Committee for the Abolition of Illegitimate Debt

This field trip has mobilised Latin American groups to set up an Alternative Platform to the official meetings to discuss these institutions’ contribution to development. The second is that the meetings are straight after world leaders adopted the 2030 Agenda for Sustainable Development – a ‘plan of action for people, planet and prosperity’. Both institutions have indicated that they are ‘fully committed’ to this agenda and are keen to define their role. However, some burning issues will be debated, particularly in light of the debt crises that have hit Europe and threaten other regions, and the recent changes in the landscape of development finance. Here we pick just some of them:

How will the world finance its infrastructure needs?

In Lima, Finance Ministers will discuss how the 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, 189 members in 2017), 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.

Group (WBG) will support the Agenda 2030. To frame this debate the WBG has just released a background discussion note which features ‘infrastructure’ as a priority. As Eurodad has highlighted this is also a priority for the G20 G20 The Group of Twenty (G20 or G-20) is a group made up of nineteen countries and the European Union whose ministers, central-bank directors and heads of state meet regularly. It was created in 1999 after the series of financial crises in the 1990s. Its aim is to encourage international consultation on the principle of broadening dialogue in keeping with the growing economic importance of a certain number of countries. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, Italy, India, Indonesia, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, USA, UK and the European Union (represented by the presidents of the Council and of the European Central Bank). , with whom the WBG and other multilateral development banks (MDBs) are working, all of which will host a global infrastructure forum – one of the few concrete commitments in the Addis Ababa Action Agenda.

However, many things have changed since the last gathering of 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 the WB in April and there is increasing competition among financial institutions to finance infrastructure. The Articles of Agreement of the Asian Infrastructure Investment Bank, led by China, were opened for signature in late June and many traditional donors have already signed. This comes on top of the setting up of the New Development Bank – the Bank of BRICS countries – established in July 2014. These two institutions will also focus heavily on infrastructure.

According to the discussion note, the WBG is committed to work on three objectives. The first one is to ‘promote climate-friendly and resilient infrastructure,’ which anticipates a clear link between the financing provided by the WBG and discussions that will take place later in the year as part of the COP 21 in Paris.

The second one is to ‘support better public investment management,’ which means getting better at identifying, appraising, screening, implementing, financing and maintaining public sector projects. This is extremely critical, given that the lion’s share of infrastructure financing is provided by the public sector (more than 85 per cent) – something acknowledged by the WBG in its discussion note and stressed by Eurodad several times. However, the initiatives in this area (‘diagnosis, technical assistance, and where appropriate, financing’) seem to constitute a plan to advise countries on how to get projects built quicker (the current safeguards review is under fierce critique by CSO groups). Instead, there should be a clear agenda that benefits the population and avoids harmful social, environmental and economic impacts. [Last month’s Report from the Special Rapporteur on extreme poverty and human rights, raised a worrying red flag: “the existing approach taken by the Bank to human rights is incoherent, counterproductive and unsustainable. For most purposes, the World Bank is a human rights-free zone.”]

The third one is particularly problematic and is connected to work area two: ‘support efforts to crowd-in new (private) sources of finance for infrastructure,’ which means work with countries to prepare projects that are ‘economically, financially and commercially viable’ and as a consequence attractive for private investors. This aim is being driven by two major initiatives: the public-private partnership cross cutting solution area (or PPP unit) and the Global Infrastructure Facility launched in October 2014. The objective is to increase private financial investment in infrastructure and promote PPPs as a financing mechanism.

The focus continues to be in the wrong place and the drivers of this ‘infrastructure agenda’ refuse to learn from well-documented past experience and evidence of the problems associated with PPPs. As Eurodad has shown in its major report on PPPs, they often end up being very risky and expensive for the public sector – see cases in Uganda and Tanzania – there is limited evidence of any impact on efficiency, and the low transparency of PPPs is particularly worrying given the major social and environmental impacts of big infrastructure projects.

Old and new debt crises and how to deal with them

The IMF faces a number of urgent challenges related to unresolved old debt crises, and the risk of new debt crises.

Greece’s debt remains unsustainable, as the IMF pointed out in a debt sustainability analysis released earlier this year. Consequently, the IMF refused to lend additional money and finally demanded a substantial reduction of Greece’s debt, most of which is now due to the Troika Troika Troika: IMF, European Commission and European Central Bank, which together impose austerity measures through the conditions tied to loans to countries in difficulty.

IMF : https://www.ecb.europa.eu/home/html/index.en.html institutions (European Commission, European Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx and the International Monetary Fund). The EU, however, continues to push for IMF participation in the third bailout programme which the Eurogroup – an informal body of ministers of the Euro zone – has negotiated in August.

The situation in Ukraine also remains difficult. The IMF has already started to disburse its loans, although the required debt restructuring of Ukraine’s existing debt stock Debt stock The total amount of debt remains uncompleted. A voluntary debt operation negotiated with a creditor committee led by the investment fund Investment fund
Investment funds Private equity investment funds (sometimes called ’mutual funds’ seek to invest in companies according to certain criteria; of which they most often are specialized: capital-risk, capital development funds, leveraged buy-out (LBO), which reflect the different levels of the company’s maturity. Templeton has thus far reached only 50% of bondholder participation. Even if the other 50% will join, the small haircut of 20% implies that the restructuring won’t achieve €15.3bn debt reduction that the IMF deems necessary. Other creditors than the bondholders made no commitments thus far.

