A Second Letter to "Drop the Debt"

Replying to a letter from Mr. Adrian Lovett posted on the "Drop the Debt" website
By Mr. Thomas C. Dawson
Director, External Relations Department
International Monetary Fund

Dear Mr. Lovett:

Thank you for the opportunity to further clarify the IMF's position on debt cancellation. I am pleased to respond to the points you raised in your letter of May 21.

We believe that credit is an indispensable means of financing development. Historically, international lending has helped many developing countries to raise the living standards of their people substantially. The total debt cancellation espoused by Drop the Debt seems to assume that any debt is too much for poor countries, and it would appear to preclude the use of loans for development. The HIPC Initiative has made very real progress in meeting your stated aim of "removing the burden of unpayable debt", while maintaining a role for properly-managed borrowing in the future.

I am surprised that you see a "dramatic departure" in the approach we are taking to debt sustainability. As you know, the HIPC Initiative is designed to remove debt as an obstacle to poverty reduction. The level of debt is important, which is why the centerpiece of the Initiative is reducing debt sharply. But the consensus in the international community has always been that debt reduction alone is not enough to ensure an escape from poverty. As you rightly point out, our recent debt sustainability paper says this.

Sustainability can only be achieved with consistent hard work to ensure favorable economic conditions, work to which we and the countries receiving debt relief are committed. Most important are sound growth-enhancing policies, without which any amount of debt reduction will do little to reduce poverty. Even with total cancellation of debt, there will remain a risk that countries again get into financial trouble. As the debt sustainability paper clearly indicates, most of the risk of future debt problems stems from a rapid accumulation of new borrowing in countries growing more slowly than they could-and must, if they are to make headway in reducing poverty.

You appear to agree that debt reduction alone is not enough, by recognizing that a range of factors contribute to poverty. We believe your efforts on behalf of the world's poor would be more effective if they focused on poverty reduction-which surely is the true goal, and one which we share-rather than being concerned simply with debt. Debt reduction is only one means to that end, never the most powerful and sometimes unnecessary. As far as the contribution of the international community is concerned, debt reduction is no more important than increasing aid, lowering trade barriers, or working to maintain a healthy international economy.

Our approach to equity among countries reflects the overall aim of the HIPC Initiative: to ensure that all committed poor countries end up with debt no higher than they can sustain. As things stand, the debt indicators of countries that benefit from the Initiative will be better than those of poor countries that do not. To us, it seems unfair to go further, to completely cancel the debts of some countries, while those which have borrowed less in the past (but are equally poor) receive no relief. We would not presume to tell members of the Paris Club that have opted to provide 100 percent debt cancellation how to spend their taxpayers' money, but neither can we take them as a model, as you seem to suggest.

We also differ on the ability of the IMF to fund debt relief from its own resources. The IMF's financial integrity and its ability to serve its membership, including its low-income members, would be compromised by the proposals you mention. Oxfam proposes funding further debt relief from the Reserve Account of the PRGF Trust. At the very least, this would undo our efforts over many years to make our lending facility for the poorest countries self-sustaining. And it would do no more than take money away from the broader group of poor countries eligible for low-interest loans from the IMF to benefit the HIPCs.

Nor can the IMF's gold be used to fund further debt relief. IMF gold holdings serve as the anchor of the international monetary system, and further operations in gold would have a negative impact on members' confidence in the Fund. The evidence that you asked for is not hard to find. Many of our members have granted 100 percent debt relief to HIPCs on their bilateral loans. Even among these countries, there is clearly no support for funding debt relief from further gold operations, which your accountants do say would be needed to cancel HIPC debt to the IMF.

I hope that these responses succeed in clarifying the IMF's position. We recognize that Drop the Debt's remit is a very specific one, but I hope that your mandate will not prevent you from taking a broader view of the ultimate goals that we share.

Sincerely yours,

Director, External Relations Department
International Monetary Fund