What is the use of IMF debt relief?
In addition to providing emergency credit to some, the IMF has decided to provide debt relief to the poorest countries under its Catastrophe Containment and Relief Trust (CCRT). Are we talking about real help or just symbolism?
International Monetary Fund Managing Director Kristalina Georgieva explained in a video message earlier this week how the IMF aims to provide economic support to member countries in their fight against the coronavirus pandemic.
His message contained a concrete promise to provide temporary debt service relief to 25 countries. This boils down to real debt relief, as lost installments are covered directly by the IMF’s Catastrophe Containment and Relief Trust (CCRT).
The CCRT is a special fund of the IMF that was created during the Ebola crisis of 2015 to serve exactly this purpose – to allow poorer members to temporarily suspend installment payments to the IMF, which in reality will then be forgiven. So it seems logical that the same mechanism would be used again amid the fear of COVID-19.
Good intention, but questionable funding
“It’s good to see the IMF step up a gear,” said Jürgen Kaiser, policy coordinator of Erlassjahr.de, a group that supports debt relief for developing countries. But Kaiser is not completely convinced, noting that the money in question will be taken from resources originally intended to support development projects.
He says more funding would be needed to adequately respond to the current virus crisis beyond the means available to help tackle a local disaster.
“It would be better if the IMF resorted to its own resources such as the gold reserves of which it still has plenty,” Kaiser suggested. The IMF did exactly that about 20 years ago to compensate for the losses of creditors associated with the HIPC (heavily indebted poor countries) initiative.
At the time, at the 1999 G8 summit in Cologne, Germany, 36 equally indebted countries were granted broad debt cancellation.
Additional funding requested
So far, no plan has been made public by the IMF to fall back on its own reserves, but Georgieva is working to increase funding for the CCRT, asking donors to increase the pot to $1.4 billion ( 1.28 billion euros) against 500 million dollars currently with a view to extending the temporary debt relief measures.
Currently, the poorest countries concerned receive debt service relief for six months, which can be extended to two years.
This would undoubtedly be good news for those who are entitled to help. “The problem is that we’re only talking about 25 countries, including countries that haven’t accumulated a lot of debt with the IMF,” Kaiser said.
Towards the end of March, IMF Director Georgieva and World Bank Director Davis Malpass pleaded for debt relief for the 76 so-called IDA countries. IDA is the International Development Association, a branch of the World Bank that helps the poorest countries.
In fact, the IMF has already pledged to help other countries outside the group of 25 it supports with its CCRT mechanism. Since mid-March, the fund has granted a total of $3.8 billion in emergency credits to 16 countries. Earlier this week, Ghana was promised $1 billion, while Senegal is expected to get $442 million.
An important sign
Does this mean the IMF applies double standards to nations that need financing? Economist Federico Foders takes a more sober stance on the organization’s funding practices. He says the IMF’s firepower is limited and so it must operate selectively, especially in a crisis situation like the pandemic.
Foders calls on wealthier nations to help poorer ones and welcomes debt relief efforts as they allow governments to focus resources on the things that really matter right now.
He acknowledges, however, that there is always a danger that funds will be used by recipients differently from what donors hope they will be allocated to.
Foders believes that countries that have long struggled with public deficits and are heavily indebted to foreign creditors are likely to use IMF financing for many things, not just to fill gaps caused by the pandemic. The economist adds that the current shutdowns will have a dramatic impact on the economies of developing countries, arguing that emergency aid can do little to cushion the blow. But he is convinced that this help will have a positive psychological effect because people feel that someone cares about them and is at least trying to help them. DW