Aid and Conditionality - The Case of Bangladesh
by Iqbal Ahmed
The Role of IMF in Policy Making in Bangladesh
Source: Unnayan Onneshan
Unnayan Onneshan organized a round table discussion on “The Role of IMF in Policy Making in Bangladesh†at CIRDAP auditorium on 20th October, 2007. Md. Iqbal Ahmed presented a paper on the issue. Ahmed showed the effect of IMF policies with empirical data and ended with questioning its role. Mr Ahmed argued that when Bangladesh needed an investment friendly environment to generate employment and output to eradicate poverty, the IMF advised the government to tightly manage demand and offered policy advice which was contradictory, which has destabilised the economy with low investment, low capital formation, low output and low employment thus leading to staglation. At the same time the IMF's advice to cut public spending has further marginalised the poor.
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Debt and Conditionality: Multilateral Debt Relief Initiative and Opportunities for Expanding Policy Space
Source: Third World Network
THE Multilateral Debt Relief Initiative (MDRI) was introduced in September 2005 to operationalise the political outcome of deliberations at the G8 summit in Gleneagles in July 2005. The MDRI is to provide 100% cancellation of eligible debt stock owed by eligible countries to four multilateral financial institutions – the International Development Association (IDA), the concessional lending arm of the World Bank, the International Monetary Fund (IMF), the African Development Fund (ADF) and the Inter-American Development Bank (IDB)1 – and is separate from but linked operationally to the enhanced Heavily Indebted Poor Countries initiative (HIPC-I).
This debt reduction is additional to the debt relief granted under the HIPC-I and taken together, it is expected that an estimated 40 eligible countries have already been or will be relieved of a significant amount of debt stock in the near future. The World Bank and the IMF estimate that both the HIPC-I and the MDRI will clear a total of close to US$90 billion in debt owed by developing countries to bilateral and multilateral creditors (Eurodad, 2006; IDA and IMF, 2006: paras 27-32). Twenty-one countries have already had their eligible debt from the IDA and the IMF written off and nine other countries are expected to complete the process in the near future. A further 10 countries have met the eligibility criteria for HIPC and are potentially eligible for MDRI relief in the future.
A critical question arising from these recent developments in debt relief is whether – aside from relieving the debt overhang of indebted countries and therefore clearing fiscal space for more productive and redistributive expenditure – the cancellation of debt, particularly from the international financial institutions (IFIs), results in greater policy autonomy for the countries concerned.
A significant constraint on national policy space in developing countries in the past two decades has been the uncompromising debt burden shouldered by these countries and the policy prescriptions which accompany country attempts to: (a) reschedule debt owed to external creditors; and (b) mobilise additional external financial resources to meet their resource gaps. Indebted countries have had to implement stringent economic conditionalities – especially those set by the World Bank and the IMF – in their bid both to renegotiate debt and to secure resources necessary for generating economic growth and financing social expenditure.
However, the recent series of debt cancellations – under both the enhanced HIPC and the MDRI – may offer eligible countries opportunities for expanding domestic policy space, enabling countries greater freedom over their macroeconomic and development policies, including options which were prohibited under the restrictive conditionalities of the Bretton Woods institutions.
This paper examines the key aspects of the MDRI and considers the opportunities this framework and completion of the enhanced HIPC initiative create for indebted countries to expand their policy space. The paper concludes that the recent upfront and irrevocable cancellation of debt of the 21 post-‘completion point’ countries and the potential debt relief for the nine ‘decision point’ countries in the near future under the enhanced HIPC initiative and the MDRI will create opportunities for greater policy space in these countries. Specifically, the debt relief will facilitate the release of countries from the economic strictures of conditionality and debt which have crippled economies in developing countries due to the damaging effect of their economic policy prescriptions.
Cancellation of debt stock has not only enabled the freeing up of fiscal resources in a number of previously heavily indebted developing countries but has also afforded opportunities for expanded policy space for countries to develop national economic policies alternative to the Washington Consensus policy prescriptions which have accompanied financing from the Bretton Woods institutions.
It will also enable the diversification of external financing sources for these countries, enabling countries to seek resources with more favourable financing terms and the decoupling of financial resources with economic policy reforms. Countries should take advantage of this increased policy autonomy to develop more appropriate policies which will generate economic growth in favour of social and economic development.
