Annual Meetings 2004 Dialogues with CSOs

Friday, October 1, 2004
1:30-3:00 pm
World Bank

The summary note was taken and drafted by an independent consultant, Paula Duggan, and reviewed and edited by the speakers. Attribution is given only to the panelists since it was not feasible to allow audience participants to review the draft text of the questions and comments before posting this note on the web. If any of the participants have comments or suggested edits to this text we ask that they send an email to the Bank’s Civil Society Team at civilsociety@worldbank.org.

In opening this session the moderator, Damian Milverton from the external affairs department of the World Bank, noted the prominence of the debt issue in the Annual Meetings of the World Bank and the International Monetary Fund (IMF) and spoke of the interest the Bank, the Fund and Civil Society Organizations have in discussing this issue together. The panelists for this meeting, whom Mr. Milverton introduced, were Mark Plant, Assistant Director, Policy Development and Review Department of the IMF; Vikram Nehru, Director, World Bank Debt Department, Poverty Reduction and Economic Management (PREM), World Bank; Alex Wilks, Executive Director of the European Debt and Development Network (Eurodad); and Jack Jones Zulu of Jubilee Zambia.
 
Mr. Plant, the first panelist to speak, began his remarks by saying that HIPC and debt sustainability are intertwined. Fifteen countries are expected to reach the HIPC completion point by the end of this year and there has been substantial impact on the debt stock in HIPC countries. The total debt stock of the HIPCs that have reached the decision point is projected to decline by about two-thirds from 80 billion to 26 billion dollars.

He then turned to the policy issues involved in the HIPC initiative and recent developments. The first development is that the sunset clause, which was put in place to avoid moral hazard problems - problems of countries taking on more debt in order to get debt relief -- has been renewed for another two years, so countries can still be eligible for HIPC. A difference is that this time the boards have decided to limit the number of countries that will ultimately be eligible  for the HIPC initiative by using 2004 data to create a list of countries that are potentially eligible for the program. Sometime in 2005 the staffs of the Fund and the Bank will draw up a list of those countries. Under the Sunset Clause, these countries will have until 2006 to become eligible for HIPC relief.  Once they reach that point, they can go through the process (to decision point and completion point) at their own pace.

Another important area of work that has been pursued in the past six months is debt sustainability analysis. The Bank and Fund are working on a Debt Sustainability Framework, which is separate from the HIPC Initiative.  There is some urgency about these new analyses because many low income countries that have received debt relief are beginning once again to borrow and there are questions regarding how much they should borrow and what advice  the Bank and the Fund should give? There are not enough grant resources available and a substantial amount of resources that are available to these countries, particularly from the multilateral development banks, are in the form of loans. If they are only able to have grants,many countries won’t be able to make the investments they need to get to the Millennium Development Goals (MDGs). So that is the reason for the debt sustainability analysis. The basic analysis advances the joint Bank-Fund debt sustainability framework paper which was prepared in March 2004. It says that there are a series of thresholds that can be used as indicators of debt distress and the thresholds will depend on how good policies are, and other factors. A whole set of empirical work was done looking at the probability of debt distress and its causes.  What came across most clearly is that the better the country’s policies, the more capable they are of taking on debt and turning the resources they borrow into something productive so they then have the returns to pay back the loans. These thresholds are indicators, not rules; they will signal the staffs of the Bank and the Fund and, more importantly the countries themselves, that they should look carefully at their borrowing patterns to see if they need to make adjustments.

There are several questions about debt sustainability, raised by the board, that the staff is now addressing: 1) Is it incongruent to supply debt relief and then say that a country can again borrow large amounts? It is difficult politically to make the case. 2) Are the thresholds too low and the probability of debt distress in the future too high? 3) How can the Bank and the Fund work together and with countries to produce these debt sustainability analyses?

Mr. Plant’s final point, in terms of developments, was that there are several proposals on the table for debt relief. As yet, not a lot of analytical work has been done on these and it won’t be done until more discussions take place at the political level and the Fund knows what direction the shareholders want the Fund to take.

