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Debt-Relief Countries Can Make Use of More Policy Space

Source: Third World Network

This article argues that it is crucial that post-‘completion point’ countries which have had their debt stocks cancelled under the HIPC initiative and the MDRI manage the policy space that they have acquired as a result, appropriately.

They should also be aware of and be on guard against corresponding measures currently pursued by the Bretton Woods institutions and other bilateral and multilateral creditors to circumscribe this newly expanded policy autonomy. The IMF and World Bank may want to continue to determine policies in the countries that have had their debts cancelled, in some cases even if these are not tied to new loans.

The measures used by these institutions to ensuretheir continued influence include:
(1) The introduction of the Policy Support Instrument (PSI) by the IMF, a non-borrowing Fund-monitored programme of reforms that a country may enter into voluntarily with the institution, and

(2) The IDA’s new modalities of aid allocation based on the performance of the ‘quality’ of their policies and institutions and rewarding countries which perform well under the controversial Country Policy and Institutional Assessment (CPIA) with larger volumes and more flexible modalities of financing.

The CPIA has been criticised for its lack of transparency and coherency in performance indicators and the controversial breadth of its coverage, including prescriptions on a range of economic and governance issues, such as a country’s ‘economic management’ and ‘quality of public administration’ as well as its ‘policies for social inclusion/equity’.

Although the CPIA indicators are not formally ‘conditionalities’ per se, there is pressure for countries to implement certain policies due to its link to World Bank, and especially IDA, financing.

Meanwhile, the PSI enables the IMF to act as a credit-rating agency for low-income countries by signalling economic health to potential creditors and investors. Policy reforms under a PSI will carry the same discipline as that of regular upper credit tranche conditionality and successful completion of a programme review by the IMF Executive Board ‘would signify the Fund’s assessment that the program is on track’, similar to reviews under financed Fund programmes - the only difference being that this does not trigger tranche disbursements.

In light of the policy space freed up by debt relief, countries therefore need to be cognisant of forms of conditionality which may accompany either the ‘signalling role’ of the IMF or the new financing from the IDA in the post-debt relief period and weigh the cost and benefits of contracting new lending from the Bretton Woods institutions, bearing in mind the expanded space available from debt relief for diversifying sources of financing.

After all, the objectives of debt relief are not only about increasing revenue flows to developing countries but also freeing countries from the economic and political coercion of debt, including redressing the asymmetrical relationship between debtor and creditor nations and debtor nations and international financial institutions. This recent debt cancellation may afford developing countries the opportunity to break out of the cycle of debt and conditionality and to engender genuine ‘country ownership’ of economic policies.

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