OCTOBER 1987 - VOLUME 8 - NUMBER 10
I N T E R N A T I O N A L F I N A N C E
Lenders See the Light
by Samantha Sparks
World finance ministers and leaders who gathered in Washington for the annual meetings of the World Bank and International Monetary Fund (IMF) September 29 - October 1 think that after several years of often fruitless economic adjustment by the Third World, it may now be the time to alter the adjustment process itself.
From U.S. President Ronald Reagan, to IMF Managing Director Michel Camdessus, to representatives of more than 150 nations, consensus has emerged that changes in present strategies are urgently needed to restore growth to the debt-strapped developing world.
No radical structural changes are in sight, despite the Third World's now-familiar call for a broad political dialogue on the debt. Rather, key IMF committees endorsed continuation of the current, case-by-case treatment of debt problems.
But there was important agreement that elements of the current strategy - particularly the role of the IMF - must be revised if the Third World's currently bleak prospects are to improve. The IMF - originally intended to supply quick-fix cash to countries with temporary balance-of- payments problems, has become a net recipient of resources from the Third World.
Last year, the IMF took about $6 billion more out of the Third World in repayments than it gave out in loans. About $200 million of this net gain came from some of the world's poorest countries in sub-Saharan Africa. "When you're giving money, you're in a position to place conditions on your borrowers," observes Richard Feinberg, Vice President of the Washington based Overseas Development Council (ODC) and an international finance analyst. "The Fund's bargaining power has severely weakened" now that it is taking in more money than it gives out, Feinberg said, so "it has to make itself attractive to debtors to maintain good relations."
Moreover, with the Third World's $ 1.1 trillion debtcrisis now in its fifth year, it appears that the IMF can no longer afford only a short-term focus. Standard IMF loans are disbursed over a period of 18 months, and must be repaid within three years. But it will take many more years before many of the structural policy reforms being demanded of debtors by creditors will take effect.
Industrial nations continue to reject the South's call for a bigger stake in the IMF as well as an increase in the institution's currency resources.
And although donor nations say they want to increase the IMF's ability to lend cheaply to the poorest countries, the all important question remains of how to finance this increase.
Nevertheless, at this year's annual meetings, several individuals endorsed the Third World's long-standing call for the world's monetary watchdog to crack down harder on its industrial shareholders, while easing up somewhat on the rigid policy demands it makes on its borrowers.
Camdessus and Treasury Secretary James Baker were two of the more powerful voices heard taking this stand. "There is more adjustment needed in the non-borrowing countries" that belong to the IMF, Camdessus told reporters on the last day of the annual parlay. "Cooperation among the big industrial countries must be strong enough to achieve this," he said.
Specifically, Camdessus and others agreed, this means fighting protectionism, reducing current account imbalances and staying in close step on exchange rates. Also tapped for a more active role in the international economy and to accept more imports were the newly industrialized powers - Hong Kong, Taiwan and South Korea.
Speakers from the North and South agreed that the IMF must be more aggressive in ensuring these conditions are met.
Meanwhile, in a surprising speech delivered as the meetings drew to a close, Baker made several concrete proposals to change the IMF's own lending policies.
"The IMF has played a central role in the debt strategy," Baker observed, "and we must ensure that it will be able to continue this role as long as debt problems persist." He continued, "To do this, the Fund must give greater attention in its programs to measures needed to promote long-run growth."
Specifically, Baker suggested replacing the IMF's present "Compensatory Financing Facility" (CFF) - designed to make up for sudden losses in export earnings - with a broader facility that would include compensation for "sustained higher interest
The CFF was created in 1963 to provide extra temporary support to countries whose export earnings had dropped precipitously over a two year period but which could be expected to recover within the same amount of time.
With commodity prices now at their lowest level in 50 years, Third World nations would welcome access to more compensatory resources than the CFF currently provides. However, the "Group of 24," which represents developing nations at working sessions of the IMF's committees said that the CFF's resources should be available without the strict conditions the IMF usually attaches to its money.
Baker argues that the IMF should ease the timetable of reform it imposes on countries that borrow its money and that the IMF should also make debtors' attempts to reform the structure of their economies a more important part of its evaluation process.
When these things are done, the U.S. Treasury chief said, commercial banks should be able to move away from their current "rigid linkages" to IMF lending patterns, toward "flexibility with regard to financing flows."
With commercial lending to the Third World stagnant two years after Baker called on the banks to step up their loans, this last part of Baker's address came as no surprise. But there is little in the bank's behavior since the debt crisis erupted five years ago to suggest they will be any more willing to listen to Baker now than they were in 1985.