Debt cancellation poses a problem for powerful countries in that the absence of debt implies a loss of control over weaker countries. Soren Ambrose points to a new International Monetary Fund (IMF) "facility" that would allow conditions to be imposed on countries even if they were no longer officially indebted to the IMF or taking loans from it. The use of this "facility" could limit the positive impact of debt cancellation, he writes.

A recent announcement by International Monetary Fund (IMF) Managing Director Rodrigo Rato while he was at the annual meeting of the African Development Bank in Abuja, Nigeria may signal the inauguration of a new tool for ensuring IMF, and by extension, US and G7 control of national economic policies in Global South countries.

The idea - a new IMF “facility” - has arisen in the context of G7 negotiations on multilateral debt cancellation. If it realizes its potential, it could significantly limit the positive impact of any G7 debt cancellation.

Since last year’s G8 summit in the US, there were encouraging signs that the US and the UK were both pushing for substantial multilateral debt cancellation programs. Prime Minister Tony Blair and his Chancellor of the Exchequer (Finance Minister) Gordon Brown have, with their customary competitive flourish, both been using the issue as part of their political appeal to British voters, and in the process have staked a lot on the outcome of this year’s G8 meeting, which the UK will be hosting in Scotland during the second week of July.

Since the most recent G7 Finance Ministers meeting, in April just before the IMF/World Bank spring meetings, hopes for a significant accord to announce at the Scotland meeting have dimmed. The different methods the two protagonists have proposed for “financing” the cancellation of IMF debt - the US wanting to use IMF assets, including the noxious Poverty Reduction & Growth Facility (formerly the Enhanced Structural Adjustment Facility), and the U.K. wanting to sell IMF gold - seem to be incompatible, and neither side is budging. In addition, some of the other G7 governments, in particular Japan and France, have been reluctant to get on board with either plan.

In the US, debt activists have been surprised by the stance taken by the Bush Administration on debt cancellation, and suspicious about its motives. Its advocacy of a 100% write-off of multilateral debt owed by between 27 and 42 countries (they’ve been a little vague) is considerably more far-reaching than the UK proposal (which has been echoed by Canada and the Netherlands), which would only cancel debt service payments for ten years. The US plan requires no additional funds from the donor countries, unlike the UK’s. Its consequent lack of “additionality” - the question of whether the ultimate result would be more cash for the countries to use to combat poverty - has moved the UK government and many European civil society groups to oppose it. Groups in the US are inclined to view debt cancellation, especially 100% multilateral cancellation, as considerably more important than “additionality”, arguing that it is the persistence of the debts that keep countries tethered to the IMF’s loans and crippling conditions.

It now appears, however, that the suspicions US groups harbor regarding the Bush Administration are not unfounded.

The hints have been there since the IMF/World Bank fall meetings in October 2004. After the G7/G8 failed to reach an agreement on debt at its June 2004 summit, public statements from Canadian Finance Minister Ralph Goodale and US Treasury Secretary John Snow in September alluded to the possible creation of a new IMF “facility” that would serve the needs of countries that neither want nor need a full-blown IMF program.

The communiqué of the IMF’s oversight body at the April 2005 meetings put the institution and its most powerful members on record for the first time as supporting such a facility, though its definition was left vague. Goodale and Snow made it sound like a staff monitoring program, in which a country submits to IMF supervision without getting any new loans; in April it was described more as a new program to “pre-qualify” countries for IMF loans if they were hit by a currency crisis.

Whichever way it was framed, it was likely to serve the same purpose: a formal way of continuing to impose its conditions on countries even if they were no longer officially indebted to the IMF or taking loans from it. This may answer the suspicions that arose with the Bush Administration’s support for sweeping debt cancellation. After all, if one accepts the premise that the primary function of debt in the global economy is to allow powerful countries to maintain control of weaker countries' economies - with the IMF and World Bank's primary purpose being to serve as the tools for doing that - an obvious question when a debt cancellation program is proposed would be "how will they continue to maintain that control?"

Some more specifics came into view in Abuja. Rato finally gave the new program a name, referring to it as a “Policy Support Agreement.” Nigerian Finance Minister Ngozi Okonjo-Iweala told Reuters on May 18 that her country was the “pilot” for the new program, adding “The IMF makes sure it is as stringent as an upper credit tranche program and then monitors it like a regular program, but the difference is that you develop it and you own it."