Mr. Zulu in his remarks noted that when the HIPC Program was first designed, it was to enable countries to get a “robust exit” from debt. He a He said that the statistics show that a lot of countries which are participating in the HIPC Initiative have not met the objective. Using the case of Uganda, he explained: Uganda has been held up as one of the best performers, but Uganda reached the completion point in 2000 and then slipped into debt unsustainability again. Although getting to the completion point may be necessary, that is not a solution to Africa’s poor countries’ debt. One of the problems many CSO organizations have with the approach of the Bank and the Fund is that it is necessary to generate growth in order to reduce poverty. While CSOs do not debate the basic assumption, the question is what kind of growth is being generated? The experience of Uganda and the experience of Zambia is that they have actually been getting jobless growth. Often, the assumption with growth is that it will trickle down eventually to all the people, but in the African experience, this is not the case. For most African countries, the thing that would give them the needed push to realize not just the growth that is imbedded in the Poverty Reduction Strategy Papers (PRSPs) but also the Millennium Development Goals (MDGs) and to some extent the New Partnership for African Development (NEPAD) initiative is first and foremost to grant these countries a 100 percent debt write off. Mr. Zulu said that the money is available, but there is just a lack of political will to garner these resources. The more we delay in mobilizing these resources the more lives are being lost. If the development agenda is going to go forward, it is important to issue grants rather than loans. No matter how many concessions are made in loans, the fact is that they are not helping African countries; they are just adding to already unsustainable debt stock. The G7 finance ministers must look at this issue very seriously and G7 countries must make these new resources available.

Mr.Wilks from Eurodad mentioned that Mr. Zulu had already covered many of the points that CSOs are bringing forward. There is a general recognition now that HIPC did not deliver what it promised—a robust exit from debt. There is also a high level of political attention now being given to the debt issue, and that is partly because of the empirical evidence that the initiative hasn’t worked. There is now a political window of opportunity. There is also the recognition it is necessary to move beyond arbitrary ratios to a more country specific understanding of financing needs and debt situation. He noted specific concern about  the Country Policy and Institutional Assessment (CPIA) measure. In the view of the CSOs, he said, it is a clumsy measure that may be defeating to some extent the idea of being country specific. His opinion was that it undermines the objective to have actors within the country themselves intervening actively in the debate about where the countries are in terms of debt and financing. Furthermore, the CPIA to date is extremely opaque, poorly understood and is produced in Washington or in the country offices. As the CPIA approach moves forward it will be interesting, he said, to see if it survives because countries will contest their ratings. If we are serious, he said, about moving to a country specific approach, then it is necessary to open this ranking exercise to scrutiny and debate.

Mr. Wilks then asked the upcoming panelist Vikram Nehru for his opinion on this, and said that he would like to know more about the new Debt department at the Bank that Mr. Nehru is heading and how it differs from the previous HIPC unit.

He also referred back to Mr. Plant’s comment that there hasn’t been much analysis of the new proposals being discussed by the G7 countries, and asked why. He also asked for more explanation of the Bank and the Fund’s position on 100 percent multilateral debt cancellation.

Mr. Nehru first put debt relief in perspective. Debt rescheduling by the bilaterals started in the 1960s. In 1988 for the first time the Paris Club offered debt reduction of up to 33%. In 1991 it went up to 50 percent, inn 1994 to 67 percent, and in 1996  to 80 percent, and then to 90 percent and now many bilaterals are offering 100 percent debt relief to HIPCs.  In the meantime came the HIPC initiative, which offered for the first time  multilateral debt relief.  In 1999  this  was enhanced, and in 2001 HIPC topping-up was introduced. There is  now talk of 100 percent debt service relief provided by the multilaterals. So the question remains: All this debt relief has been provided, and has been steadily increased over the years,  so why are these countries still facing high and growing debts? In his opinion, Mr. Nehru said the real issue is that the debt burden these countries bear is symptomatic of much deeper development problems.  While to some extent the debt  issue  is being resolved, the development problems the countries face are not. Debt relief is only one tool in addressing the problems of low-income countries, but it is not the only one.  Addressing their development challenges also requires  developing countries to adopt better policies, and developed countries to ensure more open markets and lower agricultural subsidies for their farmers..

Mr. Nehru also said that the external financing needed to reach the MDGs is 10-12 times the current debt service payments after debt relief has been provided.  In other words, even if HIPC countries were provided debt service relief of 100 percent, they would still need a large amount of resources to reach the MDGs.  So the challenge reaching the MDGs  is not so much a debt service relief issue as an overall resource issue and a policy challenge. Countries have gotten into debt distress not only because their debts are large, but also because of the poor quality of their policies and institutions and because of the shocks that they experience; shocks account for roughly one third of the explanation for the incidence of debt distress.  In the past, not only have low income countries faced a higher amplitude and higher frequency of shocks than middle income countries, but also shocks have affected them far more deeply because they don’t have the capacity to withstand them. In summary, the capacity to take on additional debt is determined by these three factors: their susceptibility to shock, their current levels of debt, and the quality of their policies and institutions. The Bank and the Fund look at the quality of policies and institutions using CPIA and for every different country, the CPIA is broken up into 20 different dimensions and is a highly disaggregated measure.
 
