IMF debt-relief programme under scrutiny

The International Monetary Fund's (IMF) controversial debt relief programme came under scrutiny this week following an internal report showing that without further foreign aid, struggling economies in Africa could find themselves in a debt trap once again. In a working paper published in Washington, the IMF noted that although its Highly Indebted Poor Countries (HIPC) initiative had achieved success in some countries, the programme was "not a guarantee for long-term debt sustainability". The HIPC initiative was first launched in 1996 by the IMF and World Bank, and entailed coordinated action by the international financial community, including multilateral organisations and governments, to reduce to sustainable levels the external debt burdens of the most heavily indebted poor countries. IMF researchers argued that while the HIPC initiative was projected to significantly reduce the total stock of debt, and generate substantial debt-service savings, the programme's emphasis on using debt relief to increase spending on the poor could in fact reverse economic gains. Debt relief campaigners have questioned the wisdom of an exclusive focus on raising social spending in HIPC countries, arguing that increased spending on social services, such as health and education, had not always been associated with improved social indicators. This was due, in part, to inefficiencies in spending, and the allocation of these funds to activities that had relatively little effect on the poor. In 2001 the IMF suggested that a comprehensive strategy to tackle poverty should focus not only on securing additional resources for social spending, "but on eliminating inefficiencies in these expenditures and reallocating funds to programmes that are most beneficial to the poor". Jubilee Research, an international debt-relief advocacy group, said it was "unfair" that often resource-strapped HIPC countries were expected to spend more on poverty-reduction programmes, and questioned whether debt-relief savings had actually contributed to overall poverty reduction in HIPC countries. "We welcome the fact that the IMF has acknowledged that the conditions it places on countries under its HIPC programme are unrealistic. We have also maintained that, even though debt relief under HIPC has produced some limited success, there remains a serious resource gap. It is because of this resource gap that many HIPC governments find it increasingly difficult to meet the demands to spend more on social services, and even post-HIPC countries will experience this same shortcoming," Jubilee Research senior economist, Romilly Greenhill, told IRIN. The IMF report recommended that HIPC countries should consider scaling down "ambitious expenditure programmes", as an option, but they faced "daunting social needs". "A tightening of spending programmes could actually generate back-tracking of reforms," the IMF noted. Another recommendation to increase resources was a broadening of the tax revenue base within HIPC countries. But while this was seen as "a worthwhile endeavour", the main drawback was the time it would take before a significant impact would reflect in government coffers. Moreover, in some of the poorer countries, the tax base was too narrow, with economies heavily dependent on largely informal activities. The report concluded that while securing further grants from the international community would bolster efforts by HIPC countries to implement their poverty reduction strategies, this option was not a panacea for weak economies. A chief concern was that some of the countries already "suffer" from aid dependency. Should donors continue to financially engage with HIPCs, these countries would have to promote an "enabling environment for higher private non debt financing flows, for example, through foreign direct investment," the IMF said. But Greenhill stressed that further debt relief, instead of aid, would benefit the ailing economies. "At least debt relief is predictable. Often, in the case of aid donations, although US $50 million is initially pledged, the country in reality only eventually receives $20 million. The added advantage of debt relief [as opposed to aid disbursement] is the inherent sense of local ownership. Aid often is assoicated with conditions imposed by donors, at least with debt relief countries can spend the funds as they see fit," she told IRIN.