SPEAKERS CONTENTS INSERTS
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REVIEW OF TWO GAO REPORTS ON THE POLICIES AND PRACTICES OF THE INTERNATIONAL MONETARY FUND
TUESDAY, JUNE 22, 1999
U.S. House of Representatives,
Subcommittee on Domestic and International Monetary Policy,
Committee on Banking and Financial Services,
Washington, DC.
The subcommittee met, pursuant to call, at 10:05 a.m., in room 2128, Rayburn House Office Building, Hon. Spencer Bachus, [chairman of the subcommittee], presiding.
Present: Chairman Bachus; Representatives Toomey, Waters, Frank, Watt, Carson, Lee, Inslee, Schakowsky, and Moore.
Chairman BACHUS. We now call to order the Monetary Policy Subcommittee of the Banking Committee. The purpose of our hearing this morning is to review two GAO reports on the policies and procedures and practices of the International Monetary Fund.
The Banking Committee requested these reports in 1998 as part of the authorizing legislation for the IMF, which was eventually passed by the Congress and signed by the President. The Banking Committee's legislative mandate specifically called for increased oversight of the IMF by the Treasury Department and by the GAO. Congress asked the GAO to investigate the financial condition of the IMF, its loan programs, and the trade practices of the IMF loan recipients.
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To facilitate congressional oversight of U.S. policy concerning the IMF, the GAO will make three annual reports to Congress. The first report examines the terms and conditions of loans that the IMF negotiates with the borrowing countries. The purpose of this report is to better understand how the IMF financial arrangements are negotiated and to determine if borrower countries comply with the terms and conditions of those loans.
The second report concerns the degree to which the IMF borrowers restrict free and open trade and whether their export policies may adversely affect the U.S. or result in unfair trade practices against U.S. companies.
The third report concerns the actual financial condition of the IMF, and this report will not be completed until September. However, it is my understanding that some preliminary results are available. This is important, as Congress must soon decide whether to authorize further funding for the IMF to finance its portion of the cost of the HIPC debt relief initiative. If the GAO has any information about the ability of the IMF to finance debt relief, I would appreciate hearing about it today.
This subcommittee is very interested in the debt relief effort for the 700 million people who are the poorest of the poor and desperately need our help.
In the past I have made my concerns known about the need for improved transparency and effectiveness of IMF balance-of-payments assistance. I am glad the GAO has made a serious in-depth study of the process that the IMF uses to consider loans, to structure loan terms and conditions, and to monitor and disburse loans.
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At the onset of this hearing, let me state what my concerns are.
Does the IMF properly use the wide discretion it has to determine the conditions and terms for loans, and does it frame those conditions in a constructive way for the borrower countries?
Second, what is the effect of the IMF loans on U.S. trading partners? Has the IMF sufficiently encouraged countries like Korea, Indonesia and Brazil to liberalize their trading practices?
Although the IMF has sometimes been criticized by a few for applying a ''cookie cutter'' approach to stabilization programs, it is my understanding that your report found this is not the case. In your first report, you found that the IMF has developed a broad framework for providing assistance that is to be applied on a case-by-case basis. You also found that the IMF's process for monitoring a country's compliance with the program conditions is a flexible one.
This raises another question, because other critics have recognized this flexibility and said the IMF has abused this flexibility by being too lenient with some countries, like Russia, while being too harsh with other countries, Uganda being an example.
For instance, in Russia, you have the issue of FIMACO, where apparently the Russian central bank took their hard currency reserves and made very risky investments in the Russian debt market. Now, your report—you all were over there earlier this spring, and that was an issue that really didn't come to light, I think, until your investigation was complete and you were preparing these reports; but I would like to know when the IMF became aware of this, if you can shed any light on that, the FIMACO arrangement and what, if anything, was done about it.
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Finally, I am concerned that the IMF has not done enough to prevent countries from using IMF loans to subsidize their export programs. In fact, my colleague, Mrs. Roukema, was concerned enough to require the GAO to report every year on the export practices of IMF loan recipients.
I am particularly concerned whether Korea has in any way used IMF funds to subsidize its steel exports. As you know, the steel industry has been severely crippled by the surge in steel imports, although I will say that the import levels have fallen off recently.
I look forward to hearing your findings on these issues, and again, thank you for your efforts in bringing more accountability and transparency to the IMF.
At this time, do any other Members wish to be heard?
At this time, Ms. Westin is going to give the statement. It will be the opening statement for the entire panel, and you have as long as you need.
STATEMENT OF SUSAN S. WESTIN, ASSOCIATE DIRECTOR, FINANCIAL INSTITUTIONS AND MARKET ISSUES, GENERAL GOVERNMENT DIVISION, U.S. GENERAL ACCOUNTING OFFICE; ACCOMPANIED BY HAROLD J. JOHNSON JR., ASSOCIATE DIRECTOR OF INTERNATIONAL RELATIONS AND TRADE ISSUES, THOMAS MELITO AND JAMES McDERMOTT
Ms. WESTIN. Thank you, Mr. Chairman and Members of the subcommittee. We are pleased to be here this morning to present several key findings in two reports that we are releasing today. We prepared these reports to address the mandate in the Omnibus Appropriations Act for 1999 that we report on the conditions that IMF negotiates with borrower countries and the trade policies of borrower countries.
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One report, the International Monetary Fund: Approach Used to Establish and Monitor Terms and Conditions, describes how the IMF establishes and monitors financial arrangements with borrower countries and assesses how this process was used for six borrower countries. These countries are Argentina, Brazil, Indonesia, Korea, Russia and Uganda.
The second report, Trade Policies of IMF Borrowers, identifies the trade policies of four IMF borrowers—Brazil, Indonesia, Korea and Thailand—and the likely effect of their policies on certain U.S. industry sectors.
The primary message of our testimony this morning is that the IMF has wide latitude in establishing and monitoring financial arrangements with member countries. This latitude arises from a process that involves both data analysis and judgment on the part of IMF staff and the executive board. Our work showed that the IMF generally followed this process for the six countries we studied.
Before I turn to the results presented in the two reports, let me say a few words about IMF conditionality.
IMF's Articles of Agreement provide that it may make resources available to members experiencing balance-of-payments problems. Access to IMF financial assistance is conditioned upon the adoption and pursuit of economic and structural policy measures that the IMF and recipient countries negotiate. This IMF conditionality aims to alleviate the underlying economic difficulty that led to the country's balance-of-payments problem, as well as to ensure repayment to the IMF.
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IMF conditionality has expanded as the magnitude and complexity of balance-of-payments problems have increased. It has moved beyond the traditional focus of policies to reduce aggregate demand to include structural policies that are aimed at increasing the capacity for economic growth. More recently, there has been an increased focus on strengthening countries' financial sectors. I should point out that evaluating the appropriateness of conditions in the arrangements was beyond the scope of this report.
I would like to highlight five important conclusions from our reports and illustrate each with country-specific examples.
First, the IMF has developed a broad framework for establishing and monitoring financial assistance arrangements that is applied on a case-by-case basis considering each country's circumstances. The process encompasses data collection and analysis, as well as judgment by the IMF executive board and staff, and thus gives the IMF wide latitude in assessing a country's initial request for assistance, negotiating terms and conditions for that assistance and determining the country's continued access to IMF resources. The IMF's charter limits financial assistance to members with a balance-of-payments need. The IMF primarily considers actual or potential problems in either the country's balance of payments or its reserve position to be a basis for providing financial assistance.
The specific conditions that the IMF and the country authorities negotiate are intended to address the immediate and underlying problems that contributed to the country's balance-of-payments difficulty. These conditions can include a variety of changes in a country's fiscal, monetary or structural policies.
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Fiscal policy conditions frequently call for countries to eliminate or reduce budget deficits. For example, Brazil's program called for limits on public sector debt. Changes in structural policies may include revisions to financial market regulation or tax policies. Korea's program, for example, called for restructuring the financial supervisory system.
The process of monitoring a country's compliance with program conditions involves both the borrower country and the IMF and is intended to ensure the country is achieving the program's overall goals. IMF staff reviews the borrower's economic performance and implementation of policy changes that were negotiated as conditions. Then the staff reports to the executive board at regularly scheduled intervals.
In certain situations where conditions have not been met, the staff may recommend that the board grant a waiver. If there is no waiver, additional financial assistance is not to be made available to the country until there is an agreement approved by the IMF executive board. This agreement may mandate policy changes before any further assistance is granted and change the conditions for future assistance.
