Select Committee on Treasury Memoranda


Memorandum submitted by the World Development Movement

  The World Development Movement (WDM) welcomes this inquiry into HM Treasury's Annual Report on the IMF. We are grateful for the opportunity to give evidence. WDM is a democratic membership organisation, with 30,000 supporters and 100 local groups across the UK. WDM undertakes research, policy analysis, political lobbying, awareness raising and public campaigning to ensure that the policies of Britain and other rich nations are fair to the world's poor. Since 1970, WDM has a strong track record of effective campaigning for debt cancellation, pro-poor development finance and fairer trade. WDM's work includes highlighting the impact of debt on nutrition in the mid 1980s, campaigning for write-off of commercial debt, pressing for an end to the injustice of IMF and World Bank structural adjustment policies, and campaigning for multilateral debt cancellation. WDM is an active member of international networks on debt, was a founder member of the Jubilee 2000 coalition and is a Board member of the Jubilee Debt Campaign.


  1.  This inquiry comes at a vital time. Under current trends, not only will the Millennium Development Goals (MDGs) be missed by a substantial margin, but the poorest countries will face sinking into deeper poverty. Per capita incomes fell by over 10 per cent in sub-Saharan Africa between 1980-2000, a period which UNCTAD characterised as dominated by IMF and World Bank mandated structural adjustment policies. Despite the IMF and World Bank's rhetorical shift to poverty reduction, there is growing recognition that the combination of heavy debt burdens and inappropriate conditionality has played a central role in the economic and social crisis that is afflicting the world's poorest countries. In addition, the suffering and economic cost of the HIV/AIDS pandemic, natural disasters (including those related to climate change) and conflict impart even greater urgency and priority to the need for action.

  2.  The past two years have seen a number of new development initiatives, but their impact has been marginal. For example, commitments made at the UN Financing for Development Conference (even if fulfilled, which has not always been the case in the past) will not be sufficient even to restore aid to the levels of the early 1990s. And the promises of trade reform in the rich nations, most recently at the WTO Ministerial conference in Doha, are already foundering on the protectionism of the US (demonstrated in the US Farm Bill and tariffs on steel imports) and the EU's lack of progress towards reform of the Common Agricultural Policy.

  3.  Failing the developing world should not be an option. A halt to the outflow of debt service payments can deliver resources to poor countries quickly and simply, utilising the established procedures for allocating public funds. This has been recognised in the call from African nations for fast-tracking of debt reduction in the New Partnership for Africa's Development (NEPAD). The Chancellor reminded world leaders of the challenge in his speech at the UN General Assembly on Children on 10 May 2002, "Too often, the world has set goals like the Millennium Development Goals and failed to meet them. Too often, we have set targets, reset them and recalibrated them again so that our ambitions, in the end, only measure our lack of achievement. This time it can be—and must be—different."

  4.  WDM commends this strong commitment, but considers that more must be done to make it a reality. This submission focuses on two key areas for change:

    —  a reorientation of HIPC, so that the initiative provides adequate resources for the achievement of the MDGs as the overriding priority; and

    —  an end to the IMF's intrusive economic conditions that developing countries are required to implement in order to qualify for debt reduction.

  5.  In addition, WDM strongly supports other issues highlighted in the Treasury report, notably the introduction of enforceable international rules to tackle money laundering as part of a broader programme of international financial regulation; improved mechanisms for international co-ordination and policy coherence; and a fair mechanism for sovereign debt restructuring.


  6.  The Chancellor has made an important call for a development compact, most recently in his 10 May 2002 speech to the UN General Assembly, "that no country genuinely committed to good governance, poverty reduction and economic development, should be denied the chance to achieve the 2015 goals through lack of resources". If this commitment is to be realised, the criteria for debt reduction must be fundamentally changed.

