September 19, 1999
Debt Relief Promised, but Who Pays the Bill?
By RICHARD W. STEVENSON
ASHINGTON -- Nearly everyone agrees that it would be a good
thing if the world's rich nations could do more to ease the huge
burden of debt that is weighing down the poorest countries. Far
better, after all, to allow governments of impoverished nations to
put what money they have into improving health care and education
than to force them to sink as much as a third of their paltry
budgets into futile efforts to keep up with loans from governments
and international agencies -- loans that their creditors have all
but written off anyway.
Under pressure from poverty-fighting groups, the big industrial
nations pledged earlier this year to expand and accelerate their
existing debt relief program, which has been widely criticized as
slow-moving and stingy.
The problem is that there is no consensus among the lenders --
primarily the governments of the rich countries, plus the World
Bank and the International Monetary Fund -- on how to pay for the
The difficulties of moving ahead will be on full display over
the next several weeks at the annual meetings in Washington of the
IMF and the World Bank. The IMF in particular is struggling to
patch together a plan to pay for its share of the debt relief
proposal and faces opposition not only within its own ranks but
also from Republicans in Congress, whose approval is required for
key elements of the plan.
The goal is to ease the debts of as many as 41 of the world's
poorest nations, most of them in Africa. The money freed by the
reduction in loan payments would ideally be channeled into social
programs like health clinics and schools.
Over the last three years, since the debt-relief initiative
began, seven countries have qualified for help by showing a
willingness to pursue prudent economic policies: Bolivia, Burkina
Faso, the Ivory Coast, Guyana, Mali, Mozambique and Uganda. The
total value of the debt service relief granted to those countries
was $3.4 billion, measured in net present value, or the discounted
value today of savings in the future.
Three more countries, Ethiopia, Guinea-Bissau and Mauritania,
are in the pipeline and should qualify for an additional $1.2
billion in debt relief.
Along with the seven big industrial democracies, the IMF and the
World Bank want to run up the total debt relief to $12.5 billion in
the next few years. Of that, the fund's share would be about $1.2
billion, seemingly a modest amount by the standards of global
finance, but enough to raise some knotty economic and political
The fund started by floating the idea of selling some of its
vast gold reserves to finance the debt reduction. But
gold-producing nations, including some of those whose debts would
be reduced, objected that selling even a small portion of the
reserves could further depress gold prices, which have been sliding
for years. So the open-market sale idea was scrapped.
Instead, the fund is turning to an accounting solution that
takes advantage of the fact that the gold reserves are carried on
its books at a value far below even today's weak market prices. Its
bylaws bar it from simply revaluing its reserves, so it is working
on a paper transaction that would cycle ownership of as many as 10
million ounces of its 103 million ounces of gold through several
central banks in a way that would allow it to revalue the gold.
The arrangement would create a paper "profit" of about $2.1
billion that the fund would be free to invest; the returns on the
investment would be used to pay for debt relief.
The idea has the support of the Clinton administration, but its
fate is uncertain in Congress. Republicans have concerns about both
the debt relief plan and the gold transaction, but their larger
complaint is with the IMF, which they see as ineffective,
inefficient and too laxly supervised, especially in light of recent
reports of continued widespread corruption in Russia, the
highest-profile client of the monetary fund.
Rep. Jim Saxton, R-N.J. a self-appointed watchdog of the fund,
said he sees the gold transaction as tantamount to using American
taxpayer money for the debt relief plan, since the United States is
the monetary fund's largest shareholder and therefore has a claim
on any profit from the gold.
"Given the multiple international investigations of the misuse
of IMF money now under way, it is simply impossible to justify
providing more taxpayer money," Saxton said.
He said the debt relief plan provides an opportunity to review
the way the fund works and to stop its drift away from tackling
macroeconomic problems like trade and exchange rates and toward
lending for social programs, a job already done by the World Bank.
Some of Saxton's proposed solutions, including an increase in
the interest rates the fund charges on loans to economically
troubled countries, infuriate the fund's supporters. And his zeal
in attacking the fund may exaggerate the degree of opposition the
institution faces in Congress.
But his criticisms suggest that those who are hoping for a quick
agreement on providing more debt relief to the world's truly poor
are likely to be frustrated.