Second, we found that the IMF has continued to make disbursements to countries that have not met all the conditions if it decides that the country is making satisfactory progress. This decision is based on IMF's analysis of data on the country's progress and IMF's judgment. For example, Argentina was granted a waiver in March 1999 when it missed a fiscal deficit target. The waiver was based on IMF's judgment that there was sufficient overall progress in implementing the program and that the deviation from meeting the required condition was minor.
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The IMF and borrower countries may also negotiate changes in conditions to respond to unanticipated developments. For example, the IMF and Korea revised Korea's program several times during its first two months. The IMF acknowledged that the initial program was overly optimistic as economic conditions worsened. Korea continued to have access to financial assistance during these renegotiations.
Third, we found that when the IMF determines that the country's progress in meeting key conditions was insufficient, disbursements have been delayed. These disbursements are not resumed unless satisfactory progress is achieved, in IMF's judgment. For example, the IMF delayed disbursements to Indonesia at various points during the current program until the IMF determined that the country had made sufficient overall progress in meeting the required conditions.
The IMF faced continual problems with Russia's implementation of its program. Over time, the IMF delayed disbursement and program approval, reduced the amount of the disbursement, and ultimately, suspended the program. According to the IMF, a primary reason for delayed disbursements was Russia's poor tax collections, reflecting a lack of government resolve to collect taxes.
However, throughout Russia's program, IMF staff expressed the view that Russia's key senior authorities were committed to the program and should be supported. Therefore, the board continued to approve disbursements. Finally, the deviations from the program became so great that there were no further disbursements after July 1998. Although the IMF managing director announced an agreement in principle in April of this year, the IMF board has not approved a new arrangement, to date.
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Our fourth main conclusion comes from the report on trade policies of IMF borrowers. We found that the IMF financial arrangements in the four countries we studied focus primarily on macro-economic and structural reforms rather than trade reforms. The reason for this focus is that restrictive trade policies were not major causes of the countries' financial problems leading to the request for IMF assistance. Nevertheless, the IMF sought to promote trade liberalization in these countries, and three of the countries have undertaken some trade liberalization within the context of their most recent IMF arrangement.
For example, Korea has eliminated four export subsidies, reduced some import barriers and made improvements to the transparency of its subsidy programs. Indonesia has committed to phase out most remaining non-tariff import barriers and export restrictions by the time its IMF program ends in the year 2000. Brazil has suspended a tax rebate given to exporters for 1999.
Finally, the large macro-economic changes in these countries caused by their recent financial crises complicate measuring the impact of their trade policies on the United States. Our analysis of recent trade data revealed that overall imports from Brazil, Indonesia, Korea and Thailand rose moderately in 1998. However, there have been substantial increases in U.S. imports from these countries in certain sectors.
For example, imports in one category of flat rolled steel from Korea rose by 36 percent to about $355 million. Under U.S. law, there are procedures to investigate and remedy situations such as steel import surges where U.S. industry believes rising imports are attributable to foreign government policy. We discuss these procedures in detail in our trade report.
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Mr. Chairman, I have presented some of the major conclusions of these two reports. My colleagues and I would be happy to respond to any questions that you or other Members of the subcommittee might have.
Chairman BACHUS. Thank you very much. I am going to go ahead and give some of the Members an opportunity to ask questions at this time.
Mrs. Roukema, do you have any questions?
Mrs. ROUKEMA. Mr. Chairman, I do not have lengthy questions at this point. I just want to perhaps get a general reaction from you.
It has already been stated—and I think you know my intense interest in the trade field. It sounds as though we are making progress here, but I am going to have to go over all the testimony. It is a very important issue for all of us, there is no question about that, but there at least has been some focus on that subject now.
One of the reasons—trade was the first reason I wanted to be here today, and I can't be here for a long time, because I have a conflict with a speech that I must be giving shortly.
But in addition, I wanted to state that there is an additional concern of mine and that relates certainly to what the G–7 nations have just stated in their pledge. It is not only for you, Ms. Westin, but for the others who are testifying later, but I saw no direct reference in your testimony to the question of the fact that the G–7 nations have pledged to work to relieve half of the crushing debt burden. A large portion of that debt burden, if not all of it, is because of IMF and World Bank requirements. The consequences of which Mr. Leach is trying to address it through his legislation, the Debt Relief for Poverty Reduction Act. The requirements that you have imposed upon these countries are having the indirect and maybe unintended consequences of withdrawing huge amounts of money from what those countries could otherwise, if properly directed, be applying to hunger and terrible problems of poverty that are escalating in these countries. I don't know that these are contradictory issues.
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Here I am, as one that is intensely interested on the trade issues, at the same time as a member of the board of Bread for the World and certainly sympathetic in terms of what the G–7 countries have now focused on. We have what may on the surface seem to be competing needs, but I think there is good reason why, both for short-term benefits as well as long-term benefits, we have to face these issues together. I hope they are not completely contradictory.
Do you have anything to state, Ms. Westin, in that respect, or shall we just leave that as an open question for further discussion after the panel is completed?
Ms. WESTIN. Well, there won't be any further testimonies, statements. So let me turn to Jim Johnson, because he and Tom Melito have worked on the HIPC, the Highly Indebted Poor Countries initiative, although we haven't done specific work on the G–7 proposal that has just come out.
Jim.
Mr. JOHNSON. With regard to your concern about trade liberalization, as we point out in our report and as Ms. Westin stated in her opening remarks, the IMF does, as a matter of course, try to encourage countries to liberalize their trade policies as they go through the development of a program; and we discuss that at some length in our report. Three countries included in our study actually had benchmarks and conditions that the countries were to meet as part of their programs. So there is progress being made in that area.
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Mrs. ROUKEMA. I just want to remind you, I have reserved judgment on that, but I do see you are making progress, but we will go in with a little more specific detail later in the hearing. If I have follow-up questions, I will submit them in writing to you.
Yes. Go ahead.
Mr. JOHNSON. Fine. About a year ago we did substantial work on the HIPC program. Of course, that has changed somewhat since then, and I would like Tom Melito, who knows this subject in great depth, to respond to your more specific question about what is happening today.
Mrs. ROUKEMA. Thank you.
Mr. MELITO. As Jim said, last fall we came out with a report on the current HIPC initiative, and at that time we reported that the amount of debt relief that was being offered at the time was probably not going to result in these countries' final exit from debt problems.
Chairman BACHUS. Would you repeat that again?
Mr. MELITO. The current initiative, the amount of debt relief that is offered under the current HIPC framework, was not likely to offer final exit for all countries from debt problems.
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And that was mostly due to the reliance of the initiative on export growth, and also the initiative was very optimistic in a lot of the projections for these countries.
The linkage in the current initiative to poverty reduction was also unclear, because for the countries which were going through HIPC at the time there was very little reduction in debt service payments. So where the budgetary resources were going to be freed up was very unclear.
You point out that the G–7 has indicated a great expansion in the HIPC framework and also linkage to the poverty reduction. We have not had a chance yet, obviously, to look at these new initiatives, but the linkage to poverty reduction is clearly something they are stating as a goal, and I think it is something which really needs to be looked at closely and how that will be implemented.
Mrs. ROUKEMA. But they are not mutually exclusive and you do see that there can be progress made on both fronts? I mean, this is a legitimate issue that is now being raised?
Mr. MELITO. Certainly. The issue would be in terms of actual debt service. These countries have very constrained budgets, thus the amount of debt relief has to be sufficient so that the actual amount of money that is being spent on debt service can go down. Resources can then be freed for other purposes, such as poverty reduction.
Mrs. ROUKEMA. Yes, and I think the fact that the G–7 countries are speaking out on their behalf is a good indication of where we should be going in the future.
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Mr. MELITO. Yes.
Ms. WESTIN. Mrs. Roukema, could I make one additional point on the trade issue?
Mrs. ROUKEMA. Please do.
Ms. WESTIN. Although there were not many trade-specific reforms included in the conditions for these four countries, many of the reforms, whether they are fiscal, monetary or, particularly, structural, will have impact on opening up the trade for these countries.
For example, one of the conditions that is in Korea's program is to eliminate the directed lending to the export-related industries, and so that should make the markets work more efficiently. But the flip side of that, of course, is that the large macro-economic effects, as in Mexico's crisis, namely the devaluation of its currency, is what is more important in leading to the increase in imports. I mean, the steel is cheaper now. It is not so much trade policies specifically, but it is the whole effect of the worsening of the economy that has led to the import surges in some of these sectors.
Mrs. ROUKEMA. I think we are going to have to get a little more specific and a little more precise, but we will take that up in written form following this hearing.
