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Bank Fund Istanbul annual meetings discuss governance, conditionality, tax and debt
07 October 2009
Although 2009 will be probably remembered as the year of International Financial Institutions' resurgence, the Spring and Annual meetings have been uneventful. The G20 leaders’ meetings in London and in Pittsburgh before the Bank/Fund gatherings set the boundaries of political agreements with the latter reduced to a follow-up role. Under discussion in Istanbul were reform of the governance of the IFIs, topping up their funding, as well as their roles in analysing debt sustainability, global imbalances and tax evasion.
Governance reforms
The communiques agreed by ministers in Istanbul are mainly a confirmation of the agreements made by the G20 leaders in Pittsburgh. The International Monetary and Financial Committee (IMFC), which gives political guidance to the IMF, promised "a shift in quota share to dynamic emerging market and developing countries of at least 5 per cent from over-represented countries to underrepresented countries using the current quota formula as the basis to work from". It makes some progress on the selection of the IMF leaders by committing to establish "an open, merit-based and transparent process for the selection of IMF management at our next meeting."
Similar marginal reforms have been confirmed for the World Bank. The Development Committee (DC) commits to reach an agreement to increase "at least 3 per cent of voting power for developed and transition countries" by Spring 2010. The G24 (group of 24 development and transition economies) demand of a 6% increase of developing countries' voting rights was dismissed, let alone the CSO demand for parity of voting rights between developing and rich countries. Bernice Romero, Oxfam’s advocacy director said “celebrating a 3% increase in voting power for poor countries is smoke and mirrors when the World Bank counts Singapore, Saudi Arabia and Israel as developing countries.”
Even the limited reforms agreed so far will prove awkward for European countries, which are over-represented on the Bank and Fund boards in terms of both numbers of representatives and votes. Yet European Commissioner Joaquin Almunia told the IMFC that “Europe will stand ready to play its part” in a “comprehensive governance reform package, which will include the size of the quota increase, the size of the IMF’s Executive Board, the involvement of Ministers and Governors in setting the IMF’s strategic agenda and voting majorities of IMF decisions”. Bert Koenders, Dutch development minister said “A shareholding formula should also take into account contributions by donor countries, including contributions to trust funds”.
Resources for low-income countries
There were few specific commitments to put forward additional resources for low-income countries – as Eurodad and others had been calling for before. The capital increase of the World Bank was deferred until Spring, partly because it cannot be divorced from the discussion of voting reform. But official sources confirmed that the UK and France were not yet keen to take a decision. Facing an increasingly stretched lending capacity, the WB President, Robert Zoellick, was reported to threaten ministers that he would soon come hat in hand if governments did not agree to increase the Bank's resources.
CSOs had also called for additional IMF resources to provide liquidity for low-income countries. The demand to transfer some of the IMF Special Drawing Rights (SDRs) to low-income countries was picked up, but in a perverse way. The advantages of SDRs are precisely that they come with no conditions attached (as they are transferred directly to central bank accounts and they are not lent through regular IMF programmes). However, France, the UK and Japan (so far) announced in Istanbul that they would transfer a share of their own SDRs allocation to the IMF, so the IMF could lend these resources to low-income countries. This will be done through regular IMF programmes which do have conditionality attached. European central bank staff informally told civil society groups in Istanbul that this approach was adopted precisely to ensure that the IMF continues putting strings on the money lent to poorer countries.
Some European governments also told NGOs in bilateral meetings that they did not think that Special Drawing Rights should be used for the purpose of providing liquidity to poor countries, and that any swapping arrangement would be too complicated to implement. Yet technical complications seem to have been quickly overcome when it comes to swapping SDRs among European Union countries. Some officials indicated that the Europeans could be getting very close to strike a deal to swap SDRs within the European Union.
IMF conditionality
Conditionality was not on the list of official discussion topics. The IMFC only congratulated the Fund for recent reforms on creating new facilities, expanding access limits and attracting new resources. IMF conditionality was, however, debated thoroughly at several CSO organised events, both at the Alternative Forum at the Bilgi University and at the official venue of the Bank and Fund meetings. Eurodad spoke at events organised at both venues and presented a new report conducted jointly with Solidar and the Global Network on the impact of IMF conditionality on decent work, "Doing a decent job? IMF policies and decent work in times of crisis".
