UNSUSTAINABLE and ILLEGITIMATE DEBT
Another meeting of the International Monetary Fund and the World Bank has come and gone, and with predictable responses to the multiple crises of economic recession, public health and climate change – limited in scope and scale, short-term and even more debt-creating. Conditions have grown more severe as the Ukraine-Russia conflict rages, on top of unpredictable COVID-19 surges and intensifying climate change. More than half of the world’s countries are struggling in the deepening abyss of debt. But all these find no resonance in the outcomes of the IMF and World Bank Spring Meetings whose “Way Forward” leads us farther down a path of greater debt accumulation, heavier debt service burdens for the global South, and a certain future of stark impoverishment and inequality.
The IMF unveiled its Managing Director’s “Global Policy Agenda 2022” while the World Bank presented a roadmap for the next 15 months. As expected, there are no bold and ambitious debt solutions from these leading international financial institutions that claim commitments to alleviate poverty and support developing countries on the way to recovery. The World Bank announced $170 billion in crisis response financing to be rolled out in 15 months, targeting to commit $50 million within the next three months. Much of this is expected to be loans though, just like the $200-billion COVID-19 crisis response from 2020-2022, of which only $23 billion of the $73 billion that went to IDA were in the form of grants. Many South countries that are already deep in record-breaking levels of public debt will continue to be locked in debt service at a time when public funds are urgently needed for peoples’ needs.
The IMF - World Bank persists in their support of false solutions, notably the Debt Service Suspension Initiative (DSSI) through the Common Framework, which have proven too inadequate, temporary, and short-sighted to address the systemic nature of the debt crisis. Total deferrals granted to 43 participating countries reached only $12.7 billion, a paltry sum compared to at least $3 trillion estimated by the UN to help developing countries. With no extension for the DSSI beyond 2021, low-income countries now bear the full brunt of debt servicing in 2022, while middle-income countries that were ignored despite facing equally difficult circumstances, face even heavier burdens due to massive borrowings incurred in the last two years.
Meanwhile, the IMF-WB have conveniently excused themselves from joining these schemes, choosing instead to peddle more loans to crisis-ridden countries with limited options and ensure continued debt payments. The IMF has even profited amid the pandemic by continuing to levy surcharges on heavy borrowers, who are also those countries in desperate straits. This has become the Fund’s biggest revenue source, amounting to an estimated $4 billion by end-2022.
Also evading responsibility for the massive accumulation of debt are private creditors – commercial banks and holders of government-issued bonds – to whom over 80% of public external debt is owed by governments. Sri Lanka is a case in point, with an $11.8 billion debt bill accumulated from sovereign bonds, or 36.4% of its external debt. Asset managers BlackRock Inc. (US) and Ashmore Group Plc. (UK) count among Sri Lanka’s biggest sources of foreign funding.
Much praise is accorded the IMF for setting up the Resilience and Sustainability Trust (RST), a new loan-based facility aimed at addressing longer-term structural challenges and macroeconomic risks, such as climate change and pandemics, by channeling the Special Drawing Rights (SDRs) contributed by rich countries to those where needs are greatest. But this lofty aim is undermined by unfair distribution, determined by the proportion of countries’ quota shares in the Fund. Thus, from the $650 billion SDR allocation that the IMF made available in 2021, only US$275 billion was received by developing countries, and of which $21 billion went to low-income countries. The IMF targeted to raise SDR12.6 billion from SDR “rechanneling” for Poverty Reduction and Growth Trust in 2021, but it has only received SDR7.3 billion pledges to date. This was also the case with the Fund’s Catastrophe Containment and Relief Trust that targeted SDR1 billion from donations of wealthier countries but only mobilized SDR0.6 billion to date.
Further, the Fund will require concurrent enrollment in a financing or non-financing IMF-supported program, which leaves out climate-threatened countries in Asia such as Bangladesh, India, Cambodia, Vietnam and the Philippines. For RST-eligible countries, they remain subject to fiscal consolidation or austerity measures that are typically embedded as loan conditionalities in IMF lending programs. In the first year of the pandemic, the IMF promoted austerity in 85% of its financing response; eventually, fiscal consolidation became requisite in 87% of IMF programs negotiated with developing countries from March 2021-2022. These entail cutting public expenditures and handing over vital essential services to private investors, to the detriment of the poor and low-income, women in the informal sector and ordinary wage earners, among others. They also include increasing regressive taxes and capping the public wage bill, which shifts the weight of resource mobilization on the mass of ordinary working people.