Regarding the new Debt Department in the World Bank: Recognizing that debt is a huge issue, Mr. Wolfensohn created the debt department in PREM with the mission to  put together a Bank-wide structure, to make sure all units in the Bank that are dealing with debt issues talk to one another understand debt issues more deeply and develop a more coherent and cohesive response, while also being open to ideas coming from outside.

Mr. Milverton joined the conversation addressing Mr. Wilks’s request for more explanation of the Bank’s position on debt relief. He said that there is much speculation about the new proposals put forward by G-7 countries.  Mr. Wolfensohn has made it clear that the Bank is certainly in favor of greater debt relief, even 100 percent debt cancellation, as long as we arethis is not just an attempt to shift resources from one area to another and there is a demonstrated commitment from donor countries to put in the additional resources needed.

FIRST ROUND OF QUESTIONS

The first speaker from the audience had three questions: First, are the Bank and the IMF going to be able to be held accountable when a country runs into unsustainability under this new framework, given that there are many judgment calls and the process is internal and not transparent? Second, regarding the CPIA, the numerical indicators are being made public but will the comments by the staff that made the judgments be made public? And third, regarding debt distress, there could be gross disagreements about why a country has actually run into debt distress.

The second speaker, who identified herself as a moderator of an earlier panel on debt sustainability, asked, when did the Bank decide that HIPC was a failure? She said she had just heard from finance ministers and others that, while it was not perfect, while it needs fixing, it works enough for most people to want to fix it.

The third speaker in this round of questions asked to be enlightened by the Fund about the sovereign debt restructuring mechanism (SDRM), saying that in the United States alone we see companies and individuals declaring Chapter Eleven bankruptcies and having the slate wiped clean and starting all over again. Why can’t countries do the same?

RESPONSES

Mr. Milverton said he thought the leading question in this round was: Has HIPC been a failure? And he asked for responses from Mr’s Zulu and Wilks.  Mr.Zulu said the fact is that countries are not exiting from their unsustainability, and that while there are some increases in terms of budgeting for the social sectors, there is still a huge mountain of debt. Mr. Wilks said that it might be a semantic issue as to whether it is a total and absolute failure, or whether it just hasn’t succeeded on its own terms of providing a robust exit from debt. The fact is that officials as well as CSO advocates are saying that further action is needed.

Mr. Plant came down on the side of moderate HIPC success: While there is a lot of dispute about whether the original formula for HIPC constituted sustainability, he said, it is indisputable that what HIPC has done is to get more resources to the HIPC countries, and that these resources have been spent on health, education and other development necessities. Still HIPC has not done enough. More resources for these countries are needed and the questions are: what is the best way to get the resources and to channel them where they are needed most? Should it be done through a broad-based forgiveness of debt? There are fairness questions here: Is it fair for example for HIPC countries to get debt cancellation when non-HIPC countries like Kenya, do not? So in summary some of these questions are: What are the fairness implications? What are the resource implications? How do you distribute the burden of getting the money out? How do you distribute the benefits? HIPC has been a success as far as it has gone, but it hasn’t gone far enough.

Mr. Nehru agreed with Mr. Plant: HIPC had two clear objectives he said. 1) to reduce debt and contribute to debt sustainability and 2) to use the savings from lower debt service payments for poverty reduction purposes. There is good evidence that it is succeeding and if it’s not enough, it is a question of resources. There is no one-to-one relationship between debt service reduction and pro-poor expenditures in government programs, but there certainly is a relationship. The Operations Evaluations Department (OED) has warned the Bank about lowering the quality standards laid down in the HIPC framework just to get countries through the process. There are 11 countries that haven’t yet reached the decision point and there is the temptation to try to rush  them through, but the minimum standards are six months of a Poverty Reduction and Growth Facility program (PRGF) and an interim Poverty Reduction Strategy Paper (I-PRSP).  The countries that can not meet these standards are either in conflict, or just emerging from conflict, or have such weak governments that the standards are difficult to meet.

Mr. Milverton asked the panel if the measures that the Bank and Fund are using for debt distress are not right, what sort of measure should be used? Mr. Nehru responded that the Bank and the Fund invited organizations to do whatever calculation they wanted and to share them. He said that the Bank and Fund staff were open to changing their minds. But he said, from the Bank’s experience different measures come up with similar results.

On debt distress mechanisms, Mr. Plant said that the SDRM is a mechanism designed for restructuring debt to private creditors and that this discussion was about official debt.

SECOND ROUND QUESTIONS

In the second round, the first question related to the current “IMF gold proposal” on the table. The speaker said that there seemed to be wide agreement that gold could be used. He said if there is political will there seems usually to be a technical way.

The second speaker looked at the compatibility of the debt sustainability framework with the PRSP approach and asked, who are the clients of the Bank and the Fund in this case? Is it the creditors or is it the borrowing governments, and where does the power really lie?
 