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Thank you very much.
I thank you, Mr. Chairman.
Chairman BACHUS. Thank you, Mrs. Roukema.
Ms. Carson, you are yielding to Ms. Lee?
Ms. LEE. Thank you very much, Ms. Carson.
Mr. Chairman, let me commend you for the concern and attention you have given to the operations of the IMF. I remember last year that there was quite a bit of discussion and controversy around the additional $18 billion a year, and I don't remember very favorable testimony from many with regard to support for that.
But having said that, I would like to ask a question with regard to this whole issue of conditionality and whether or not the conditions which the IMF sets for it have actually, ultimately increased or decreased the standard of living in those countries where IMF has loans?
And then second, I remember way-back-when, when Prime Minister Manley was the Prime Minister of Jamaica, that there were many issues around IMF conditionality during that period; and part of the controversy had to do with some of the conditions with regard to the foreign policy of Jamaica, because they had normal relations with Cuba.
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I am just wondering, in 1999, now, in terms of IMF conditionality, do those types of foreign policy considerations still pertain?; or did you look at it in terms of your overall study?
Ms. WESTIN. When we looked at the conditions, we looked at specific conditions for these six countries, and I don't believe that there were conditions in there that related to foreign policy issues. The conditions we did determine as we looked at how IMF assesses the balance-of-payments needs, and we actually have a table in our report in which we link the conditions that were set up to try to solve the underlying problems that led to the balance-of-payments problem; and I think that you can make that link in there.
For the question of evaluating whether these were the appropriate conditions or what were the outcomes of the conditions, you are absolutely correct that that was not part of this particular study. We have thought about how we might do that, and it is a difficult question to answer.
Part of the difficulty arises because you don't really know what would have been the case in the country without the IMF assistance. Second, the critics of the IMF have charged that the IMF needs to take into account more of the effect of its programs on the social policies in the country, and the conditions that it puts on are intended to improve the economy and thereby help the poor that way. But I know that some have suggested there need to be more specific conditions related to the relief of the social factors.
Ms. LEE. Mr. Chairman, can I have a little bit more time? May I ask a follow-on question to that?
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Given that, it seems you stopped short of looking at really what the true impact is of IMF participation, if you only look at the improvement of the economy. Because, of course, the economy may have improved, but you may have tens of thousands more individuals out of work; and so, on balance, did it improve or did it not improve?
Also, with regard to some of the requirements in terms of the cuts in government programs, did the health care of the people of those countries improve as a result of the economy getting better, because of the conditions set by the IMF?
Ms. WESTIN. Part of the difficulty is also that it is not just IMF conditions that lead to changes in the economy; it is what the country undertakes. And that might not be part of the IMF program.
So I think all of these factors would have to be figured in. It is difficult to make a direct causal link between just the conditions in the IMF program and then what happened to various sectors in an economy.
Chairman BACHUS. Thank you.
Mr. Toomey.
Mr. TOOMEY. Thank you, Mr. Chairman.
A couple of questions I would like to follow up on your testimony. One, you mentioned—you observed that the IMF limits financial assistance to members with balance-of-payment needs, but that the IMF has broadly interpreted that; and I wonder if you would comment a little more on just how broad that interpretation has been, whether you believe it is consistent with the charter, whether it has gotten to the point where it overlaps with and is perhaps redundant with respect to international development banks, and whether you think that the IMF is, in fact, institutionally capable of what seems to me a much broader role than it was originally intended to have?
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Ms. WESTIN. Well, I will answer the first part of that question and then turn to Mr. Johnson.
With regard to whether the IMF is establishing a balance-of-payments need before it gives assistance, we can really only speak to the six countries we looked at, but we were able to establish that. I think the reason why we say there is wide latitude or that they have broad discretion is because not only do they look at the actual balance of payments or at the reserve position, (changes in the reserves); but they also base it on potential changes, and as soon as you have both actual and potential in there, it gives you pretty wide latitude.
But, of course, it is the country that requests assistance from the IMF. It is not as if the IMF is looking to establish a program in every country. It is the country that makes the initial request for assistance.
Jim, do you want to take the next part of the question?
Mr. JOHNSON. I think that it is probably beyond the scope of our work to know whether or not IMF has the capability to undertake development activities. That is a very broad question, and it really goes to the issue of whether or not the World Bank and the IMF are fulfilling the functions that have been established for them.
There has been and will continue to be debate on that issue and it really is a question of how the ESAF structural adjustment programs are designed and developed, more than a question of what conditionality is applied to assistance furnished under the general resources account.
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Mr. TOOMEY. Thank you. Another question on a different topic really.
I believe Russia was one of the countries that you looked at, and of course, there are sensational accounts in the press about large sums of funds that were siphoned off that go into the wrong places.
Were you able to confirm that that happened, and if so, what went wrong? Is it a reflection of institutional, systemic problems, or is it a rare anomaly; and could you just comment on that?
Ms. WESTIN. Mr. Melito, do you want to comment? You have been following——
Mr. MELITO. As part of our ongoing work on analyzing IMF's financial operations, we will have some discussion of what IMF does to ensure that central banks are functioning in a way consistent with their general principles. We have thus far not been able to get access to the current information about FIMACO.
When the PriceWaterhouseCoopers audit is complete——
Chairman BACHUS. Mr. Melito, will you move the mike a little closer to you?
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Mr. MELITO. Sorry about that.
We have not had access to information yet which deals with the Russian Central Bank. We have had one interview with the IMF thus far on this subject. When the PriceWaterhouseCoopers audit is complete, which is scheduled, I believe, by the end of this month, we intend on meeting with the IMF and going over its results.
The IMF is formulating a set of principles on how it believes central banks should operate. These will be, I think, ready for the annual meetings according to their current timetable. These will be voluntary principles. I believe these principles will be established as a reaction to some of the concerns that have been expressed. But we have no information about what is contained in the PriceWaterhouseCoopers audit.
Mr. TOOMEY. Did you identify any systemic problems that might lead to this kind of development in the future?
Mr. MELITO. Prior to this recent goal of establishing principles, the IMF's approach to central banks was to not get directly involved in their operations. This was based on the assumption that central banks were operating transparently and with principles which were consistent with how things should work. Their indication to us in this one interview is that this has been their experience all along, and there haven't been too many instances of concern in the past.
They referred to one country, Kenya, I think, where they had some concern, but they have not had a major concern until recently, and they seem to be reacting to it. I cannot state whether they are acting quickly or appropriately yet. We haven't had a chance to evaluate that.
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Mr. TOOMEY. Thank you.
Thank you, Mr. Chairman.
Chairman BACHUS. All right, Ms. Carson.
Ms. CARSON. Thank you, Mr. Chairman.
Staff told me that the six countries included in your study were Argentina, Brazil, Indonesia, Korea, Russia and Uganda, and I am looking in your book and I can't find Uganda. Am I just overlooking it or—OK, it is not in this book here?
Ms. WESTIN. It is not in the trade policies report. We had four countries for the Trade Policies, and three of the countries overlap, Brazil, Indonesia, Korea; but for trade we also did Thailand. We looked at the larger trading partners with the U.S. among IMF borrowers for that particular report.
But in the Terms and Conditions report, the approach used to establish and monitor conditions for financial assistance, we have examples of Uganda throughout the report, and we include an appendix that includes the conditions in Uganda's current ESAF program.
Ms. CARSON. Thank you.
Chairman BACHUS. Did you want to yield your additional time to Ms. Lee, is that my understanding?
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Ms. CARSON. Yes.
Ms. LEE. Thank you very much for yielding. Let me get back to this whole issue of Russia and the IMF. Last year I believe we held hearings and heard some very troubling testimony as to what has taken place in Russia with regard to IMF funds, and it was very troubling in the sense that none of our witnesses during their testimony really could explain how this country and the IMF are going to tighten up a little bit so we could make sure that in the future funds did not end up in the wrong hands or being misused.
Now, if we are only recommending principles, guiding principles, and not really getting involved in IMF conditions with regard to anticorruption measures as a condition, then it seems to me that there is somewhat of a double standard when it comes to conditions vis-a-vis Russia versus conditions that are placed on other countries.
I am not sure if I am hearing this correctly or not, but could you explain that, please?
Ms. WESTIN. Well, for example, if you are perhaps comparing how the conditionality was handled for Uganda as compared with Russia and the monitoring, we looked at the monitoring of both of the current programs for those countries, and we found that essentially the process was followed the same way. With Russia, as I mentioned, there were several times that disbursements were delayed, and ultimately the program was suspended because the deviations from the conditions were so far afield.
