A Letter to "Drop the Debt" by Thomas C. Dawson, Director, External Relations Department, IMF

May 3, 2001

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A Letter to "Drop the Debt"
By Thomas C. Dawson
Director, External Relations Department
International Monetary Fund

May 3, 2001

Dear Mr. Lovett:

I would like to take this opportunity to thank you for your support of the HIPC Initiative, which continues to be an important part of the international community's reaction to that challenge. The Managing Director has asked me to respond to your proposals of February 14. The lapse of time has allowed my colleagues and I to think about your proposals, drawing as well on your "Reality Check" report. I understand that you have had discussions with colleagues during the Spring Meetings here in Washington as well.

Reducing world poverty is today's central development challenge, and I would like to wish you all the best as you work to mobilize the world community behind this objective. As you know, the Managing Director has made poverty reduction in poor countries one of the IMF's top priorities, and he has put Africa in particular at the center of the Fund's activities. We share your goals, as well as the view that tackling poverty requires a comprehensive approach, of which debt reduction is an important element. However, we believe that there are several difficulties with your proposals, and that there are more productive ways of using funds for poverty reduction in poor countries. Let me be specific:

You proposed that the IMF cancel 100 percent of outstanding credits to the poorest countries.

The IMF is a cooperative institution, which requires special attention to the equitable treatment of all member countries. In designing the HIPC Initiative, we have established clear criteria which are applied equally to all member countries in determining the eligibility for debt relief. Specifically, qualifying poor countries with indebtedness above a certain level were offered the chance to bring their debt down to that level. The Drop the Debt proposals strikes us as somewhat arbitrary, providing disproportionate benefits to those countries who were highly indebted to begin with, and the greatest benefit of all to those who have borrowed heavily from the Bretton Woods institutions.

Were this not the case, there is still the question of financing. As you are aware, it has not been easy to raise the financing needed for the HIPC Initiative as currently designed. For the Fund, total debt cancellation in the absence of full funding by bilateral donors would do serious damage, fundamentally changing its role as an anchor for the international financial system based on the revolving character of its resources. Debt cancellation would not only eliminate PRGF lending, but also impair the Fund's financial integrity.

Indeed, the report by the accountancy firm Chantrey Vellacott that you commissioned found that the only way the IMF could cover the costs of additional debt relief was through more gold sales. But the IMF's gold reserves are a fundamental strength in its financial position, giving it increased credibility and the capacity to assist its broader membership in crisis situations. The 1999 decision by the membership to use income from investing the profits from off-market gold sales to help finance the IMF's contribution to the HIPC Initiative had a substantial cost to the institution and its members. It was an exceptional one-time measure. Additional sales would put at risk the confidence of members in the Fund's solidity, and thus its ability to lend.

You proposed that debt payments from conflict countries be set aside to be returned at the earliest practical opportunity.

You will have heard that, at the Spring Meetings, we have launched a trust fund to reduce the debt servicing costs of HIPCs emerging from conflict. We feel this is a more effective way of assisting post-conflict countries. Since many conflict-ridden countries are not current on their debt service payments, your proposal would provided limited post-conflict assistance.

You proposed that the list of countries eligible for debt relief be expanded.

The HIPC Initiative was targeted at the poorest, most heavily indebted countries because they were in greatest need of relief. At the same time, they could be provided with enough debt relief to become sustainable within the available resource envelope. Reducing debt to a lower level, which would bring a larger number of countries into eligibility, is a legitimate way of working to reduce poverty. We have our doubts about whether it is the most cost-effective way to do so. However, this is fundamentally a question of money. It would not be enough for the G-7 to call on the IMF and World Bank to cancel 100 percent of poor country debt, as Drop the Debt proposes. These countries, and other IMF members, would have to make a special budget allocation to pay for the cost of this additional debt relief. At present, there is little support in donor countries to do so. And as I noted earlier, providing additional debt relief without such funding would do lasting damage not only to the IMF, but also to other international lending agencies.

As you know, international development assistance has declined sharply over the past decade, even as many countries enjoyed unprecedented prosperity. What is needed now is a focused campaign to increase aid allocations to fight the AIDS crisis and other pressing needs of poor countries. The Managing Director, as well as Bank President Wolfensohn, are supporting just such a campaign. I hope that you will join us.

Second letter on this topic


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