Brown refused to answer but Manuel, whose own government is repaying debts from the apartheid era that South African civil society organizations deem odious, showed that Finance Ministers are well aware of the precedent that would be set if they ever conceded that Iraq’s debt is indeed odious by saying “It’s a very tough call. Who will be the determiner of whether debt is relieved? ...If that should happen in Iraq why should it not happen in the Democratic Republic of Congo?”