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With Russia, as with any of the programs, as we have stated, there is a considerable amount of judgment on the part of IMF staff and the executive board on whether they deem that satisfactory progress has been made, even though conditions have not been met, that they will decide to perhaps renegotiate some of the conditions or go ahead and approve the disbursements. But the program was suspended in Russia, and no further disbursements have been made since last July.
Ms. LEE. I understand, but in terms of—if, in fact, further disbursements will be made, have the anti-corruption initiatives, if you have developed any, or will there be any forthcoming; should in fact more disbursements be made, or will the central bank continue to do business as they have been doing business?
Ms. WESTIN. I understand from the agreement in principle that was announced in April, there are some prior actions that Russia must take before the next arrangement is made. I am not sure if those prior conditions include anti-corruption or not.
Mr. JOHNSON. They don't directly include anti-corruption, but one of the prior conditions is that the PriceWaterhouseCoopers audit must be completed before a new program would be approved, and to date, that audit has not been completed. We understand that there is a draft report on that audit. We have not seen the draft, but it should be nearing completion. As I said, that is one of the prior conditions, and one would presume that that audit would call for some improvements, some changes, and make some recommendations in how the central bank operates so that the concerns that were raised in the past don't reappear again.
The IMF has told us that they are very concerned about this issue in Russia, but historically, their dealings have been with central banks, and the presumption is that the central banks operate in an above-board manner and without a great deal of corruption. The IMF's concern is focused on the macro-economic conditionality that is attached to the program and whether those conditions are met, more than on where the actual money goes.
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I think the IMF recognizes that there has to be some balance in that, and they are taking steps in that direction now. Whether or not the steps are sufficient is, of course, a matter of judgment.
Ms. LEE. Well, it just seems to me that if the audit is concluded and there are recommendations, that if they are not incorporated into IMF conditions and policies, you are going to see the same type of activities take place in the future.
Mr. JOHNSON. We will be requesting a copy of that audit report when it is completed, and we intend to take that into account in our September report on the financial condition of the IMF. That topic will be covered in more detail in the September report.
Chairman BACHUS. All right. Thank you.
We are going to go—I am going to yield my time to Mr. Toomey; and then Mr. Inslee, you will be after Mr. Toomey if that is all right.
Mr. TOOMEY. Thank you, Mr. Chairman.
I would just like to explore a little bit about, as a very practical matter, how the IMF prices its loans, and specifically, I guess a couple of thoughts. One, is there any direct explicit reference to market rates? Is there any effort to tie pricing to either a secondary market for debt for the countries that are borrowing or, otherwise, is there a conscious effort on the part of the IMF to develop some hurdle for a return on risk? Is that the methodology?
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And a general reflection on whether the rates end up being below what would be considered fair market rates or not? I mean, if they are not, then presumably it is crowding out private capital markets. If they are lower, then it is an implicit taxpayer subsidy, and I would be curious to know what kind of rates prevail and what kind of criteria are used to determine them.
Ms. WESTIN. Since 1983 the interest rate charged for standby arrangements and extended Fund facilities, the general resources account, resources is a weighted average of the short-term sovereign borrowings of five countries whose currencies make up the SDR: the U.S., the UK, France, Germany and Japan. And currently, this rate is a little over 4 percent, and commercial rates tend to be higher than those offered by the five nations.
For the SRF, for the Supplemental Reserve Facility, there is a premium added on. This is the facility that was set up——
Mr. TOOMEY. If I can interrupt you for just a second, you mentioned five different countries, each of which has a different currency. When we talk about a single rate, how is that translated into a—I assume the 4 percent you referred to is the U.S. dollar weight.
Ms. WESTIN. It is a weighted average of the borrowing power of those five countries.
Mr. TOOMEY. Not in terms of dollars? For instance, is it the UK borrowing cost, the sovereign debt priced in U.S. dollars, or is it comparing pounds sterling to U.S. dollars to Japanese yen?
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Ms. WESTIN. No. It is my understanding that these five currencies are what make up the value of the SDR. So they do a weighted average of what these countries are able to borrow funds at to come up with this 4 percent.
Does that answer your question?
Mr. TOOMEY. Yes.
Ms. WESTIN. Then for the supplemental reserve facility, the SRF, there is a premium interest rate on. That is the facility that has been used, just since 1997, when a country is in a balance-of-payments crisis, liquidity crisis, and needs to have access to funds quickly, and those rates are 7 percent currently, and then for the ESAF, those rates are set for all countries for ESAF loans at 1/2 of 1 percent.
Now—so IMF says the rate is market based, but it is lower than the rate that at times that they can borrow in the commercial market partly because the IMF is a preferred borrower. Its debt is senior to loans, for example, that commercial banks might make.
Mr. TOOMEY. OK. But the extent to which it is market based can only be said to be market based in that it refers to general, global market conditions; and it bears no relevance whatsoever, if I understand correctly, to the rate at which the borrowing nation could borrow money.
Ms. WESTIN. Do you want to expand on that?
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Mr. MCDERMOTT. That is correct, sir. However, a few other differences exist between the IMF loans and commercial loans that affect comparisons between them.
The key point is conditionality. Commercial loans to any one of these countries are not going to have the type of conditions that are associated with an IMF financial assistance package. Further, the IMF has priority over other lenders. That is also a difference between the two loans, making a direct comparison between interest rates on commercial loans and on IMF financial assistance packages problematic.
Mr. TOOMEY. Although a given country could adopt the reforms that the IMF requests and issue debt in the international capital markets, and then you would have a direct comparison. I mean, in either case it is sovereign debt, it is senior sovereign debt.
Ms. WESTIN. That is right, and that is my understanding of why, with the supplemental reserve facility, SRF, that premium is added on to make it so that the IMF is not necessarily the first option that a country would go to if it needs to borrow; and if it comes out of its difficulties, presumably then it is able to get back to the international capital markets, and often then, it can borrow lower than 7 percent.
Mr. TOOMEY. And the 7 percent is the nominal rate? That is not a premium added to some other rate?
Ms. WESTIN. No. The premium is the 3 percent over the 4 percent, which is the weighted market-based rate.
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Mr. TOOMEY. So the net cost, which is no surprise to anybody, is that IMF loans are always, I assume, priced considerably lower than any other kinds of debt that that nation can issue?
Ms. WESTIN. The SRF hasn't been used very often yet, but when the country is in deep financial trouble, yes, that rate is definitely below the rate that they could borrow otherwise. But as I said, as they come out of their difficulties, like Mexico did after the peso crisis, they are able to get back to the global capital markets and then they tend to pay off the IMF loans because they are more expensive.
Mr. TOOMEY. If I could just very quickly, Mr. Chairman, the conscience intended policy is not to attempt to price the loan with regard to the risk inherent in the loan, but rather to use a totally separate, unrelated set of criteria for establishing the rate?
Ms. WESTIN. That is correct.
Chairman BACHUS. Mr. Inslee.
Mr. INSLEE. Thank you. I wanted to ask you, specifically, there is a reference to Korea and steel in the report that I picked up on, and I wanted to ask you, just in general, what conclusions you could make about IMF funding and how it is tied to trade issues from the other side, meaning protection of our interests, if you will, and our markets, particularly with regard to steel; what would you conclude, if anything?
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Mr. JOHNSON. If the question is whether or not IMF programs in one way or another subsidize a country's export policy, that is a—particularly in the case of the crisis countries, that is a very difficult question to unravel, because so much of it depends on the macro-economic effects. But it is true that for a long period of time, Korea operated with a policy of directed lending, which might have a subsidy effect.
Korea has pledged under the IMF program to eliminate the directed lending policy so that part of the issue should disappear. Steel, a number of different types of steel commodities, clearly increased in imports in the U.S. as prices dropped, but trying to figure out to what extent that was the result of a trade policy or the effect of macro-economic issues that were ongoing at the time is very difficult to do.
Mr. INSLEE. This is the direct lending policy you are referring to. Is that something IMF decides on a country-by-country basis?
Mr. JOHNSON. I am sorry. The Korean government had a policy of directed lending. What Korea would do is direct government-owned banks to lend to steel companies.
Mr. INSLEE. Correct.
Mr. JOHNSON. And IMF, as part of their condition for the program for Korea, negotiated an agreement with Korea that it would eliminate that particular policy.
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Mr. INSLEE. Does IMF, in general, attempt to eliminate those directed loan programs?
Mr. JOHNSON. Yes.