Those are promises Africans have heard before (e.g. with the poverty reduction strategy papers); it would require a confirmed optimist to accept Okonjo-Iweala’s assertions at face value. She even went so far as to call it a “breakthrough” in Nigeria’s campaign for debt cancellation, since it would provide members of the Paris Club (the association of bilateral creditors) with the evidence they required that Nigeria was adhering to IMF standards - something that its reluctance to accept a more formal IMF program made difficult.

In Abuja, Rato indicated that the Policy Support Agreement facility has not yet been formally created, but that even when it is it will not represent a significant deviation from current practice: “The board is discussing the possibility of having a new instrument, which would be a monitoring agreement, but the fact is that if it is decided, and I think it will be, it is very similar to what we are already doing in Nigeria. It would be formally defined, but it will not require any changes in our relationship with Nigeria," he added. (all quotes from Reuters article of May 18, “Nigeria Set to Christen New IMF Agreement Fin. Min.”)

In fact, the IMF has monitoring programs with a number of countries that are not borrowing money. So why create a new name and make new announcements as if something new were happening? This is a change of form more than substance; it is the very fact of the spotlight thrown on the process that makes it news. By giving these programs a formal name and definition, and by publicizing them with press conferences and perhaps a new study (apparently to come in July), the IMF is assigning this function a new status, a new political profile. It is saying more straightforwardly than before that it will be "available" to impose its views on Southern countries even if they manage to extricate themselves from both multilateral debt and IMF programs.

If this Policy Support Agreement facility comes into common usage, it could effectively extend the IMF’s reach to most middle-income countries in addition to low-income countries not receiving IMF resources. Until now the IMF has relied on a very effective "unwritten agreement" whereby donors and creditors all defer to the IMF in determining which countries are creditworthy. When the IMF cuts off its loan program to a country for non-compliance with its policies, the World Bank, regional development banks, and bilateral agencies generally follow suit. With the prospect of the IMF’s relationship with low-income countries changing - to the point of irrelevance if current practices are followed - it was time to formalize this arrangement so that the IMF could continue overseeing those countries’ policies. That the new facility could also give the IMF a clearer path into middle-income countries not in crisis (e.g. South Africa, Brazil, the Philippines) is a bonus. It is now more likely that donors and creditors will make adherence to a "PSA” an explicit condition of loans or grants to any developing country.

The PSA has the potential to sharply minimize the potential benefits of new debt cancellation agreements, since they would be far less likely to free countries from IMF conditions.

The Policy Support Agreement, then, is potentially a significant expansion of the IMF's power, in both middle-income and low-income countries. There is some hope that it will never fully realize its potential, however. One of its quasi-predecessors, was the Contingent Credit Line (CCL), introduced several years ago as a “pre-approval” mechanism for countries that might need IMF loans when facing a sudden currency crisis. No country ever signed up for the CCL, and it was allowed to expire quietly in the last year. That Rato’s comments on the PSA, identifying it with existing monitoring arrangements, seem relatively unenthusiastic suggest that this, too, might not get off the ground. Let's hope.

Nigeria has been waging an unusual and innovative campaign for debt cancellation, with the government taking the lead and deploying the president, finance minister, and members of parliament. The comments by Finance Minister Ngozi Okonjo-Iweala - characterizing what amounts to a pledge to obey IMF strictures as a “breakthrough” for debt cancellation - raise the possibility that all the hard-hitting rhetoric employed by the Nigerians will fade away as soon as a somewhat better deal from the IMF and Paris Club presents itself. Recent debates in the Nigerian legislature on a proposal to repudiate external debt represent the most promising move by a Southern country government on debt in years. They appear to be a calculated move to expand the success realized by Argentina in its negotiation of a very favorable buy-out of its bondholders. If Okonjo-Iweala succeeds in getting a good deal from the Paris Club and short-circuits the legislature’s agenda for repudiation, Nigeria would be sending a very ambiguous signal to debt campaigners in civil society and governments around the Global South. Now is the time for increased pressure from civil society organizations and progressive politicians in Nigeria to ensure that does not happen.

* Soren Ambrose is with the 50 Years Is Enough Network, Washington, DC USA

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