The IMF’s recognition of climate change as a significant factor in unsustainable debt and the WB’s declared alignment of its funding with the Paris Agreement ring hollow in the face of continued infusions of multilateral public money into fossil fuels. The IFIs have remained silent on the demand for investigating and canceling the public debt that financed fossil fuel projects, even as they also acknowledge these as harmful to people and planet. These public debts were incurred in the name of the people, but caused the violation of many human rights and the very right to life, the massive destruction of land, food and water resources, erosion of local livelihoods, and the further exacerbation of climate change and its impacts.
From 1947 to 2020, the bank’s main institutions for loans and development financing disbursed and committed $1.2 trillion worth of principal value of loans, equity, guarantees and grants. One-third or $367 billion of funds disbursed or committed by the the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA) went to energy projects of which $237 billion went to fossil fuel projects while $31 billion went to other harmful projects, such as large hydro dams and geothermal. Even after the Paris Agreement was signed, at least US$ 20.6 billion in oil and gas projects from 2016 to 2021.
To the IMF and the World Bank, as well as world leaders, national governments, financial institutions, public and private, we reiterate calls of global civil society for urgent, just, ambitious action, in compliance of their obligations and responsibilities, and commit to the following:
Unconditional cancellation of unsustainable and illegitimate debt by multilateral, bilateral and private lenders.
Recognition of the sovereign right of peoples to use resources freed from debt to address immediate needs, for vital and universal healthcare, social protection, and other essential services and rights.
Support for efforts to undertake national debt audits (government audits and independent citizens' audits) to critically and comprehensively examine public debt, and thoroughly review changes in lending, borrowing and payment policies; and respect the decisions reached by these processes.
Support for the call to establish a fair, transparent, binding and multilateral framework for debt crisis resolution, under the auspices of the UN to and not in lender-dominated arenas, that addresses unsustainable and illegitimate debt.
Support, rather than obstruct, a thorough-going national and global review and changes in lending, borrowing and payment policies and practices aimed at preventing the re-accumulation of unsustainable and illegitimate debt, strengthening democratic institutions and processes, and upholding human rights and peoples' self- determination.
Asian Peoples’ Movement on Debt and Development
April 26, 2022
“There is broad recognition in the international community that fiscal responses to the multiple crises have been far from adequate and largely, in the form of loans. International financial institutions warn of debt distress among developing countries and yet act in a manner that is making the situation worse.”
Lidy Nacpil, APMDD Coordinator, spoke on this issue at the virtual Civil Society Policy Forum of the IMF and World Bank in a session entitled “National and Global Debt Mechanisms, Towards Long Term Sustainability in a Post COVID-19 Recovery” held last April 14. She was joined by other co-organizers LATINDADD, EURODAD, AFRODAD and Jubilee USA who also gave inputs during the event.
Moderators Iolanda Fresnillo of Eurodad and Eric LeCompte of Jubilee USA laid out the context of unprecedented debt levels in the wake of the economic shock of COVID-19 . Threats to achieving shared climate and development goals have grown more acute. These include the failure of debt relief initiatives to help countries achieve sustainable debt levels at the same time that climate finance commitments continue to fall short. Opportunities abound to secure green and inclusive rebuilding in every region and nation, but the challenges are significant, and time is running out.
Nacpil pressed lenders to be more consistent in words and deeds, citing their avowed policy shift away from fossil fuels, and yet failing to provide more grants for renewable energy. She pointed out that , even with this policy shift and so-called “retirement mechanisms” underway, there is no clarity on whether the loans incurred by Southern governments for these fossil fuel projects will be cancelled. Unless cancelled, they remain as debt burdens for the people.
Patricia Miranda, Global Advocacy Director of the Latin American Network for Economic and Social Justice (LATINDADD) raised concern over the exclusion of Middle-Income Countries (MICs) in debt relief, the failure to compel the participation of private creditors, the persistence of austerity measures as loan conditionalities and the steep rise in domestic debt.
She noted that lenders left out MICs in the Debt Service Suspension Initiative (DSSI) despite rapid debt accumulation and a disproportionate share of worsening socio-economic and human conditions among the global regions. Championed by the G7, G20 and IFIs in response to the pandemic, the deferral of debt payments expired in December 2021 after only a year and a half of implementation and involved only a handful of developing countries.
Miranda also pointed out that many MICs have overwhelmingly sourced public debts from private creditors and domestic sources. Private lenders are not compelled to join the debt relief efforts. Domestic debt levels, which she noted have surpassed external debts, is not included in the IFIs’ debt sustainability framework even as it carries its own set of fiscal risks.
On the Paris Club’s Common Framework for Debt Treatments Beyond DSSI, she critiqued both design and implementation. “If it’s a ‘common framework’, then rules must apply to all [including private lenders],” said Miranda. She added that this is better assured through a sovereign debt workout mechanism under the auspices of the United Nations where the costs of debt-related instability are both shared by borrowers and lenders.