In dialogues with the IMF, CSOs recognised changes at the Fund, including in their programmes and conditionality frameworks for low-income countries. However, they also raised concerns that change is still minimal and does not represent a breakthrough on conditionality. New research by Eurodad, Third World Network and Center for Economic and Policy Research shows that the macroeconomic frameworks prescribed by the IMF are overly stringent in the crisis context and that flexibility is only granted in a limited and temporary basis.
Capital flight, financial transactions tax and global imbalances
A further set of issues debated in Istanbul concerns potential World Bank and IMF roles in tackling tax evasion, capital flight and global imbalances. More governments are now interested to discuss these matters and progress may perhaps now be made.
There is an increasing interest among some European countries on the issue of tax evasion and avoidance, including Norway, Germany and Spain - who organised a joint event on tax evasion in development finance. A senior German official, for example, commented that “countries which have been able to mobilise domestic resources more efficiently have fared better than those which rely on volatile external finance”. The Spanish representative indicated that his government wanted to follow-up on the tax evasion issue during its 2010 presidency of the European Union, saying there is a need to crack down on tax impunity so we can mobilise resources for health and education.
A window of opportunity also seems to be opening for considerations on the possibility of establishing a financial transactions tax, although finance ministries and the IMF seem to be more concerned about setting up a guarantee fund for financial institutions that raising money for developing countries. In the fringes of the meetings, at at press conference organised by Oxfam, Joseph Stiglitz urged to set a financial tax for economy "polluters" and said that "money raised by the tax could be used to help poor countries who weren’t responsible for the financial crisis and are nevertheless suffering its consequences."
The IMFC also called “on the Fund to study the policy options to promote long-term global stability and the proper functioning of the international monetary system." And to examine “the full range of macroeconomic and financial sector policies that bear on global stability". This has appeared in the communiqués before, however, so it is not certain that progress will be made on these tough questions.
Debt unsustainability: little progress
In meetings with Eurodad and other CSOs senior EU officials agreed with Eurodad’s recent analysis that some countries are on the verge of having major debt repayment difficulties as a result of the crisis. If job losses and remittance flow declines persist this is likely to be a major problem in 2010. They agreed that for low-income countries short-term financing from the IMF is not the right solution.
At the Development Committee ministers “supported the joint efforts by the Fund and the Bank to increase the flexibility of the Debt Sustainability Framework”. They also committed (without details) “to ensure that IDA has the concessional resources it needs” and “to explore the benefits of a new crisis response mechanism in IDA”. However a less ambitious path to providing finance to low-income countries was also set out with the possibility of providing expensive loans to low-income countries via so-called “IBRD enclave lending”.
Ministers from Highly Indebted Poor Countries regretted that the changes to the Bank/Fund debt sustainability framework have been done without any formal consultation of low-income countries”. They complained that “funding provided by the MDBs to combat the global crisis has been frontloading existing financing, not additional financing” and therefore called for a “sharp increase in grants and concessional loans, especially for infrastructure and agriculture”.
Finally some ministers and IFI officials expressed openness to work on a proposal for a debt arbitration procedure, another long-standing demand of Eurodad and members – see for example our Responsible Finance Charter.
Conclusion
Many ministers said in their Istanbul speeches that they are determined to guard against complacency. They made little progress in Istanbul, however, and will need to intensify the pace and intensity of negotiations if they are to meet their deadlines for the 2010 Spring Meetings where they are expected to deliver agreements on governance and funding mechanisms.
Further information
Debt in the downturn, Eurodad, September 2009
Heads up on the World Bank IMF annual meetings, Eurodad, September 2009
From London to Pittsburgh: assessing G20 actions for developing countries, Eurodad, 2009
Analysis of IMFC and DC communiqués, plus reports from CSO and official meetings, Bretton Woods Project, 2009
See also on ft.com: The World Bank must fix its business model, by Alnoor Ebrahim