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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Policy Coherence: Aid, Trade and Investment
Source: North South Institute
In principle aid is used to assist low-income countries evolve an appropriate mix of policies and institutions to support their development goals. The efficiency and effectiveness of this process could be enhanced by increased coherence within and across the aid, trade, and investment policies which feature prominently in the donor-recipient relationship. Policy coherence exists when the gap between policy intent and outcome is minimized by using mutually supportive approaches in related policy areas in pursuit of a common goal. Policy coherence is naturally more complicated where national policy is significantly influenced by policy-making at the supranational level. In this case policy coherence requires harmonization through international cooperation around jointly determined and voluntarily accepted common norms and approaches.
Central to the aid relationship is a common understanding of development as societal transformation for the purpose of enhancing the abilities of all members of the society to shape their own lives. In this context, the goals of development combine income growth with poverty eradication and human development, while the “drivers†of development include macroeconomic stability, openness, good governance, quality infrastructure and strong institutions. Among these, openness and institutions are the most contentious and constitute the main sources of policy incoherence. In both cases, no general consensus has emerged regarding the best approaches, the adjustment processes and time paths for generating sustainable growth through policy and institutional reforms.
The aid relationship presumes an understanding that both sides share a common interest in achieving certain development objectives. It is characterized, however, by policy coherence issues arising from ineffective partnership and collaboration which in turn reflect donor prescription of policy and institutional reforms considered unacceptable by recipients, and unwillingness by donors to accept experimentation in these reform areas. Similarly, standard donor prescription that trade openness enhances growth and poverty reduction often clashes with recipient-country perspectives that are more nuanced because in low-income countries supply response capacity is typically limited, the adjustment process is slow and, hence, the expected efficiency gains are limited and/or delayed while up-front costs of liberalization are real and can be substantive. Finally, with regard to investment policy where donors have tended to push aid recipients towards full liberalization, the latter seem to prefer a two-track approach which promotes export-oriented foreign direct investment (FDI) through liberalization and attracts market-seeking FDI through protection.
In addition to policy coherence within each of aid, trade, and investment policy area, coherence across the three policy areas is also critical for enhancing the positive impact of development assistance. For instance, aid disbursement conditioned upon trade liberalization will lack policy coherence where the aid recipient’s economy has limited supply-response capacity or is patently unable to defray the short-run costs. Similarly, the donor provision of aid to particular low-income countries may be more or less offset when the donors simultaneously erect trade barriers against their exports. There are many examples of this conflict. For instance, distortions to agriculture in several donor countries lead to significant reduction in the real income of many aid-recipient countries.
Across the aid, trade, and investment policy areas, there is a fundamental difference in the perspectives of aid donors and recipients. The former generally expect that aid disbursement should go hand-in-hand with the liberalization of the trade and investment regimes of the aid recipients; while the latter contend that building their supply response capacity should have priority and, hence, that trade and investment policies must be coordinated and strategically linked and involve gradual, selective and differentiated liberalization.
Enhancing policy coherence and, thus, effectiveness of aid requires an appropriate mechanism for reconciling and accommodating these differences. This should encourage the aid-recipient country to articulate a consistent development program with coherent policies for dealing with identified constraints and indicating how and where external assistance is required. It should then permit donors to evaluate the program’s coherence and feasibility and, in the process, coordinate donors’ activities with the program as a basis for establishing a constructive and mutually beneficial partnership.
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Challenge of the Current Aid Architecture: Addressing the Development Needs of Africa
Source: AFRODAD
"African countries like many other developing countries need external resources primarily to supplement their meagre domestic resources from their economies. The assistance countries receive redress the financial gap that arises from their development needs and act as catalyst and play a complimentary role in the implementation of the national development programs as well as stretegies. The articles concludes by saying that aid architecture must address political interests of both donors and recipient as well. Aid would only work with good public institutions and if policies are nationally-owned. Other important factors include the need to address weak public finance management systems, respect public systems by donors, and the development of Partnership principles are mutually agreed. Lastly engagement with non-state actors and parliaments must be meaningful if Africa is to make head way in improving aid architecture in the continent."
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World Bank officials shy away from participation
Source: Focus on the Global South
The four day Independent Peoples Tribunal (IPT) on the World Bank in India concluded on September 25th hearing numerous depositions indicting the Bank's policy and project interventions in India. While the World Bank India office did engage with the IPT and claimed they would make a deposition to respond to some of the evidence against the Bank,they failed to show up despite provision of adequate space and time by the organisers.