Mr. INSLEE. Is there anything we, meaning in this country, could or should have done or should do in the future—let's take steel for an example—to be more assertive, or ask IMF to be more assertive in this regard?
Mr. JOHNSON. I think that our official policy has probably been fairly stringent. The U.S. Government works with the IMF as they negotiate these agreements, and I think—and I don't know how the other panelists see this, since it was not a direct subject of our study, but it seems to me that USTR and others are fairly forceful in letting the IMF knows what the U.S. needs in that regard.
Mr. INSLEE. Thank you.
Chairman BACHUS. Thank you.
Mr. Moore, do you have any questions?
Mr. MOORE. No questions.
Chairman BACHUS. All right.
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Mr. Watt, you have no questions?
Mr. WATT. No.
Chairman BACHUS. Mr. Frank, any questions?
Mr. FRANK. No questions.
Chairman BACHUS. All right. Let me ask you about the IMF supposed gold sales. There has been a lot of discussion about the IMF selling gold. It is my understanding that they are proposing to sell up to 10 million ounces of its gold reserves to finance its portion of the recently expanded HIPC initiative. What the IMF intends to do is sell the gold and then replace the book value of the gold, which is about $40, and then apply the surplus, which ought to be $170-$180 per ounce, to debt relief.
Can you give me any idea about—I understand this is going to be probably $2 to $2.25 billion. With that in mind, is that—well, I am trying to figure out how to pose this question.
Do you all have any comments on that, I will ask you, on the proposed gold sale?
Mr. JOHNSON. I am going to ask Tom Melito to discuss this, since he has been heavily involved in looking into this matter, but I think the transaction is a little bit more complicated even than you suggested.
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A fund will be created and that money will then be invested, and the earnings from the investment will be used to go into the trust fund. It is a complex transaction. Also, it requires an 85 percent vote of the executive board to accomplish this, but with that, I would like Tom to comment.
Mr. MELITO. As you said, there are several components to the sale. The first $43-an-ounce belongs to the general resources account, which will be paid back. And then the profits above that will be put into an investment account. It is the interest from the investment account which will be used for ESAF/HIPC trust fund. Your estimate is probably correct. It is probably around $2.4 billion which will go into the investment account.
I am not exactly sure what interest rate they expect to earn on that account, so that needs to be examined more closely.
Chairman BACHUS. What is that amount again?
Mr. MELITO. Well, if the price of gold is around $280 an ounce, which I guess is a little higher than the current price, that would earn about $2.8 billion for the 10 million ounces. About $400 million of that would be for the general resource account. That leaves about $2.4 billion for the investment account. That is just an estimate.
The role of gold at the Fund, according to the Fund's 1995 document, is that it provides a fundamental strength to its balance sheet as undervalued asset. I think they will perceive this as continuing that role, since the resources from the gold sales will stay within the Fund.
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We do not know the details of the gold sales, but what little indication there has been is that the IMF will try to minimize disruptions to the gold market. This is something which we will monitor as it proceeds, but we do not have any information on how they intend to implement the gold sales.
Chairman BACHUS. Jeffrey Sachs testified before our subcommittee, the full Banking Committee, last week. I think you all were present during that testimony. He said that IMF could finance, from their current balance sheet, the debt relief that is been proposed.
Do you have a comment on that?
Mr. JOHNSON. I am not sure how he was able to read the balance sheet in order to get to that conclusion.
The balance sheet is very obscure. But, we have looked at the operating budget of the IMF and there are some reserve accounts that make up about $6 billion.
Chairman BACHUS. $6 billion?
Mr. JOHNSON. About $6 billion, but they are for specific purposes, with the exception of two reserve accounts. One, I believe, has about $1.4 billion in the account and its usefulness now—the reason for that reserve account being established has expired essentially. There is a proposal that those funds could be used for the HIPC/ESAF trust fund.
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Chairman BACHUS. How would you identify that particular reserve?
Mr. JOHNSON. I believe that is called the SCA–1 reserve. Is it 2?
Mr. MELITO. Yes.
Mr. JOHNSON. SCA–2 reserve, and it was set up for countries that were then in arrears to offset the arrears principal, but that has been overtaken by events and that money will be disbursed one way or another.
Chairman BACHUS. Other than that one, you mentioned a second reserve?
Mr. JOHNSON. Well, there is another reserve account that, again, it is also set up for principal amounts that are in arrears by countries that are currently in arrears, and that is not fully funded at this point.
Chairman BACHUS. How much is in that reserve?
Mr. JOHNSON. About 900 million SDRs, which would be about $1.2 billion.
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Then there is a special reserve account, again, that makes up that difference that we spoke about.
Chairman BACHUS. You mean the difference between $6 billion and the $1.4 billion plus?
Mr. JOHNSON. There are actually two reserve accounts; a special reserve account which is part of their operating contingency, and then also a general reserve where they essentially set a target of 5 percent of net profit for other contingencies. But in total, they would not make up the amount that would be required for total debt relief.
The other part of that equation is, of course, that we don't know what the debt relief requirement will be at this time.
So it is fairly difficult to say whether they have sufficient reserves to handle the required debt relief.
Now, the word ''reserves,'' as used by the IMF, has several different meanings. In their operating budget, they do set aside a working balance reserve for operations, which I believe is about $19 billion. That is not really available for this type of use.
In addition, the IMF believes, and these amounts are not booked and they do not show up on the balance sheet, the IMF believes that they need a certain amount set aside in the event that creditor countries come and request to draw on their reserve tranche, which is a fundamental right that countries have, something that the IMF feels—and we agree with them—that they need some resources available for that purpose.
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Chairman BACHUS. Mr. Johnson, you say these monies don't show up on the balance sheet?
Mr. JOHNSON. The category of reserves that the IMF has kind of put a fence around for creditor countries to draw on in case they need to draw on their reserve tranche is not identified in the balance sheet. The amounts are there, but it is all lumped with the Fund's holding of currency of member countries.
Chairman BACHUS. In looking at balance sheets, is that a normal accounting practice for that? You say that is $19 billion, is it?
Mr. JOHNSON. Well, the $19 billion is like a working capital fund.
Chairman BACHUS. Is that the same one we are talking about or is that different?
Mr. JOHNSON. No, that is separate. The reserve that I had just referred to for countries to draw on for their reserve tranche would be in the neighborhood of $30 billion.
Chairman BACHUS. $30 billion?
Mr. JOHNSON. Yes.
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Chairman BACHUS. That is not clearly identified in their balance sheet?
Mr. JOHNSON. No, it is not. But it is identified now—one of the benefits of the congressional debate, I think, over the last year-and-a-half on the IMF has been that they have become much more transparent and they do put their operating budget on the Web. It is available on a monthly basis, and those amounts are identified in their operating budget.
Chairman BACHUS. How are they identified? Are they separately broken out and identified?
Mr. JOHNSON. They are identified in bracketed terms for the reserve that is set aside for countries to draw on their reserve tranche. The $19 billion reserve is identified specifically for working balances.
Chairman BACHUS. Let me ask you, you identified the reserve account, $1.4 billion. What is the account which you said was 900 SDRs or thereabout?
Mr. JOHNSON. That is special contingency account number one. It is just a designation that they use, and that is a reserve that has been established for countries—to take care of countries that are currently in arrears, like Sudan and Iraq. I think there are about five or six countries. Somalia is another country.
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Chairman BACHUS. Then you have two special reserve accounts?
Mr. JOHNSON. Yes. Then there are two reserve accounts, a special reserve account and a general reserve account, for essentially contingencies.
Chairman BACHUS. What is the breakdown of the amount of money in those two accounts?
Mr. JOHNSON. I would have to provide that. I don't have those numbers with me.
Chairman BACHUS. They total somewhere in the neighborhood of $4 billion?
Mr. JOHNSON. $6 billion. The total for the four accounts would be about $6 billion.
Chairman BACHUS. OK. Outside of the potential sale of gold, could you quantify the—give us your best estimate for the exact amount of funds available to the IMF in its current balance sheet, that they could use to fund debt relief?
Mr. JOHNSON. That they could use to fund debt relief?
That would be a very difficult number to develop, first of all, because the amount that is needed for their normal operations, for satisfying needs of countries that may have a balance-of-payments problem, is not known. In fact, potential demand for IMF resources is not known outside of the staff and management of IMF. They hold that information very closely, as they should, because that information could affect markets if it became known.
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The operational budget does show amounts that are available for lending, for use by the IMF.
Chairman BACHUS. What is that amount?
