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Financing Debt Reduction and the Trade-off With Official Flows



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Financing Debt Reduction and the Trade-off With Official Flows

On the whole it would be undesirable to transfer more bilateral aid to the World Bank and IMF. Thus there is a trade-off between using Bank and Fund resources for maintaining current levels of lending (or improving the terms and size of IDA and ESAF loans) and providing more debt relief.




A preliminary analysis of the trade-off suggests that it would be preferable to provide debt relief rather than aid. However, the extent of this trade-off will depend critically on how the Bank and Fund contribute to the HIPC Initiative and any further debt reduction. This suggests that resources should first come from those sources which will have the least impact on official financing in the future, particularly to the poorest countries, and used in sequence until the point is reached where the costs to developing/low-income countries of reduced capital flows equal the benefits of debt reduction. The sequence implied by this approach is broadly as follows:
 Bank and Fund loan loss provisions;
 The capital proceeds of sales of IMF gold reserves (with the largest volume of sales politically attainable);
 IBRD reserves released by relaxing the capital-plus-reserves constraint on lending;
 Bilateral contributions;
 IDA reserves and reflows.
While the cost of using bilateral contributions to finance multilateral debt reduction is relatively high, this would not be the case if genuinely additional resources could be generated. One possibility for this would be to secure agreement from those bilateral donors which are not already doing so to meet their international commitment to provide development assistance of 0.7% of GNP for a single year, on a one-off basis, expressly for debt reduction, for example to mark the Millennium. This would generate additional resources of around $100bn - equivalent to about half of the total debt of all the HIPCS (in present value terms), even before taking account of the debt reduction likely under existing mechanisms.
If current efforts to provide adequate debt-reduction for low-income countries were to fail, other financing mechanisms might be feasible in the long term. These would include, for example, the proceeds of a "Tobin tax" - an internationally-applied tax levied at a very low rate on all international currency transactions. The sheer volume of such transactions means that such a tax would raise very considerable sums (possibly hundreds of billions of dollars per year), which would provide plentiful resources for debt reduction and other priority development needs.
To achieve just and sustainable financial flows will require political mobilisation by concerned people and governments to press the World Bank and IMF to reconsider their models and operations.



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