In its preliminary findings, the IPT observed the Bank had an undue and disturbingly negative influence in shaping India's national policies disproportionate to its contribution, financial or otherwise. While India is the world's largest single cumulative recipient of World Bank assistance, with lending totaling about $60 billion (Rs. 2,40,000 crores) since 1944, current annual borrowing amounts to less than 1% of the country's GDP ( In 2005, India's annual borrowing from the World Bank for new projects was 0.45% of GDP)
The loans however has been used as leverage to bring about important policy changes and impose conditionalities in areas such as governance reform, health, education, electricity, water and environment- many of these with obvious political and social consequences. The loans also legitimize substantial additional funding from a diversity of bilateral and multilateral donors such as the Asian Development Bank and Department for International Development (DFID-UK). The Bank's loans have caused extensive social and environmental harm from mass displacement in the Narmada valley to loss of livelihoods of traditional fishworkers in places such as Barwani.
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Foreign Aid and the National Reform Agenda: The Case of Lebanon
Written by Mr Ziad Abdel Samad, Executive Director of the Arab NGO Network for Development
Lebanon witnessed a 15 year civil war (1975-1990) that caused massive physical destruction and huge human losses. During the post war reconstruction period (1990-2007), Lebanon became a highly indebted country, whereby debt currently constitutes almost 200% of the GDP.
Since September 2004 Lebanon is witnessing an ongoing deep structural and political crisis. In July 2006, Israel launched a war against Lebanon causing huge direct and indirect losses estimated to reach over 9 billion US dollars.
The donor community convened in “Paris III Conference†during early 2007 and pledged more than 7.6 billion US dollars to support Lebanon. Paris III conference had three main objectives: (1) providing direct support for the post war reconstruction plan, (2) securing cash for the due debt services and (3) covering the budgetary deficit. A new reform program was promised by the government in return to these pledges; it includes significant economic and structural reform including privatization, tax increases, labour law reform, and reforms to the social security system. This program was the result of national public efforts supported by a World Bank team. The International Monetary Fund was delegated to monitor the implementation of the reform process and the multinational consultancy firm Booz Allen Hamilton was contracted to provide technical assistance to the public administration and oversee the coordination of efforts within the reform process.
In exchange, Lebanon pledged to increase growth rate by promoting foreign investment and enhancing competitiveness. This implies the integration of Lebanon in the global economic system and the promotion of trade liberalization. Unfortunately, all this process is perceived as a target in itself instead of being understood as a factor towards enhancing development, thus adopting it within the framework of a national developmental strategy.
In order to reduce the budgetary deficit, the government tends to increase public revenues by reforming the tax policy, mainly based on increasing the VAT. This is because Lebanon adopted a new tariff rate in the year 2000 which halved custom revenue. Unfortunately, these low tariff rates (mostly ranging between 5% and 10%) were adopted as well under Lebanon’s obligations in its accession package to the World Trade Organization.
On the other hand, the government is working towards privatizing two major sectors in the near future: communications and power. The main objectives of this privatization are: (1) to secure cash flow to pay the due debt services, (2) to overcome the inefficiency of the public administration and (3) to enhance competitiveness.
Consequently, Lebanon is a clear model of the interlink between foreign aid and the reform agenda which is not necessarily the result of a dialogue reflecting national priorities but it is a strategy proposed according to the donors’ vision.
World Bank Consultations on Conditionality - Submissions from Civil Society
Source: EURODAD
During 2007 the World Bank will be reporting on their use of conditionality in partner countries, in particular the implementation of the ‘Good Practice Principles’ agreed as a follow up to the Conditionality Review in 2005. However, indications to date suggest that the report prepared by the World Bank will be rushed, based on inadequate consultation, and heavily biased towards the World Bank perspective.
CSOs are therefore proposing to compile alternative evidence on the impacts of World Bank conditionality on the ground. This will be based on short (3-5 pages) submissions prepared by NGOs in country. The combined evidence will be compiled into a short briefing for presentation to key donor countries and World Bank staff.
Would you like to contribute a submission from your country? If so, please get in touch with Nuria Mulina at Eurodad - she can be contacted at nmolina@eurodad.org or +32 (2) 543 90 68. You can find a list of the countries where the Bank plans to have consultation here. As you will see, there’s still quite a bit of information missing but the Bank says they’ll be posting more dates and further information during next week.
Kindly click on the attachment below for the guidelines to prepare the submissions.
Mozambique: Donors Imposed Policies On Mozambique, Chissano Admits
Source: AllAfrica.com
Speaking on 11 and 12 June 2007 at the British University city of Oxford at a conference on “New Directions in Development Assistance’, Mozambique’s former president, Joaquim Chissano, admitted that the foreign aid granted to Mozambique when he was in power “came with the imposition of prescriptions and the questioning of the predominant development paradigmâ€. Freed from the constraints of office, Chissano could now give his real opinion of the aid industry - and it is largely in line with what critics of the IMF, the World Bank and bilateral donors have been saying for many years.
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