APPENDIX 2
First supplementary memorandum submitted
by the Bretton Woods Project
THE LINK BETWEEN FINANCING THE HIPC INITIATIVE
AND ESAF
HOW THE
ENHANCED STRUCTURAL
ADJUSTMENT FACILITY
IS FINANCED
The Enhanced Structural Adjustment Facility
was established as a temporary fund in 1987. Funds are mostly
provided by bilateral donors who pay into either the Loan Account
or the Subsidy account. Contributions to the Loan Account are
returned eventually to the lenders with interest at market rates.
Donations (which are not returned) to the Subsidy Account are
used to subsidise the rate of interest that is charged to the
developing country borrowers on the loans made from the Loan Account.
ESAF funds were due to run out in 1992 when
the fund was replenished. it was envisaged that this money would
last until 1996. However, ESAF funds have been committed and disbursed
much more slowly than was anticipated because countries have been
slow to seek ESAF funding and because poor programme implementation
has often delayed disbursement. This has meant that the ESAF could
continue beyond 1996 without needing additional funding.
A SELF-SUSTAINING
ESAF
The ESAF has a third account called the Reserve
Account. Payments made on loans and additional income earned on
the ESAF funds are paid into this account. It is from this account
that contributors to the Loan Account are repaid. The IMF calculates
that by about 2003 or 2004 there will be sufficient money left
in the Reserve Account to enable the IMF to establish ESAF on
a permanent basis without requiring future bilateral contributions.
In the meantime the IMF is seeking resources to replenish ESAF.
Because many of the key donors (including the UK) made it clear
that they would not contribute more bilateral funds to ESAF the
IMF has been forced to look for alternative funding sources.
It is important to be aware that if ESAF becomes
self-financing then the opportunity for parliamentary oversight
of ESAF and the IMF's activities in developing countries will
be greatly diminished.
GOLD SALES
FOR ESAF
The question of how the IMF would finance the
HIPC Debt Initiative arose at the same time as the question of
how it would finance ESAF. Whilst donor support for the HIPC Initiative
has been strong, disappointment with the impact of ESAF has led
to concerns from donors and waning interest.
However, the ESAF is very important for the
IMF. Although ESAF provides only a relatively small amount of
money to developing countries it contributes an enormous amount
of work for Fund staff. Moreover, without a fund from which to
provide loans to the poorest developing countries the Fund's influence
in these countries would be greatly diminished. Thus, it has been
an IMF priority to ensure that ESAF is replenished—more
of a priority than finding funds for the HIPC Initiative.
In the light of this, although there is no reason
why these two financing issues should be connected, it has been
judicious for the IMF to insist that the two are linked in order
to ensure there is a commitment from the Executive Board to continue
supporting ESAF.
ESAF PROGRAMMES HAVE
NOT CONTRIBUTED
TO POVERTY
ERADICATION
Two reviews of ESAF (an internal staff review
completed in 1997 and an external evaluation completed in 1998)
have demonstrated that ESAF programmes have not contributed significantly
to economic development and poverty eradication. Growth rates
have been very low and insufficient to compensate for population
growth; investment rates have fallen dramatically; spending on
social services per person has declined; inequality is increasing;
as many countries have experienced worsening inflation as those
who have experienced a decline in inflation rates; more money
is spent on debt servicing but debt burdens are still growing;
and a large proportion of ESAF programmes break down or experience
lengthy interruptions.
Influential Harvard economist, Jeffrey Sachs,
has argued against replenishing ESAF on the basis that the IMF
"is a monetary institution designed for short term balance
of payments. It knows next to nothing about real long term development
issues and it's done a miserable job, if we only care to look
at the record . . . if the results were dramatically good after
20 years of structural adjustment programs in Africa (that) would
be one thing, but basically the results are dreadful compared
to what the continent needs and what it could achieve"; and,
"the IMF is saying now that it is concerned about social
policy, but it's not a social policy institution—shouldn't
be, can't be, and is completely miscast the way it is right now."
DELINKING MONEY
FOR THE
HIPC INITIATIVE FROM
ESAF
The current IMF proposal for gold sales calls
for half the proceeds to be used for ESAF, with the other half
to be used to bolster ESAF. It is an important matter of principle
that the IMF contributes to IMF debt reduction from its own resources.
However, NGOs across the globe are very concerned that resources
for debt relief should not be used to finance ESAF. The HIPC Trust
Fund and the ESAF accounts are not institutionally linked and
there is no technical reason why finance for debt relief should
be linked to ESAF. Moreover, if the issues of HIPC financing and
ESAF financing are delinked, then a smaller amount of gold need
be sold to finance the HIPC Initiative.
Before any new money is given for ESAF, proper
consideration should be given to the usefulness of ESAF and the
role of the IMF in the poorest countries. Particularly since it
is ESAF loans that are being forgiven under the HIPC Initiative.
HIPC DEBT RELIEF
WILL HELP
ESAF
Even if the money from gold sales does not help
to finance the ESAF, it will benefit from HIPC debt reduction.
This is because at the moment some of the IMF's non-performing
loans are ESAF loans. This means that the IMF is not receiving
loan payments and interest from some borrower countries so there
is less money in the ESAF accounts to lend on to other borrowers,
ie as more debts build up to ESAF the more IMF lending is constrained.
Money from the HIPC Trust Fund will be paid
to ESAF to cancel debts owed by the HIPCs. In effect then, because
the ESAF loans have effectively been repaid, this money is freed
up for future lending. At the same time, the remaining outstanding
loans to ESAF become viable, ie governments are more likely to
be able to repay them. In effect then, the ESAF will gain considerably
from the HIPC Initiative even if the ESAF is not directly refinanced.
Bretton Woods Project
July 1999
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