An emerging challenge is the recent commodity price crash, and the expected rise in global 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. following decisions made by the US Federal Reserve FED
Federal Reserve Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank : http://www.federalreserve.gov/ . For many developing countries that have commodity-dependent economies and lots of outstanding US dollar debt, the combination of lower export earnings with an 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 shock could be fatal. It would trigger a new wave of developing country debt crises. The fact that the Chinese downturn seems to continue is also hurting the commodity exporters hard. To make things more complicated, analysts predict this will be the first year since 1988 that emerging markets experience a net outflow of capital.

the document prepared by the IMF in advance of the meetings in Lima ignores the work of the UN on debt restructuring principles

The above problems could provide new impetus to the debate on a new multilateral debt restructuring framework. Greece and Ukraine provide clear evidence that, with current instruments, debt restructurings cannot be conducted speedily and effectively when they are needed. However, the document prepared by the IMF in advance of the meetings in Lima ignores the work of the UN on debt restructuring principles. Instead, the document refers to the Fund’s work on improving collective action clauses and voluntary contractual approach to debt restructuring. But these are useless to address the current challenges as the lion’s share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of Greece’s debt is due to official creditors – not to private bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. holders –, the situation in Low Income Countries is similar. Even the existing HIPC Heavily Indebted Poor Countries
HIPC In 1996 the IMF and the World Bank launched an initiative aimed at reducing the debt burden for some 41 heavily indebted poor countries (HIPC), whose total debts amount to about 10% of the Third World Debt. The list includes 33 countries in Sub-Saharan Africa.

The idea at the back of the initiative is as follows: a country on the HIPC list can start an SAP programme of twice three years. At the end of the first stage (first three years) IMF experts assess the ’sustainability’ of the country’s debt (from medium term projections of the country’s balance of payments and of the net present value (NPV) of debt to exports ratio.
If the country’s debt is considered “unsustainable”, it is eligible for a second stage of reforms at the end of which its debt is made ’sustainable’ (that it it is given the financial means necessary to pay back the amounts due). Three years after the beginning of the initiative, only four countries had been deemed eligible for a very slight debt relief (Uganda, Bolivia, Burkina Faso, and Mozambique). Confronted with such poor results and with the Jubilee 2000 campaign (which brought in a petition with over 17 million signatures to the G7 meeting in Cologne in June 1999), the G7 (group of 7 most industrialised countries) and international financial institutions launched an enhanced initiative: “sustainability” criteria have been revised (for instance the value of the debt must only amount to 150% of export revenues instead of 200-250% as was the case before), the second stage in the reforms is not fixed any more: an assiduous pupil can anticipate and be granted debt relief earlier, and thirdly some interim relief can be granted after the first three years of reform.

Simultaneously the IMF and the World Bank change their vocabulary : their loans, which so far had been called, “enhanced structural adjustment facilities” (ESAF), are now called “Growth and Poverty Reduction Facilities” (GPRF) while “Structural Adjustment Policies” are now called “Poverty Reduction Strategy Paper”. This paper is drafted by the country requesting assistance with the help of the IMF and the World Bank and the participation of representatives from the civil society.
This enhanced initiative has been largely publicised: the international media announced a 90%, even a 100% cancellation after the Euro-African summit in Cairo (April 2000). Yet on closer examination the HIPC initiative turns out to be yet another delusive manoeuvre which suggests but in no way implements a cancellation of the debt.

List of the 42 Heavily Indebted Poor Countries: Angola, Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Comoro Islands, Congo, Ivory Coast, Democratic Republic of Congo, Ethiopia, Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Kenya, Laos, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Myanmar, Nicaragua, Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Somalia, Sudan, Tanzania, Togo, Uganda, Vietnam, Zambia. /MDRI initiative that deals with official debt has expired, won’t be available to tackle a new debt crisis in impoverished countries.

Both institutions are facing critical governance issues

The much delayed implementation of the IMF governance reform is a burning issue for the institution and it appears that on this issue they are heading towards a near certain crisis. At the same time, the World Bank will be proposing a shareholding review during these meetings, as a follow up of an agreement reached in 2010.

2015 should mark the completion of the Fifteenth Review of IMF quotas, which affect the voting share of IMF members. However, the Fourteenth Review has not yet been ratified, as the US Congress has blocked it – the US’s 16.85% voting share gives it a de facto veto on any decisions requiring an 85% majority of votes. It seems highly unlikely that anything will change to alter this scenario, and 2015 will end with the Fourteenth review unratified. Furthermore, this is the last chance for Ministers to meet before the end of year deadline.

This crisis comes at a time of significant global economic uncertainty, and high existing calls on the IMF’s resources. IMF quotas have to be paid for – so they directly affect the core resources that the IMF can lend to member countries. Edwin Truman of the Petersen Institute, and former assistant secretary of the US Treasury, recently estimated that IMF financing needs, dependent on the quota reform process, are “at least $500 billion” if not $750 billion in additional resources from this IMF reform round.

The World Bank’s review acknowledges that the ‘distribution of shareholding is important for the legitimacy of the institution.’ The document also refers to a ‘complex and evolving background’ for this review. Following only superficial reforms, developing countries still have a lack of representation at the Bank. The aim will be to get more engagement and a greater voice for developing countries to counter their motivation for setting up alternatives. This time the reforms seem to also be a mechanism to replenish Bank capital, and this is clearly intended to make it able to compete with the new players. Whether any concrete changes do take place remains to be seen.