  7.  The current criteria embody a solely macroeconomic approach to debt sustainability—the ratio of external debt (measured at Net Present Value) should not exceed 150 per cent of exports. Countries qualifying receive enough debt relief to meet this criterion[1]. However, HIPC is failing to ensure that countries do not slip back below this threshold. Two World Bank/IMF reports presented to the Spring Meetings revealed that almost half of the countries that have passed decision point already exceed the HIPC sustainability criteria, including two of those that have already passed the completion point, Uganda and Bolivia. In fact, Uganda, often cited as the star pupil, has debts that are almost double the level of the criteria. [2]

  8.  Recent commentaries have blamed a temporary decline in commodity prices and overly optimistic forecasts of export growth used by the IMF. However, the fundamental problem is that the debt reduction deal provided under HIPC has failed to set the countries onto a path of economic growth and poverty reduction. In addition to the inappropriate conditions applied by the IMF (addressed in the following section), the level of debt is sufficient only to keep the economies from default, but is insufficient to provide for the necessary investments in health care, education and basic services to reduce poverty and establish the basis for a productive domestic economy. Without sufficient resources, HIPCs are unable to break the vicious cycle of poverty and debt.

  9.  A new approach is urgently needed. The criteria used by HIPC have been heavily criticised from those within the World Bank as well as by civil society. Most importantly, the debt sustainability criteria bear little connection to the MDGs. If the underlying aim is to ensure that countries have sufficient resources to meet the MDGs, the criteria applied by HIPC must reflect that aim. An alternative approach was embodied in a 1998 UK International Development Committee report, following WDM's recommendation, that unsustainable debt should be defined as "debt which cannot be repaid without damaging the prospects of human and social development." In response, the government acknowledged that "we should think about working not just from the concept of external sustainability, but from the expenditure required to meet the International Development Strategy." [3]

  10.  This concept has not yet been acted upon, even in the light of an internal report by the IMF and World Bank to the Spring Meetings in 2001 on the worsening circumstances of many recipients of HIPC debt reduction. A number of reports over the past several years have warned of the inadequacy of current approaches and urged a link between HIPC and the MDGs. [4]Calculations have demonstrated that full debt cancellation is required for HIPCs to achieve the MDGs. [5]A far bolder approach to HIPC and other heavily indebted countries is urgently needed if, as the Chancellor warns, our ambitions are not to merely measure our lack of achievement.

  11.  The stumbling block has usually been cited as the lack of finance. However, this bears closer scrutiny. A recent response to a Parliamentary Question by the Secretary of State for International Development reveals the UK's modest commitment of funds to date. DFID paid US$40 million to the HIPC Trust Fund in 2000-01 and US$33.7 million in 2001-02. [6]These amounts represent less than 1 per cent of UK aid. In addition, it has been established that the World Bank and the IMF are in a position to contribute significantly more from their own resources without jeopardising future commitments or raising borrowing costs to their clients. [7]

  12.  The British Government has, in the past, played an important role in providing leadership on debt. It is time to do so again. Others in the international community are clearly willing to play a role. The Canadian Finance Minister, Paul Martin, has made a high profile call for a review of HIPC. He has accorded high priority to HIPC for discussion at the forthcoming G7 Finance Ministers meeting in Halifax.

  13.  On 18 April, the US Congress passed a Bill to insert additional sustainability criteria into HIPC. Debt sustainability would not only depend on the debt/export ratio, but also the proportion of government revenues spent on servicing external debt. For countries which are suffering from "a severe health crisis", in particular HIV/AIDS, governments should be paying no more than 5 per cent of government revenues of debt service. For others, the limit would be 10 per cent. All of the 26 countries that have past Decision Point, apart from Rwanda, are paying more than 5 per cent and six countries more than 20 per cent. The adoption of this additional criteria would make a huge difference to releasing resources for poverty reduction

  14.  In addition to indications of support from other countries, the Government has massive support from Parliament. Early Day Motion 736 has gained the support of over 340 MPs, a majority of those eligible to sign, making it one of the two most supported EDMs in Parliament. The EDM calls for the acceleration of debt cancellation under the HIPC process to the level required to help achieve the MDGs.

