The IMF and World Bank Annual Meetings 2015: The State of Play

Next week’s annual gathering of the World Bank and IMF is going to be different for two reasons. Firstly, Finance Ministers from around the world will leave Washington DC and visit Lima, Peru – the first time the Meetings have been staged in a Latin American country for almost 50 years. This field trip has mobilised Latin American groups to set up an Alternative Platform to the official meetings to discuss these institutions’ contribution to development. The second is that the meetings are straight after world leaders adopted the 2030 Agenda for Sustainable Development – a ‘plan of action for people, planet and prosperity’. Both institutions have indicated that they are ‘fully committed’ to this agenda and are keen to define their role. However, some burning issues will be debated, particularly in light of the debt crises that have hit Europe and threaten other regions, and the recent changes in the landscape of development finance. Here we pick just some of them:

How will the world finance its infrastructure needs? 

In Lima, Finance Ministers will discuss how the World Bank Group (WBG) will support the Agenda 2030. To frame this debate the WBG has just released a background discussion note which features ‘infrastructure’ as a priority. As Eurodad has highlighted this is also a priority for the G20, with whom the WBG and other multilateral development banks (MDBs) are working, all of which will host a global infrastructure forum – one of the few concrete commitments in the Addis Ababa Action Agenda. 

However, many things have changed since the last gathering of IMF and the WB in April and there is increasing competition among financial institutions to finance infrastructure. The Articles of Agreement of the Asian Infrastructure Investment Bank, led by China, were opened for signature in late June and many traditional donors have already signed. This comes on top of the setting up of the New Development Bank – the Bank of BRICS countries – established in July 2014. These two institutions will also focus heavily on infrastructure. 

According to the discussion note, the WBG is committed to work on three objectives. The first one is to ‘promote climate-friendly and resilient infrastructure,’ which anticipates a clear link between the financing provided by the WBG and discussions that will take place later in the year as part of the COP 21 in Paris. 

The second one is to ‘support better public investment management,’ which means getting better at identifying, appraising, screening, implementing, financing and maintaining public sector projects. This is extremely critical, given that the lion’s share of infrastructure financing is provided by the public sector (more than 85 per cent) – something acknowledged by the WBG in its discussion note and stressed by Eurodad several times. However, the initiatives in this area (‘diagnosis, technical assistance, and where appropriate, financing’) seem to constitute a plan to advise countries on how to get projects built quicker (the current safeguards review is under fierce critique by CSO groups). Instead, there should be a clear agenda that benefits the population and avoids harmful social, environmental and economic impacts. [Last month’s Report from the Special Rapporteur on extreme poverty and human rights, raised a worrying red flag: “the existing approach taken by the Bank to human rights is incoherent, counterproductive and unsustainable. For most purposes, the World Bank is a human rights-free zone.”] 

The third one is particularly problematic and is connected to work area two: ‘support efforts to crowd-in new (private) sources of finance for infrastructure,’ which means work with countries to prepare projects that are ‘economically, financially and commercially viable’ and as a consequence attractive for private investors. This aim is being driven by two major initiatives: the public-private partnership cross cutting solution area (or PPP unit) and the Global Infrastructure Facility launched in October 2014. The objective is to increase private financial investment in infrastructure and promote PPPs as a financing mechanism. 
The focus continues to be in the wrong place and the drivers of this ‘infrastructure agenda’ refuse to learn from well-documented past experience and evidence of the problems associated with PPPs. As Eurodad has shown in its major report on PPPs, they often end up being very risky and expensive for the public sector – see cases in Uganda and Tanzania – there is limited evidence of any impact on efficiency, and the low transparency of PPPs is particularly worrying given the major social and environmental impacts of big infrastructure projects. 

Old and new debt crises and how to deal with them

The IMF faces a number of urgent challenges related to unresolved old debt crises, and the risk of new debt crises. 

Greece’s debt remains unsustainable, as the IMF pointed out in a debt sustainability analysis released earlier this year. Consequently, the IMF refused to lend additional money and finally demanded a substantial reduction of Greece’s debt, most of which is now due to the Troika institutions (European Commission, European Central Bank and the International Monetary Fund). The EU, however, continues to push for IMF participation in the third bailout programme which the Eurogroup – an informal body of ministers of the Euro zone – has negotiated in August. 
The situation in Ukraine also remains difficult. The IMF has already started to disburse its loans, although the required debt restructuring of Ukraine’s existing debt stock remains uncompleted. A voluntary debt operation negotiated with a creditor committee led by the investment fund Templeton has thus far reached only 50% of bondholder participation. Even if the other 50% will join, the small haircut of 20% implies that the restructuring won’t achieve €15.3bn debt reduction that the IMF deems necessary. Other creditors than the bondholders made no commitments thus far. 

An emerging challenge is the recent commodity price crash, and the expected rise in global interest rates following decisions made by the US Federal Reserve. For many developing countries that have commodity-dependent economies and lots of outstanding US dollar debt, the combination of lower export earnings with an interest rate shock could be fatal. It would trigger a new wave of developing country debt crises. The fact that the Chinese downturn seems to continue is also hurting the commodity exporters hard. To make things more complicated, analysts predict this will be the first year since 1988 that emerging markets experience a net outflow of capital. 

The above problems could provide new impetus to the debate on a new multilateral debt restructuring framework. Greece and Ukraine provide clear evidence that, with current instruments, debt restructurings cannot be conducted speedily and effectively when they are needed. However, the document prepared by the IMF in advance of the meetings in Lima ignores the work of the UN on debt restructuring principles. Instead, the document refers to the Fund’s work on improving collective action clauses and voluntary contractual approach to debt restructuring. But these are useless to address the current challenges as the lion’s share of Greece’s debt is due to official creditors – not to private bond holders –, the situation in Low Income Countries is similar. Even the existing HIPC/MDRI initiative that deals with official debt has expired, won’t be available to tackle a new debt crisis in impoverished countries.

Both institutions are facing critical governance issues

The much delayed implementation of the IMF governance reform is a burning issue for the institution and it appears that on this issue they are heading towards a near certain crisis. At the same time, the World Bank will be proposing a shareholding review during these meetings, as a follow up of an agreement reached in 2010. 

2015 should mark the completion of the Fifteenth Review of IMF quotas, which affect the voting share of IMF members. However, the Fourteenth Review has not yet been ratified, as the US Congress has blocked it – the US’s 16.85% voting share gives it a de facto veto on any decisions requiring an 85% majority of votes. It seems highly unlikely that anything will change to alter this scenario, and 2015 will end with the Fourteenth review unratified. Furthermore, this is the last chance for Ministers to meet before the end of year deadline.

This crisis comes at a time of significant global economic uncertainty, and high existing calls on the IMF’s resources. IMF quotas have to be paid for – so they directly affect the core resources that the IMF can lend to member countries. Edwin Truman of the Petersen Institute, and former assistant secretary of the US Treasury, recently estimated that IMF financing needs, dependent on the quota reform process, are “at least $500 billion” if not $750 billion in additional resources from this IMF reform round.

The World Bank’s review acknowledges that the ‘distribution of shareholding is important for the legitimacy of the institution.’ The document also refers to a ‘complex and evolving background’ for this review. Following only superficial reforms, developing countries still have a lack of representation at the Bank. The aim will be to get more engagement and a greater voice for developing countries to counter their motivation for setting up alternatives. This time the reforms seem to also be a mechanism to replenish Bank capital, and this is clearly intended to make it able to compete with the new players. Whether any concrete changes do take place remains to be seen.