Debt policy update, from Jubilee Debt Campaign

10 February by Jubilee Debt Campaign

Highlights

1) Debt risks increase as commodity prices stay low According to the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
and World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 180 members in 1997), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

http://worldbank.org
, 10 low income countries have seen an increased risk of not being able to pay their debts over the last year as global commodity prices have fallen.

2) IMF tweaks lending rules but continues to be able to bailout reckless lenders Removal of systemic exemption clause does little to restrict IMF’s ability to bailout reckless lenders

3) Proposal for UK aid money to be used to promote western exports Government hopes ‘untied export credits’ would increase UK exports

4) Uganda road project cancelled but debt remains World Bank admits multiple failures but $176 million debt from scheme remains

5) Billions of made-up money to count as aid through Cuba debt cancellation Close to $3 billion of made-up money to count as aid, based on 11% interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rate charged to Cuba since 1987.

1) Debt risks increase as commodity prices stay low
According to the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
and World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 180 members in 1997), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

http://worldbank.org
, 10 low income countries have seen an increased risk of not being able to pay their debts over the last year as global commodity prices have fallen. At the same time, 4 countries risk ratings have improved.

Cameroon, Dominica, Ghana, Mauritania and Mongolia have all seen their risk rating increase from moderate to high. The Republic of Congo, Ethiopia, Madagascar, Vanuatu and Zambia have all now been assessed as at moderate risk of not being able to pay debts, when previously they were listed as at low risk.

Those countries which are said to now be at reduced risk are all small states which may be benefitting from the fall in oil and commodity prices: Comoros, Haiti, the Maldives and Samoa.

In 2013 Cameroon was assessed to be at low risk, with external debt payments projected to be 3% of government revenue in 2016 and 2017. The IMF now says Cameroon will be spending 7% of government revenue on external debt payments this year, a doubling in just two years. Government revenues are now projected to be $5.1 billion rather than an expectation of $6.5 billion. And debt payments in 2016 have increased from an expected $190 million to $340 million.

Zambia also used to be assessed as low risk but this has now increased to moderate. Back in 2012 the IMF predicted debt payments in 2016 would be 3.5% of government revenue. They are now expected to have trebled to 10.4%. Zambia has a huge shortfall in government revenue on what was previously predicted, $4.6 billion rather than $7.2 billion. In addition, debt payments are now expected to be $475 million rather than $250 million.

These IMF and World Bank reviews of countries debt situations tend to take place every one-to-two years. So more countries could be reported to have worsening situations as the impact of commodity price falls and a strengthening US dollar come to be seen in future assessments.


2) IMF tweaks lending rules but continues to be able to bailout reckless lenders

The IMF has removed the ‘systemic exemption clause’ which allowed it to take part in the bailout of Greece’s lenders in 2010, even though it was known Greece’s debt was unsustainable. However, this has been replaced by other criteria which will continue to enable the IMF to bailout lenders, rather than them being forced to accept a reduction on the debt. |1|

Developing countries had pushed for the removal of the systemic exemption clause after it enabled the bailout of Greece’s creditors which they strongly criticised at the time. The change has now happened because Republican Senators in the US also pushed for its removal, in return for agreeing voting reforms within the IMF. Eurozone governments had been trying to keep the clause.

The new rules consider three scenarios:

  1. Where the IMF is confident the debt can continue to be paid, the IMF can lend exceptional amounts
  1. Where the IMF regards debt as clearly unsustainable - not able to be paid - the IMF will usually require a private sector debt restructuring as a condition of its lending
  1. Where the IMF thinks the debt could be sustainable, but is unsure, the IMF can lend so long as the country concerned gets finance from other sources as well. This could include, within Europe, loans from the ESM ESM
    European Stability Mechanism
    The European Stability Mechanism is a European entity for managing the financial crisis in the Eurozone. In 2012, it replaced the European Financial Stability Facility and the European Financial Stabilisation Mechanism, which had been implemented in response to the public-debt crisis in the Eurozone. It concerns only EU member States that are part of the Eurozone. If there is a threat to the stability of the Eurozone, this European financial institution is supposed to grant financial ‘assistance’ (loans) to a country or countries in difficulty. There are strict conditions to this assistance.

    http://www.esm.europa.eu/
    . Elsewhere it might include loans from institutions such as the World Bank. It could also come from private lenders extending how long loans are repaid over, without changing the amounts owed or interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

    The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
    .

Fundamental problems not addressed by this slight policy change include the fact that debt sustainability is defined as ability to pay, rather than looking at the costs of repaying for meeting basic needs and human rights. It assumes that only debts owed to the private sector need to be restricted, when for low income countries 91% of debt is owed to governments or multilateral institutions. For middle income countries it is 42%.

The presumption in the policy continues to be that debts are sustainable, rather than acknowledging that future predictions tend to be overly-optimistic, and debt crises go on for years or decades. And linked to this is the fact that the IMF will continue to be the organisation evaluating the sustainability of debt, rather than a body independent of creditors and debtors, such as a UN institution.


3) Proposal for UK aid money to be used to promote western exports

The UK’s Department for International Development is considering using aid money to subsidise lower interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rates for export credits for some low income countries.

Export credits are government backed loans to foreign governments and private companies to buy exports from the lending country. Under OECD OECD
Organisation for Economic Co-operation and Development
OECD: the Organisation for Economic Co-operation and Development, created in 1960. It includes the major industrialized countries and has 34 members as of January 2016.

http://www.oecd.org/about/membersandpartners/
rules, Western government export credit agencies, such as UK Export Finance, are only supposed to lend to low income country governments at lower interest rates. |2| But UK Export Finance does not have such a ‘concessional lending’ arm so the UK government claims it is currently blocked from supporting exports to some low income countries.

