Campaign improves IMF debt assessments, but risk of crises continues to increase

20 October 2017 by Tim Jones

Independence Arch in Accra, capital of Ghana (Photo: Joe Ronzio/Flickr)

The IMF and World Bank have agreed some positive changes to their system for monitoring debts of impoverished countries, though some large issues have been ignored. The system, known as the Debt Sustainability Framework, is important as it directly impacts on amounts of lending by the World Bank and other multilateral development banks, and influences lending decisions by governments and the private sector.

A key improvement is that some of the hidden cost from Public-Private Partnerships (PPPs) will now be included. This was one of the main demands of global civil society of the review, and 2,500 people wrote to the UK’s representative at 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.
asking for this change to be made. One of the main reasons government’s use expensive PPP schemes to provide public services is because they enable debts to be hidden. Hopefully the changes will bring PPPs onto more of a level playing field with other forms of public investment, though much more still needs to be done.

Another positive improvement, called for by global civil society, is to reduce the importance of 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.

assessments of economic policies in deciding how much debt impoverished countries can cope with.
Under the old system, World Bank assessments of how widely free market economic policies have been introduced, including trade liberalisation, deregulation and regressive taxes, increased how much debt countries were thought to be able to take on, even though there is no evidence that these free market economic policies reduce the risk of debt crises. Following the review, these assessments will still be included, but they carry less importance.

The review acknowledges the importance of debts owed by the private sector in causing debt crises. However, changes to how the IMF’s and World Bank assessments work to ensure these are covered are being discussed by a follow-up process, happening between now and the end of 2017.

There are some other fundamental issues which have not been addressed. Some of these are not surprising. Global civil society called for debt assessments to be carried out by a body independent of creditors and debtors, rather than the World Bank and IMF, which are themselves significant lenders. It is not a shock to learn that the IMF and World Bank ignored this suggestion. However, the review does admit that judgement by the institutions has sometimes led to debt ratings being different.

For example, in Mozambique, which is now in a large debt crisis, the review says that between 2009 and 2014, based on debt figures alone, the south-east African country should have been rated as at medium risk of a debt crisis, but instead this was continually downgraded to low risk.

The debt assessments will continue to be based on how likely a country is to stop paying some of its debts, rather than a broader definition of debt crisis being when debt is preventing the meeting of basic needs or progress towards the Sustainable Development Goals. Furthermore, by applying the current framework to a past database of debt crisis, the IMF and World Bank say the new assessments would still have missed 1-in-5 crises, even based on their own definition of what constitutes a crisis.

Aside from predicting crises, the review presents evidence that past IMF and World Bank assessments have tended to underestimate future debts. It says that 40% of assessments between 2007 and 2010 had large changes (greater than 15% of 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.
) on expected debts five years later, and of these, 80% had underestimated what debts would be.

Debts can be a useful form of investment, and global civil society had called for the debt assessments to incentivise the better use of loans by recognising that where good transparency and accountability exist, these means debts are likely to be better spent, and so governments have more space to borrow for useful investments. These suggestions have been largely ignored. However, the IMF’s board, in commenting on the review, said that they would like more action to increase debt transparency, and there are signs that this theme will continue to grow in importance. In the UK, we are campaigning to ensure that all loans to governments under UK law are publicly disclosed when they are given. The UK, alongside New York, are the two jurisdictions under which most loans to governments are made, so the UK government has a key role to play in ensuring transparency is achieved.

So far this year, three more countries have gone into debt distress on the Fund and Bank’s ratings (Chad, Gambia and South Sudan, joining Grenada, Mozambique, Sudan and Zimbabwe), whilst the number of countries in debt distress or at high risk has increased to 27, from 15 in 2013 (see graph below). Just 11 of 67 countries are assessed as at low risk, the lowest number since assessments began in 2007. The improvements made by the IMF and World Bank to debt assessments, following campaigning by civil society, are unlikely to be enough to prevent a new round of debt crises.


Tim Jones

Jubilee Debt Campaign



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