IDB now in on MDRI but once again the devil is in the detail

IDB now in on MDRI but once again the devil is in the detail

 

On 16 March 2007, the Inter-American Development Bank confirmed that it would write-off US$4.4bn in debt owed by the five Latin American HIPCs (Bolivia, Guyana, Haiti, Honduras and Nicaragua). This followed announcements in November 2006 then again in January 2007 that a political decision on the cancellation had been reached by the institution; only the implementation details needed to be worked out. The deal also follows significant political pressure by some Latin American nations and civil society organisations in Latin America, Europe, the United States and Canada. The IDB reports that US$3.4bn in principal payments and US$1bn in interest payments has now been cancelled.

 

IDB debt cancelled per country (US$mn)

According to the IDB’s President Luis Alberto Moreno, this “historic” decision “will help these countries free up resources to invest in quality education, health and other social services their citizens need to overcome poverty”. These are impressive words but once again, the devil is in the detail.

 

 

The devil is in the detail

 

“While [the decision] would bring tremendous benefits, on the other hand we are going to see a reduction in our access to the soft resources of the institution which brings additional challenges”.  Guyana’s President Bharrat Jagdo commenting in the national press.

 

On the one hand, the IDB has agreed to a cut-off date of end-2004. This mirrors the decisions taken by the IMF and AfDB . Previous staff papers had proposed cut-off dates of only end-2003 or worse end-2001. This would have seen only US$2.1bn or US$1.6bn in principal cancelled respectively . It also opts for up-front cancellation rather than gradual cancellation as debt service payments fall due. However it is important to stress exactly how this end-2004 write-off will be paid-for.

The cancellation has been financed through the IDB’s Fund for Special Operations (FSO), the concessional loan window of the institution (equivalent to the World Bank’s IDA), i.e. entirely through internal resources. This loan window provides grants and subsidised loans to the five Latin American HIPCs and five other countries (Dominican Republic, Ecuador, El Salvador, Guatemala and Paraguay). Interest rates on FSO loans for the five HIPCs currently stand at just 0.25%.

The FSO is financed through the two means: repayments from borrower countries and periodic replenishments. This means that if FSO resources are used to cancel debt, adequate future replenishment of the fund becomes critical if countries wish to retain access to the same level of concessional resources in the future. The United States (the IDB’s major shareholder) had repeatedly stated that it wanted to separate negotiations on debt cancellation from negotiations on replenishment of the FSO, however this made many other shareholders uneasy. The deal eventually agreed represents a major step backwards for additionality for the MDGs. Meanwhile, according to the IDB, shareholders have promised “to “assess, no later than 2013, the need for an eventual replenishment”.

 

Additional or not additional? That is the question

So just how additional is the deal? Debt service payments to the IDB will be reduced by an average of around 30%. But the costs of debt cancellation will be offset by cuts in new concessional lending and by the cancellation of undisbursed amounts on non-performing loans.

The cuts in concessional lending involve a 25% reduction in IDB loan allocations for Bolivia, Guyana, Honduras and Nicaragua. Calculations by Debt Relief International indicate that this will reduce the IDB’s allocation of resources to these countries from US$400mn in 2007 to US$287.7mn.

To illustrate how this will work in practice let’s take the example of Nicaragua. In 2007, Nicaragua will have its debt service slashed by US$18mn thanks to this deal. Normally, the country would have been entitled to US$94.5mn in new resources however this amount has now been subject to a 25% cut so that it will now receive only US$70.9mn in 2007. This represents a “net loss” of US$5.6mn. In the case of Guyana, the net loss will be US$4.7mn.

Secondly, by cancelling undisbursed amounts on existing non-performing projects, the IDB will generate a further US$210mn to fund the plan. This will affect Guyana in particular, according to Debt Relief International. But more important than this, it is the borrower country alone which is held responsible and penalised for the failures in these particular loans when cumbersome and slow procedures within the IDB also contribute to the problem of aid effectiveness.

Finally, following the cancellation, the five Latin American HIPCs will no longer have access to just FSO resources but will receive a blend of FSO and OC funds (OC loans are on commercial terms). The IDB calls this the “parallel loan” system.

 

 

Country finance mix post-cancellation

What’s in it for Haiti?

Haiti has been treated differently. It will not receive immediate and unconditional cancellation, much to the protest of civil society organisations around the globe who argue rightly that given Haiti’s critical social and economic situation it cannot afford to make any repayments to any creditor at this time. So why is Haiti delayed? Simply because Haiti has not yet completed the HIPC Initiative and is not scheduled to do so until 2010 at the earliest. This is therefore the earliest date that Haiti’s debt cancellation can become fully effective. Haiti owes a total of US$1.2bn to external creditors of which US$534mn is owed to the IDB . Haiti paid-out US$133mn in debt service payments to external creditors in 2004, money that it can ill afford to lose.

Under the IDB debt deal, Haiti will receive grants only until it reaches completion point under the Heavily Indebted Poor Countries Initiative at which point it will then receive a blend of 50% grants and 50% loans. As the figure indicates, Haiti will receive US$50mn in grants from the FSO in 2007. However, prior to the cancellation, Haiti received US$83.1mn in interest free loans from the FSO. Although it will not have to pay-back the new funds – which is positive – it will result in less money in Haiti’s pocket in 2007 to the tune of US$33.1mn. Haiti is clearly likely to feel this pinch. Jubilee USA, Jubilee South (Americas) and other civil society organisations are campaigning hard for Haiti’s debt to be immediately cancelled in view of Haiti’s critical poverty needs and the odiousness of many of the debts to which creditors lay claim.

So why has this approach been adopted? Predictably IDB staff papers had stressed the need to compensate the institution dollar-for-dollar for lost reflows. Concerns over the additionality of the deal even led a number of European countries, and in particular the UK, to abstain from several votes on the plan. But discussions on donors stumping up the cost never went very far. A key problem centred around the fact that the governance structure of the Inter-American Development Bank is very different from that of the World Bank. Whereas wealthy G7 and European countries are major shareholders within the World Bank, the IDB’s major shareholders also include middle-income countries such as Argentina and Brazil (each with 10.7% of total votes). These countries argued that they would bear a substantial part of the cost of this cancellation when they also had serious external debt burdens and large populations living in poverty.

Eurodad had in fact argued that, where donors wanted to contribute to the cancellation, they could do so, but the IDB was in excellent health financially and could mobilise the funds necessary to pay for this deal. We revealed how the capital of the Bank stands at around US$101 billion. Moreover, during the last five years the IDB's annual net income had consistently revolved around the US$1 billion mark, and the reserves linked to the Ordinary Capital (the IDB’s non-concessional loan window for “wealthier” borrowers) had increased from US$8 billion in 2000, to more than US$14 billion in 2004. Eurodad proposed that the institution’s net income could be drawn-on to fund the cancellation . This way, debt relief could be delivered with additionality.

Additionality was ultimately abandoned due to the inability of shareholders to reach a consensus on more additional and concesisonal financing. But changes in the terms of new disbursements will in fact increase debt service burdens for “beneficiary” countries over the medium term and jeopardise MDG related expenditures and the debt sustainability prospects of these countries. It also sends out a signal to the broader creditor community that it is OK to lend to these countries at less-concessional levels which raises concerns of potential free-rider behaviour. It will be the citizens of these Latin American countries that will pay the price for this.

 

 

Related documents:

 

 

Justice for Latin America on IDB debts (January 2006)

 

IDB Debt Cancellation: Where Are We Now?

 

G8 Debt Deal Expands to Include Inter-American Development Bank