Addressing the need not only for global mechanisms, Iolanda enjoined the panelists to share on national initiatives that could serve to counter measures adopted in international financial centers which affect developing countries, but are without benefit of scrutiny by citizens.
Jason Braganza, Executive Director of the African Forum and Network on Debt and Development (AFRODAD), shared his organization’s experiences on domestic financial architecture reforms, including promotion of local arbitration mechanisms and provisions for automatic debt cancellation in extreme circumstances. He said that these also promote the empowerment of the judiciary and the legislature.
The above civil society panelists’ responses largely addressed the inputs of Diego Rivetti, Senior Debt Specialist at the World Bank and Martin Cerisola, Assistant Director at the IMF Strategy, Policy and Review Department. Both speakers reiterated, among others, the IFIs’ support for the Common Framework. They recognized the slow progress in getting more borrowing countries on board but noted that this may be due to factors outside of the CF. They did not counter the risk of rising domestic debt as a significant factor that should be included in the debt sustainability framework but explained that country authorities have been able to create domestic debt markets and are reluctant to change jurisdiction.
To the criticism raised on austerity measures, their response was a reiteration of the need to put policies in place for reducing public expenditures and increasing taxes as part of reforms towards better fiscal management and planning.
April 16, Manila – “Sri Lanka is currently in its worst economic and financial crisis yet, which has triggered lack of fuel, cooking gas and power cuts, runaway inflation and deepened hunger and deprivation. But peoples’ voices are being silenced with teargas, water cannons, arrests, increased military surveillance and questioning of civil society leaders,” said Lidy Nacpil, coordinator of the regional alliance Asian Peoples’ Movement on Debt and Development who called for international solidarity and support for the Sri Lankan people and denounced the reprisals against protesters demanding accountability from the Gotabaya Rajapaksa government.
She added that the Sri Lankan government’s recent decision to suspend all foreign debt payments, pending negotiations for a bailout with the International Monetary Fund, “should immediately lead to allocating funds freed from debt service to address the worsening humanitarian crisis”.
The acute shortages of food, fuel and other essentials have fueled the mass outpouring of protest and rising people power. But even as the economic crisis intensified and the risk of starvation grew more severe , the Sri Lankan government prioritized bondholders by paying $500 million for a maturing international sovereign bond in January 2022.
Sri Lanka’s debt-to-GDP ratio has been skyrocketing even before the pandemic, rising from 42% in 2019 to 104% in 2021. Borrowings went heavily into large scale infrastructure projects which have gone bust under the pandemic. Up to $8.6 billion in debt payments fall due this year, but the country has less than $1.94 billion in its reserves. Interest payments of $78.2 million are also supposed to be collected on April 18, followed by payment for a $1 billion maturing sovereign bond on July 25. The bond have since fallen below the face value at $0.54 to the dollar.
“This is an opportune time to start examining debt service payments being claimed from the Sri Lankan people through a participatory and transparent debt audit that will shine a light on debts whose legitimacy should be questioned,” Nacpil said. “Such debts should be immediately and unconditionally canceled.”
She cited loan-funded projects which eroded local livelihoods, caused massive environmental destruction and contributed to worsening climate threats. The Norochcholai Lakvijaya Coal Power Plant 300 MW expansion project funded by US$300 - $400 million from China, was found using outdated technology and threatened the agricultural livelihoods and marine life in the area. The project was scrapped in line with government’s pronouncements supporting renewable energy, but there is still no clarity on the public debt incurred which will eventually add to the Sri Lankan people’s fiscal burdens, unless canceled as well.
Hambantota Port Project is another example of contentious debts, said Nacpil. US$ $809.35 million was sunk in Phase 2 of this project mostly from China EXIM Bank loans. Then failing to meet high debt servicing costs, the previous Sri Lankan administration practically ceded the port to China for 99 years. Although this reduced loans to China by roughly $1 billion, loans have piled up since and borrowing costs are now higher.
The Sri Lankan government has been incurring more debt, and shown no transparency on debt repayments. It has also lacked transparency in entering into bilateral agreements, including the Colombo Port City which is financed through a $1.4 billion loan issued by the state-owned China Communications Construction Company. Reports of corrupt practices and public suspicion over financial transactions, as well as threats to the livelihoods of fishing communities, are also fueling the growing civil unrest.
“No one should be forced to trade off the right to food and health for debt service payments,” stated Nacpil, stressing solidarity with the Sri Lankan people, and cautioning how IMF bailouts are “laden with austerity conditions, and are short-term and rigid. They’re often a cure worse than the disease.”
