November 24, 2009
This is a joint post with Benjamin Leo.A special new lending facility was announced in July 2009 with the objective of providing up to $17 billion in new loans through 2014 and, to entice cash-strapped borrowers, the lender is waiving interest payments for the first two years. This may sound like dangerous new short-term teaser offers for sub-prime borrowers. But this isn’t coming from Countrywide Financial. It actually is a new IMF facility for low-income countries, including some of heavily indebted poor countries (HIPCs) who are just barely coming out of the last debt crisis.The stated objectives of the new IMF facility are laudable: to offset the effects of the global economic crisis by boosting international reserves and supporting adjustment policies. And yes, the overall terms are more concessional than past IMF loans. Nonetheless, the net impact on national debt levels may be significant. And it was just four years ago that the IMF committed to cancel roughly $6 billion in bad loans to many of these very same countries.Despite a tumultuous track record, new lending to HIPCs is, of course, not always a bad thing. Some of these countries have regained solid fiscal footing and are delivering robust growth results. In other cases, the loan volumes involved may be reasonable relative to GDP and export levels. For others, however, IMF and other international lending can be disproportionately large in relation to their fragile economies and debt carrying capacity. Take the example of Zambia. This year, the IMF approved new lending of $330 million, equivalent to roughly 3 percent of its GDP. When compared to skyrocketing U.S. deficits, this may seem modest. But, remember that this is 3 percent from only one lender and in only one year. The World Bank, African Development Bank, China, and other lenders are providing substantial sums as well. And they will probably do the same next year, and the year after…Worse yet, IMF and World Bank growth projections used partly to justify new lending remain extremely rosy compared to actual and historical performance. Our new dataset of IMF growth projections for HIPCs suggests a structural optimism of at least one percentage point per year . Lending volumes to the HIPCs have also remained unchanged (total lending to HIPCs pre-MDRI was about $4 billion per year; post-MDRI it is virtually the same and likely will be even higher given the new stimulus lending).In some ways, this is not dissimilar from Countrywide using aggressive assumptions to justify aggressive lending to vulnerable borrowers. The difference is that Countrywide no longer exists and that its new parent corporation appears uninterested in continuing these failed practices and is not actively targeting the same old recently-defaulted sub-prime borrowers.As suggested in the new CGD working paper by one of us, Ben Leo (Will World Bank and IMF Lending Lead to HIPC IV? Debt Deja-Vu All Over Again) now is a good time to take a step back from the frenzy of stimulus-inspired lending and re-examine the issue of debt sustainability in low-income countries. The upcoming IDA and AfDF replenishment negotiations present a good opportunity for this self-reflection. Absent corrective action, the international community may be faced with yet another HIPC bailout in the not too distant future.
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.