Debt institutions

The World Bank, the IMF, the Paris Club, the London Club - who does what? Here we profile the main international institutions - formal and informal - which make the decisions on debt that affect so many lives.

THE WORLD BANK

The World Bank consists of the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The IBRD focuses on middle income and creditworthy poor countries, while IDA focuses on the poorest countries in the world.

International Development Association
Established in 1960, IDA aims to reduce poverty by providing interest-free loans and grants to countries with a GDP per capita of less than $1,025 (2007). IDA is one of the largest sources of assistance for the world’s 80 poorest countries.

IDA lends money (known as credits) on concessional terms. This means that IDA credits have little or no interest charge and repayments are stretched over 35 to 40 years, including a 10-year grace period. Since its inception, IDA credits and grants have totalled $161 billion, averaging $7–9 billion a year in recent years with about 50 percent directed to Africa.

THE INTERNATIONAL MONETARY FUND (IMF)

The International Monetary Fund was one of the Bretton Woods Institutions created in 1945 to help promote the health of the world economy. It is an international organisation of 185 member countries headquartered in Washington DC. The IMF is mandated to ensure the stability of the international monetary and financial system. The Fund aims to promote economic stability and prevent crises; to help resolve crises when they do occur; and to promote growth and alleviate poverty. It uses three main functions—surveillance, technical assistance, and lending—to meet these objectives.

IMF lending
In the event that member countries experience difficulties financing their balance of payments, the IMF can provide financial assistance. A policy program supported by IMF financing is designed by the national authorities in close co-operation with the IMF, and continued financial support is conditional on effective implementation of this program. The IMF provides financial support to fight poverty through its concessional lending facilities—the Poverty Reduction and Growth Facility (PRGF) and the Exogenous Shocks Facility (ESF)—and through debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). In most low-income countries, this support is underpinned by Poverty Reduction Strategy Papers (PRSP). These papers are prepared, in theory, by the country in consultation with civil society and external development partners to describe a comprehensive economic, structural and social policy framework that is being implemented to promote economic growth. They are agreed by the Boards of the World Bank and the IMF. Officially, the goal of IMF lending is to change poor countries so that their economies become export-led, so they generate enough foreign exchange to be able to pay back old loans and get new loans.

THE PARIS CLUB

What is the Paris Club?
The Paris Club is an informal group of creditor governments from major industrialised countries. There are 19 permanent members but other creditor governments may be invited if one of their debtors needs debt relief. These creditors meet every six weeks in Paris with debtor countries in order to reschedule or cancel debts. It provides a forum for representatives from the governments of rich countries (creditors) who have made loans to poor countries (debtors) to decide the rescheduling of debt. Rescheduling allows poor countries to postpone payments. Concessional rescheduling means there is also a reduction in the amount of money countries have to pay every year. The Paris Club began offering debt cancellation (in addition to rescheduling) in 1988. Originally they agreed to forgive up to 33% of debts of poor countries. This increased to 90% in 1999. Since Iraq, the Paris Club also offers debt cancellation to middle-income countries through the so-called ‘Evian Approach’.

Since the Paris Club is an informal group (it calls itself a 'non-institution'), it does not have any statutes. There are a number of rules and principles including: decisions on a case by case basis, consensus, conditionality, solidarity, and comparability of treatment.

Conditionality required by the Paris Club
The Paris Club meets only debtors that are committed to implementing economic and financial reforms dictated by the rich governments. Usually the indebted country must have a current program with the IMF. The amount of debt relief is determined by the financing gap identified in the IMF programme.

History of the Paris Club
In the 1950s, 60s and 70s, creditors believed the debt service problems of poor countries were temporary. Debt relief took the form of payment rescheduling, sometimes on concessional terms, and sometimes with access to new credit. In order to make sure that all a country’s bilateral creditors contributed equally, the Paris Club was developed. At meetings in Paris, creditor governments formed a committee to agree on the needed debt relief, in consultation with the IMF, and to try to make sure that all creditors offered terms at least as favourable as those agreed by the Paris Club.

The first Paris Club meeting took place in 1956, when Argentina met with its public creditors. Since then, the Paris Club has reached 398 agreements with 83 debtor countries. Since 1983, the total amount of debt covered in these agreements has been $505 billion. Around $60 billion in debt and debt service has been cancelled through the Paris Club process.

THE LONDON CLUB

The London Club is an informal group of commercial banks that join together to negotiate their claims against a sovereign debtor. The debtor initiates a process in which a London Club "Advisory Committee" is formed, which is typically set up in parallel with the Paris Club. The Committee is chaired by a leading financial firm and includes representatives from other firms, and upon signing of a restructuring agreement, the Committee is dissolved.

The aim of the London Club is to ensure equal treatment was provided to all bank lenders while providing rescheduling terms to help the country return to creditworthiness. Its first meeting took place in 1976 in response to Zaire's debt payment problems.