2016 IMF and World Bank Annual Meetings: The Bretton Woods Institutions stuck in policy dilemmas

24 October 2016 by Bodo Ellmers , Tiago Stichelmans , Mathieu Vervynckt

This year’s Annual Meetings of the IMF and World Bank took place against the backdrop of continued sluggish growth in developed and developing countries alike. The impact of the commodity price crash weighs heavily on many developing countries and has caused a significant fall in global trade. While the IMF warns that both private and public debt levels remain dangerously high, that the anticipated deleveraging did not happen, the main response of the Bretton Woods Institutions (BWIs) is new lending facilities that create new debts.

Debt levels up – payment capacity down

Setting the tone for the Annual Meetings, 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.

announced in its Fiscal Monitor that global debt rose in 2015 to the record level of US$152 trillion, representing 225% of global GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
. In the aftermath of the global financial crisis, advanced economies continue to have higher debt levels than developed countries. However, the impact of collapsing commodity prices is increasingly felt by the latter. Many of the world’s poorest countries suffered massive revenue losses and face increased borrowing needs, while at the same time their capacity to sustain current debt levels has been reduced. Sustaining current private and public debt levels would become particularly difficult when 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.
start to rise again. This scenario implies that the risks of a major new debt crisis - the second one within a decade - are high and growing.

More lending facilities – more debt

For the time being, many of the IMF’s most important member states – the major shareholders – can continue to borrow at negative 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. Consequently, IMF Managing Director Christine Lagarde announced ahead of the Annual Meetings that IMF borrowers should benefit too. She announced that interest rates on concessional lending will continue to be set at zero for as long as and whenever global interest rates are low. The extension of the zero-interest policy for many of the IMF facilities was perhaps the most tangible policy decision taken at these meetings.

Meanwhile, the G24 group of major developing countries and emerging economies made a renewed attempt to add a new lending facility to the IMF global financial safety net (GFSN) that would help commodity-dependent countries to smooth over the impact of price fluctuations. But this did not find consensus. Instead, the BWIs’ member states welcomed a new facility that was set up to provide finance to a second group of highly vulnerable developing countries: those affected by the refugee crisis. The World Bank World Bank
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’s “Global Concessional Financing Facility” is expected to provide US$ 7.5 billion over the next five years - by blending just US$1.5 billion in grants with US$ 6 billion in loans – and will consequently add to the debt burden of already distressed countries.

More partnerships - more contingent liabilities Liabilities The part of the balance-sheet that comprises the resources available to a company (equity provided by the partners, provisions for risks and charges, debts).

Thus, instead of promoting deleveraging, both BWIs’ responses rely on actions that create more debt, including by leveraging more private capital to finance infrastructure through guarantees Guarantees Acts that provide a creditor with security in complement to the debtor’s commitment. A distinction is made between real guarantees (lien, pledge, mortgage, prior charge) and personal guarantees (surety, aval, letter of intent, independent guarantee). and other means. The World Bank’s Development Committee welcomed the Global Infrastructure Connectivity Alliance, endorsing an initiative developed by the more exclusive club of 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). members earlier this year. This alliance will develop regional infrastructure plans for bankable infrastructure projects. It adds another layer to the already congested range of initiatives to promote infrastructure investments, notably in the form of Public Private Partnerships (PPPs).

With this, the World Bank is continuing its leading role in promoting PPPs. In addition to producing policy papers on PPPs for the G20, the World Bank Group already created the PPP unit and the Global Infrastructure Facility in 2014; hosted the Global Infrastructure Forum earlier this year; and recently signed the “Joint Declaration of Aspirations on Actions to Support Infrastructure Investment” with 10 other multilateral development banks. This was with the objective of investing a minimum of $350 billion in 2016-18 in infrastructure development, with the aim of attracting and partnering with private investors in particular.

During the annual meetings, civil society organizations (CSOs) repeated their concerns about the increased promotion of PPPs, building on Eurodad’s research which found that PPPs often worsen the fiscal problems against which they are offered as solutions. In a side-event organised on this particular topic, we highlighted that one of the main reasons why governments go for the PPP option instead of the public borrowing one is because perverse accounting measures allow them to keep the PPP projects off balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. sheet. The IMF somewhat seconded this critique as a new IMF working paper has found substantial fiscal risks caused by PPPs. In spite of such warnings, the World Bank stated during the side-event that it would not necessarily disapprove a PPP project if the government decides to keep it off-balance sheet. CSOs renewed their call that the true costs of PPPs need to be disclosed.

Disagreement going forward

Otherwise, the IMF Committee (IMFC) communiqué reflects ongoing disagreement between IMF Member States as well as academia on how to overcome the current growth and development stalemate, as it mixes old-school calls for structural reforms and adjustments with calls for fiscal policy flexibility and the promotion of high-quality investments, while ensuring at the same time sustainable debt levels.

The term “inequality” made it into both communiques this year - the IMFC’s and the World Bank’s Development Communique, but the transformation from rhetoric into compelling redistributional policies remains at an infant stage. The hypocrisy that an increasingly progressive IMF rhetoric is not met by reformed practices in actual operations has been noted by external observers as well as by Eurodad’s latest research on conditionality that has been launched at the Annual Meetings.

One key area of dissent remains the question of how the IMF’s lending facilities should be funded. While all stated that the IMF needs to be adequately resourced to provide an effective GFSN, the G24 members advocated for the quota-based approach. Here, member States make compulsory contributions, according to their quota. Currently, the IMF has to top up the limited quota-based resources with borrowed money, which creates dependence on certain countries and the risk that loans to the IMF might not always be available in sufficient volume when a crisis hits. As the necessary majority for increased quota-resources could not be reached, the IMFC welcomed new borrowing arrangements with 26 countries worth US$360 billion.

An SDG-based approach to debt sustainability?

Debt sustainability has been a big issue at these Annual Meetings, also because the joint IMF and World Bank Debt Sustainability Framework (DSF) is currently under review. CSOs have demanded for decades that debt sustainability assessments should first and foremost assess to what extent debt prevents the meeting of basic needs and development goals. They renewed this call at these Annual Meetings, through a joint CSO submission endorsed by 31 organisations and networks, and at a side event co-organised by Eurodad. At the annual CSO Town Hall event, Christine Lagarde seconded the call that the new DSF needs to take the sustainable development goals into account. It remains to be seen how this new approach will be operationalised. Mark Flanagan, the Head of the IMF’s Debt Policy Division, flagged at our event that many stakeholders expect the reformed DSF to pay more attention to debt-service-to-revenue ratios (instead of the conventional debt-to-GDP ratios), and to the contingent liabilities coming from, for example, shaky private banks or PPPs.

Limited progress was made on the question how heavily indebted countries can reach sustainable debt levels without sacrificing their growth and development to austerity policies. CSOs recalled at the Civil Society Policy Forum that further progress towards human rights-based sovereign debt Sovereign debt Government debts or debts guaranteed by the government. workout mechanisms is needed. Such progress, however, continues to face political blockades at the IMF. In the absence of effective institutions for sustainable solutions to debt problems, the challenge to deleverage without jeopardising growth and development will remain difficult to master for the Bretton Woods Institutions.

Source: Eurodad



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