FUND-BANK DEBT PLAN IS SELF-SERVING

7:26 PM Oct 4, 1996

FUND-BANK DEBT PLAN IS SELF-SERVING
Geneva 4 Oct (Chakravarthi Raghavan) -- The Multilateral Debt Reduction and Relief plan of the IMF and the World Bank approved this week at the annual Fund-Bank meeting of in Washington is essentially self-serving one to ward off criticisms, and will provide no relief to the indebted country, a critic of the IFIs said.

Mr. Percy S. Mistry, now a private consultant and formerly chief-of-staff in the financial complex of the World Bank was commenting on the outcome of the plan that has been endorsed by the Interim and Development Committees of the two IFIs, and is to be administered through a World Bank run Multilateral Debt Facility.

Mistry is the author of a just published study, by the Hague-Based FONDAD (Forum on Debt and Development), "Resolving Africa's Multilateral Debt Problem: A response to the IMF and the World Bank".

In the study Mistry has sharply criticised the Fund-Bank proposals for multilateral debt relief to countries, and has put forward alternative ideas and principles to redress the asymmetric approach "dominated entirely by the views, preferences and vested interests of the IFIs with little account being taken of the legitimate needs and imperatives" of the highly indebted poor countries (HIPCs).

Jan Joost Teunissen, Director of Fondad, in a preface to the study, says that Mistry "in his usual, thorough and undiplomatic manner" has taken a detailed look at the figures and policies behind the multilateral debt crisis and suggests compelling reasons for a new strategy to resolve the problems. In sub-Saharan Africa (SSA), the servicing of the multilateral debt absorbs almost half of total debt payments, and in a large number of these countries, the debt servicing is financed by extraordinary levels of bilateral grant aid flows.

Such diversion of aid, Teunissen says, is "illogical (and) detracts from essential developmental, humanitarian and social infrastructural support, thus further damaging Africa's recovery prospects."

Some observers at the Fund/Bank Washington meetings this week said that the latest proposals for multilateral debt relief, endorsed by the Interim and Development Committees, are more or less on the lines of the proposals which early this year had been leaked by Bank staff (and used by World Bank President Wolfensohn in meetings with NGOs), and appear to have helped blunt the sharp criticisms from NGOs, several of whom appear to have been successfully coopted by the Bank through invitations for dialogue on this and environment issues.

Other NGOs and observers in the South though view the exercise as one of 'flim-flammery'.

The Fund/Bank papers suggest that 20 countries (17 in SSA) have a serous multilateral debt problem, with eight of them classified as having an unsustainable multilateral debt burden. Under the plan, these eight or so nations would be eligible to get some debt relief after six years of further adjustment.

Many of these supposed to be eligible have already undergone 10-15 years of structural adjustment programs, and to make them wait for another six years to get some relief did not make any sense at all, Mistry said.

Other critics say it is an attempt by the two institutions to ensure that the debt relief plan works to ensure continued adoption of their failed neo-liberal policy approaches and conditionalities -- the socalled 'Washington Consensus', whose chief author, Mr. Robinson, recently told a meeting called by the Inter-American Development Bank that atleast another five years of these policies would be needed for Latin American countries would show growth.

If the criteria applied in selecting the countries with a serious debt problem were to be used today, there will be some 68 countries needing debt reduction and relief, Mistry said. And the approach under the Fund/Bank plan is very similar to that of the Paris Club (of government creditors) which has brought no real relief over the years for these countries, he added.

Mistry points out in his study that contrary to the 'changing' position of the IFIs, more dispassionate observers suggest that the multilateral problem affects about 30-35 low-income countries, and the multilateral debt crisis (even by the Fund-Bank reckonings) affect more than the 15-18 countries that were affected by the commercial bank debt crisis of the 1980s, but less than the 50-55 affected by the bilateral debts handled by the Paris Club.

Multilateral debt problem, Mistry notes in his study, is now widely recognized as having serious "crowding-out effects" on public and private investments, affecting growth and export earnings, and that such payment obligations are also imposing unnecessarily heavy pre-emptive burdens on increasingly constrained bilateral aid programs.

But since they managed to persuade the bilateral aid donors, between 1990-194, to provide exceptional levels of grant aid for multilateral debt servicing, this extraordinary is now being taken for granted by the IFIs as ordinary, and expanded bilateral aid flows as normal external financing which the debt-distressed can use to meet multilateral debt service obligations, and is "irrational circularity" on the part of IFIs, Mistry charges.

The Mistry study analyses in detail the constantly changing positions of the two IFIs on this multilateral debt reduction and relief (MDRR) issue over the last 2-3 years, and says that their approach in their latest papers this year appear to be motivated by:

* a desire to reduce to an absolute minimum the number of countries to which the MDRR has to be applied;

* to give both institutions a prolonged period of time to exert a short-leash policy-reform chokehold over these indebted countries and prove that their adjustment policies will work, given sufficient time;

* and to provide sufficiently long lead time for their own contributions to any future trust fund to be financed from allocation of their net incomes thus deflecting pressure to reduce immediately their reserves.

Mistry has argued for a different approach, with a different set of principles, for MDRR:

* Independence and impartiality in developing an equitable approach to MDRR which would result in sustainable debt servicing outcomes;

The World Bank and the Fund, he says, have too strong a vested interest in containing MDRR and have demonstrated beyond any reasonable doubt they are incapable of approaching the issue in an impartial and fair manner. As involved parties, it is inappropriate to expect the IFIs to be independent or impartial in judging the problems of HIPCs. A Special Independent Commission on Multilateral Debt (SICOM) headed by a high-ranking and internationally credible, former senior executive of the IFIs who is a public figure should instead by set up, with SICOM reporting directly to the Development Committee, Mistry says.

* Adopt a case-by-case, institution specific approach to MDRR by eliminating unnecessary linkages between different multilateral creditors;

* Eliminate unnecessary cross-linkages between action on MDRR and action for further relief on claims of other creditors;

* Action to provide further debt reduction and relief by all creditors being undertaken simultaneously and sequentially, with pari passu burden-sharing by all creditors from here on;

* Focus MDRR initially on debt stock reduction and not just on rescheduling or debt-service relief as proposed by the IFIs;

* Use bilateral funds only to finance the MDRR efforts of the African Development Bank;

* Require MDRR provided by other multilaterals and the IFIs to be financed from their own resources:

* Arresting immediately further growth of multilateral debt overhang in affected HIPCs by putting interest on outstanding multilateral loans into non-accrual status immediately;

* Applying a time-limit to cleaning up the multilateral debt overhang;

* Ensuring that the preferred creditor status of the IFIs is not used as an excuse by IFIs to assume exempt creditor status;

* Combining a global Multilateral Debt Facility with country-specific MDRR funds.

Mistry says this alternative approach offers a more practicable and reasonable basis for dealing with the debt burden and redress the balance in an approach dominated entirely by the views, preferences and vested interests of the IFIs, with little account taken of the legitimate needs and imperatives of the HIPCs.

He notes that though the World Bank seems prepared to move expeditiously, it is being held back by the IMF which "seems to be running interference on all MDRR proposals until it has achieved its own self-serving objective of financing an expanded, self-sustaining ESAF (Extended Structural Adjustment Facility).

Other critics have suggested that the major aim of the IMF, and its staff, which are finding themselves increasingly without any role even in the developing world or the transition economies, want an ESAF to be able to twist the African governments to hue to the neo-liberal theology.