Mr. JOHNSON. I think that is $117 billion. One moment. Yes, $117 billion, but, of course, certain amounts are—then you have to subtract from the $117 billion, $19 billion for the working balance that I mentioned earlier and also $17 billion that is already committed, which leaves the IMF with $81 billion of resources that are uncommitted and available for use.
Looking at their liquidity ratio, in other words, the amount that is available for use versus the amounts of credits that could be drawn from the IMF by countries calling on their reserve tranche, is nearly 100 percent; it is 96.9 percent at the end of May. So they seem to be in a fairly satisfactory position in terms of liquidity.
Last fall, when the debate was ongoing about the quota increase, their liquidity had dropped to around 27 percent, I believe.
Chairman BACHUS. Twenty-seven percent, is that what you said?
Mr. JOHNSON. Yes.
Chairman BACHUS. Where is it now?
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Mr. JOHNSON. It is at 96.9 percent. That takes into account the quota increase. So it brought them back up to a fairly satisfactory situation.
Chairman BACHUS. What are some other options, other than gold reserves, that are readily apparent as sources to fund debt relief?
Mr. MELITO. In the case of the IMF, these numbers are preliminary, but based on the announcement in Cologne of the kinds of expansions to HIPC that they are discussing, IMF's share of debt relief would be approximately $2.3 billion. The Cologne Initiative indicated several ways to finance IMF's share.
Chairman BACHUS. That is out of a total of $80 billion that they maybe now have available to loan?
Mr. MELITO. It is out of the $27.4 billion that they consider to be HIPC's portion, with the other part considered bilateral debt relief.
Chairman BACHUS. This is HIPC's portion of IMF debt?
Mr. MELITO. IMF's part of the $27.4 billion under an expanded HIPC is $2.3 billion.
Chairman BACHUS. $2.3 billion?
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Mr. MELITO. Yes. In the Cologne Initiative, they had several suggestions on how this would be funded. One was the gold sales that you referred to. Another is have the use of premium interest rates that accrue to the HIPC trust fund. We think that means interest charges from the SRF, but that needs to be looked into further.
Then, finally, they proposed contributions from the SCA–2 account as a potential financing source. All along though, IMF has been soliciting bilateral contributions, and I believe as of this past April they had received about $75 million in bilateral contributions as well.
So how this all adds up in terms of IMF's potential $2.3 billion obligation I am not sure yet, but this has been the proposed sources of IMF's funding to date.
Chairman BACHUS. It seems pretty readily apparent that there are several accounts which contain billions of dollars that could be made available for debt relief, if there was a willingness of the IMF to utilize those accounts. Am I correct?
Mr. MELITO. They each have their own purpose. The reason SCA–2 is now on the table is that its purpose has pretty much expired.
Chairman BACHUS. Is that the $1.4 billion?
Mr. MELITO. Yes.
Chairman BACHUS. How about the $1.1 billion account?
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Mr. MELITO. That one, I believe, has a continuing purpose. It is for countries which are currently in arrears. The SCA–2 account was designed for countries which were in arrears in the late 1980's following the Latin debt crisis, and there are only a couple of countries which are still potentially eligible there. But they desire, and this is a policy of the IMF, to hold a reserve account for current arrears.
Chairman BACHUS. You are saying there is about $80 available to loan right now? Is that right?
Mr. MELITO. Out of the general resource account, yes.
Chairman BACHUS. Now, what was the $27.4 billion of that? Is that the——
Mr. MELITO. That is the estimate coming out of Cologne on how much an expanded HIPC would provide in debt relief. That is also from all creditors. That includes the World Bank, and the U.S. share. That is bilateral plus multilateral contributions to a new HIPC initiative.
Of that, $2.3 billion would be how much IMF would be responsible for.
Chairman BACHUS. All right. But actually, and I know this is maybe apples and oranges, but IMF has $80 billion available to loan, or for debt forgiveness actually, if they wanted to apply the entire $80 billion to debt forgiveness. Is the entire debt of the HIPC nations $27.4 billion?
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Mr. MELITO. The entire debt is not $27.4 billion. I believe it is just over $200 billion as of 1998 for the 41 HIPCs. The $27.4 billion is how much debt forgiveness is being proposed under the new initiative.
Chairman BACHUS. To be forgiven?
Mr. MELITO. To be forgiven as part of HIPC's share. They also want to forgive debt as part of the Paris Club process and also through forgiving ODA. That is how they get the total amount of debt forgiveness to be around $70 billion, that is by adding the different components.
Chairman BACHUS. Let me ask you this: When you assess the value, and Mr. Sachs pointed this out, Professor Sachs, what is the true value of that HIPC debt? I mean, a lot of it is not being repaid, so can you give me some estimates on what you really think it is being carried on the books, at what amount?
I am talking about for all 45 countries, what is the true value of their debt? What would be the true cost of forgiving that debt?
Mr. MELITO. I understand. Different creditors have taken different approaches. The U.S. has taken the approach where they tried to estimate a market value of this debt, and that has tended to be on average—Secretary Geithner said around 10 cents on the dollar.
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Other creditors hold it at 100 cents on the dollar.
Chairman BACHUS. Which is totally unrealistic, is it not?
Mr. MELITO. Well, it does make some sense for the World Bank and IMF traditionally to hold it at 100 cents on the dollar since they have traditionally been fully repaid. Prior to the HIPC initiative, there had been very little multilateral debt relief. So this has been a new development for the institutions.
Chairman BACHUS. Haven't they only been repaid because they loaned more money to repay it?
Mr. MELITO. Partly that, but also partly the bilaterals were taking the loss. Basically, bilateral loans were going into arrears.
Chairman BACHUS. But it wasn't being paid, was the bottom line?
Mr. MELITO. Countries are paying back some of their debt. They were choosing among their creditors, and they tended to choose the multilateral creditors, because that is where their new resources were coming from.
Chairman BACHUS. You are saying 10 cents on the dollar is a much more realistic figure for the value?
Mr. MELITO. I can't comment on that. I think it is an interesting question for us to look into, because there is actually a very different approach among the different countries.
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I know that when we did our work last year, some countries carry it 100 cents on the dollar for budgetary purposes. I think Germany was an instance. That makes it very difficult for them to forgive debt. Even if you believe it is worth less, their budget system is different than ours. To get into that is going to be very complicated, but I think it is an interesting issue.
Chairman BACHUS. What is the amount owed to the United States?
Mr. MELITO. From the HIPCs?
Chairman BACHUS. Yes.
Mr. MELITO. I think it is $6 billion, in nominal terms.
Chairman BACHUS. So 10 cents on the dollar would be $600 million?
Mr. MELITO. If it is nominal.
Chairman BACHUS. So 10 percent of that would be $600 million?
Mr. MELITO. Correct.
Chairman BACHUS. So when I testified last week that the cost to every American of total forgiveness of our debt would be about $1.20 a year, so that was pretty accurate, wasn't it?
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Mr. MELITO. If it is just $600 million, it is something along those lines, yes.
Chairman BACHUS. So it is pocket change?
Mr. MELITO. That is a policy decision about what the competing budgetary interests are, but it's a small amount, yes.
Chairman BACHUS. So the United States could basically announce that it is giving a full forgiveness of all of those countries' debts, the amount owed to them, for $600 million?
Mr. MELITO. Correct.
Chairman BACHUS. OK.
Ms. WATERS. Mr. Chairman, if I may. Let me just ask you with this new direction, the Cologne Initiative, the indication that we will give debt relief, but we will kind of dictate or formulate what countries must do in order to receive this debt relief—and it sounds admirable when it speaks to education and health and it alludes to AIDS—if I am to understand all of this correctly, because of structural adjustment many of these countries ended up not being able to support health care, which causes them to get way behind in what it was able to do for their health care systems and their children.
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We have basically increased infant mortality rates, and so forth, because they were dedicating a disproportionate share of their revenue to the payment of debt. Now am I to understand that there has been a reversal, and in this initiative they are saying we are going to give debt relief, but you must dedicate it to those areas where you have not supported it before because of structural adjustment? Am I to understand that there is some kind of reversal here?
Mr. MELITO. Again, this is just the announcement on the initiative in Cologne, so we need to look at the details, but they are linking debt relief to poverty reduction. That is clearly a goal that they have made a primary purpose of the new initiative.
We do not know how they will implement that. We do know that they will not announce how they will implement that until the fall meetings.
Ms. WATERS. OK. We will all have to pay special attention to that.
