IRIN Focus Report on new debt relief initiative

Signalling a change in debt relief strategies, the International Monetary Fund (IMF) and the World Bank (WB) announced this week a poverty reduction initiative that could cancel up to US $27 billion in debt owed by the world's poorest countries, most of them in sub-Saharan Africa. At an historic joint annual meeting in Washington, the two Bretton Woods institutions agreed to provide greater debt relief to a larger number of countries more quickly, but with the emphasis changing from mere debt relief to poverty reduction. WB President James Wolfensohn said in an address to the Bank's board of governors: "We will take a balanced approach linking macroeconomic and financial parameters with the human, structural and social aspects." He added: "With poverty reduction front and centre of our agenda, our work at the rockface must be governance, institutions and capacity building." Wolfensohn said that although debt relief was a necessary step for many developing countries, it was not the end in itself. The real goal, he said, was reducing poverty. Gold sales To reflect the shift in focus, the IMF's Enhanced Structural Adjustment Facility (ESAF) has been renamed the Poverty Reduction and Growth Facility. The main elements of the new package are contributions by industrialised countries and the IMF towards a fund for debt relief. The bulk of the IMF contribution would come from the investment income on the profits from the off-market sale of up to 14 million ounces of gold. According to the IMF the sale will work on two levels. As a first step, the IMF would sell gold to a heavily indebted country at the prevailing market price. The profits from the sale would be placed in a special account and then invested for the purposes of debt relief. Then the IMF will accept at the same market price, the same amount of gold from the member country in settlement of that country's financial obligations to the IMF. The IMF's holdings of physical gold would remain unchanged. The basic rules The aim of the plan is for each country to prepare a poverty reduction strategy with the help of the IMF and the WB. Country strategies have to be approved by the governing boards of the two institutions. The strategy also has to take into account economic policies which will promote faster sustainable growth. More emphasis will be placed on good governance, transparency, accountability and the involvement of civil society. Priority will be placed on reform measures that are seen as critical in achieving the government's social goals. The plan's critics Seth Amgott, spokesman for Oxfam's advocacy office in Washington told IRIN that although Oxfam thought the initiative was a step in the right direction it felt that the IMF's role as "gate keeper" had to be reduced. "We are also concerned that donor nations would finance the package with cuts in aid budgets and not give new money," he added. Tony Burdon, Oxfam policy advisor, said in a statement: "It would be a cruel hoax indeed if debt relief was financed with cuts in aid budgets." In her reaction to the new initiative, Ann Pettifor, director of the debt relief pressure group Jubilee 2000 said: "We welcome the new emphasis in poverty reduction. However, we are not confident that the IMF is an appropriate institution to deliver a reduction in poverty. Changing the name of ESAF may bolster the position of the IMF and help to attract new funds. However, better qualified institutions like the WHO, UNICEF and UNAIDS are neglected and starved of funds. By locking the IMF into poverty reduction programmes we may simply be recreating the IMF's failures of the past 20 years." Pettifor added: "When a king or president dies, world leaders drop everything to attend the funeral. Twenty thousand children die each day, because money is diverted away from health and clean water into debt service." She stressed: "Too many countries will still be paying more on debts that on health and education. It covers too few countries, offers too little cancellation and has no deadline. As a result debt will be stretched over too many years." South African Finance Minister Trevor Manuel and other finance ministers from the Southern African Development Community (SADC) who were in Washington this week, have criticised as "insufficient" the enhanced debt relief plans. Manuel said that it still meant that poor countries would have to establish a six-year track record of IMF-approved economic performance. He indicated that some of the conditions attached to debt relief were "excessively burdensome", with the only two countries in Africa - Uganda and Mozambique - eligible for the plan. Donor response This week, Britain's development minister Clare Short offered a further US $50 million in addition to the US $171 million that her government had already promised. The European Development Fund is said to be willing to provide an estimated US $700 million, the US about US $600 million, and Germany about US $75 million. On Thursday, US president Bill Clinton announced that he was instructing his government to forgive debt owed to the US by some of the world's poorest nations. "Today I am directing my administration to make it possible to forgive 100 percent of the debt these countries owe to the United States, when, and this is quite important, when needed to help them finance basic human needs and when the money will be used to do so," news reports quoted Clinton as saying. Clinton added: "Simply put, unsustainable debt is keeping too many countries and poor people in poverty."