Debt Justice Program Manager
Asian Peoples' Movement on Debt and Development
As austerity conditions are imposed on governments in exchange for loans, and fiscal space narrows further, we are forced to trade off people’s well-being for creditworthiness, by continuing debt service payments. These come with harsh gendered spillovers, borne even more heavily by women who already face discrimination, oppression and violence in their daily lives.
Women carry a much heavier share of unvalued, unrecognized and unpaid, but socially and economically vital care work. They are also usually tracked into the lower rungs of the services sector which are deemed unskilled labor and thus, poorly paid. Debt conditionalities such as privatization of health and water stand in the way of budgeting for adequate, affordable and quality public services which can make a big difference in helping women.
Debt cancellation, starting with illegitimate debts, is a decisive step towards a just recovery, and a gender-just and sustainable economic rebuilding.
#DebtJustice for #GenderJustice and #ClimateJustice now.
READ MORE: APMDD's Message for #IWD2022
Finance at the heart of major challenges to just, equitable, and inclusive development
This March, 20 years ago, the first International Conference on Financing for Development was convened under the auspices of the UN in Monterrey, Mexico. It was significant for several reasons.
The Conference was an initiative of the Group of 77 (G77), the coalition of more than a hundred developing countries, which shared growing discontent over the systemic failures of the international financial architecture. It was the first gathering of its kind spotlighting the deep cracks of this global economic and financial system through which countries of the South often fell through, and the need to mobilize financial resources to resolve persistent conditions of inequality, deprivation and impoverishment. It also sought to bring debates on the global economic and financial system back to the UN where countries are more assured of equal footing, rather than in narrow decision-making processes of international financial institutions and North governments where the richest countries hold sway.
Today, several promises of the 2002 outcome document, the Monterrey Consensus, remain not only unfulfilled but rolled back, starting with the main goal “to eradicate poverty, achieve sustained economic growth and promote sustainable development as we advance to a fully inclusive and equitable global economic system”. Many of the financing for development issues remain unresolved and cracks have all the more deepened. There is no clearer indictment of systemic failure than the multiple crises intensified and exposed by COVID-19 that continues unabated especially in South countries.
Speaking last March 17 at the annual conference of the group of open-minded states called the “Friends of Monterrey”, APMDD Coordinator Lidy Nacpil, underscored the key role of development finance in addressing the multiple crises of economic recessions, public health and climate.
“Finance is at the heart of every major challenge to just, equitable and inclusive development that is compatible with the health of the planet, most especially now at this time of multiple crises….The multiple crises should be taken as an opportunity to take decisive steps in transforming the global economic and financial system” but recommendations laid out in the draft Financing for Sustainable Development Report (FSDR) “fall short of taking the multiple crises as an opportunity to take decisive steps to transform the global financial system and begin constructing a new one that serves the needs and interests of people and the safety of the planet.”
She reiterated key and urgent issues that civil society organizations* have consistently been raising, in light of serious gaps in the draft FSDR which will be adopted during the 2022 session of the UN Economic and Social Council (ECOSOC) Forum on Financing for Development Follow-up (FfD Forum) in April 2022.
a. The establishment of a Sovereign Debt Workout Mechanism under the auspices of the UN that would comprehensively address unsustainable and illegitimate debt, including through extensive debt cancellation for all countries in need.
b. The establishment of a universal, UN intergovernmental tax body and a UN Tax Convention to comprehensively address tax havens, tax abuse by multinational corporations and other illicit financial flows through a truly universal, intergovernmental process at the UN, with broad rights holders’ participation.
c. The delivery by Global North countries of their full climate finance obligations.
d. Agreement on a moratorium on Investor-State-Dispute-Settlement (ISDS) cases, removal of all ISDS provisions in all bilateral investment treaties and trade and investment agreements and the urgency for members of the World Trade Organization to adopt without delay a waiver from the obligations under the TRIPS agreement for health technologies and products related to COVID-19 countermeasures.
e. The regulation of Credit Rating Agencies (CRAs).
f. Review development outcomes of public-private-partnerships, blended finance and other financing mechanisms that promote a ‘private finance first’ approach to infrastructure and public services.
g. The acceleration of the implementation of the official development assistance (ODA) commitments to fulfill and exceed the 0.7% target for ODA in the form of unconditional grants.
h. The Assessment of systemic risks posed by unregulated or inadequately regulated financial sector instruments and actors.
i. A Global technology assessment mechanism at the United Nations.
j. Ensuring fiscal space and scaling up international cooperation for decent jobs creation and universal social protection in line with SDGs and ILO standards.
*Lidy Nacpil spoke on behalf of the CSO Financing for Development Group, an open civil society platform involving more than 800 organizations (with more than 950 individual members), and the Women’s Working Group on FfD.
For the full text of her input, see Civil Society Perspectives on the Thematic Chapter of the 2022 Financing for Development Report.