Do you know if we have ever asked the countries who receive debt relief if, in fact, we made debt relief available to the tune of the Cologne Initiative, how they would use their savings or their monies that they would not be paying back? Did we ask them to present a plan of how they would use it? Do you know whether that was taken into consideration?
Mr. MELITO. As part of the process to determine how to link debt relief to poverty reduction, the IMF and the World Bank have solicited input from the NGO community and presumably other interested parties. That report is scheduled to be published in the next few weeks, I understand.
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Ms. WATERS. Is that consistent with the direction of IMF? I mean, whatever was gathered, for example, if we looked at sub-Saharan Africa, there are reports coming out of there saying if we didn't have to pay back this money, this is what we could do; this is what we would do. Has anybody seen that?
Mr. MELITO. The linkage between debt relief and poverty reduction would have to come through debt service, and I think that is now recognized by the IMF and others. These countries have been paying some percentage of their debt all along.
Ms. WATERS. Of course they have been.
Mr. MELITO. The question is will any debt relief plan lower what they are actually paying, and then any savings which are derived from that, whether it could be used for purposes other than that——
Ms. WATERS. Let's go back. Did you say, the question is whether or not any debt relief would lower what they are now paying? Did you say that?
Mr. MELITO. Yes.
Ms. WATERS. That is the whole reason for debt relief.
Mr. MELITO. On the existing initiative, prior to any expansion they may implement, there really was no clear linkage between the debt forgiveness and the lowering of debt service.
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Ms. WATERS. Did you know that?
Chairman BACHUS. No.
Mr. MELITO. So that for most countries, the actual amount that they would pay in debt service would be little changed. I think in a couple of cases debt service would, in fact, go up. That is one of the reasons they are expanding the initiative. I think in all cases now they intend for actual debt service obligations to go down for recipients.
Chairman BACHUS. You are talking about in their proposal, the limited debt forgiveness that they are proposing?
Mr. MELITO. Yes.
Chairman BACHUS. You are not talking about, obviously, a full extinguishment of debt relief would free up tremendous amounts?
Mr. MELITO. Sure. We are talking about the current Cologne proposal.
Chairman BACHUS. The current proposal?
Mr. MELITO. And its effect on debt service. When I was referring to little effect on debt service, I mean the existing HIPC initiative.
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Ms. WATERS. OK. I am referring to Cologne now.
Mr. MELITO. The Cologne Initiative, again we have to look at these numbers closely, but the magnitudes of the debt relief they are discussing should have a substantial effect on debt relief.
Ms. WATERS. Substantial?
Mr. MELITO. Yes.
Ms. WATERS. That is what we are looking for.
Now you said something a moment ago, when you were speaking to Mr. Bachus about interest rates—would you repeat that?
Mr. MELITO. It was my colleagues, actually.
Ms. WATERS. Oh, I thought it was you.
Was it you?
Ms. WESTIN. Talking about the interest rates and how it was set in response to Mr. Toomey's question?
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Ms. WATERS. I am not sure. I thought I heard it from Mr. Melito.
Premium rate.
Mr. MELITO. Oh, premium.
Ms. WATERS. Premium rates.
Ms. WESTIN. The premium, the 3 percent?
Ms. WATERS. Yes.
Would you repeat that, please?
Mr. MELITO. Sure. As part of the funding of IMF's share of HIPC debt relief, the Cologne Initiative proposed that the receipts from premium interest rates accrue to the HIPC trust fund. We think what they mean, because we haven't actually had a chance to discuss this with them, that they mean the funding from the SRF, which would be part of the loan to Brazil, part of the loan to Russia, part of the loan to Korea. Whether or not that is what they are talking about, we need to verify.
We do know from our previous discussions that they were focusing on the Brazilian loan and taking 2 of the 3 percentage points on the Brazilian loan and considering devoting that to the HIPC trust fund. I believe their estimate at that time was around $200 million.
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Ms. WATERS. Would you let us know as soon as you are able to ferret all of that out?
Mr. MELITO. Yes.
Ms. WATERS. IMF, you had the responsibility for oversight of, I guess the loans, the debt relief, structural adjustment, all of that. Is that correct? What is your responsibility?
I missed it. I am sorry I was late and I apologize for that.
Ms. WESTIN. Our responsibility under the Omnibus Appropriations Act is to report to Congress on the terms and conditions of the loans.
Ms. WATERS. OK.
Ms. WESTIN. The monitoring of the loans. The General Accounting Office does not have monitoring authority or oversight over IMF.
Ms. WATERS. OK. Thank you very much.
Chairman BACHUS. One of the things that you were to report to us was about the conditionality of these loans and to compare the conditionality of what the conditions may have been for one country as opposed to another country.
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Let's address Uganda, which is obviously one of the countries that is a prime candidate for debt forgiveness. What conditions were put on the loan to Uganda?
Ms. WESTIN. On Uganda, just looking through the report where we list these out——
Chairman BACHUS. Yes.
Ms. WESTIN. In our Terms and Conditions Report, the thicker report, in the appendix on Uganda, Appendix 7, we do list out several conditions. The conditions for Uganda tended to be in the three areas of conditions of other loans. Some of them are fiscal. Some of them deal with monetary policy. Some of them deal with structural adjustments.
Did you want me to relate some of the specifics?
Chairman BACHUS. Yes. What were the differences in those conditions? Were they pretty normal? How did they compare to, say, the conditions that were put on Russia?
Ms. WESTIN. Well, one of the conditions you often see is, for example, setting the ceiling of how much money can be in the banking system. That is a monetary policy to help control the rate of inflation.
I think it is difficult to answer specifically were the conditions the same from country to country, because the problems that cause the balance of payments difficulties tend to be a little bit different; the economic conditions and structure.
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Chairman BACHUS. What was the cause in Uganda?
Ms. WESTIN. For Uganda, I have another table here. We have a table in the letter of the report that talks about it.
Chairman BACHUS. So it would be in there? We could follow it there?
Ms. WESTIN. Yes.
Chairman BACHUS. Was there any consideration given to how that—go ahead.
Ms. WESTIN. I have the underlying causes of the problems, the balance of payments problems for Uganda; vulnerability to external shocks; uncertainty over revenue measures, in other words how much revenue they were going to be able to get; substantial expenditure pressures, meaning there were budget pressures.
Chairman BACHUS. One of those would have been debt relief?
Ms. WESTIN. And deterioration in terms of trade. In other words, making it more difficult for them to raise revenue from the trade.
Chairman BACHUS. In other words, a lot of these highly indebted poor countries, their problem is lack of reserves or budgetary restraints because of debt payment? Is that correct?
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Ms. WESTIN. Debt payment is certainly part of it, that is right.
Mr. JOHNSON. Also, an underlying reason for that is that many of those countries are single export—they have a single product, and if the market price deteriorates in some way, their export earnings drop radically and that makes them very vulnerable to any of these kind of shocks that occur.
Chairman BACHUS. Do you know, has there been any consideration by the IMF, the fact that if they are a single product exporter, if they have a single product to export, that the only way to break that dependency on that one product is through education and through raising the educational level of the people so that their economy can produce other goods and services?
Mr. JOHNSON. I don't know that we have seen those kind of discussions take place. There is a recognition that economies need to diversify in order to grow and sustain growth, but the sort of fundamentals that you speak of, I would have to defer to people that have read the more detailed document.
Mr. MELITO. Export diversification is a major goal of any of these conditionality programs. Do they make a direct linkage to education? I am not sure. I am not aware of such a linkage. I think they are dealing more in terms of sectors and what sectors can be effectively developed.
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Certainly education is an important input in that context. They do take it very seriously that these countries need to have diversified exports.
Chairman BACHUS. Ms. Waters.
Ms. WATERS. This may not be a fair question, but since our Chairman moved in the direction of what does it take to diversify the exports and get more involved in global trade in order to support these countries, has there been any discussion about ways that we could assist in the development of natural resources so that these countries can realize some of the wealth potential from gold and diamonds and oil?
It seems to me that this potential is somehow being lost because of a lack of either the country's ability to develop these resources or the plain old exploitation of them by others who kind of get hold of the means by which to produce them. Is there any discussion of that anywhere?
Mr. MELITO. Part of the HIPC initiative, the current initiative, was to estimate exports into the future, and they relied heavily on substantial export growth. This came partly from an assumption of export diversification.
They did expect a number of these countries to get into primary metals, and other areas.
I can tell you one example of why it is so difficult. They assumed that Burkina Faso would be able to get heavily into the gold sector, but the infrastructure of Burkina is very primative, and it is very difficult to get out to where the mining is, where the gold is. Over the course of the last several years, the price of gold has steadily fallen. So being able to get enough international investment into the sector with the lower price of gold has been a challenge that I don't think they will be able to meet currently.
