IMF cancels Liberia's debt

13 November 2007

The International Monetary Fund (IMF) announced yesterday that it will write off Liberia's debt by securing $842 million from its own institutional reserves and donor country pledges. The move comes after the Fund endured heavy criticism in the international media last month for not following through on its commitment to Liberia, eighteen months after the country had met the IMF's stringent policy conditions.

The International Monetary Fund (IMF) announced the cancellation of Liberia’s debt yesterday. A combination of donor pledges, primarily from the Group of Eight (G8) wealthy countries, and the IMF's own reserves, amounting to a total of $842 million, will enable a Fund-managed process of debt clearance.

The debt cancellation agreement with Liberia encompasses $2 billion debt to the primary multilateral creditors -- the World Bank, the IMF, and the African Development Bank -- as well as $1b to the Paris Club of creditor nations, and $1 billion to commercial banks.

Liberia, a country emerging from 14 years of civil war, needs debt cancellation in order to mobilize desperately needed development aid. According to Jubilee USA, debt relief symbolizes a sense of real progress for Liberia in the international community and gives its democratically elected government, led by President Ellen Johnson-Sirleaf, a significant boost. It allows the government to expend its resources and capacity toward poverty reduction and governance instead of being mired in bureaucratic talks with the international financial institutions.

In an IMF press release on November 12, the Fund’s Managing Director, Dominique Strauss-Kahn, affirmed that this is a “critical step in moving Liberia onto a path toward comprehensive debt relief.” Strauss-Kahn thanked the donors, leaders of low-income countries, World Bank President, Robert Zoellick, and Liberian President, Ellen Johnson-Sirleaf, for the leadership of her economic team. Johnson-Sirleaf`s government balanced the country’s budget and doubled revenues within four months of taking office and signaled no-tolerance for corruption by firing corrupt government officials.

“Despite difficult post-conflict circumstances,” Strauss-Kahn said, “the Liberian government has established an encouraging track record of macroeconomic management and reforms.”

The IMF had committed to cancel Liberia's debt upon its implementing the Fund's political and economic policy recommendations. During the annual meetings of the IMF and World Bank last month in Washington, President Johnson-Sirleaf had asserted to both the IMF and World Bank that Liberia has met its political and economic requirements to obtain debt cancellation, while recovering from a civil war. However, 18 months after Liberia met the recommendations, the IMF had still not followed through on its end of the bargain. Consequently, the Fund was heavily criticized for “failing to meet its commitment to write off $800 million in debt owed by Liberia.” The IMF had “repeatedly missed its goals for writing off loans, interest payments and penalties.” Debt cancellation campaigners illustrated the situation as a failure of global debt agreements and promises made to Liberia.

The Fund’s inaction was rooted in the fundamental disagreements between IMF managers, middle-income countries, and rich G8 countries. IMF managers maintained that Liberia’s debt financing should come from the shareholder countries; middle-income countries asserted that rich countries should be contributing the majority of the required cash; wealthy countries argued that the IMF possesses sufficient internal resources to meet Liberia’s financing needs. With the dissensions over how to finance Liberia's debt relief now resolved, the IMF is intent on concluding a three-year Fund-supported economic program with the Liberian government, under the Heavily Indebted Poor Countries (HPIC) initiative. The IMF claims this is geared toward "debt sustainability" and "further economic recovery" for the country.

Resources

• IMF Managing Director Dominique Strauss-Kahn Announces Financing Milestone on Debt Relief for Liberia, IMF Press Release No. 07/254, November 12, 2007 (IMF website)
• Arrears Clearance Plan for Liberia Approved, World Bank Press Release, November 12, 2007 (World Bank website)
• IMF ready to cancel Liberia debt, BBC News, November 13, 2007 (BBC website)
• Bono takes IMF to task on Liberia, by Eoin Callan, October 18, 2007 (Financial Times website)
• Liberia Needs Your Voice, Jubilee USA, October 2007 (JubileeUSA website)