As the global economic crisis spread throughout the developing world in 2008, some of us waited for the next unfortunate phase for poor, debt vulnerable countries -- the resumption of massive IMF lending. This is a movie that we've seen many times before. And we know the ending. Sadly, it's less of a Hollywood ending and more of a Parisian tragedy.
It didn't take long to get the IMF engine roaring. In 2008 and 2009, the IMF provided nearly $2.7 billion in new loans to Heavily Indebted Poor Countries (HIPCs). And, much more has been set aside for HIPCs and other poor countries. Granted, this lending was important for offsetting the impact of the global crisis and preventing further macroeconomic disruptions. The problem is that it also is greater than the total amount of IMF debt relief provided so far under the landmark 2005 Gleneagles Summit deal ($2.6 billion). In other words, the IMF has wiped out the achievement that civil society groups marched for and ultimately celebrated with only two years worth of new loans.
The other key debt achievement from 2005 was the IMF-World Bank Debt Sustainability Framework (DSF). Through this framework, creditors would determine whether a poor country should receive grants or loans according to indebtedness and institutional performance indicators. For example, countries with high debt levels (so-called "red light" countries) would receive all grants. The basic idea was to wipe the slate clean through the Gleneagles debt deal and use the DSF to make sure we never encounter this problem again. The dirty little secret is that the IMF doesn't adhere to its own framework. Almost half of new HIPC lending in 2008 and 2009 went to countries that are either already in debt distress (i.e., default or arrears) or at a high risk of experiencing debt distress. These are the "red-light" countries. Unfortunately, no policemen were patrolling the streets as the IMF sped right through those red lights.
The picture becomes even starker when we examine IMF lending at the country level. Take the case of the Democratic Republic of the Congo (DRC). With a debt-to-GDP ratio of nearly 120 percent, the DRC has a highly unsustainable debt load. Yet, the IMF disbursed $276 million in new loans to it last year. At the same time, the IMF has committed to provide roughly $320 million in future debt relief to the DRC under the HIPC Initiative. Put differently, the new IMF loans are canceling out the impact of HIPC debt relief projected for this year before it has even been provided.
As suggested in my recent CGD working paper, Will World Bank and IMF Lending Lead to HIPC IV? Debt Deja-Vu All Over Again, shareholders at the IMF and other international financial institutions need to take a step back from the frenzy of stimulus-inspired lending and re-examine the issue of debt sustainability in poor, debt-vulnerable countries. Absent corrective action, the international community -- led by the IMF -- may be faced with yet another round of debt relief in the not too distant future.