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Financial Post, Weekly edition, Wed 01 Jun 88, page 12. Editorial.


Summit direction needed on debt

Brian Mulroney wants this month's summit meeting in Toronto of the big seven industrial nations to focus on economic issues. That was, after all, the original purpose of these affairs.

Among the economic questions to be considered, none is more important than the Third World debt problem.

Approaches to the problem - few would dare to claim solutions - have been advanced by both public and private sectors. But as Royal Bank of Canada Chairman Allan Taylor noted recently, the key element for an assault on the debt crisis is political will. And that, he said, must come from the seven summiteers.

The instruments for dealing with the problem, Taylor stressed, are the World Bank and International Monetary Fund. But it is the leaders of the countries that are the principal shareholders in these institutions that must give direction to the Bank and the Fund.

This direction should include a commitment to continue lending, but the lending must more than ever be contingent on appropriate economic policies being adopted by the recipient countries.

And it must be done on a case-by-case basis. As the World Bank said last month in a special report on the heavily indebted middle-income countries: ''The Bank's assistance is tailored to the specific country circumstances. The most important criteria to differentiate the Bank's assistance strategy are country policy performance and the source of present difficulties. There is considerable variation among the heavily indebted countries with respect to both these criteria.''

Agencies such as the World Bank and IMF accept the need for policy shifts the commercial bankers want to see if lending is to be continued. But the World Bank wants to make sure the commercial banks stay in the game. ''While the Bank's financial role can and should remain significant in meeting these financial requirements, it is also crucial that other creditors continue to do their part,'' the World Bank special report said.

In Taylor's view, the commercial banks' role should be restricted to short-term trade financing, and a narrow range of commercially viable project funding. ''More medium- and long-term money from commercial banks should only be expected through co-financing - equivalent status with official lenders such as the World Bank - or where guarantees are available,'' Taylor said.

It's the Bank and IMF that have the clout to impose policy conditions on the borrowers. That's why co-financings, with the commercial banks riding along under the conditions imposed by the multilateral lending agencies, offer the best chance of keeping the commercial banks in the field - where the World Bank and IMF want them to be. That would be a helpful direction for the summit leaders to give the multilateral lending institutions this month.

This information is provided by the Financial Post.
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Revised: June 3, 1995

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