The third questioner asked again about the judgmental aspects of the CPIA and the new debt sustainability framework.

RESPONSES

On IMF gold sales, Mr. Plant said the  choice is not up to Fund staff but up to the shareholders. They could decide to convert the gold assets for use and then it would be up to the staff to figure out ways of going about it.

Onthe Debt Sustainability Framework and the PRSP, Mr. Nehru responded  that the client was the borrowing country, but that all parties needed the same information so that everyone could make their own assessment of debt sustainability.

Mr. Wilks said in response to Mr. Plant and Mr. Nehru that he thought the question really is about who makes the decisions, which is something that still needs to be tackled. Also, referring back to a first round response, he said that CSOs do not have the capacity to do counter-analyses to the Bank and the Fund.
 
Mr. Nehru, answering the third question, spoke to the tension at the root of the decision-making process: On the one hand, it is important to make sure that country circumstances are taken into account and that the decision making process is not mechanistic. On the other hand, taking country circumstances into account requires making judgments, and reasonable people can disagree on judgments. So there is going to be criticism of the process either way.

FINAL ROUND OF QUESTIONS

The first speaker in the third round said he appreciated what was just said about reasonable people disagreeing, but that the Bank and CSOs had not really reached that point because the raw data that is used by the institutions to compute things like the CPIA are not disclosed and so they can not be studied or replicated in studies from outside.

The second speaker asked if there is any real discussion about taking the conversation to the regional level, with “regional IMFs”, given that circumstances are different in different regions as well as country by country.

The third speaker referred back to Mr. Wilks’s point and asked, who decides?

The fourth speaker asked, where do we factor in accountability on the lenders side when a loan goes wrong?

RESPONSES

On the CPIA question, and how it is arrived at and whether it is a fair system, Mr. Nehru responded  that the system is becoming more and more open to scrutiny, but that it is a painstaking and complex process that includes discussions with country authorities and very careful assessments based on written instructions on how this is to be assessed to make sure it is comparable across countries. There are also certain benchmark countries that are used, and there is an external panel. He also said that the Bank and the Fund are interested in getting to the point where they can get the kind of feedback the system needs.

As far as who decides, he noted that the Bank and Fund, as lending institutions, are required  to make assessments of the assistance they plan to give. It is a responsibility which the institution has to its Board and the shareholders (which are the Bank and Fund member countries).

The question regarding decisions that have gone wrong and who is culpable is a tough one, Mr. Nehru said. One of the reasons for the HIPC framework and debt relief is because of the recognition that past lending has not led to the results that the countries and the IFIs had hoped for, especially in terms of growth performance. Whether the cause is the lending, slow growth, country policies, or the framework of the implementation  are all questions that are open for discussion, interpretation and analysis. Determining what went wrong or right is one of the reasons for the Operations Evaluation Division (OED) of the Bank and the Independent Evaluation Office (IEO) of the IMF.

On the question of the regional approach and regional institutions Mr. Plant said that similar types of institutions are springing up, and he gave NEPAD as an example. He said it is within the regions’ prerogative to do this. But he also mentioned the potential problems of duplication of efforts and multiplying bureaucracies.

Coming back to the CPIA question and who decides, Mr. Plant said the Fund’s mandate is to assess the economic policies of countries every year, and the Fund encourages the countries to publish or to allow the Fund to publish those reports. They assess both low-income and middle-income countries and look at how debt in the world is evolving. The Bank and the IMF have developed a common framework so that at least for those institutions there is a standard that people can examine and criticize.

Mr. Wilks said in response that what the CSOs are trying to do is to open up the discussion. The CSOs note some progress, but think that there needs to be more country specific debate.

Mr. Zulu said that CSOs are concerned that the Bank is overlooking growth trends. Using the example of Zambia, he said between 1992 and 2000 the economic growth was about one percent, prior to that growth was negative. Only in the last four years has it hovered around 4 percent.  The decision point documents project 5-6 percent, which is quite misleading.  If those projections do not materialize everything is thrown off course and the debtor country is to blame. If there is a policy mistake both parties must share the blame.

Before Mr. Milverton closed the discussion, a Bank staff member in the audience offered further explanation of the CPIA. He said that one can look at the CPIA questionnaire and see what judgment means. It is a judgment, he said, but it is not opaque, and the two institutions are in the process of making more information available. Furthermore, the Bank and the Fund compare the judgments to external indicators, and if they are either on the low side or the high side they check to make sure there is objectivity in the analysis.

Mr. Milverton closed the discussion by saying first that clearly the institutional shifts are still happening on the debt issue.  He noted that  the discussion had covered a lot of territory and been very complex. After thanking the panelists and the audience, he said that there would certainly be more opportunities for further comments and questions in the near future.

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