The response to this problem is to propose to use UK aid money to subsidise lower interest rates. However, it is debatable whether it would be illegal under UK law to subsidise loans tied to British exports, |3| so the proposal is for these subsidies to be available to any export credit agency Export Credit Agency When private businesses of the North obtain a market in a DC, there is a risk that economic or political problems may prevent payment of bills. To protect themselves, they can take out insurance with an Export Agency Credit such as COFACE in France or Ducroire in Belgium. If there is a problem, the agency pays instead of the insolvent client and the Northern business is sure of getting what is owed.

According to the Jakarta Agreement for the reform of public export credit and credit-insurance agencies, they “now the greatest source of public funding in the world, underwriting 8% of global exports in 1998, i.e. 391 billion dollars of investment, mainly for big civil and military projects in the developing countries. It is far more than the annual average of Official Development Assistance (…) which approaches 50 billion dollars. The outstanding debt of the Export Credit Agencies represents 24% of the debt of developing countries and 56% of public credits held on these countries.”

One of the main criticisms lodged against them is that they are not very fussy about the nature of the contracts insured (arms, infrastructure and huge energy projects such as the gigantic Three-Gorges Dam project in China) nor about their social or environmental consequences. They often give their support to repressive and corrupt regimes (like Total in Myanmar (formerly Burma) which means implicitly supporting fundamental human rights violations.
– what the UK government is terming ‘untied export credits’.

But the UK government do expect that UK exporters would benefit from this use of aid money. Documents proposing the scheme hope that 50% of contracts under this scheme would be won by UK exporters. Reading between the lines, it appears that the proposal is a way to try to use UK aid money to benefit British companies.

Furthermore, even a properly ‘untied’ export credit facility would not be truly untied. Buyers would only be able to borrow through it if buying goods or services from a country with an export credit agency, primarily Western countries and a few middle income countries such as China.

A government announcement of whether or not to go ahead with the scheme is expected within 6 months.


4) Uganda road project cancelled but debt remains

In January the World Bank cancelled a road building project in Uganda after “multiple failures … on the part of the World Bank, the government of Uganda, and a government contractor”. |4| There has been sexual abuse and misconduct by construction workers and mistreatment of staff working on the project. Environmental concerns, such as layers of dust on banana plantations, have also been raised. However, the debt from the project remains.

Christine Baryamuzura, local council secretary for women in Bukonderwa, a village in the Ugandan district of Kamwenge, told the Guardian a “tragedy that has come to this village. Everything has been destroyed: our gardens, our homes, even our girls. Of course we want the road, but should it be at the expense of our lives? Our leaders care more about the road than the people’s health.” |5|

On announcing cancellation of its funding for the road, World Bank President Jim Yong Kim said “It is our obligation to properly supervise all investment projects to ensure that the poor and vulnerable are protected in our work. In this case, we did not.”

However, $176 million of the $190 million of loans planned by the World Bank for the scheme have been disbursed. This is a debt which the people of Uganda through their government now owe for the disastrous project.

Jubilee Debt Campaign has written to the UK’s representative at the World Bank, Melanie Robinson, to ask if “Whether as part of the review of the project, the World Bank will consider cancelling part of the debt in relation to its failures on the project?” and stating that:

“Loans can be a useful tool when invested well, but if a project has been subject to multiple failures, the people of the country concerned cannot be expected to take on all the costs of debt repayments.”


5) Billions of made-up money to count as aid through Cuba debt cancellation

£139 million of ‘made-up money’ will count as UK aid and contribute towards meeting the UK government’s target for spending 0.7% of national income on aid, documents released under the Freedom of Information Act have revealed. Under an agreement with Cuba on its debt to the UK, £139 million of late interest will be cancelled, whilst Cuba has agreed to repay the £42 million which was lent originally, plus £21 million of contractual interest.

The late interest has been calculated using an annual interest rate of 11% since Cuba defaulted on the debt, far above the interest rate the UK government itself pays. The UK government has not received any payments on the debt since 1987, and there was no expectation that any of the made-up late interest would ever be paid.

The deal will cost Cuba money as it has not been making payments. The debt comes from loans backed by UK Export Finance. Following a campaign by Jubilee Debt Campaign, the UK government revealed in 2012 that of the original loans to Cuba, almost half were for “boats and vessels” though did not specify whether these were for civilian or military use.

The UK government has refused to conduct a full audit of debt owed to UK Export Finance to discover how beneficial or not the original loans were. Calculations by the Jubilee Debt Campaign have identified that at least 20% of loans where debts are outstanding were for military equipment, including to dictators such as Saddam Hussain in Iraq, General Suharto in Indonesia and General Mubarak in Egypt.

Cuba has also reached agreement with 13 other Western governments on the same terms as the UK. $2.6 billion of late interest will be cancelled in total under the deal, |6| all of which is likely to be counted as aid in the respective countries.


Source: Jubilee Debt Campaign


Footnotes

|1| http://www.imf.org/external/np/sec/...

|2| It is not clear how much this is implemented. UK Export Finance has been backing loans to Ghana despite it being classed as at moderate (and now high) risk of not being able to pay its debts.

|3| One interpretation of the International Development Act (2002) is that it prevents aid being tied to UK exports.

|4| http://www.worldbank.org/en/news/pr...

|5| http://www.theguardian.com/global-d...

|6| http://www.clubdeparis.org/en/commu...

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