House of Commons Issue No. 16 Minutes of Proceedings and Evidence of the Standing Committee on Foreign and International Trade
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From Bretton Woods to Halifax and Beyond:
Towards a 21st Summit for the 21st Century Challenge

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This is an area in which Canada has made a considerable contribution in previous G-7 economic summits, from the "Toronto terms" of 1988 to the "Naples terms" resulting from last year's summit, which called on the Paris Club (the forum for the rescheduling of bilateral official debts) to write down up to two-thirds of the debts owed by the poorest and most highly-indebted countries. However, the overall stock of developing-country external debt has continued to grow to over US$1,600 billion and the multilateral problem of high debt burdens remains unresolved.

As argued by Harvard economist Jeffrey Sachs, a prominent adviser to non-OECD countries facing international payments crises, there is still no adequate overall rules-based framework for dealing with many of the problems of nearly insolvent debtor countries and their creditors. Sachs therefore envisages that a potential role for a reformed IMF should be to act as a supranational parallel to the domestic administration of bankruptcy laws (along the lines of the U.S. "Chapter 11" protection). This would give to the Fund the legal powers to bring about a better and more orderly way out of liquidity crises, or from under crushing debt burdens, that are costly not only to the countries concerned but to the global economy as a whole. 38 Such a proposal, which we will refer to again in revisiting the powers of the IMF to promote greater financial stability, is bound to be contentious. However, we raise it here as a further and provocative idea that we think Canada should pursue at Halifax to enlarge the scope for reforming the IFIs' roles in dealing as constructively as possible with sovereign debt problems. In particular, we wish by this initiative to encourage reflection on new techniques to protect developing-country interests in regard to their international creditors.

If the non-OECD world as a whole needs better ways to resolve debt payments crises and to reverse outflows to richer countries, the problems of debt servicing and insolvency are by far the most serious for the severely-indebted low-income countries (SILICs), mainly in Sub-Saharan Africa, which owe much of this debt directly to the IFIs. Despite the various debt reduction initiatives to date, the plight of these countries in particular "continues to worsen", in the words of the latest DAC report on the development cooperation efforts of donor countries. 39 While IFI net flows to poor countries are expected to be modestly positive overall, some countries have built up a clearly unsustainable overhang of debts to them. As well, as Gerald Helleiner pointed out:

A great deal of the servicing now successfully undertaken by borrowers from the international financial institutions are financed directly by grants from Sweden, Holland and other countries that see that the provision of cash to allow them to service their debt to the IMF and the World Bank is the best form of aid. But those donors are becoming very annoyed at the opportunity cost, because they could be using the money for much more useful activities. [16:27]

Several other witnesses, and notably the brief submitted by Oxfam-Canada, urged that the question of debts owed to the IFIs - which cannot at present be rescheduled or written down - be revisited at the Halifax Summit. The government has indicated that it is aware of these dilemmas, stating in its response to the report of the special joint committee: "The World Bank is examining the issue of the growing debt owed by the poorest countries to multilateral institutions. Canada will press for innovative ways of assisting SILICs to manage this component of their debt burden". (p. 40) Given that high real interest rates pursued in the North for domestic reasons have contributed to the size of that burden, there is a compelling argument for creditor governments and the IFIs helping to lighten it. Among the options that might be explored are rescheduling or suspending debt service payments in the cases most deserving of attention (the major problems are in about a dozen very low-income African countries). In practical terms, any such options should avoid increasing budgetary aid costs or compromising the high credit standing of the IFIs. Recently, proposals have also been made (for example, by the British government, and endorsed by Canada's Minister of Finance, the Hon. Paul Martin in his 26 April address to the IMF's Interim Committee meeting in Washington, and in his 2 May appearance before the Committee) for the use of the IFIs' reserves - in the case of the IMF, to sell a "modest" amount (perhaps 10%) of its gold stocks valued at US$40 billion to achieve a more lasting solution, on a selective country-by-country basis, in cases of accumulating arrears and clearly unserviceable debt burdens. A special allocation of SDRs to the poorest countries might also be used for this purpose. In such cases, however, strong conditionality would probably have to be applied to the countries being assisted in order to prevent the "moral hazard" of such problems recurring.

Therefore, the Committee recommends that Canada continue to demonstrate international leadership on debt relief issues by raising at Halifax the Sachs proposal for a larger reformed IMF role in resolving sovereign debt crises. Recognizing, more particularly, the growing problem of unserviceable debts owed to the IFIs themselves by the poorest countries, the Halifax programme of action should specifically include measures to lighten the burden of multilateral debt for these countries, and should address changes in IFI rules which may be required to achieve a more long-term solution to this problem. The use of IFI reserves to resolve such debt problems should, under "Halifax terms", be applied on a selective country-by-country basis, and be broadly conditional on countries' commitments to sound economic policies and to poverty-reduction and sustainable human development objectives.

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