  15.  In the light of such opportunities for further movement on debt, it is disappointing that the Treasury report restricts its recommendations to improving the implementation of HIPC, including through flexibility for top-up debt reduction for countries below the sustainability criteria at completion point. Welcome though it is, WDM considers that such flexibility will be insufficient to ensure that countries continue to meet the HIPC criteria, let alone provide the basis for countries to achieve the MDGs.


  16.  The HM Treasury report summarises the UK's submission to the Poverty Reduction Growth Facility (PRGF), calling for more capacity building, progress on Poverty and Social Impact Assessments and clearer links between the PRGF and poverty reduction. These are useful recommendations and would help close the gap between the aims of the PRGF and the reality of its implementation.

  17.  However, these recommendations do not go far enough. A number of civil society organisations have revealed that there has been a lack of consultation on the core economic conditions that are embodied in the PRGF, and little opportunity to examine alternatives. A review of four PRSPs and twelve interim papers, undertaken by WDM, shows the degree to which the IMF has continued to exercise the dominant influence over macroeconomic policies[8]. This conclusion is echoed by an IMF study of PRSPs in six countries, which found that macroeconomic policies had drawn heavily from the existing PRGF. [9]

  18.  Above all, this continuity is a problem because of the poor track record of these policies in the poorest countries[10]. UNCTAD's report last year on Africa revealed that incomes of the poorest 20 per cent of the population had dropped by an average of 2 per cent per year during the period in which IMF and World Bank structural adjustment programmes had been the dominant economic policy instrument. It concluded, "experiments in structural adjustment programmes have not been successful in establishing the conditions for sustained growth. There has been a remarkable failure to take proper account of external conditions in policy design." [11]

  19.  A clear statement of the failures of the IMF's policy conditions and advice to the world's poorest countries is long overdue. The needs to be full public and Parliamentary debate over the economic decision-making. Governments must be responsible for policy making, and fully accountable within their societies for the outcomes. It must be made absolutely clear that it is not the role of the IMF and World Bank to prescribe government policies on issues such as trade liberalisation, financial sector liberalisation, labour market reform, privatisation, agriculture sector reform, and charges for health care and education. The aim of full ownership of PRSPs by the countries concerned needs to become a reality.

April 2002

1   According to the World Bank, "a country can be said to meet its external debt sustainability if it can meet its current and future external debt service obligations in full, without recourse to debt rescheduling or the accumulation of arrears and without compromising growth", in "The challenge of maintaining long term debt sustainability", IMF and World Bank, 20 April 2001. Back

2   Heavily Indebted Poor Countries (HIPC) Initiative-Status of Implementation", World Bank and IMF, 22 March 2002, "The Enhanced IIIPC Initiative and the Achievement of Long Term External Debt Sustainability", World Bank and IMF, 27 March 2002; and "New World Bank reports confirm that the HIPC Initiative is failing". 29 April 2002, jubilee Research, London. Back

3   Third Special Report: Government response to the third report from the Committee, Session 1997-98: Debt Relief, International Development Select Committee, House of Commons 28 July 1998. Back

4   See "Debt Relief: From Fanfare to Fatigue" World Development Movement, London, July 2001; and Human Development Approach to Debt Sustainability CAFOD, London, 2001. Back

5   The Unbreakable Link-Debt Relief and the Millennium Development Goals Jubilee Research and Jubilee Debt Coalition, London, February 2002. Back

6   Hansard, 7 May 2002, column 13W, House of Commons, London. Back

7   "Reality Check: The need for deeper debt cancellation and the fight against HIV/AIDS" Drop the Debt, London, April 2001. Back

8   Policies to Rollback the State and Privatise? PRSPs investigated, April 2001, WDM, London. Back

9   "Reviewing some early poverty reduction strategy papers in Africa 2001, Caroline Robb and Alison Scott, IMF Policy Discussion Paper. Back

10   "The Policy Roots of Economic Crisis and Poverty: A multi-country participatory assessment of structural adjustment" November 2001, Structural Adjustment Participatory Review International Network (SAPRIN), Washington DC. Back

11   Page 49, "Economic Development in AFRICA: Performance, Prospects and Policy Issues" 2001, UNCTAD, Geneva. Back

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