Multilateral debt initiative, a cruel hoax!
For Release: October 2, 1996
Ministers gathered at this year's annual World Bank/IMF meetings are patting themselves on the back for a debt relief agreement for the poorest countries that will not even begin to address the enormity of the debt crisis. The initiative is not so much a debt relief package as a means to continue harsh economic adjustment measures.
To be eligible under the proposal, countries must have a proven track record of successfully implementing Structural Adjustment Programs of fiscal austerity and trade liberalization for up to six years. Moreover, the IMF's contribution to \debt relief\ under the new initiative is the soon-to-be replenished Enhanced Structural Adjustment Facility (ESAF). The funds that will be provided through ESAF will be used to further support the implementation of structural adjustment programs, which have been criticized for their harsh social and environmental impacts. In fact, ESAF loans have been available to the most highly indebted countries for years, yet their debt burdens have continued to grow.
Meaningful debt relief requires a serious commitment by creditor nations and the multilateral institutions to cancel substantial amounts of debts owed by the poorest countries, which have by all accounts become unpayable. Debt relief must be clear and up-front. What the world's poorest do not need is a continuation of the smoke and mirrors performances of the world's financial leaders witnessed at this year's annual meetings.
For more information please contact:
Robin Round, Coalition Coordinator
phone: (202) 234-7800
fax: (202) 234-3309
The Debt relief proposal which has been approved calls for the following measures to be taken by various creditors as follows:
The Paris Club (bilateral creditors) increases the amount it is willing to provide to eligible countries seeking debt relief from 67 to 80 percent. This does not include debt that has been incurred after a given country has first applied for debt rescheduling (post cut-off debt) or debt incurred through development assistance.
The World Bank has agreed to contribute $500 million to a Trust Fund that will be used to service debts owed by eligible countries with additional commitments of up to $2 billion. Contributions from other regional banks and additional bilateral contributions are also being sought.
The IMF has agreed to find resources to allow it to provide loans on more concessional terms and possibly grants through its already existing concessional arm known as the Enhanced Structural Adjustment Facility (ESAF).
Eligible countries would have to have a proven track record of strict adherence to structural adjustment programs of fiscal austerity and trade liberalization.
IMF Contribution: The IMF is abdicating responsibility for its own role in contributing to the debt crisis. The IMF has committed none of its own resources to real debt reduction. IMF donor governments, led by Germany, have refused to sell IMF gold stocks for debt relief. Further, the IMF has succeeded in shifting the responsibility for financing its contribution for debt relief from its own coffers back to the donor countries. Bilateral Debt: The proposal to increase the debt relief provided by bilateral creditors (Paris Club) from 67 to 80 percent in fact only increases the actual amount of debt relief by one or two percentage points for eligible countries. In real terms it will only mean a 16.7% reduction overall of bilateral debt. This is because loans made after the date of the first negotiation of debtor countries with the Paris Club (the so- called cut-off date) will not be eligible for debt reduction. Secondly, debt incurred through development assistance programs are also not eligible for the reduction. For many of the countries which are considered eligible for the debt reduction, the net effect will be minimal. Nicaragua, for instance will only get an 8.4% real reduction from the new Paris Club terms.
Time Frame: As thousands of children die every day as a direct result of the debt crisis the debt package will not even begin to kick in until the year 2000 at the earliest for the countries deemed eligible. It has yet to dawn on the financial leaders of the world that every day of postponement means thousands of additional lives lost and untold continued suffering for the world's poorest.
ESAF and debt relief
The perception of ESAF as a response to debt problems arises from an understanding that refinancing previous loans on softer terms, with a grace period, should have a positive effect on debt service obligations over the short term. Through ESAF arrangements, loans can be provided to the poorest countries at very low interest (one percent, perhaps even lower in the future), with a grace period of five years or longer, as part of agreements to implement structural adjustment programmes.
But is ESAF an appropriate means of responding to the needs of countries stressed by debt? A look at the experience of ESAF indicates that it is not an effective method of addressing debt problems, either directly in terms of reducing debt obligations, or indirectly in terms of stimulating positive economic development in general so as to help provide capacity to deal with debt obligations:
Presently, almost all of the debt of highly indebted poor countries to the IMF is on ESAF terms. Therefore, refinancing this debt under new ESAF loans would have no effective impact on the debt burden of these countries.
In the IMF Occasional Paper, Economic Adjustment in Low-Income Countries: Experience Under the Enhanced Structural Adjustment Facility (1993), it was admitted that while some countries with the ESAF experience \can be considered to have made progress in the sense of cutting or holding constant their debt and debt-service burdens\, about half of the countries studied \experienced little change or even increases in debt and debt-service ratios and had increased recourse to exceptional financing\.
Countries that have had ESAF arrangements continue to be reliant on exceptional financing, and unable to attract private investment. Their economies still need the funds provided by other countries and by international financial institutions.
ESAF is not purely a financing mechanism. The funds that are provided through ESAF are advanced to support structural adjustment programmes, which have been criticized for years because of their harsh social impact.
Several countries have had a series of ESAF programmes, or other similar arrangements. There is enough evidence to indicate that their effectiveness is unsatisfactory, both in terms of what they were ostensibly designed to do and in terms of any impact they might have on reducing the overall debt burden of these countries.
There is no reason to assume that a replenishment of ESAF funds, through the sale of IMF gold or otherwise, would provide for better results.