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They do see this as a very important element in these countries' exports, but they have to consider it in the context of the overall price of the commodity and the difficulty of getting investment in places that are far from the cities.
Ms. WATERS. I see. Does IMF ever view assistance in development in looking at the potential of these countries? For example, even with the problem that you have identified of the price of gold, and even if the price of gold, you know, the world market ends up 50 percent, say, of what it is now, it just means more people will be able to buy gold. So do they ever look at investment and long-range development rather than simply whether or not these areas are attractive to investment from international interests?
For example, if the government or the private sector of Uganda or one of the other countries decided they wanted to develop some of these natural resources, but they needed capital by which to do so, does the IMF look at those possibilities for investment in these countries in firms or interests that would like to develop the natural resources to provide for growth and basically development? Do you know of any of that?
Mr. MELITO. The IMF's approach to this usually involves the other multilaterals, so this usually requires project lending, because you need to build up infrastructure, which the World Bank and the other regional banks are better suited toward.
It also usually involves a concerted effort in terms of trying to align the country's economy to something which is receptive to international investment.
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I know that they take this very seriously. I am just unable to answer about whether it is effective or not. I think it is country by country.
Ms. WATERS. I don't see any evidence of that.
Mr. MELITO. There are some countries that have had some successes. Uganda has certainly gotten some private investment over the last ten years which has been an improvement over the previous ten years.
Ms. WATERS. Do you know what areas?
Mr. MELITO. Certainly in coffee production.
Ms. WATERS. Coffee.
Mr. MELITO. But I believe in some of the other primary commodities. It is not a large part of their economy, but it is something they aim for.
How successful this has been is a different question. It is part of their goal to achieve those things.
Ms. WATERS. I see.
Ms. WESTIN. Yes. I found a criterion that had to do specifically with health and education. This was a quantitative criterion, performance criterion, for Uganda in its most current IMF arrangement, that it had to increase its minimum expenditure by no less than 50 percent of the first $8.6 billion of import support in excess of cumulative projections.
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That was to go to health and education. Sorry, that is billions of Ugandan shillings, not dollars.
Ms. WATERS. Health and education?
Ms. WESTIN. To go to health and education, which were considered priority program areas.
Ms. WATERS. Now, can you tell me how much savings they are going to realize from debt relief?
The reason I am asking this is, when you look at the amount of savings and you look at the mandate, whether or not it makes good sense, whether or not it is reasonable, whether or not it was what the country can do, can you tell me yet or do we have to wait awhile to find out whether or not Uganda—what the debt relief really is or is not?
Mr. MELITO. Speaking about the current HIPC first, our report shows that, in fact, Uganda's debt service was going to rise following the HIPC initiative. That was because some of the bilaterals had been giving money to a fund which was helping Uganda to pay its debt service. That money was no longer going to be contributed after HIPC debt relief.
Under the expanded initiative, we do not know. We do know that there is an intention for it to be retroactive. By that, they mean countries like Uganda which have already received debt relief under the existing initiative will have their debt level lowered now to whatever the level would be under the new initiative.
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As I said earlier, they really are intending now to lower debt service, but I do not know what that impact will be.
Ms. WATERS. Mr. Chairman, it would be very important for us to understand the initiative and to calculate now what it is going to mean, so if we need to make a case that, in fact, it is not doing what it is intended to do, that you are not going to have real debt relief, something else needs to be done. We need to know that as quickly as we can know it.
Chairman BACHUS. Let me say this: We commissioned the GAO to take a look at the HIPC debt relief process, and you have done that. But now we have had these announced changes in Cologne so that study is somewhat dated.
So what I would request, and I think it is a follow-up to what we have already requested, and this is an annual assessment, is that you go back now, based on what is been proposed at the G–7 meeting, and that you renew your study on HIPC debt relief so that you can answer some of these questions that Ms. Waters and I and others are concerned about.
So in light of Cologne, the G–7 meeting, we would like you to renew your study.
Mr. JOHNSON. We can certainly do that, and we can discuss with staff the arrangements on timing and on specific issues.
Ms. WATERS. Mr. Chairman, I would like to ask you also to consider, since I have been trying to make AIDS a factor in debt relief, not just foreign assistance, but in debt relief consideration, and since they are directing that resources be spent on health and education, which would include AIDS, I would like to know what the increased burden on the countries is as a result of AIDS.
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For example, if you had a health care system that cost you X amount of dollars in 1990 and then with the growing and the increases and pressures of AIDS, now it is, you know, twice that much, I would like to know that; so that I would be able to at least try and make a case for why then, if this is what the criteria that you are using are to get this debt relief, that you dedicate X number of dollars, I would like to show that, OK, there is an increase, so you need to factor in this increase in the cost of it for the health care system based on this AIDS epidemic. So if we could find out what those increased pressures are, I would like to know.
Mr. JOHNSON. We did a report last fall that addressed some of those issues, and I will see to it that you get a copy.
Ms. WATERS. OK.
Mr. JOHNSON. I am not sure it addresses your question in total, but it does address some of the issues and what the U.N. and the Agency for International Development are doing primarily in Africa, but in other countries as well, to address the issue of AIDS/HIV.
Ms. WATERS. That is fine. I want to see what we can do as we look at debt relief in relationship to it also.
Mr. JOHNSON. That study did not include issues like debt relief, but there may be some correlation that can be made in follow-up work that we do.
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Ms. WATERS. Thank you.
Chairman BACHUS. Thank you.
My last question: You actually traveled to Uganda and examined the conditions there; is that correct?
Mr. JOHNSON. We did that for the HIPC program review.
Chairman BACHUS. The HIPC program. How about for the ESAF?
Mr. JOHNSON. Yes, April 1998.
No, we did not travel to any of the countries, with the exception of Indonesia.
Ms. WESTIN. Yes. We have been working on this in conjunction with other jobs, the House Banking request that we have underway.
Chairman BACHUS. Sure, I understand.
Ms. WESTIN. Indonesia, Korea and Thailand.
Chairman BACHUS. By traveling there and seeing the conditions in Uganda, what was the effect of the IMF's HIPC debt relief program? Was there a positive effect? Could you determine whether it had beneficial effect?
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Mr. MELITO. At the time a GAO team visited, and I was not on that particular team, the HIPC relief had not yet begun so it was still at that time a projection.
Chairman BACHUS. When was that?
Mr. MELITO. This was April of 1998, which was just prior to the actual final agreement with Uganda, but as I indicated earlier, the projections at the time did not indicate any dramatic change in Uganda's debt service and, in fact, an increase was likely.
Chairman BACHUS. So it could be safe to assume that it has probably not had any positive effect on addressing the severe social needs of the people?
Mr. MELITO. I would like to look at this again, but according to the numbers at that time, I would not see how they could have had a clear linkage to poverty reduction under the existing framework.
Chairman BACHUS. All right. Thank you.
Ms. WATERS. Mr. Chairman, if I may, I did go to Uganda on the trip with the President, and I spent a lot of time visiting their health clinics and looking at the AIDS problem, which is just overwhelming. They have no treatment for AIDS. They do have testing, but they can't do anything about it once it is identified. It is awesome. I also went to some of their public schools that are basically schools without windows and with very little in the way of resources.
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Even though they have a very dedicated and powerful leader in Museveni, they are desperate for resources.
Chairman BACHUS. It seems that the IMF has tremendous financial resources, but that as far as in the areas of debt relief or the highly indebted poor countries, almost none of those resources have gone into addressing any of the social needs of the people of those countries, which is a real disappointment. I think it also should empower us in Congress to continue to press for full debt relief for these countries.
Thank you very much.
Ms. WATERS. Thank you very much.
Chairman BACHUS. Thank you.
Ms. WATERS. I ask unanimous consent to submit my statement for the record, Mr. Chairman.
Chairman BACHUS. Without objection, your statement will be entered into the record. I think it can be entered into the record at the start of the hearing right behind mine.
Ms. WATERS. Thank you.
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Chairman BACHUS. Or in front of mine.
This hearing is adjourned. We really appreciate the work you have done. Very complex issues. It is something that you have not been intimidated by, and you have shown a lot of professionalism, and I appreciate your answers and your testimony here today.
Ms. WESTIN. Thank you.
Chairman BACHUS. You have acquitted yourself well.
[Whereupon, at 11:55 a.m., the hearing was adjourned.]