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September 26, 2005
The World Bank and International Monetary Fund concluded their annual meetings yesterday with an agreement to write off as much as $57.5 billion in debt to ease the burden on impoverished countries...
The debt-relief package, an endorsement of the initiative agreed to by the Group of Eight major industrialized countries in July, would wipe out the debts that the poorest of nations owe to the World Bank, IMF and African Development Bank. The proposal is being sent to the executive boards of those institutions for final approval, World Bank President Paul Wolfowitz said...
One of the main sticking points heading into the meetings was concern about the drain on the World Bank's budget once it wrote off so much debt -- eliminating the repayments the bank has come to depend on to finance its operations. Roughly $42.5 billion of the total amount of debt write-off is tied to the World Bank's International Development Association.
The G-8 countries on Sept. 23 sought to address that by pledging additional money out of their pockets to ensure that there would be no reduction of resources at the World Bank or the IMF.
The proposal the IMF and World Bank policymaking committees agreed to in the end calls for prompt ``dollar for dollar'' compensation to help maintain the other programs for poor nations, according to a report by a joint committee for the institutions.
The Wall Street Journal has this handy graphic (page A2 in the print version) of the largess-receiving countries:
The WSJ article also makes it clear that the negotiators were cognizant of this plan being seen as a reward for bad behavior:
... some [IMF] member nations thought it unfair to forgive loans to poor nations with huge debts but not provide equal treatment for poor countries that had better managed their borrowing. In the end, IMF governors backed a plan to offer debt relief to any member nation with an annual per capita income of less than $380, regardless of its credit problems...
The benefits will go first to 18 countries that have been certified as having sufficiently prudent economic policies to qualify. An additional 22 nations may qualify, but still have to clear the bar by sticking to economic plans that satisfy IMF economists. Together, those countries owe some $55 billion to the IMF, World Bank and the smaller African Development Bank.
The article characterizes paying off poor countries that did not manage their debt well as "unfair", but economists would generally stress the moral hazard problem: Forbearance for poor policy may just induce more poor policy. That the issue was raised, and an attempt made to address it, is a good thing.
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