IMF admits more debt relief might be necessary

An IMF report has found that poor countries have been permanently affected by financial crisis.

Last weekend the World Bank and IMF held their Spring meetings to assess their operations. The meeting also gave campaigners a limited opportunity to try and hold the institutions to account.

Of most interest to debt activists is a paper written by IMF staff which assesses whether the financial crisis signals a ‘new debt crisis’ in the poorest countries (‘Preserving debt sustainability in low-income countries in the wake of the global crisis’). Their answer is ‘probably not’, but only because they make extremely optimistic assumptions. In fact, the paper is worrying to anyone concerned not to repeat the debt crises of the past.

The report states some of what we already know – that very poor countries are spending more money to weather the financial storm but they have less money coming in. As such, the debt situation they face has clearly got worse. But most interesting is the assessment that many of these countries will be permanently impacted by the financial crisis. For instance, current account deficits are only expected to get close to what they were before the crisis in around 2021.

The IMF believes that most countries will be able to climb out of this crisis but only if its assumptions prove correct, namely that growth recovers quickly, that the countries return to ‘conservative budgeting’ and that adequate international finance is forthcoming.

If these assumptions are wrong, particularly the assumptions about a quick return to growth, the debt situation of many countries could worsen significantly. Even if they’re not wrong, countries will be paying proportionality more money servicing their debts than they would have been without the crisis.

Some of the countries in ‘debt distress’ are unsurprising – countries which have not yet completed the HIPC debt relief scheme, plus Burma and Zimbabwe. Of particular concern, debt servicing is a major problem for Democratic Republic of Congo and possibly Liberia – a very clear sign that both countries passage through HIPC should be speeded up.

But high risk countries turn out to be far more diverse and include countries which have already passed through HIPC like Burundi and Burkina Faso, as well as countries not eligible like Djibouti and Tajikistan.

The IMF suggests a number of measures for these countries to take, including sharp austerity measures and better financing terms from donors. The latter seems particularly optimistic, given the IMF admits that domestic debt levels in many countries are expected to be permanently higher, which surely says something about the availability of assistance. And they themselves admit that their suggested measures will probably not be enough for some countries like São Tomé and Príncipe, Tajikistan, Tonga and Afghanistan. The paper concludes that the need for debt relief in isolated cases at some point in the future cannot be ruled out.

The paper couldn’t be a clearer admission that a debt moratorium should have been called to help low income countries out of the mess of the financial crisis, as campaigners have been calling for. Forcing counties into years of austerity to pay for a crisis they did not create is neither just nor helpful to the battle against poverty.

But it also throws up a more serious structural problems with debt relief schemes agreed to date. First it is clear that HIPC and MDRI have not been sufficient to get countries to a state whereby debt is no longer a problem for them. Second, it is proof that HIPC did not go wide enough, as a whole host of new countries are now facing debt problems (and indeed always were). Third, given that many countries owe money to a wide array of lenders – not just very rich countries and the IMF/ World Bank – a more structural solution was clearly needed.

Given that debt crises are now a major issue for developed as well as poor countries, surely it is time to re-assess an international arbitration process – a debt court – which will allow an ongoing solution to the problem of debt crises and ensure that the poorest do not constantly have to pay for crises they did not create, simply because they are ‘dispensable’.